M&A financing including LBOs

Mergers and acquisitions are major events. The financing structure can make or break a deal. This module covers cash vs stock, mixed consideration, and the leveraged-buyout (LBO) mechanics that have driven private equity for 40 years.

Cash, stock, or mix

• Cash deal: buyer pays cash for target's shares. Seller's shareholders receive certain value. Buyer either uses own cash, raises debt, or both. Tax-realised for sellers.
• Stock deal: buyer's shares exchanged for target's shares. Sellers receive shares (continued ownership in combined entity). Often tax-free for sellers depending on jurisdiction. Buyer preserves cash but dilutes existing shareholders.
• Mixed consideration: combination — some cash + some stock. Common in large deals where neither pure form fits.

When each makes sense

Cash deals are simpler and give certainty. Best when: buyer has cash; seller wants liquidity; market conditions make stock unattractive. Stock deals preserve buyer's cash. Best when: buyer's stock is highly valued (and using it is 'cheap'); seller wants continued exposure to combined entity; tax considerations favour exchange. Mixed consideration is the workhorse for large deals — typically 50-70% cash + 30-50% stock.

The LBO playbook

Leveraged buyouts use significant debt to fund acquisitions, with the goal of using debt service to discipline operations and exiting at higher multiples. The typical structure:

Typical LBO capital structure for a $500m enterprise value deal:

  Senior secured term loan A     $200m   40%   T+3% = ~10%
  Senior secured term loan B     $150m   30%   T+5% = ~12%
  High-yield bond                $75m    15%   ~14%
  Mezzanine                      $25m    5%    ~22% all-in
  PE equity contribution         $50m    10%   target 25%+ IRR
  ────────────────────────────────────────────────────────────
  Total enterprise value:        $500m

  EBITDA at deal: $50m
  Leverage: $450m debt / $50m EBITDA = 9x — aggressive, used for high-quality
             stable-cash-flow targets
  Interest service: ~$50m/year — equal to EBITDA. Tight. The deal requires
  growing EBITDA to ~$70m to be comfortably serviceable.

Exit assumption: in 5 years, sell at $700m EV (40% growth + multiple expansion).
Debt repaid: $200m. Equity value: $500m. Equity contribution was $50m → 10x.
IRR: ~58%. THIS is what LBO returns look like when they work.

Why LBOs amplify returns

Take the same operating improvement (say, $10m EBITDA growth from $50m to $60m). In an all-equity buyout at 10x EBITDA: equity value grows from $500m to $600m, a 20% return. In an LBO with $450m debt and $50m equity: equity value grows from $50m (initial) to $150m ($600m EV − $450m debt), a 3x return. Same operational improvement, 15x the equity return. This is leverage's power — and its risk.

African M&A

African M&A is dominated by trade buyers (companies acquiring competitors or expanding regionally) rather than PE buyouts at smaller scale. Notable deals: KCB/NBK merger (2019); Safaricom/Vodacom acquiring Tanzania assets; Old Mutual/Saham consolidation; the IB-led Twiga Foods/Greenwheels acquisition (2024); Equity Bank's expansion into DRC. LBO activity in Africa is smaller — PE firms tend to do growth-equity rather than buyouts at scale because debt markets are shallower.