What's The Big Deal?
Get the view from the inside. Every week, Graham Smith (ex-Ares) and Deborah Taylor (ex-Barclays) take a look at Wall Street’s headline-grabbing deals.
From mega-mergers and hostile takeovers to complex private credit transactions, they break down the why, the how, and the who behind the numbers.
What's The Big Deal?
Did Claude Fable 5 Just Solve Private Equity?
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Stripe and Advent have proposed a $50+ billion take-private acquisition of PayPal. It's a mega deal that doesn't fit neatly into any traditional M&A category.
Stripe is the private payments giant.
Advent is one of the largest global PE firms. PayPal is a public payments company with $33 billion in revenue.
And the combined transaction is arguably too big for a traditional buyout, which is exactly what makes it interesting.
In this episode, Debs and Graham dig into what makes this deal different, then put Anthropic's newest model, Fable 5, to the test on building an LBO model for the transaction.
Graham walks through why this isn't a standard LBO: rather than a private equity firm buying PayPal outright, Advent is partnering with Stripe to fund the equity portion, taking an ownership stake in the combined group.
That hybrid structure is becoming more common at the mega end of the market where traditional buyouts run into scale constraints.
Graham also flags a specific complication with payments companies: not all of PayPal's cash is available for financing the deal.
Payment companies hold customer cash to settle transactions, which sits on the balance sheet but isn't operational cash.
Fable 5 catches this nuance early, suggesting a $3 billion minimum cash floor and excluding customer funds from the financing calculation.
That's the kind of judgment call that separates a first-year analyst model from a professional one.
The Fable 5 output produces a working LBO model with specific assumptions: five times leverage split three-to-two between term loan B and senior notes, a 30% purchase premium to the current PayPal share price, a five-year hold period, and a 20% tax rate.
The base case returns come out at $66 billion exit equity value against $24 billion at close, generating 2.75x money multiple and 22.4% IRR. Debs and Graham walk through whether those assumptions are too cautious (they're using lower leverage than the actual proposed transaction), what a higher purchase price would do to returns, and where the standalone LBO framing doesn't fully reflect what the actual deal is trying to accomplish.
The episode closes with a promise to revisit as the deal evolves: the $60.5 initial offer has been rejected, negotiations continue, and the combined group structure will reveal more about Stripe and Advent's real thinking on equity returns. Watch this space.
Key Discussion Points:
- The Stripe/Advent/PayPal deal: what's been proposed and where it stands
- Why this isn't a traditional LBO: partnering with a private company as buyer
- The customer cash complication in payments company M&A
- The platform-play thesis: private equity's mega-deal strategy in 2026
- Fable 5's LBO model: five times leverage, 100% cash sweep
- The verdict: $66B exit equity value, 22.4% IRR at base case
- Where the assumptions might need adjustment
- What the standalone LBO framing doesn't capture about the real deal
What's the Big Deal? is an educational podcast covering deals and market developments in public and private markets. Nothing in this episode constitutes financial advice.
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So together, this is a substantial business, and arguably one that's too big for a traditional buyout.
SPEAKER_03PayPal is a public company, this would be a tape private deal. We've got information on PayPal as a public company, less information on strike. So I think a bit of a challenge to flaw this week.
SPEAKER_01Still put Fable to the test impressive model today to see how good of a job it does.
SPEAKER_03This is looking pretty good, and actually it suggests that the numbers do work on a standalone traditional LBO basis. We've used very cautious leverage assumptions here, five times debt to EPDA, which is lower than the actual proposed transaction. And you're still coming out with an IRR of about 22%. What is the big deal that we're going to be looking at this week?
SPEAKER_01So we have some really, really big but admittedly high-level headlines on Stripe's proposed acquisition of PayPal this week. Now, this is this is kind of an LBO, but also kind of not in the sense that Stripe is partnering with Advent, obviously a big, big, well-known global private equity firm, to buy PayPal. So we are going to both talk about what this transaction means. We will prompt Claude again to see what kind of LBO model it gives us for this really indicative early transaction. And also talked about some of the areas in which we just need more information to really be able to analyze the equity returns here because it's not necessarily as simple or as obvious as you might think.
