Case 049LBO modelling testsWarm up
Fill the blank lines of a sources and uses template: enterprise value Rs 900 crore including Rs 200 crore of existing debt to refinance, fees of Rs 25 crore and Rs 20 crore of minimum cash funded at close. Sources are a Rs 450 crore term loan, Rs 150 crore of notes and sponsor equity. What is the equity cheque?
1The situation
A modelling test hands you a half-filled transaction summary for the buyout of Suryakant Textiles, a yarn and fabric maker with EBITDA of Rs 120 crore. The purchase is agreed at an enterprise value of Rs 900 crore, 7.5x EBITDA. The company has Rs 200 crore of existing bank debt, which must be repaid at closing and is included in the enterprise value. Transaction fees, advisers and financing costs, come to Rs 25 crore, and the lenders require Rs 20 crore of cash on the balance sheet from day one.
Funding is a Rs 450 crore term loan, Rs 150 crore of senior notes and sponsor equity. The template has blank lines for the purchase of equity, total uses and sponsor equity.
2Your task
Fill in every blank line, find the sponsor's equity cheque, and say what share of the funding it is.
Quick check
What is the sponsor's equity cheque?
Worked solution
Try it on paper, then open one step at a time.
30-second answerThe answer to give first
The sponsor writes a Rs 345 crore cheque, 36.5% of total funding of Rs 945 crore. Uses are Rs 700 crore for the shares, which is EV less the debt it contains, Rs 200 crore to repay that debt, Rs 25 crore of fees and Rs 20 crore of cash. Sources are Rs 450 crore of term loan, Rs 150 crore of notes and the equity plug.
Step 1What goes on the uses side, and why is the equity price not Rs 900 crore?
Buying a flat with a home loan still on it: if the agreed value is Rs 90 lakh and Rs 20 lakh of it is the seller's outstanding loan, you pay the seller Rs 70 lakh and the bank Rs 20 lakh, not Rs 90 lakh plus Rs 20 lakh. Enterprise value already includes the debt, so the purchase of equity is Rs 900 crore less Rs 200 crore, Rs 700 crore, and repaying the Rs 200 crore is a separate use. Then the two lines candidates forget: Rs 25 crore of fees and Rs 20 crore of cash the lenders want on the balance sheet. Total uses: Rs 945 crore.
Step 2How do you find the equity, and how do you check it?
Sources must equal uses, and equity is the one source not fixed in advance, so it is the plug: Rs 945 crore less Rs 450 crore less Rs 150 crore is Rs 345 crore. Check it two ways. First, the columns: 450 + 150 + 345 = 945. Second, the economics: Rs 600 crore of new debt is 5.0x EBITDA of Rs 120 crore, and equity is 36.5% of the total, a normal shape for a mid-market buyout. If the equity share came out at 10% or 70%, a line is wrong.
| Common slip | Equity it gives | Error, Rs crore |
|---|---|---|
| Add the refinanced debt on top of EV | 545 | +200 |
| Forget fees and minimum cash | 300 | -45 |
| Forget only the minimum cash | 325 | -20 |
| All lines included | 345 | 0 |
Step 3Why do the small lines matter?
Because they are real cash on day one. Fees and minimum cash are Rs 45 crore, about 13% of the equity cheque, and they raise the money the sponsor must earn a return on without buying anything that grows. In the returns model that shows up immediately: a sponsor that sized its fund commitment on Rs 300 crore would be short at closing, and the IRR it quoted to its committee would be overstated because the denominator was wrong. The limit of the template is that some fees are paid by the company, capitalised into the financing, rather than funded at close; read the template's notes to see which lines it expects, and say so if you are unsure.
A strong candidate also writes the check rows the template does not ask for: total sources minus total uses equals zero, debt over EBITDA, and equity over total. Graders in a timed test look for those three lines because they show the model will flag its own errors.
Where candidates lose it
The usual loss is adding Rs 200 crore of refinanced debt on top of a Rs 900 crore enterprise value, as if the buyer paid for the debt twice. EV already includes it, so the purchase of equity is Rs 700 crore.
The second miss is leaving fees and minimum cash out of uses. They are small, but the plug absorbs every rupee, so the equity cheque comes out Rs 45 crore light.
What the interviewer asks next
- The company also has Rs 30 crore of excess cash that the buyer gets. How does that change the uses?
- The lenders cut the term loan to Rs 400 crore. What happens to the equity cheque and the equity share?
- Where would a rollover by the founder of Rs 50 crore of his shares go in the table?
Asked at Carlyle Group, Credit, New York, 2023 (Wall Street Oasis): The modeling test and filling in the blank lines
Company names and figures are illustrative.