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Deal Structuring & Financing Acquisitions
Private & Confidential -1-
Deal Structuring is of paramount importance
REGULATORY CONSIDERATIONS
TAX CONSIDERATIONS
ACCOUNTING CONSIDERATIONS
FINANCING CONSIDERATIONS
DEAL TIMING
• Open offer requirements, ownership norms, capitalization norms
• Capital gains impact to sellers, stamp duty and sales tax issues, availability of past tax losses
• Ability to consolidate, goodwill impact, provisioning in the balance sheet, purchase consideration break-up between
assets
• Cost of capital, availability of funds on target vs. acquirer balance sheet, tax benefit for interest expense, Cross-
border jurisdictions
• Implementation time to financial closure
Private & Confidential -2-
Commonly Used Deal Structures
P
Transaction Structures | Stock Purchase Target
Shareholders Target Corp. Target Assets
Benefits
Target Stock Acquirer
Cash
Some Potential Issues
Recent Examples • Simple and quick to • May lead to tender offer • Vodafone’s acquisition of
execute requirements the equity from Essar in its • Minimal transaction costs • Potential capital gains telecom business • Pricing benchmarks are Implication for the seller • Mahindra’s acquisition of
easier to establish • Inability to cherry pick select Shares in Satyam Computers assets of the business • Emami’s acquisition of
shares in Zandu
Private & Confidential -4-
Transaction Structures | Asset Purchase
Target Shareholders
Target Corp. Target Assets
Acquirer Shareholders
Cash Acquirer Corp.
Target Assets
Benefits
• Fairly quick to execute • Ability to cherry pick assets
(or a specific business) • No tender offer requirements • Could be slump sale or
Piecemeal transaction of assets
Some Potential Issues
• Potential implications of stamp duty and sales tax • Cash inflow into the company and not to the shareholders
Recent Examples
• Schneiders’ purchase of the cabling business of
Smartlink • Indo Asian Fusegear - Legrand • Abbott’s purchase of Domestic Formulations business of Piramal’s
Private & Confidential -5-
Transaction Structures | Mergers
Acquiring company’s
shareholders
Acquiring company XYZ
Target (merged)
company’s shareholders
Cash and/or other ABC consideration stock
Assets Target
(merged) company ABC (dissolved)
Cash and/or other consideration
Benefits
• Ability to consolidate operations into a single entity • Ideal in situations like JVs
wherein existing shareholders wish to continue
• Variants include reverse mergers and demergers
Some Potential Issues
• Time consuming - needs court approvals • Needs approval of lenders and majority shareholders
Recent Examples
• Centurion Bank of Punjab with HDFC Bank • Bank of Rajasthan with ICICI Bank
Private & Confidential -6-
Financing Acquisitions
P
Some Key Considerations Sources of Financing Forms of Financing Cost of Financing
Private & Confidential -8-
Sources of Financing Sources of Finance
Buyer Seller
Commercial Finance Long term Banks Companies Finance
Insurance Companies
Venture Leveraged Capital Firms Buyout Funds
Pension Funds
Private & Confidential -9-
Financing Considerations Differ The buyer / management team provide the most critical portion of
the transaction
Management/ Buyer
Seller of Target Company
The amount of principal a buyer invests often dictates
The capital structure of the transaction
The terms of the transaction
The types of lenders that will participate
Seller may finance part of the transaction if the seller receives a
premium over an all cash price
Seller may be willing to take back long term, subordinated debt and
occasionally preferred stock
Earn-out arrangements are also used for compensation
Private & Confidential - 10 -
Financing Forms | Characteristics
DEBT EQUITY
CHARACTERISTICS SENIOR SUBORDINATED PREFERRED COMMON
Tax-deductible finance costs X X
Covenants/ Restrictions X X
Convertibility features X (In specific cases) X
Dilution of Ownership X (In specific cases) X X
No required fixed payments X
Base for leverage X X
Not subject to redemption X
Cost of financing Low Higher Higher Highest
EPS dilution of shares X (In specific cases) X X
Private & Confidential - 11 -
Financing Forms | Other Financial Instruments Debt with Warrants
Junk Bonds
Paid-in-Kind Debt Paid-in-kind Securities
Debt securities with attached or detachable equity warrants
Gives the debt holder participation in the future performance of the company
High-yield, high risk securities
General obligation bonds that have credit ratings below investment grade
Debt securities with interest and /or principal payable in cash or securities of
the issuer at the issuer's option
Preferred Stock which pays dividends in cash and /or additional shares of
