price. When time has arrived for the exit of the financial buyer, either the market or the company will have had to change for a trade buyer to be interested. Galbani, the leading Italian cheese company, was sold by BC Partners in 2006 to Lactalis. • Stock market flotation. This strategy must be implemented in stages, and it does not allow the sellers to obtain a control premium; most of the time they suffer from an IPO discount. It is more attractive for senior management than a trade sale. At end-2006, Hertz was IPOed by Clayton Dubillier & Rice, and Carlyle. • Sale to another financial investor, who in turn sets up another LBO. These “secondary” LBOs are becoming more and more common. Elis is a tertiary LBO.
920 C ORPORATE GOVERNANCE AND FINANCIAL ENGINEERING • A leveraged recapitalisation. After a few years of debt reduction thanks to cash flows generation, the target takes on additional debt with the purpose of either paying a large dividend or repurchasing shares. The result is a far more financially leveraged company. VOLUME OF 2007 EXITS FROM B C500m + BY ROUTE Buyback: 3% Trade sale: 24% IPO: 22% Secondary buyout: 51% Source : Arbor Square Associates. If the company has grown or become more profitable on the financial investors’ watch, it will be easier for them to exit. Improvement may take the form of a successful redundancy or cost-cutting plan or a series of bolt-on acquisitions in the sector. Size is important if flotation is the goal, because small companies are often undervalued on the stock market, if they manage to get listed at all. The problem emerges when the target company’s profits do not allow a large enough dividend payment to the parent company, which is then unable to pay its bank interest charges or repay its debt in a timely fashion. Apart from recapitalising the company, renegotiating with creditors is the traditional solution (interest rates, covenants, repayment schedule), but in some countries creditors cannot secure their loans with the assets of the subsidiary as long as the loans are extended to the holding company. Section 44.2 T HE PLAYERS 1/ P OTENTIAL TARGETS The transactions we have just examined are feasible only with certain types of target companies. Companies for which income streams are volatile by nature, such as trading companies, do not have access to LBO financing. The same is true for companies requiring heavy capital expenditure, such as certain high-tech companies. The target company must generate profits and cash flows that are sufficiently large and stable over time to meet the holding company’s interest and debt payments. The target must not have burdensome investment needs. Mature companies that are relatively shielded from variations in the business cycle make the best candidates: food, retail, water, building materials, real estate, cinema theatres and yellow pages are all prime candidates.
Chapter 44 L EVERAGED BUYOUTS (LBO S ) 921 THE WORLD’S 10 LARGEST LBOs IN 2007 AND 2008 Target Date Sector Equity sponsor Value ($bn) TXU February 2007 Energy KKR/TPG 45 Equity Office
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