Management buyout (MBO) deals

Question 1

Financial Engineering (1)

Answer 1

Debt availability
Low interest rates
Stable companies
Limited competition

Question 2

Earnings enhancement (2)

Answer 2

Poorly managed targets
Growth sectors
Operational skills

Question 3

Multiple arbitrage (3)

Answer 3

Rising markets
M&A skills

Question 4

Operational improvements

Answer 4

Process improvement
- working capital
- location(s)
- outsourcing

Growth initiatives
- sales organisation
- marketing
- new products / services
- exports

Strategic M&A
- new geographic and sector markets
- industry consolidation

Question 5

Legal and financial structure of buyout (NewCo / Target Co; / debt)

Question 6

Importance of debt in MBO

Answer 6

MBOs are a type of LBO so use borrowed funds
Banks consider MBOs risky so securing finance must be well planned by management team
Financing from PE firm usually easier to obtain but must give up more in terms

Question 7

Types of debt

Answer 7

Senior debt - debt and obligations which are prioritized for repayment in the case of bankruptcy

Junior debt - lower priority than senior debt but typically secured and does not have an equity kicker

High yield bonds - a corporate bond that represents debt issued by a firm with the promise to pay interest and return the principal at maturity

Mezzanine debt - typically unsecured and has an equity kicker

Payment-In-Kind (PIK) debt - type of high-risk loan or bond that allows borrowers to pay interest with additional debt, rather than cash

Institutional debt - unsecured Debt for borrowed money which may be raised by the Borrower or any of its Subsidiaries in the private placement or public debt markets pursuant to terms satisfactory to the Required Lenders, but which shall exclude Subordinated Debt

Question 8

Investment criteria for an ideal MBO opportunity

Answer 8

Strategy and market positioning
- defensible market position
- dominant presence in mature market
- clear exit route

Company
- profits convert to cash
- historical sales and profit growth
- cost control culture
- independently viable

Management team
- operate independent of parent
- strategic awareness
- shared objectives
- financial sophistication