Leveraged Buyouts: A Practical Guide to Investment Banking and Private Equity, + Website

CHAPTER 8

Balance Sheet Adjustments

It is now time to revisit the transaction at hand. We have just hard-coded the latest reported Heinz balance sheet. However, what will the balance sheet look like after the transaction? It is important to properly represent what the balance sheet will look like after the purchase in order to make proper projections.

First let’s recap what happens when a buyer comes into the business.

THE BUYER IS PAYING FOR

• Shareholders’ equity at a premium (purchase price): The price negotiated for a transaction can represent the book value of the business (which is identified by shareholder’s equity on the balance sheet). However, it is common for a buyer to pay a higher value for the business than what is stated as its book value. First, companies can have a public market value that most likely trades at a premium to book value (see Chapter 2 on valuation). Second, to properly incentivize the seller, a buyer typically pays a premium to the market value. This is called a control premium. That premium can be represented as goodwill. We may make additional adjustments to goodwill but this is a conceptual beginning. We will discuss such adjustments in the Goodwill section of this chapter.
• Net debt (short-term + long-term – cash) and other obligations: Refer to the discussion in Chapter 3 where we gave an initial overview of the buyout process. The buyer is responsible for the net debt only under certain conditions. Because Heinz is a public company, the buyer ...