M&AANDPEPEANDLBOMARCH2022

MERGERS & ACQUISITIONS
AND PRIVATE EQUITY

LECTURE-BOOK (139 slides)
PART III
PRIVATE EQUITY AND LBO

CHAPTER 1 :PRIVATE EQUITY
PRIVATE+ EQUITY
TARGET FUNDING
4PRIVATE COMPANIES 4EQUITY

(TO REMAIN PRIVATE OR TO 4NEAR EQUITY
BECOME « IPOABLE »)
4PUBLIC COMPANIES FUNDING PROVIDED BY

(TO BE DELISTED) 4INSTITUTIONAL INVESTORS
4RETAIL INVESTORS
TWO MAIN KINDS OF PE:
MANAGEMENT
4VENTURE-CAPITAL (YOUNG
AND HIGH GROWTH 4HANDS OFF
COMPANIES) 4HANDS ON
4HANDS IN
4PE IN MATURE COMPANIES
3
©SPOC Essec Buisson Reproduction
& distribution are forbidden
FUNDS OF
FUNDS GROWTH
OTHER PORTFOLIOS HIGH GROWTH MEZZANINE
REAL ESTATE OF ACTIVITIES GRANTING
INFRA. INVESTMENT MATURE MEZZANINE
NATURAL FUNDS BUSINESSES DEBT
RESOURCES
OTHER
PRIVATE
COMPANIES & P2P
TURNAROUND TRADE PE SECONDARIES

&DISTRESSED SALE TRANSACTIONS
TROUBLED BUYERS ON EXISTING
COMPANIES INVESTORS’
DISTRESSED COMMITMENTS
equity
DEBT
SPACs
IPO OF SHELL VENTURE-
BUY OUT
COS FOR CAPITAL
(LBO)
FUTURE M&AS NEW AND
ACQUISITION
EXPANDING
OF COS
COS
THROUGH
SPVS
4
©SPOC Essec Buisson Reproduction & distribution are
FUNDS WORK ON THE BASIS OF CONTRACTS BETWEEN INVESTORS AND

MANAGERS(FUNDS RULES).THEY EXIST FOR A MAXIMUM OF APPROX.10 YEARS
GENERAL
INVESTORS(LP)
PARTNER(GP)
management funding
PRIVATE EQUITY FUND
investment
TC 1 TC 2 TC 3 TC 4 TC 5
©SPOC Essec Buisson Reproduction 5

Bain-and-Company-Global-Private-Equity-Report-2020
https://www.bain.com insights/topics/global-private-equity-report/
https://www.youtube.com/watch?v=OmnFhsfISyw

https://www.bain.com



https://www.amf-france.org/sites/default/files/private/2021-07/spacs_opportunities-and-risks-of-a-new-way-of-going-
public.pdf
https://www.esma.europa.eu/press-news/esma-news/esma-publishes-disclosure-and-investor-protection-guidance-spacs


INDICATORS OF PERFORMANCE:
J CURVE EFFECT
 THE IRR
 THE VINTAGE YEAR RETURN
 THE ALPHA OF JENSEN
 THE RATIOS OF FPERFORMANCE:
- DISTRIBUTED OVER PAID IN
- RESIDUAL VALUE TO PAID IN
- TOTAL VALUE TO PAID IN Source Calper


https://www.preqin.com

CHAPTER 2 :THE LEVERAGED BUY-OUT(LBO)
A) WHAT IS A LBO?
ACQUISITION OF A PRIVATE COMPANY BY ONE OR SEVERAL PE FUNDS
COMPLETED THROUGH A HOLDING COMPANY (NEWCO) THAT GETS THE

EQUITY AND BORROWS TO ACQUIRE THE TARGET COMPANY(OPCO)
MINIMIZING LAY-OUT OF CAPITAL AND MAXIMIZING DEBT AGAINST

THE ASSETS AND CASHFLOWS OF THE TARGET COMPANY
LBO PERIOD = UP TO 10 YEARS
KINDS OF EXIT:
IPO
RECAPITALISATION
SALE TO ANOTHER COMPANY OR INDUSTRIAL EXIT
SECONDARY LBO (AFTER 3 OR 4 YEARS)
MERGER BETWEEN TARGET COMPANY AND NEWCO

THE LEVERAGED BUY-OUT
A) WHAT IS A LBO?
EQUITY EQUITY
EQUITY FUND(S) MEZZANINE MANAGEMENT
… OF OPCO
CASH & SHARES

HOLDING LOANS
(NEWCO)
FORMER BANKS
SHAREHOLDERS
« DIVIDENDS » ACQUISITION
OPCO(TC)

B) KINDS OF LBO
1) LBO = AN EXTERNAL ENTITY (A FINANCIAL INVESTOR OR FUND)

