M&A, Restructuring & L.B.O. PDF

M&A, Restructuring & L.B.O. This document may not be photocopied, reproduced or distributed to third parties without the prior written consent of Hubble Finance Frédéric CWILING Reproduction prohibited, all rights reserved Summary of sources of value creation for investors Closing : n EBITDA Acquisi...

M&A, Restructuring & L.B.O. This document may not be photocopied, reproduced or distributed to third parties without the prior written consent of Hubble Finance Frédéric CWILING Reproduction prohibited, all rights reserved Summary of sources of value creation for investors Closing : n EBITDA Acquisition Multiple Exit : n+3 100 8x EBITDA 120 +20% Exit Multiple 10x +25% Enterprise Value 800 Enterprise Value 1200 Expenses 40 Expenses Total Amount of Acquisition 840 Total amount of disposal 1200 New Debt 600 Debt to repay 450 -25% Equity = Cash out 240 Equity = Cash in 750 +213% - 2 Frédéric CWILING Reproduction prohibited, all rights reserved Summary of sources of value creation for investors Cash Flow Value 900 Trading Value 800 150 (40) Gain 700 240 600 Growth Capital 500 Gain 160 400 750 300 200 100 240 0 Equity at closing Frédéric CWILING Ebitda Increase Multiple differential Debt Repaym ent Expenses Equity at exit Reproduction prohibited, all rights reserved Summary of sources of value creation for investors Cash Flow Value 900 Trading Value 800 150 (40) Gain 700 240 600 Growth Capital 500 Gain 160 400 750 300 200 100 240 0 Equity at closing Ebitda Increase Multiple differential Debt Repaym ent Expenses Equity at exit In this example, investors have more than tripled their investment in 3 years, while EBITDA increased by only 20% ! In this case, the rise in multiple is the main driver of value creation  Key factors of value creation : - Increase of profitability by developing the company - Decrease the net financial debt, by paying back the debt used for the investment - Increase in « multiple » used for valuation, by expanding the size of the company, thus creating higher market share and 4 stability 4 Frédéric CWILING Reproduction prohibited, all rights reserved Main documents/ Points of negociation / dealbreakers Non Disclosure agreement Teaser Memorandum of Information / Understanding (MOI / MOU) Letter of intent (LOI) Share Purchase Agreement (SPA) Reps & Warranties Shareholders’ agreement Frédéric CWILING Reproduction prohibited, all rights reserved SPA Signed between NewCo and the sellers, it defines: Price: – Calculation methods – Cash or deferred payment – « earn-out » Allows to reconcile divergent views on valuation Particularly suitable if strong growth, or if the seller remains manager for a certain period Duration: 1 to 3 years – Vendor loan Specific transaction clauses 6 Frédéric CWILING Reproduction prohibited, all rights reserved SPA - Examples Sincerity of information provided No judicial proceedings Careful and wise management No exercise of competing activity Up-to-date Insurance Payment … 7 Frédéric CWILING Reproduction prohibited, all rights reserved Reps & Warranties Risks covered Overestimated assets / underestimated liabilities Inaccuracy of representations and warranties Compensation Ceilings, trigger thresholds and franchise Duration: legal requirement for tax and social liabilities, other to be negotiated (up to 4 years in general) Bank guarantee, escrow 8 Frédéric CWILING Reproduction prohibited, all rights reserved Shareholders’ agreement Ensures the life of the deal, in particular by anticipating in advance the zones of potential conflict of interest between financial investors and Management Governance Instrument Set up some protections and obligations Limited application Penalties for non-compliance depend on the laws of the country (often damages in France ; Return to the previous situation in some countries) 9 Frédéric CWILING Reproduction prohibited, all rights reserved Shareholders’ agreement Governance Organization of power, typically through the setting up of a management board and a supervisory board The agreement provides for the composition of the governing bodies and the number of directors by category The agreement provides for majority rules for making certain strategic decisions – Budget – External growth – Significant Capex – Disposal of strategic assets 10 Frédéric CWILING Reproduction prohibited, all rights reserved Shareholders’ agreement Protections & obligations Inalienability of securities Pre-emption rights tag along drag along Anti-dilutive clauses The mezzanine debt benefits from some of these clauses, when it has warrants 11 Frédéric CWILING Reproduction prohibited, all rights reserved Management package Key element of Management's motivation, and sometimes the choice of the winning sponsor (when Management is decision-making) Capital structuring Equity Convertible bonds Warrants for performance If the investor's IRR is > x%, additional warrants are allocated to the Management The reverse is also possible … - Dilution of managers by conversion of convertible bonds in case of underperformance 12 Frédéric CWILING Reproduction prohibited, all rights reserved