SPEAKER_03Ooh, I'm so looking forward to this. It's been a while since we've looked at a deal, hasn't it, Graham?
SPEAKER_01Actually, I think the last one we looked at was uh was GameStop's proposed acquisition of eBay. This one feels this one feels a little bit more real and a little bit more deliverable. We've got Advent involved. Stripe's obviously a really credible player. They're growing like crazy, have been around for a while, like big, you know, big private company. This one feels like it actually has legs and that it's worth taking a look at today.
SPEAKER_03Amazing. And of course, PayPal is a public company. So this would be a take private deal. We've got information on PayPal as a public company, less information on Stripe. Uh so I think a bit of a challenge for Claude this week.
SPEAKER_01Yeah, let's see, let's see how it does. We'll still put Fable to the test, Claude's most impressive model to date, and see see how good of a job it does. I hope I'm not out of Fable credits. I've been using it a lot in the last week. So if this just stops, we might have to switch and go back to Opus, just like the good old days. But we'll see how we go.
SPEAKER_03Okay. And that's crazy, isn't it? The good old days of Opus. Um okay, right, let's dive in. We'll get the um the prompt running uh and then maybe we can flesh out a bit more detail about the deal itself.
SPEAKER_01Okay, so I've got I've got Excel Excel open, I've got the Claude interface open, and let's give it a prompt. So I like we were talking about the other week, I always like to start simple and see how well Claude does with a really, a really simple prompt. I'll ask it to ask me some clarification questions as we go. I'm just gonna say build a leverage buyout model for Stripe slash advents proposed acquisition of PayPal.
SPEAKER_00Ask me any clarification questions as you go.
SPEAKER_01All right, I'm on, I'm on auto mode on Fable 5. Let's see how we go. Oh, the first, I see we've got we've got Fable's first questions for us here. So let's let's see what let's see what's asking. All right, it's asking if we have a specific LBO template in mind, or should I build a standard structure, sources, uses, operating model, that schedule returns, sensitivities. Actually, that sounds good. So I'm gonna hit standard. Should I pull PayPal's actual financials from SEC filings? Yep, great. How should we set the purchase price? Premium to market. Now, this is a this is a P2P. Usually when we're talking LBOs, we're often looking at private companies and we're often talking an EV to EV.multiple basis. But here I do want to change, I want to set this as a a premium to the public price. Because as it stands now, Stripe slash advent made an offer that I want to say was almost a 30% premium to PayPal's closing share price, and that offer got initially rejected. So we want an input that we can tinker with.
SPEAKER_03Absolutely. It was a $60.5 per share offer, and that's already been rejected. So usually the next step is an adjustment to that premium and uplift in the offer price. So once we build the model, we can return to it, tweet those assumptions, um, and see how that affects the outputs of the model.
SPEAKER_01This is not a standard private equity deal. And at least just given the number given the numbers we have in the headlines in terms of the say headline leverage, it's really difficult, I think, to just attribute all that leverage to say PayPal. Like if we were looking at this on purely a standalone basis, I don't think we'd be looking at the same leverage number as an example. But let's hit standard and see where we go. Okay, so Claude has come back with a series of initial assumptions just to have us run through. So we say, okay, pulling latest financialists from SEC, Edker, great assumptions tab. We're saying 30% premium to closing share price. It says five times leverage split into terminal MB and senior notes. Let's see, sources and uses, operating model, five year, five year down to free cash flow, debt schedule, mandatory amortization, cash flow, cash flow sweep. Okay, returns, exit EV, debt pay down, IRR, money multiple, sensitivities, five by five grids, multiple premium pay versus leverage. Okay, you know, based again, based on a really simple prompt, like not perfect, but this feels like it's about in the right ballpark.
SPEAKER_00So I'm just gonna say it looks good. Build it. So Debs, let's have a chat about what makes this deal a little bit different.
SPEAKER_03Yeah, let's talk about what makes this different. Because I know we've touched previously on sort of traditional LBOs, the use of leveraged by private equity firms to go in, buy a company cheap, improve the business, sell it on at a profit, and that leverage effect magnifies their returns. And you know, we've done a previous episode where we really worked through those mechanics. But your view, Graham, I know you we spoke earlier, your view is that this is not a traditional LBO. So talk us through what makes it different. And is this the future for LBOs?
