The arithmetic of the opco-propco split at the close of a buyout: how much is multiple arbitrage, how much is leverage, and what has to stay true at exit.
On paper, yes: the property is sold at a rent multiple well above the multiple paid for the company, and the difference comes back as cash. In an illustrative 450.0 buyout at 9.0x EBITDAR, selling 8.0 of rent at a 6.5 per cent yield raises 123.08 and lifts the equity IRR from 14.61 to 23.92 per cent. But 8.66 of those 9.31 points depend on exit buyers still paying 9.0x for a business now carrying the rent, and the gain is gone if buyers cut the leaseback company's exit multiple to 6.88x while the unsold company would still fetch 9.0x.
Worked in full in Sale and Leaseback by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
A buyout sponsor that acquires a company owning its real estate can split it at closing: the operating company (opco) stays with the sponsor, the buildings (propco) are sold to an investor and leased back. The opco loses EBITDA equal to the new rent and is valued at the company multiple, while the buildings are sold at the property yield. When the inverse of the yield, the rent multiple, is above the company multiple, the two pieces are worth more apart than together. That gap is the multiple arbitrage that makes sale and leasebacks a standard line in buyout sources and uses.
| Input | Value |
|---|---|
| EBITDAR at entry / purchase multiple | 50.0 / 9.0x |
| Enterprise value | 450.00 |
| Senior debt, times post-rent EBITDA | 5.0x |
| Leaseback rent / yield | 8.0 / 6.50% |
| EBITDAR growth / rent indexation, a year | 4.0% / 2.0% |
| Interest rate / cash conversion of (EBITDA − interest) to debt repayment | 8.0% / 50% |
| Hold / exit multiple of post-rent EBITDA | 5 years / 9.0x |
Rent cover at entry is 6.25x EBITDAR, comfortable for a leaseback investor. The leaseback is priced at 15.38 times the rent.
Leaseback proceeds = rent ÷ yield = 8.0 ÷ 6.50% = 123.08
Post-rent EBITDA = 50.0 − 8.0 = 42.0; senior debt = 5.0 × 42.0 = 210.00
Equity = 450.00 − 123.08 − 210.00 = 116.92, against 450.00 − 250.00 = 200.00 without the leaseback
Arbitrage = rent × (1 ÷ yield − company multiple) = 8.0 × (15.38 − 9.0) = 51.08
Day one. The opco, valued at 9.0x its post-rent EBITDA, is worth 378.00. Add the 123.08 of leaseback proceeds and the two pieces are worth 501.08 against the 450.00 paid. The sponsor's cheque falls by 83.08.
Five years of cash. Without the leaseback the company repays debt from 250.00 to 152.08. With it, the rent rises with indexation to 8.83 and the smaller debt falls from 210.00 to 126.38.
Exit at 9.0x. Without the leaseback the enterprise value is 547.49 and the equity 395.41, a 1.98x multiple and a 14.61 per cent IRR. With it, 9.0x the post-rent EBITDA of 52.00 gives 468.00, equity of 341.62, 2.92x and 23.92 per cent.
Run the same leaseback at an 11.11 per cent yield, the inverse of 9.0x, where the rent multiple equals the company multiple and there is no arbitrage. It raises only 72.00, and the IRR is 15.25 per cent: 0.65 points above the deal without a leaseback. That is the pure financing effect of replacing equity with a lease. The other 8.66 points come from the valuation gap, and they are only realised if the exit buyer pays the same 9.0x for a company whose EBITDA is now struck after a rent it does not control.
| Exit multiple | Exit equity | Equity multiple | Equity IRR |
|---|---|---|---|
| 9.0x | 341.62 | 2.92x | 23.92% |
| 8.5x | 315.62 | 2.70x | 21.97% |
| 8.0x | 289.62 | 2.48x | 19.89% |
| 7.5x | 263.62 | 2.25x | 17.66% |
| 6.88x | Equal to no leaseback |
The leaseback deal is robust to multiple compression on this case: it still beats the unsold structure until the exit multiple falls to 6.88x. But compression hits both. The company without a leaseback earns 12.79 per cent at 8.5x and 10.84 per cent at 8.0x, so the comparison that matters is whether the market will apply a lower multiple specifically because of the rent.
| Yield | Proceeds | Sponsor equity | Arbitrage | Equity IRR | Multiple |
|---|---|---|---|---|---|
| 6.00% | 133.33 | 106.67 | 61.33 | 26.21% | 3.20x |
| 6.50% | 123.08 | 116.92 | 51.08 | 23.92% | 2.92x |
| 7.50% | 106.67 | 133.33 | 34.67 | 20.70% | 2.56x |
| 9.00% | 88.89 | 151.11 | 16.89 | 17.72% | 2.26x |
Presenting the leaseback as deleveraging because senior debt falls from 250.00 to 210.00. The lease is a fixed claim senior in practice to the equity. Capitalise the rent at 8 times, a common rule of thumb, and lease-adjusted leverage on EBITDAR rises from 5.00x to 5.48x; fixed claims rise from 55.6 to 74.0 per cent of enterprise value. The sponsor has not created 51.08 of value so much as sold a long-dated, indexed claim on the company to an investor who prices it like property. Whether that investor is right is the leaseback buyer's question: much of what it paid is exposure to this company's credit.
Illustrative, pre-tax and on a pre-IFRS 16 basis, which is how buyout lenders and buyers usually measure EBITDA after rent. Transaction costs and the tax on any gain on sale are ignored.
A sale and leaseback at closing lifts this buyout's IRR from 14.61 to 23.92 per cent, but almost all of the lift is a bet that exit buyers pay the same multiple for EBITDA struck after the new rent as for the business that owned its buildings. Model the exit multiple and lease-adjusted leverage before counting the arbitrage as value. The book prices the same transaction from the other side, where the rent is chosen by the seller and the price follows, and the free workbooks for the book include rent cover at group and at the signing entity. See also whether a sale and leaseback reduces net debt to EBITDA and how to calculate rent cover.
Because the property is sold at a rent multiple, 15.38x at a 6.5 per cent yield, while the company is valued at its EBITDA multiple, 9.0x in the worked case. Each unit of rent given up costs 9.0 of company value and raises 15.38 of cash, a gap of 51.08 on 8.0 of rent, and less equity is needed at entry.
Not on a lease-adjusted basis. Senior debt falls from 250.00 to 210.00 because it is sized on post-rent EBITDA, but capitalising the rent at 8 times adds 64.0. Lease-adjusted leverage on EBITDAR rises from 5.00x to 5.48x, and fixed claims rise from 55.6 to 74.0 per cent of enterprise value.
When the leaseback yield is at or above the inverse of the company multiple, 11.11 per cent at 9.0x, so there is no arbitrage, or when exit buyers pay a lower multiple for a business carrying a large rent. In the worked case the leaseback still beats the no-leaseback deal unless the exit multiple falls to 6.88x.
This article is one calculation from Sale and Leaseback. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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