Transcript Structuring a LBO

Mergers
Olivier LEVYNE
Principle
• Contribution of assets and liabilities of one of the merging
entities to the other entity (absorbing company) based on
their net book value or on their economic value.
• The first company is then broken up
• The merger parity is based:
– Either on book value of the shares (ie: equity book value /
number of shares)
– Or on the economic (or market) value of the shares (ie: NAV per
share or listed price)
• The balance sheet equilibrium then relies on the premium
= Value of assets contribution – capital increase
Base case
• Assumptions
Fixed assets
WCR
Total
Company 1 (to be taken over)
Accounting balance sheet
700 000 Capital
300 000 (1000x100€)
Reserves
Net debt
_______
1 000 000
Listed price/share
Fixed assets
WCR
Total
Company 1 (to be taken over)
Economic balance sheet
1 200 000 Capital
300 000 (1000x100€)
Reserves
Latent capital gain
Net debt
_______
1 500 000
100 000
400 000
500 000
_______
1 000 000
1 200
100 000
400 000
500 000
500 000
_______
1 500 000
Fixed assets
WCR
Total
Company 2 (absorbing entity) - pre merger
Accounting balance sheet
200 000 Capital
900 000 (2000x100€)
Reserves
Net debt
_______
1 100 000
Latent capital gain:
3 000 000
Listed price/share
200 000
800 000
100 000
_______
1 100 000
400
Base case
• Parity and contributions based on book values
Fixed assets
WCR
Total
Company 1 (to be taken over)
Accounting balance sheet
700 000 Capital
300 000 (1000x100€)
Reserves
Net debt
_______
1 000 000
Listed price/share
Fixed assets
WCR
Total
Company 1 (to be taken over)
Economic balance sheet
1 200 000 Capital
300 000 (1000x100€)
Reserves
Latent capital gain
Net debt
_______
1 500 000
100 000
400 000
500 000
_______
1 000 000
1 200
100 000
400 000
500 000
500 000
_______
1 500 000
Fixed assets
WCR
Total
Company 2 (absorbing entity) - pre merger
Accounting balance sheet
200 000 Capital
900 000 (2000x100€)
Reserves
Net debt
_______
1 100 000
Latent capital gain:
3 000 000
Listed price/share
200 000
800 000
100 000
_______
1 100 000
400
Company 2 (absorbing entity) - post merger
Accounting balance sheet (parity based on book values)
Fixed assets
900 000 Capital
300 000
WCR
1 200 000 Premium
400 000
Reserves
800 000
Net debt
600 000
_______
_______
Total
2 100 000
2 100 000
Parity based on the equity BV
Company
1
2
Value of assets (BV)
1 000 000
1 100 000
(Net debt)
(500 000)
(100 000)
Equity value
Nb of shares
Value / share
Parity
Nb of shares to issue
Nominal value
Capital increase
Contribution (NBV)
(Capital increase)
Premium
500 000
1 000
500
1
1 000 000
2 000
500
for 1
1 000
100
100 000
500 000
(100 000)
400 000
Base case
• Parity and contributions based on economic
values
Fixed assets
WCR
Total
Company 1 (to be taken over)
Accounting balance sheet
700 000 Capital
300 000 (1000x100€)
Reserves
Net debt
_______
1 000 000
Listed price/share
Fixed assets
WCR
Total
Company 1 (to be taken over)
Economic balance sheet
1 200 000 Capital
300 000 (1000x100€)
Reserves
Latent capital gain
Net debt
_______
1 500 000
100 000
400 000
500 000
_______
1 000 000
1 200
100 000
400 000
500 000
500 000
_______
1 500 000
Fixed assets
WCR
Total
Company 2 (absorbing entity) - pre merger
Accounting balance sheet
200 000 Capital
900 000 (2000x100€)
Reserves
Net debt
_______
1 100 000
Latent capital gain:
3 000 000