SPEAKER_01Well, maybe. I mean, so let's say let's if we think about a traditional LBO, this is where a financial sponsor just goes and buys another company. And it can be a P2P, like we're looking at here. Let's say, let's say if this was just Advent looking to buy PayPal and they made and they made an offer to PayPal shareholders saying, we are gonna pay this much of a premium over PayPal's current share price. And in exchange for that, we would like you to tender or PayPal shares to us and that operate PayPal as a private company. Of course, you can either do that or you can buy just a private company. One thing that we've seen just, I mean, in a lot in in recent years, really last decade, two decades really in terms of in terms of private equity is I think we had a discussion a few a few weeks ago, a few months ago, around how private equity is getting, I think, a lot more, a lot more competitive. And it's not enough just to just to buy a company, load it up with debt, sell it five years down the line for a financial return. You actually have to know what you're doing and make real operational. And for that reason, one of the really one of the really common private equity plays we've seen in recent years has been the platform opportunity, where you have a private equity, private equity firm that buys a company, takes it private, uses that company as a platform through which to make bolt-on acquisitions, spend a bunch of capex, start up new operate, new operations, diversify, build, you know, whatever, whatever the case may be, you know, really transformationally changing the company that it buys. This feels like some kind of a hybrid approach, right? Because if Advent weren't involved, this would be just straight up corporate MA where you've got one company buying another. Here you've got this situation where, and this is why I say we don't really have enough details to really know exactly what's happening behind the scenes here, but you have Stripe, this private company, which has got, you know, I don't know, I don't know enough about who the shareholders in Stripe today are, but I imagine you've got just a long roster of venture capital firms, private equity, private, private investors who have all put money in to support Stripe fears. It doesn't sound like Advent's not buying Stripe and PayPal. Advent is partnering with Stripe to buy PayPal. So Advent's going to inject equity, and that equity will be used to fund the equity portion of the LBO consideration for PayPal. And they're obviously going to be getting some kind of equity ownership in Stripe slash the combined group. And what I don't know is behind the scenes how that splits, what the what the implied valuation for for Stripe is, how much, how much of the equity that admin's taking is part of as part of this transaction. But it does feel like this kind of kind of hybrid approach where you've got private equity, you know, really sees an opportunity to consolidate, consolidate some of the some of the big players in the in the financial services space is making this investment into Stripe. And then they're doing it on this, it's almost like a like this is almost like a JV in some ways. So I'm actually really curious to see what what headlines come out in the next couple of weeks, couple months as we learn a little bit more about this deal and learn a little bit more about what's actually working, or learn a little bit more about what the relationship between Advent and Stripe looks like here.
SPEAKER_03And just to clarify, Graeme, so what makes this different? Well, a couple of the things that you've highlighted. So, first of all, this isn't like a platform type sort of scale up where it's the private equity firm using its portfolio businesses to kind of consolidate. It's actually partnering with another private company, which albeit has already probably private backing from lots of private equity firms.
SPEAKER_00Yeah.
SPEAKER_03And then secondly, the scale, uh, the relative scale is the business here. This isn't just a small add-on. This is Stripe, which we don't have numbers for, but we know it's a large business, uh, larger than PayPal. Um, and you know, we're probably talking maybe twice, three times the size of PayPal. Um, so this is a you know, two, you know, not dissimilar in size businesses uh being consolidated together. Whereas often with these platform businesses, you're going around buying much smaller ones, aren't you?
SPEAKER_01Yeah, exactly. And you're right. This is a this is a mega deal. I mean, Stripe, as the latest information we have, I think their last, their last fundraising round valued them at about $160 billion of equity. We don't know much about Stripe's balance sheet, whether Stripe has much debt. So whether whether that $160 billion equity turns into something more than that in terms of enterprise value, or if Stripe has negligible net debt and we think enterprise value and equity value are basically the same. PayPal on its own is already a pretty big business. At I want to say the the offer being made was just north of $50 billion equity value. So together, together, this is a this is a substantial business and arguably one that's too big for a traditional buyout.
