Hi guys,
I've been thinking about the following issue today:
Say you have a company with $100m EBITDA, and you want to LBO it at EV = 10x EBITDA = $1bn.
Let's also assume that your (you = the sponsor) maximum Debt/EBITDA ratio is 6x, so you finance the LBO with $600m in debt and $400m in own cash.
My question is: do you as a sponsor care about whether the target company has been previously more or less levered?
My intuition is that you should not care, since you pay with 6x EBITDA in debt anyway, and you also pay the entire EV which implies that all the existing debt gets bought out anyway.
But I keep reading from different sources that ideal LBO candidates should have low debt levels, and to be honest I can't yet see why...
Any insights would be highly appreciated!