Private Equity & Management Buy-outs

Course Overview:

The sale of companies to management teams backed by Private Equity investors, using a leveraged financing of the acquisition, has become an increasingly common feature of the corporate scene. Whilst appearing simple to arrange, there are complex elements to a successful transaction.

This course covers the principles and practicalities involved in arranging and negotiating a management buyout. In addition to the legal issues to be addressed, the use of bank debt and other financial instruments is examined in the context of developing a workable structure for the deal.

Course Content:

The Growth of Private Equity and Leveraged Buyouts

• Academic rationale for the use of leverage
  • Modigliani/Miller theory
  • Michael Milken’s research
  • Growth of shareholder activism
    • Reviving under performers
  • Changes in company law
  • The development of the European high yield bond and securitisation markets

The Principles of Leveraged Finance

• The use of debt to drive equity values
  • Cash flow management
    • Reducing debt to drive equity value
  • Operational improvements
    • Building “need to have”
  • Incentivisation of management
    • Getting rich together
  • Cash-capture clauses

Exercise: Good or Bad LBO?

Discussion of recent transactions to see which ones the attendees would do, and what lessons can be learned about elements of success or failure

• Structuring the transaction
  • Target IRR
    • Assessing the return appropriate to the risk
  • Assessing debt capacity
    • Forecasting future cash generation
  • Senior / mezzanine debt mix
    • Judging asset values
  • Forecasting exit values
• Consideration of non-bank finance
  • High-yield bonds
    • Terms and size of issue
  • Second lien debt
    • Too much debt?
  • PIK finance
    • Saint or sinner?
  • Vendor loan notes
    • Making the deal look good

Case Study: Based on information provided attendees are tasked with structuring the finance for an MBO. Answers are discussed to identify the critical elements in the financing

• Legal elements
  • Warranties and indemnities
    • Investor protection
  • New Memo & Arts
    • Incorporating P.E. control elements
  • Tag along and drag along
    • Control of the exit
  • Veto rights for private equity
    • Control of management
• Management
  • Jensen and Meckling agency theory
    • Why buyouts work
  • The envy ratio
    • Management incentivisation
  • Agreeing the ratchet
    • Carrot and stick
  • Good leaver / bad leaver provisions
    • Covering under performance

Exercise: Agreeing the terms of the envy ratio

Identifying and Closing a Good Transaction

• Ideal company characteristics
  • The three golden rules
• MBO / MBI
  • Assessing management strength
• Meeting vendors’ expectations
  • Structuring the deal
• Avoiding conflicts of interest
  • Recognising the risks of multi-layered financing
• Due diligence
  • Investigation and verification
• Tie-in with contract terms
• Structuring the debt appropriate to the business

Discussion: How to finance the acquisition of Manchester United. The Man U accounts are reviewed with the object of deciding how to finance its acquisition. Answers are compared to the actual result.

• Exit
• Control by P.E. house
• IPO
• Second round financing
• Trade sale
• The “living dead”