If a company is acquired for a 50% premium and its EV/EBITDA increases from 10x to 15x, what can be inferred about its net debt?

In evaluating this scenario, it is essential to understand the relationship between enterprise value (EV), net debt, and the EBITDA multiple. When a company is acquired for a premium, such as 50% in this case, the enterprise value reflects both the equity value and the company's net debt.

If the acquisition premium leads to a rise in the EV/EBITDA multiple from 10x to 15x, it indicates a significant increase in the perceived value of the company in relation to its earnings before interest, taxes, depreciation, and amortization (EBITDA). Given that the EV of a company is calculated as:

EV = Equity Value + Net Debt,

and that the increase in the EV/EBITDA multiple suggests that the market has increased its valuation of the company relative to its earnings, it follows that the equity value would also increase.

If we consider the scenario where net debt is zero, the entire enterprise value would be derived from equity. Upon the acquisition, as the premium implies a higher valuation without an offsetting increase in net debt, this scenario aligns logically, indicating that the level of net debt does not escalate. Therefore, net debt being zero simplifies the calculation, as the increase in enterprise value would be directly linked