SPEAKER_03So how is it how's Claude getting on with the prompts? We're still uh oh, it's still working through the prompts, isn't it? It's not waiting for any responses from us. Um so while we're doing that, um, so you mentioned that this is kind of potentially the new style of private equity. Are there other other deals that we've seen out there that kind of follow this approach, or is it a really pioneering new type of um way of generating returns, partnering with a private company for this?
SPEAKER_01Let me see. I don't know, you know, in terms of in terms of these kind of mega deals, I mean, the mega, the the last, let's, in air quotes, mega deal that we saw that we talked about was electronic arts. Now that was that was a little bit different in the sense that you had you had some private equity firms, you had some sovereign wealth, you know, kind of partnering together to to take EA private. There wasn't, as part of that acquisition, another, another acquisition target they were looking to buy. So I think the I think the parallel here is just the what I'll call the standard private equity kind of platform opportunity, buy and build, whatever you want to call it. And again, this is such a this is such a common feature of the private equity market.
SPEAKER_03And let's check in with Claude. Uh, what's where's it got to now? So is it waiting for a prompt from us?
SPEAKER_01Let's see. Let's say checkpoint recap. All right, we've got 20, 28% offer, LTM revenue, $33 billion, EBITDA $7 billion. This we're talking, we're talking PayPal. This is this sounds about right given some of the some of the research we were doing, we were doing just before. We've got the the financing structure staying three times term loan B, two times senior notes. Let's see, judgment call to confirm. Okay, interesting. Judgment call to confirm. I apply the six billion of PayPal's corporate cash and short-term investments toward the funding above a $3 billion min cash floor. Now, we were talking about this before, before we hit record on the episode. Usually in an LBO, what you do is you assume that you can that you can use all the target's cash as part of your acquisition funding, as it relates to a public LBO like this, because once you once you buy the equity value, you take control of everything and you own the cash. And usually you're going to keep some level of min cash in the business.
SPEAKER_03Yeah. So I one of the challenges with payments companies or yeah, with payment companies in general, um, is that um some of the cash that they have is customer cash because they're holding cash on behalf of settled payments. And they tend to have a need for a certain level of operational cash above that. So the assumption that we usually make that cash is free and available for paying down debt is not quite the same. And it kind of does make the calculations of things like enterprise value, that's the value of equity, plus net debt, that's debt net of cash, a little bit more complex. So you do need to make some judgments. Now it looks like Claude is suggesting that they exclude um customer cash. So customer funds are excluded, and they're excluded, they're going to include cash above a three billion minimum cash floor. So actually already making an assumption about the minimum cash requirements. So I think that's a pretty sensible starting point.
SPEAKER_01Yeah, you make the point. What I don't it doesn't say we don't have the the breakdown of what customer funds are in terms of what what number that is, but the point that it's it's highlighted that I actually think is is quite helpful here because that's a fairly specific aspect of this transaction. So yeah, I'm saying like looks good, continue. Let's go.
SPEAKER_03Okay, so sometimes we can take a sneaky peek at some of the assumptions and sources and uses. Do you want to try and have a look and see what it's done already?
SPEAKER_01All right, so we've got we've got inputs for share price, premium, got our equity value calculation. This ties up with what we've seen in the news. And we've I've I've seen that $53 billion already. Okay, we say cash, cash equivalent system-term debt, short-term investments.
SPEAKER_00Okay, excess cash, the six billion. EBITAM margin, capex.
SPEAKER_01CapEx is a percentage of revenue. I'm assuming this is what we're gonna use to drive our to drive our forecast model, even though we haven't taken a look at it yet. And then acquisition financing, okay, the structure that we've we've already talked about, five times total leverage, three times term loan B, two times senior notes, seven percent interest rate on the on the term loan B, saying one percent errorization per year, eight and a half percent interest on the senior notes. We're saying 100% cash cash sweep of excess free cash forward to term loan B, because we're gonna we're gonna pay the term loan B, of course, before before any of the senior notes. And I suspect we're not gonna pay off the whole term loan B in this five-year forecast period. 20% tax rate, five-year whole period, entry enterprise value, 7.8 times EV to LTM EBITDA. We've been talking a lot the last couple months about the AI valuations, about a lot of the IPOs that are coming, about SpaceX, that's like, you know, 300 times EBITDA, which acknowledge admittedly are crazy numbers. But 7.8 times valuation multiple here seems pretty low. I mean, when I was when I was financing a lot of mid-market private equity yields, we're usually talking an acquisition multiple somewhere between uh 10 and 15 times, depending on cash conversion, how fast we expected these companies to grow. This is pretty low, especially if we're saying, if we're saying PayPal is a fairly cash generative business.