BUYS THE SUBJECT COMPANY
- PRIMARY LBO
- FOLLOW-ON OR SECONDARY LBO
2) MBO = MANAGEMENT BUYOUT
THE COMPANY IS BOUGHT BY ITS MANAGEMENT
3) MBI = LBO IN WHICH THE INVESTORS HIRE NEW MANAGERS FOR

THE SUBJECT COMPANY
4) OBO= THE COMPANY IS ACQUIRED BY ONE OR MORE OF ITS

ORIGINAL SHAREHOLDERS

THE LEVERAGED
C) KINDS OFBUY-OUT
LBO
B) KINDS OF LBO
5) LBU LEVERAGE BUILD-UP
A FIRST LBO ON A TARGET COMPANY AND OTHER LBOS WITH THIS

FIRST COMPANY BEING THE ACQUISITION COMPANY
LBU CAN BE OFFENSIVE OR DEFENSIVE
THE MAIN PURPOSE OF A LBU IS TO CREATE INDUSTRIAL SYNERGIES
6) BIMBO= (L)BI+(L)BO EXTERNAL MANAGERS BUY THE TARGET

COMPANY WITH THE HELP OF ITS KEY MANAGERS
7) PIPE PRIVATE INVESTMENT IN PUBLIC EQUITY (…)

C) THE DIFFERENT LEVERAGES
1) CONTROL LEVERAGE
2) FINANCIAL LEVERAGE
MAXIMUM ROE OR IRR AND MAXIMUM TSR(TOTAL SHAREHOLDER
RETURN)
TSR= EQUITY SERVICE(DIVIDENDS +REPAYMENTS) + GAIN ON STOCK PRICE
3) FISCAL LEVERAGE OR LEVERAGED TAX OUT

ADVANTAGES DERIVED FROM SPECIFIC TAX REGIME
4) OPERATING LEVERAGE
5) MANAGERIAL AND SOCIAL LEVERAGE(LEVIER MANAGERIAL )

IMPROVED CORPORATE GOVERNANCE, INVOLVEMENT OF MANAGERS
(MANAGEMENT PACKAGE)

C)THE DIFFERENT LEVERAGES
1)EXAMPLE OF CONTROL LEVERAGE
PRINCIPLE= OPTIMIZING CONTROL AND MINIMIZING EQUITY INJECTION
EXAMPLE OF WATERFALL HOLDINGS( ORDINARY SHARES)
INTEREST INTEREST
PERCENTAGE PERCENTAGE
NEWCO1 26% NEWCO2 26%
408 MILLION 800 MILLION TC 800
FUND 51% 208.08 M NEWCO1 51% 408 M MILLION
INVESTORA 49% 199.92 M INVESTORB 49% 392 M NEWCO2
100%
CONTROL CONTROL
DRAWBACKS= LOSS OF FISCAL LEVERAGE AND RISK FOR THE INVESTOR

( RISK INCREASES AS HIS RETURN GOES DOWN)

2) FINANCIAL LEVERAGE
ROE = ROCE + (ROCE-iat)* NET FINANCIAL DEBT/EQUITY
iat COST OF DEBT AFTER TAX

ROE (RETURN ON EQUITY)= NET INCOME/EQUITY
ROCE= EBIT*(1- Corp tax )]/(EQUITY + NET FINANCIAL DEBT)
ROCE = EBIT*(1- Corp tax )]/(NON-CURRENT ASSETS +WCR)
ROCE >iat ROCE < iat

ROE > ROCE ROE < ROCE
POSITIVE LEVERAGE NEGATIVE LEVERAGE

3) FRENCH FISCAL LEVERAGE
a)PARENT COMPANY REGIME (REGIME MERE-FILLE)
➔ THE HOLDING AND THE TARGET OR DAUGHTERCOMPANY MUST BE

FRENCH AND LIABLE TO CORP TAX
➔ THE HOLDING MUST HOLD AT LEAST 5 % OF THE TC
INCOME FROM EQUITY INTEREST( DIVIDENDS )OF THE OPCO

IS TAX-FREE
(EXCEPT FOR A SHARE OF COSTS AND EXPENSES REPRESENTING 1% TO 5% OF THIS INCOME)

a)PARENT COMPANY REGIME :EXAMPLE(1st YEAR)
Stand alone TC income before tax 100

Newco (Holding) income before tax saving (5)
Dividends of TC (80) (here assumption
Tax free because Newco holds at least 5% of TC (to be stake 100%)
subtracted from revenue liable to corp. tax)
Revenue liable to corp. tax 15
Corp. tax (34%) (5.1)
Net Newco group income after tax 9.9

b)TAX CONSOLIDATION(REGIME D’INTEGRATION FISCALE)
➔ THE HOLDING MUST HOLD AT LEAST 95% OF THE CAPITAL OF ITS

SUBSIDIARIES
➔ ACCOUNT DATES MUST BE IDENTICAL WITHIN THE GROUP
CORPORATE TAXES COMPENSATE EACH OTHER WITHIN THE GROUP :
1.THE OPCO GIVES ITS TAX TO THE HOLDING
2.THE HOLDING PAYS THE TAX FOR THE GROUP
DIVIDENDS FROM THE OPCO ARE TAX-FREE

b)TAX CONSOLIDATION:EXAMPLE(1st YEAR)
Newco income before tax saving (5)

