Debt-financed acquisition

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The foreign (capital) buyout (English leveraged buyout , LBO) is a funded highly leveraged corporate takeover as part of a structured finance . Such leveraged acquisitions are typical of so-called private equity investors.

General

The purchase price for the acquisition of a company (called “target” or “target company”) must be financed by the purchaser (investor). For this he has equity , outside capital or a mixture of these at his disposal. The outside capital can come from bank loans, specially issued bonds or other sources.

The term "leveraged finance" indicates a high proportion of debt financing, the one lever effect ( leverage does) result. A high return on equity - attractive for the investor - can be achieved through the low use of own funds , as long as the return on total capital is higher than the interest on borrowed capital . The prerequisite is that the target company generates a sufficiently high free cash flow with which the liabilities can be repaid.

A company acquisition that is primarily made through debt capital is referred to as a leveraged buy-out if the financing banks grant debt capital solely on the basis of the expected viability of the target company (without any further obligations on the part of the buyer). Since the acquisition of a company is to be classified as a project financing from a banking point of view, the bank expects that the target's cash flow enables long-term debt servicing capability. The interest and repayments resulting from the loan financing (i.e. the debt service ) usually have to be paid from the target's cash flow. However, lenders usually require equity to reduce their credit risk . Banks willing to finance take on a significantly higher credit risk with a high proportion of external financing than with traditional credit financing, which they try to reduce by means of loan collateral for assets (pledging of the share package).

history

The term LBO is not used consistently in either the specialist literature or in practice. In the USA, the LBO emerged from the “bootstrap financings” of the 1930s, in which an entrepreneur, due to age, sold his company to investors who financed the purchase price with a high proportion of loans.

Spectacular individual transactions with a high proportion of borrowed capital gave rise to the concept of leveraged buyouts in the 1980s . It was still a matter of “bootstrap financings”, since the target company's cash flow is used to repay the LBO's debt and the LBO has to be secured with banks from the target company's own assets. The takeover of the conglomerate RJR Nabisco in November 1988 by the financial investor KKR was the largest LBO in history at $ 31.4 billion by 2006.

Largest "Mega" -Buyout all time was then in November 2006 the acquisition of Hospital Corporation of America (HCA) by the consortium Bain Capital / KKR / MLGPE for $ 33 billion as the banking giant Citigroup in September 2007, the corporate takeover of EMI Group by Financed by Terra Firma Capital Partners , the largest bad investment in the history of leveraged buyouts began . The takeover by Terra Firma in September 2007 was for a purchase price of £ 4.2 billion, of which Citigroup had financed £ 3.7 billion (88%). After Terra Firma could no longer raise the loan interest for the purchase price financing (thus debt servicing was no longer available), Citigroup had taken over the EMI shares from Terra Firma in February 2011. As a result of loan write-offs, Citigroup lost £ 2.2 billion (originally £ 3.4 billion loans) and Terra Firma lost its equity share of £ 1.7 billion. The equity portion of this transaction of only 12% of the purchase price significantly increased the risks for the bank and Terra Firma. The takeover of EMI by Terra Firma turned out to be one of the biggest failures of leveraged buyouts in financial history.

species

Depending on the buyer, a distinction is made between management buy-out (MBO), management buy-in (MBI), employee buyout (EBO), owner buyout (OBO) and institutional buyout (IBO). With the MBO, the company is acquired by all or part of its management, with the MBI an external management buys the target company, with the EBO the target company's workforce acquires the company. A previous co-partner buys from OBO, while the purchaser is an associated company with IBO. The investment is often sold by the investor after a holding period of usually 4 to 5 years (the investment received receives the exit status ). If the next buyer is also a financial investor , it is called a secondary buy-out , and when it is sold to a third financial investor , it is called a tertiary buy-out .

Examples (Germany)

See also

Individual evidence

  1. Rico Baumann, Leveraged Buyouts , 2012, p. 9
  2. to pull oneself up by one's bootstraps means something like " pull yourself up by your own shoelaces"
  3. Allen Jaffrey Michel / Israel Shaked, The Complete Guide to A Successful Leveraged Buyout , 1988, p. 2
  4. Vassil Tcherveniachki, corporations and private equity funds , 2007, p 50
  5. Sebastian Ernst, The Economic Effects of Private Equity Investors , 2010, p. 11
  6. Torben Katzer, Buyouts , 2009, p. 1
  7. BBC News of February 1, 2011, EMI Taken Over By Citigroup in Deal To Write Off Debts
  8. Stephan A. Jansen (2013): "Mergers & Acquisitions: Company acquisitions and cooperation. A strategic, organizational and capital market theoretical introduction", Gabler: Wiesbaden, pp. 25, 46.

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