SPEAKER_03Yeah, it is. I mean, I don't have the exact numbers to hand, but honestly, PayPal share price has been really struggling in recent years. Uh, you know, it was, it had such a great hold of the payments market for a long time. But, you know, obviously that position has been challenged uh by competitors, presumably including Stripe. Um, and yeah, it's looking pretty cheap these days. So that does make it very attractive as a target. Um, but yeah, I I think we were both shocked uh by high single-digit multiple for tech company. That's basically what PayPal is. Um, but yeah, uh it definitely reflects the fact that you know it's been under pressure. Um we should stress that this deal that this offer has been rejected. It's been rejected by the board. Also, one of the major shareholders has come out um and said this is well below what the business is worth. I think um they've said that you know the shares are worth at least $70 each, and they're only being offered $60.5 at the moment. So um, yeah, it looks cheap, but it has been rejected. Um, in terms of rules of thumb, just while we're waiting for the rest of the build, um some of the metrics that I've been reading about, they don't look too scary in terms of this uh particular deal. Uh the total leverage uh or the total debt package, about $50 billion with financing agreed by JP Morgan and Morgan Stanley. That's puts them on about a 6.7 times debt to eBayDA multiple, which sounds high, but as you said, cash generative target and a mix of debt and equity. So that's about 75% debt, 25% equity. Uh why do you think this is being structured as this kind of strategic, almost joint arrangement between Stripe and private equity when the numbers actually don't look scary just in terms of a take private LBO on its own?
SPEAKER_01Well, I'm gonna I'm gonna disagree with one thing you've said there in terms of this this not looking scary on its own. Because if we if we really believe the enterprise value is 54, 55 billion here, let's say it's a little bit, let's say it's a little bit more than that, if we're talking $50 billion of committed financing, then we're really saying, we're really selling, saying the LTV or loan to value. This is something we look a lot, we look at a lot in this kind of world, basically to say of the enterprise value, how are we breaking down that mix between debt and equity, right? What as a percentage of the value, as an enterprise value of this business, how much is in is in the debt? So if we say we are $50 billion of debt over $50, $55 billion, and here I must have messed up a zero here, right? We're at 91. So it's really this is 91% LTV, right? This is this is indicative of the of the kind of blockbuster LBOs of the the 90s, really, where you had you had LTVs getting up to this this kind of crazy level. You know, basically we're saying here the the lenders in this case will be taking you know ostensibly 100% of the risk. One of the things you think a lot about when you're a when you're a creditor is how much risk capital do I have sitting behind me or sitting in front of me, rather if we're talking about a burst luck piece. So if I were thinking about this in terms of just a a standalone, a standalone buyout, I would say, again, let's say this $55 billion EV is right. I would say we're really, if you're really pushing it, you're probably getting to, you know, maybe, maybe 70% of the capital structure being being leveraged, but that's admittedly, that's really high for today still. Then we're at $38 billion of financing, not $50 billion. So I think it's important to put that $50 billion of financing in context. I think the only, the only way that you get that financing deal done, regardless of the fact that you can probably support a seven times debt package with a with a cash-generated business. What you can't necessarily do is get someone to lend ostensibly up to 100% of the valuation of that business with the debt package. So the only way I think this comes together is on the basis that it's the combined striped PayPal entity, not a pure LBO of PayPal on its own. Does that make sense?
SPEAKER_03Yeah, completely. And it's really interesting, isn't it? That you know, we can think about rules of thumb. Like we often talk about debt to eBits are multiple. But you can't just focus on that single metric. We have to kind of almost triangulate between, you know, the returns you need to generate for private equity, the debt to EBITDA multiples that the lenders are going to be satisfied with. And on top of that, loan-to-value numbers, loan-to-value ratios that also satisfy the lenders. And only then, if they all tie together nicely, is this a viable deal. And then we've also got to, of course, the actual company, the target itself, got to agree to the actual purchase price as well. So we're kind of jumping between all of these different constraints, aren't we?
