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Best-Sellers of 2019 Net Debt Adjustments

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Aca Nexia Round Table of Private Equity Actors, January 30, 2020


During the past year, we can see that the net debt is, as a general rule, not developed in the VDD reports which do not present an analysis of adjusted net debt. Therefore no benchmark ‘is really possible even if we take into account the’ Equity Bridge ‘of the’ memorandum of information ‘, on the transition between enterprise value and share value.
Basically, the net debt is traditionally composed of accounting elements; positive values, availability, investment values ​​and term accounts; and negative values, short, medium and long term bond and bank loans and other items such as current accounts.
Adjustments to net debt can be presented in 3 groups, the “Mandatory”, the “Optional” and the “Possible”.
Bonds include all financing tools based on mobilization of “deconsolidating” receivables, finance leases, tax balances (IS / CICE), price supplements, balances generated by elements of WCRs which have the nature of debt such as litigation, restructuring, impacts linked to the exit from a group, matters of scope, voted dividends not paid.
The Option category includes in particular all the adjustments related to the seasonality of the WCR, retirement commitments, CAPEX, employee participation and profit-sharing, prepayment penalties, among others.
The “Possible” constitute a category which requires taking into account additional analyzes: taking into account the arbitrage of normativity of the EBITDA (departure of managers, rent franchises, retirement), the clauses of return to better fortune existing tax loss carryforwards, discontinued or unfolding activities, unprofitable, tax provisions, and of course the effect of these potential adjustments on the taxation of the result.
In our opinion, the elements that result from debt mobilization tools, including factoring, reverse factoring, expected effects, “Dailly” contests and whose objective is to ensure financing of working capital, are to be taken into account in adjusted net debt.
Restatements linked to bank financing such as leasing debt, including the residual value, the contractual clauses of loans which may apply in certain circumstances (change of shareholder, penalties for early repayment), are generally accepted without discussion . The discussion is more about the methods of calculating the lease debt, for example.
The elements generally recognized in WCR and which have the nature of cash items, such as matured debts and the ““non-normative”” elements of WCR are more debated and must be particularly well founded and documented.
The category of unrequited outflows of resources, in which are classified unpaid voted dividends, provisions for litigation and restructuring, retirement commitments, matters related to the scope of the transaction (exits from minority interests, entities not taken over, exit tax consolidation, other cash flows), do not debate the merits of the adjustments, but require more discussion on the amounts to be retained.
Finally, there are various elements such as tax loss carryforwards, the IS on regulated provisions, the cost of the former management during the post deal support period, the return to better fortune clauses, for which the merits of adjustment of net debt is debated, not to mention the discussions on the amounts to be retained.
In summary, as much bank financing, outflows of unrequited resources and perimeter issues, are fairly obvious reasons for reprocessing, as much the reprocessing of WCR elements and the taking into account of off-balance sheet commitments are questionable and must be reviewed on a case-by-case basis. Other subjects among which, tax loss carryforwards are not to be taken into account, with some exceptions. As always, there are unclassifiable topics of attention, such as EBITDA adjustments and specific elements related to the deal and its financing.

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