Here’s something to consider before getting all worked up about dilution. Ask yourself where the dilution is coming from and what are the proceeds of the dilution being used for. If the dilution is occurring for the purposes of reducing the debt then consider the balance sheet impact and the impact on the EBITDA multiple that may be assigned to the company afterwards. If you have a reorg situation in which the shareholders face little dilution then it is likely that the company emerges with the same debt load it had before unless it sold off assets to pay the debt or it got new funds from a rights offering, used the funds to pay the debt and issued preferred shares to the subscribers. In these situations you still have parties sitting above you in the priority scheme but your relative ownership of the common stock remains mostly intact. If the shareholders face large dilution for the purposes of large debt conversion then you end up owning less of the company but the debt load is smaller and the equity component is larger.
Simple equation: less dilution = larger slice of the equity pie of a company with a large debt load. More dilution = smaller slice of the pie but the slices are worth more than those of the debt laden company. A debt laden company cannot command an EBITDA multiple as high as one that is not as debt laden, all other things being equal. So for any given level of EBITDA the multiple assigned will be partially affected by its leverage.
Just realize that if someone tells you only what the dilution is and then proceeds to ask what the equity is worth then the proper response should be to look completely confused and start asking more questions because you do not have enough information to answer their question. You will need to know several data points which may include some combination of share structure, EBITDA projections, EBITDA multiple, Enterprise value, value assigned to equity based on discounted cash flows, total allowed claims, amount of valuation reserves set aside for unsettled claims, emergence debt level, working capital etc.
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