SPEAKER_01Yeah, exactly. No, if you think, I mean, what we don't have are any of the financial details for Stripe and therefore for the combined business. And if you think about almost seven times leverage being being serviceable by PayPal on its own, is that serviceable by the combined group 100%? Does it look pretty, pretty moderate in the context of the total, the total valuation for both of those businesses put together? If we think Stripe is valued at $160 billion equity value, enterprise value, don't really know yet because we don't have details of their balance sheet. Let's assume they've got ostensibly no net debt and that those numbers are one of the same. We add on another 60 billion or so of enterprise value for PayPal. And all of a sudden we've got a business that's call it $220 billion of total enterprise value. And if we're putting $50 billion of financing on that, on that group capital structure, actually this leverage, this leverage multiple or this leverage, this LTV looks looks pretty low.
SPEAKER_03Yeah. Okay. That's great. Okay, now let's have a look at some of the tabs. I know it's still building some of the detail of the model, but should we see if the sources and uses of funds is ready for us to take a look at?
SPEAKER_01So here we've got this sponsor equity plug getting us to total sources of $65 billion. Now let's just see. All right, let's look at our uses of funds because it's gonna be a bit easier to put these numbers in context looking at what we're actually buying here. Person to PayPal equity, $55 billion or $54 billion. Sorry, $53.4. God, I can't. I'm you can tell I'm on vacation, devs. God. $11 billion.
SPEAKER_02Can I just say you keep mentioning it and it's not making me feel any more happy about the fact that I'm teaching in Frankfurt and you're on holiday this week. But anyway, yeah, just keep dropping it into the conversation, Graham.
SPEAKER_01Okay, so we've got $53.4 billion of equity value, $10.9 billion of debt to refinance, and then we've got some assumptions here for financing fees and transaction fees. Uh so in terms of our in terms of our total sources and uses, this doesn't, this doesn't look crazy, right? I go back up to my sources, I see the the, you know, in essence, we've always got we've always got the sponsor equity as the plug because we've made an assumption for the financing structure bring with us. We've said that we can use this $6.3 billion of excess cash on PayPal's balance sheet. Uh so this this looks about right. Okay, now we've got, let's see, sponsor equity contributions. We don't really know what the the details behind the scenes are in terms of where where this equity is coming from. So we've got stripe, advent, block, it's a co-investor. Okay. At this point, I'm not really I'm not really too concerned with this part of the model because it doesn't really, it's not really going to tell us much in the standalone PayPal model that we're taking a look at. Operating model. Let's see, how has we built this? Sorry, how has how have we built this here? Got some assumptions for revenue growth, EBITDA margin, DNA, capex, changes in networking capital. These are basically the same drivers that we use. Build a really mini, mini operating model, you have projection, you know, projection period. And then go all the way down to unleavened free cash flow from EBITDA, with the the main things you need to get from EBITDA to cash flow being taxes, changes networking capital, and capex. And let's see, we've got EBITDA, let's see, less DNA, and then capex changes networking capital. So we've got this stop here that says EBITDA less capex less is changes networking capital. So this is this looks to me like we've got pre-financing, pre-financing cash flows, but admittedly without the impact of tax. So I'm assuming. Either it hasn't, it hasn't been built yet or it's been ignored. I know we talked about it it talked about an assumption for a 20% tax rate. So I'm assuming it's gonna pick that up at some point. But in terms of in terms of really high level, high-level beats, this doesn't look crazy, right? Project a really basic income statement. We're projecting down to free cash flow. And then the whole point of an LBO model really is to take that free cash flow and then apply that cash flow to making debt repayments, which should be our debt schedule tab, one tab over. Okay, we've got taxes included here. So we've got a link to the previous tabs, whatever we're gonna call this, eBIT less capex, less change of networking capital, less interest expense, less cash taxes. That gets us our actual free cash flow before debt repayment. And then we've got mandatory AMOR, and then we're sweeping 100% of the excess cash, but we've got, let's see, less than 100% being applied in 2030. So we're actually assuming that we pay down, we are assuming we pay down the full, the full term loan B in this structure. Which we are, right? So we've got ending balance on term loan B at transaction closed $21 billion, and then we're paying it all the way down to zero in year five this model here in cell G19.
