A sponsor and a strategic buyer both want a dairy. Work out each bidder's maximum price and explain who can usually pay more, and why.

The sponsor can pay about Rs 886 crore, 8.9x, and the strategic up to about Rs 1,188 crore, 11.9x. The sponsor works backwards from its exit: Rs 960 crore of exit equity discounted at 20% for five years is about Rs 386 crore, plus Rs 500 crore of debt. The strategic adds Rs 187.5 crore of capitalised synergies to Rs 1,000 crore of standalone value. Strategics usually win because they own synergies and need a lower return.

Backwards, from the exit. A sponsor does not ask what the business is worth; it asks what it can pay and still earn its required return. Its ceiling is the exit equity discounted at the hurdle rate, plus whatever debt the lenders will put in at entry. Think of a landlord who will only buy a flat if the rent and resale give 20% a year: the price is set by that target, not by what the neighbour paid.

Exit value is Rs 140 crore at 9.0x, Rs 1,260 crore. Less Rs 300 crore of debt, exit equity is Rs 960 crore. To earn 20% a year for five years, every rupee in must become 1.20 to the power 5, about 2.49 rupees. So the equity cheque can be at most Rs 960 crore divided by 2.49, about Rs 386 crore. Add the Rs 500 crore of entry debt and the ceiling is about Rs 886 crore, or 8.9x today's EBITDA.

Forwards, from value. The strategic's ceiling is what Madhuvrik is worth to it: standalone value plus the synergiesExtra profit the combined company earns that neither would earn alone, here from buying milk and running trucks together. only it can capture. Rs 25 crore of pre-tax savings is Rs 18.75 crore after tax, and at 10x that is worth Rs 187.5 crore, taking the ceiling to about Rs 1,188 crore. Paying the full ceiling would hand every rupee of synergy to Madhuvrik's sellers, so a disciplined strategic bids below it, but it has room the sponsor does not.

Because the two buyers discount at very different rates. The strategic values Madhuvrik at 10x with no synergies, which implies a cost of capital close to its own, perhaps 10% to 12%. The sponsor discounts its equity at 20%, and that single number is the main reason it falls behind. The chart shows the sponsor would need to accept about 13.9% a year just to match Rs 1,000 crore, before any synergies. Leverage lifts the sponsor's return on a given price; it does not let the sponsor pay a price its hurdle rejects.

Name the conditions, because the interviewer wants to know you have not memorised a rule. A sponsor wins when it brings synergies of its own, when debt is cheap and plentiful, or when no strategic can act. A sponsor that already owns a dairy can treat Madhuvrik as an add-on and count procurement savings exactly as the strategic does. In strong credit markets 6.0x of debt instead of 5.0x adds about Rs 60 crore to the ceiling, even if the extra Rs 100 crore is still owed at exit. And a strategic with a weak share price, a competition problem or a board focused elsewhere may not bid at all.

Close with the banker's view, which is what the seller is paying you for: run a process that includes both, use the strategic's synergies to set the price, and keep a sponsor in the room as the alternative that stops the strategic bidding at its standalone value.