preferred stock at the issuer's option
Private & Confidential - 12 -
Financing Forms | Other Financial Instruments Adjustable Rate Preferred Stock
Debt securities with put option Alphabet / Tracking Stock Sale-lease back financing
Preferred stock with interest rates that are reset at periodic auctions
Investors retain put option
Investors hold a company's stock but the shares participate only in the
earnings of a specified subsidiary or group of assets
Similar to Senior Debt
Complicated as to who receives the risk/benefit of the residual value
Private & Confidential - 13 -
Acquisition Finance (Debt) | Structuring FACTORS DRIVING ACQUISITION FINANCE
Company’s Perspective Minimum equity contribution
Appropriate leveraging through an optimal funding structure balancing cost and risk Limited recourse to parent for repayment - Ring fencing liability associated with acquisition
STRUCTURING REQUIREMENT
• Lender ‘s Perspective Adequate security with commensurate return Protection against default Promoter comfort and contribution
Myriad transaction specific structuring options available Different contemporary financial instruments for funding the acquisition including debt, mezzanine and equity Indian and offshore laws and regulations relating to acquisition, tax and investment BROAD STRUCTURING OPTIONS
• Target Vs. Acquirer (Leveraged Vs. Own Balance Sheet) • Recourse Vs. Non-Recourse • Off-shore Vs. On-shore SPV
Private & Confidential - 14 -
Acquisition Finance (Debt) | Challenges Objective Issues / Challenges
Optimizing Cost
Structuring the Transaction most appropriately Finding the most suitable Lender
Timely completion of the Transaction / Synchronize the entire process
• To minimize the Financing cost
• To minimize Transactions Costs like DD cost, Legal cost etc.
• To minimize Future Costs like Prepayment penalty, Commitment charges, Penal interest etc.
• To finalize the best suitable Financing instrument and provide the most appropriate Security
• To choose the best suitable Jurisdiction and most optimal Borrowing Vehicle
• To negotiate the Financial Covenants / other Restrictive covenants
• To structure the Repayment schedule as per the Cash flow
• To minimize the various kind of Tax (Withholding, Dividend Distribution, Income Tax etc.)
• To decide the most suitable Lender from a long-term perspective
• Whether to go for a Bilateral loan or Syndicated loan
• To complete the Transaction in a Short Time especially when there are multiple bidders for
the Target
• To coordinate across different geographies, lenders and various advisors
Private & Confidential - 15 -
Case Study - Acquisition Finance for L.T. Overseas Ltd. (1/2) Business Acquisition
USD 20 MN L T Overseas Ltd. Kusha, INC. Strategic Opportunity
• One of the largest • The largest basmati rice • Kusha has provided the marketing
basmati rice players in marketing and distribution and distribution platform for LT
India with a topline of company in the US, with
~USD 120 MN revenue of ~ USD 40 MN
• Owner of “Dawaat” and • Has portfolio of strong brands,
“Heritage” brands “Royal” and “Pari”, with 40% market share in the US
basmati rice industry
Overseas’ brands
• With its milling and product
development capabilities, LT
Overseas will be able to launch high
value add products in the US market
• LT Overseas became the largest
basmati player in the US
Private & Confidential - 16 -
Case Study - Acquisition Finance for L.T. Overseas Ltd. (2/2) ‘DEBT TO OFFSHORE SPV WITH RECOURSE’
Lending Bank Rupee The Lending Bank, through its offshore operations,
India Operations Corporate
Loan of Rs. 80 million
Acquirer
ONSHOR
OFFHORE
Equity Investment
extended US$ 13 million financial assistance to facilitate acquisition of the Target Extended additional US$ 2 million to the Indian operations through its Indian Balance Sheet Loan extended infused as Equity in the US SPV
Guarantee
Lending Bank - Senior Debt Offshore Branch US$ 13
Million
Cash flow available for Acquirer to be
utilized for debt servicing
US$ 2 million
Acquirer SPV USA
Acquisition Consideration for 100% stake
Target USA
Security Pledge of SPV and Target’s shares Corporate Guarantee of the Indian Parent Pledge of Promoters’ shareholders in the Indian
Parent company Mortgage of Target company brands
Repayment Cash flow accrued at the Target level Undertaking to capitalize the USA operations, if
required Time taken to conclude the financing: 2 months
Private & Confidential - 17 -
Contact Details Corporate Executive Director Email: [email protected]
Lloyd Bancaire Worldwide.
United States Luxembourg Hong Kong United Kingdom Singapore
www.lloydbancaire.com
Private & Confidential - 18 -