SPEAKER_03I guess I wonder at this point, Graham, whether it's sensible to assume 100% cash sweep. Basically, every dollar of cash, every cent of cash they're generating is going towards paying down debt in a business where we know that they have to hold a certain level of operational cash uh to help facilitating payment settlement. Uh so I feel that's a bit punchy. Um, but I don't know. You tell me. What in your experience, uh, did you see 100% cash suite used often in your uh LBO models?
SPEAKER_01Well, so what I want to there's one, there's one actually this is a it's a really good point. One thing I'm checking for here is to see how the because we obviously we built in, we built in a concept of min cash here, right? What I okay, what we don't what we don't have, we okay, we do have the cash schedule here. I was I was looking, I was looking for just for just this line in essence. Because basically what we're saying is if we start with $3 billion in min cash and then we apply 100% of whatever cash we generate in the subsequent periods, we should always keep this $3 billion min cash balance in essence in the bank. And this is what we can see is happening here in row 29.
SPEAKER_03Just to recap on the flow. So the operating model, that's the forecasts, the earnings and the cash flows. We take the cash, the cash is deployed each year, paying down the debt as quickly as possible, uh, including the interest payments on that debt as well. And then basically you get to the end, that summary layer in rows 27 down basically tells you how much debt and cash you have at the end of each year based on that expected repayment forecast. So, what do we do with that net debt figure?
SPEAKER_01Well, now the thing we need to do is make some exit assumptions. And you're you're right. Basically, the LBO model is just a cash flow model. How much cash do we generate every year? Either how much of a cash balance do we build up or how much of that cash balance are we using to repay debt? But the thing we really need to calculate our equity returns now is what our exit equity value assumption is going to be. So in this model, we're just assuming we exit in five years' time, we sell the business for an assume, for an assume multiple, and what equity return does that does that generate? We'll touch on this in just a second because this is looking at looking at PayPal as a standalone LBL model like this, I think is is interesting and kind of indicative of where PayPal on its own generate equity return in terms of what the actual plan is for PayPal as part of Stripe. Stripe is not assuming that it's gonna sell PayPal in five years for some exit EV multiple. There's a much bigger, much bigger plan going on here. So you can kind of make the argument this model is is kind of finger in the air indicative at giving you where an equity return might shake out, but it's also not that reflective of the reality of this proposed transaction.
SPEAKER_03So, Graham, would be the expectation be that Stripe would buy out the other uh equity investors at this point? So the mechanics would still work. It's just we're just talking about the layer for private equity in terms of point.
SPEAKER_01I I don't know. I'm actually really interested to find out what some of the what some of the equity investment terms are for Advent in a deal like this. Like obviously, Stripe is still private. It's gonna get listed at some point. Is Advent gonna monetize when when Stripe lists? We've got some more interesting exit options to consider for a transaction like this. That's not that's not indicative of just the standard private equity deal. But if we are looking at this on a standard private equity basis, we see we've got a couple, a couple credit stats talked about here. We've got debt to debt to EBITDA, aka leverage. We want to see this multiple coming down, we're de-risking the leverage investment over time, interest coverage, EBITDA over cash interest. We want to see this multiple going up because we're we're building more interest coverage headroom in this model over time. So high level, these look about how we'd expect. And then we get lo and behold, to the the returns. So you see how this works, it's pretty, it's pretty basic, right? We say 20, 2030, our exit year EBITDA uh 9.7 billion. We've got an exit multiple assumption. We're just saying this is equivalent to our entry multiple, so no multiple expansion at this point. We subtract the net debt and we get our exit equity value. And then we compare the exit value to the entry value, and those are equity returns, right? So we say we're generating $66 billion of equity value in year five compared to $24 billion uh at close. We got two and three quarter times our money uh on a money multiple basis and a 22.4% IRR. So again, in terms of in terms of the mechanics of this model, this model actually looks right. If we were if we were looking at this on just a straight up private equity, we're gonna buy out PayPal, hold it for five years, and then sell it. This model makes sense to me. It's not it's not crazy. Would we tweak some of the assumptions a little bit? We change the leverage, the leverage assumptions a little bit, we push the purchase price up a little based on the fact this offer's been rejected. Yeah, we would. We see these returns go down a little bit, maybe. But in terms of the way this model has been built mechanically, it's actually got it's got everything you'd expect to find. Like again, as a as a first pass, here's a simple prompt. Build me a basic LBO model. This is a basic LBO model. This doesn't look too different from some of the ones that we run through in the classroom. I haven't obviously gone through and audited any of the formulas here. Would I find some stuff in terms of the way, say, interest expense is calculated that it might change? Maybe, right? But again, finger in the air, high level. It doesn't look crazy.
