Finance_Deal Structuring & Financing Acquisitions
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Transcript of Finance_Deal Structuring & Financing Acquisitions
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8/10/2019 Finance_Deal Structuring & Financing Acquisitions
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Deal Structuring & Financing Acquisitions
Private & Confidential
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Deal Structuring is of paramount importance
REGULATORYCONSIDERATIONS
TAX CONSIDERATIONS
ACCOUNTINGCONSIDERATIONS
FINANCINGCONSIDERATIONS
DEAL TIMING
Open offer requirements, ownership norms, capitalizationnorms
Capital gains impact to sellers, stamp duty and sales taxissues, availability of past tax losses
Ability to consolidate, goodwill impact, provisioning in thebalance sheet, purchase consideration break-up betweenassets
Cost of capital, availability of funds on target vs. acquirerbalance sheet, tax benefit for interest expense, Cross-border jurisdictions
Implementation time to financial closure
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Commonly Used Deal Structures
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Transaction Structures | Stock Purchase
TargetShareholders
TargetCorp.
TargetAssets
Benefits
Target StockAcquirer
Cash
Some Potential Issues Recent Examples
Simple and quick to May lead to tender offer Vodafones 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 Mahindras acquisition of
easier to establish Inability to cherry pick select Shares in Satyam Computersassets of the business Emamis acquisition of
shares in Zandu
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Transaction Structures | Asset Purchase
TargetShareholders
TargetCorp.
TargetAssets
AcquirerShareholders
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 ofassets
Some Potential Issues
Potential implications of stampduty and sales tax
Cash inflow into the companyand not to the shareholders
Recent Examples
Schneiders purchase ofthe cabling business of
Smartlink Indo Asian Fusegear -
Legrand Abbotts purchase of
Domestic Formulationsbusiness of Piramals
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Transaction Structures | Mergers
Acquiring
companysshareholders
Acquiringcompany XYZ
Target
(merged)companys
shareholders
Cash and/or other ABCconsideration stock
AssetsTarget
(merged)company ABC
(dissolved)Cash and/or other
consideration
Benefits
Ability to consolidateoperations into a single entity Ideal in situations like JVs
wherein existing shareholderswish to continue
Variants include reversemergers and demergers
Some Potential Issues
Time consuming - needscourt approvals Needs approval of lenders
and majority shareholders
Recent Examples
Centurion Bank of Punjabwith HDFC Bank Bank of Rajasthan with
ICICI Bank
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Financing Acquisitions
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Some Key Considerations
Sources of Financing
Forms of Financing
Cost of Financing
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Sources of Financing
Sources of Finance
Buyer SellerCommercial Finance Long term
Banks Companies Finance
InsuranceCompanies
Venture LeveragedCapital Firms Buyout Funds
PensionFunds
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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 andoccasionally preferred stock
!Earn-out arrangements are also used for compensation
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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
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Financing Forms | Other Financial Instruments
Debt with Warrants
Junk Bonds
Paid-in-Kind Debt
Paid-in-kindSecurities
!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
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Financing Forms | Other Financial Instruments
Adjustable RatePreferred Stock
Debt securities with
put option
Alphabet / TrackingStock
Sale-lease backfinancing
!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
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Acquisition Finance (Debt) |Structuring
FACTORS DRIVING ACQUISITION FINANCE
!Companys 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
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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
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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
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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 ofRs. 80million
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 SPVGuarantee
Lending Bank - Senior DebtOffshore Branch US$ 13
Million
Cash flowavailable for
Acquirer to beutilized for
debt servicing
US$ 2 million
Acquirer SPV
USA
AcquisitionConsideration for 100%
stake
Target
USA
!Security
! Pledge of SPV and Targets 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
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Contact Details
Corporate Executive DirectorEmail: [email protected]
Lloyd Bancaire Worldwide.
nited States Luxembourg Hong Kong United Kingdom Singapore
www.lloydbancaire.com
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