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by Blackstone4
2912 days ago
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Here's an example. Company A (let's call it Dell but the figures are made up) is public and has an Enterprise Value (EV) of $100bn (EV includes net debt and equity). It has no debt and Michael Dell owns 14%. Dell is taken private by Michael, Silver Lake and co. using $40bn of equity (with Michael rolling his 14% stake into this equity) and $60bn of debt. Michael Dell's original 14% interest was worth $14bn. But $14bn of $40bn is 35% of the total equity. The rest is debt. |
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There are various ways this can happen. Using the figures from my answer above:
- If Dell is able to increase its profitability by 50%, then in theory the EV should increase by the same amount. So $100bn goes to $150bn. But debt stays the same whilst equity goes from $40bn to $90bn ($150bn EV - $60bn debt). This means Michael's stake is now worth $31.5bn (35% of $90bn).
- Private equity companies are often valued on multiples of EBITDA (which roughly translates into profit for capex light companies). So Dell might have originally be valued at 5x times EBITDA to get to the EV of $100bn. But let's say the valuation multiple has risen to 6x (since markets valuations have been going up since the Dell take-private and Dell is now a more attractive mix of software + hardware rather than just being hardware which implies a lower valuation as its more cyclical). A 6x EV/EBITDA multiple will take the EV to $120bn (assuming flat profit). This will increase the equity to $60bn ($120m EV - $60bn debt). Michael's stake will be worth $21bn (up from $14b).
Combine an increase in profitability with a high valuation multiple, you can go from $14bn to $40bn fairly quickly if things go your way.
I can't remember but Michael may have put in cash during the take-private on top of rolling his original equity stake. This would have also increased his stake.