SPEAKER_03I agree. I think this is looking pretty good. And actually, it suggests that the numbers do work on a standalone uh traditional LBO basis. We've used very cautious leverage assumptions here, five times debt to EBITDA, which is lower than the actual proposed transaction. And you're still coming out with an IRR of about 22%. That's not bad, is it?
SPEAKER_01You are. I mean, admittedly though, you know, we're still we're still in the region of, you know, if we think about if we think about debt to total capitalization here, we're still we're still in the kind of upper regions of where of where we'd see loans of value. So it does, by the way, it does make sense that this deal works on a base case equity return basis, right? We're not buying for an insanely expensive multiple. A decent share of that entry enterprise value is being financed with leverage. So there's a decent amount of just pure financial engineering going on here. So you can't say, yeah, this does, this does probably make sense.
SPEAKER_03Okay. So two things. I think we should make this available in the show notes because this is actually the first time we've looked at a proper LBO model. I know we've looked at some scratch calculations for uh LBO returns, but actually, this is a proper LBO model. I think it'd be quite good to show that people can have a little navigate through the formulas. We don't promise that the formulas are correct. Um, definitely don't promise that.
SPEAKER_01We're not that don't don't not don't use this in an interview necessarily. Don't don't take this as 100% correct. I'm I'm on vacation, so I'm gonna send this, I'm gonna send this off, and then I'm gonna head out on a hike today. So don't expect it to be fully gone through. But you know, for first, for first pass, not too bad. You know, let me even try it. This is uh I'm gonna hit F12. Hey, F12, F12 does work on a Mac. It does uh does say that is here. I'm gonna save, save this down, save a new version, and we'll we'll get this uploaded as part of the show notes when this when this episode goes live.
SPEAKER_03Fantastic. And then the other thing I think we should promise our listeners is that we will revisit this uh because I have a sense, and I'm sure you do as well, Graham, that this is a deal that will keep moving, it'll keep progressing. It's now kind of the ball is back in the bidder's court to come back with a higher offer now that it's been rejected. Uh the numbers look sensible enough that it looks like it could still work, uh, even if the price goes up slightly. So we should revisit this. We've saved the model down so we can just keep fine-tuning it and revisiting it and talking about uh the negotiation process and maybe learn a little bit more about uh LBOs as we're as we're watching the deal evolve.
SPEAKER_01Indeed. Fine-tuning it and as figure out a bit more about, say, the combined group structure. I'm actually interested to see how how Claude would do actually modeling this, modeling this in the way that it is really going to happen and see if we can make some some assumptions about what we think, what we think Stripe's plan for the combined business is and see if we can figure out how Stripe and Advent are really thinking about their equity returns here. Because one thing I can tell you is this is really, this is helpful being indicative, saying if we were to buy Stripe on a sorry, if we were to buy PayPal on a standalone basis, but we know, we know that they're not just gonna buy this to then sell it in five years. So we've got to do some more detailed thinking about what this real transaction looks like, but we don't have the data for that just yet. So watch this space.
SPEAKER_03Well, thanks so much for listening to this week's episodes. Uh a return to looking at deals, a bit of deal dissection here. Uh it's been great fun. Uh, and I hope you've enjoyed listening to it. And I hope you've learned a little bit more about LBO modeling. That's thanks from me for this week. And over to Graham.
SPEAKER_01Thanks everyone. We'll see you same time next week.