Listed price/share
200 000
800 000
100 000
_______
1 100 000
400
Company 2 (absorbing entity) - post merger
Accounting balance sheet (parity based on economic values)
Fixed assets
1 400 000 Capital
250 000
WCR
1 200 000 Premium
950 000
Reserves
800 000
Net debt
600 000
_______
_______
Total
2 600 000
2 600 000
Parity based on the economic value of equity
Company
1
2
Value of assets (eco)
1 500 000
4 100 000
(Net debt)
(500 000)
(100 000)
Equity value
Nb of shares
Value / share
Parity
Nb of shares to issue
Nominal value
Capital increase
Contribution (NBV)
(Capital increase)
Premium
1 000 000
1 000
1 000
2
4 000 000
2 000
2 000
for 1
500
100
50 000
1 000 000
(50 000)
950 000
Base case
• Contribution based on book value and parity
based on the economic value per share
Fixed assets
WCR
Total
Company 1 (to be taken over)
Accounting balance sheet
700 000 Capital
300 000 (1000x100€)
Reserves
Net debt
_______
1 000 000
Listed price/share
Fixed assets
WCR
Total
Company 1 (to be taken over)
Economic balance sheet
1 200 000 Capital
300 000 (1000x100€)
Reserves
Latent capital gain
Net debt
_______
1 500 000
100 000
400 000
500 000
_______
1 000 000
1 200
100 000
400 000
500 000
500 000
_______
1 500 000
Fixed assets
WCR
Total
Company 2 (absorbing entity) - pre merger
Accounting balance sheet
200 000 Capital
900 000 (2000x100€)
Reserves
Net debt
_______
1 100 000
Latent capital gain:
3 000 000
Listed price/share
200 000
800 000
100 000
_______
1 100 000
400
Company 2 (absorbing entity) - post merger
Accounting balance sheet (parity based on economic values)
Fixed assets
900 000 Capital
250 000
WCR
1 200 000 Premium
450 000
Reserves
800 000
Net debt
600 000
_______
_______
Total
2 100 000
2 100 000
Parity based on the economic value of equity
Company
1
2
Value of assets (eco)
1 500 000
4 100 000
(Net debt)
(500 000)
(100 000)
Equity value
Nb of shares
Value / share
Parity
Nb of shares to issue
Nominal value
Capital increase
Contribution (NBV)
(Capital increase)
Premium
1 000 000
1 000
1 000
2
4 000 000
2 000
2 000
for 1
500
100
50 000
500 000
(50 000)
450 000
Base case
• Contribution based on book value and parity
based on the listed share price
Fixed assets
WCR
Total
Company 1 (to be taken over)
Accounting balance sheet
700 000 Capital
300 000 (1000x100€)
Reserves
Net debt
_______
1 000 000
Listed price/share
Fixed assets
WCR
Total
Company 1 (to be taken over)
Economic balance sheet
1 200 000 Capital
300 000 (1000x100€)
Reserves
Latent capital gain
Net debt
_______
1 500 000
100 000
400 000
500 000
_______
1 000 000
1 200
100 000
400 000
500 000
500 000
_______
1 500 000
Fixed assets
WCR
Total
Company 2 (absorbing entity) - pre merger
Accounting balance sheet
200 000 Capital
900 000 (2000x100€)
Reserves
Net debt
_______
1 100 000
Latent capital gain:
3 000 000
Listed price/share
200 000
800 000
100 000
_______
1 100 000
400
Company 2 (absorbing entity) - post merger
Accounting balance sheet (parity based on listed prices)
Fixed assets
900 000 Capital
500 000
WCR
1 200 000 Premium
200 000
Reserves
800 000
Net debt
600 000
_______
_______
Total
2 100 000
2 100 000
Parity based on the economic value of equity
Company
1
2
Value / share
1 200
400
Parity
0,33 for 1
Nb of shares to issue
3 000
Nominal value
100
Capital increase
300 000
Contribution (NBV)
(Capital increase)
Premium
500 000
(300 000)
200 000