Income tax paid by Newco for the Group (5.1)
Newco (Parent company) holds at least 95% of TC
Newco receives corp. tax of TC and pays tax for the 34 (34%*100)
Group
Income tax contribution of TC
Net Newco income after tax savings 23.9
FRENCH FISCAL ADVANTAGES HAVE 2 MAIN LIMITS

1° POSSIBILITY TO HOLD AT LEAST 95% OF OPCO
2° CHARASSE AMENDMENT

4CHANGES IN FRENCH FISCAL RULES HAVE NEGATIVELY IMPACTED LBO

OPERATIONS
MAIN CHANGES ARE :
1- A SPECIFIC REGIME IS APPLIED TO CARRIED INTEREST
2- TAX DEDUCTIBILITY OF INTEREST ON LBO LOAN IS LIMITED TO 75% OF

THE INTEREST IF INTEREST TOTAL MORE THAN EUR 3 MILLION
4IF TAX CONSOLIDATION IS NOT POSSIBLE ONE SOLUTION IS DEBT PUSH

DOWN

D) FINANCING STRUCTURE
EXAMPLE OF FINANCING POSSIBILITIES

* EQUITY
• NEAR EQUITY
• SHAREHOLDERS’ LOAN
• BRIDGE EQUITY( IN CASE OF UPSIDE FINANCING)
HYB (LISTED BONDS) BULLET
MEZZANINE C PIK INTEREST AND CASH INTEREST
MEZZANINE B
MEZZANINE A
SECOND LIEN SENIOR JUNIOR TO SENIOR FOR GUARANTEES

SENIOR DEBT C IS BULLET 9 YEARS +
C LOAN JUNIOR TO B LOAN B IS GENERALLY BULLET
B LOAN JUNIOR TO A LOAN 7/8 YEARS
A LOAN FIRST SENIORITY A IS AMORTIZED 5 TO 7 YEARS
SENIOR CAPEX LOAN(ON TC)

BRIDGE LOAN (OFTEN INCLUDED IN SENIOR DEBT 1 YEAR IF REPAYABLE
AS NET CASH)
EXCEPTIONAL DIVIDENDS
LIQUIDITY KIT(ON TC) EXAMPLES: FACTORING AND LEASE BACK
27
COVENANTS
LEVERAGE RATIO < 4 NET DEBT / EBITDA
SENIOR DEBT LEVERAGE < 3 NET SENIOR DEBT / EBITDA
EBITDA/DEBT SERVICE EBITDA/CASH FLOWS FROM FINANCING ACTIVITIES
INTEREST COVER RATIO > 3 EBITDA /CASH INTEREST
INTEREST COVER RATIO CFADS /CASH INTEREST
REPAYMENT COVER RATIO CFADS /CHANGE IN DEBT
DSCR(DEBT SERVICE COVER RATIO) CFADS/ (CASH INTEREST + CHANGE IN DEBT)

INDICATIVE MINIMUM = 1.20 TO 1.40


E) THE MANAGEMENT PACKAGE
INVOLVEMENT OF MANAGEMENT ENABLES THE NEWCO TO OPTIMIZE

FISCAL LEVERAGE AND MANAGERIAL LEVERAGE
PARTNERS KIND OF EXPOSURE TO HORIZON=f (FINANCIAL

FUNDING PERFORMANCE OF « REASONABLE »LEVERAGE)
TC
FINANCIAL EQUITY VERY HIGH 5 TO 7 YEARS
INVESTORS
MANAGEMENT EQUITY HIGH TO VERY HIGH 15 YEARS AND MORE
( 5 TO 20%)
BANKS AND SENIOR DEBT DEPENDS ON DEPENDS ON SENIORITY AND
FUNDS SECOND LIEN SENIORITY AND MATURITY BUT SHORTER
MEZZANINE MATURITY OF LOAN THAN FOR MANAGERS
MANAGEMENT PACKAGE

FISCAL AND LEGAL INCENTIVES OR PROFIT-SHARING SCHEME ARE BASED ON

AGENCY THEORY
CERCLE 1 IS RELUCTANT TO EXTEND THE PACKAGE TO OTHER MANAGERS &
EMPLOYEES….
FISCAL REQUALIFICATION MAY OCCUR
PACKAGE IS TRIGGERED BY SPECIFIC EVENTS(IRR OR x PERFORMANCES )
SCOPE OF MANAGEMENT
PACKAGE
CERCLE 1
EXECUTIVES OR TOP
MANAGEMENT
CERCLE 2
EXECUTIVES AND
OTHER MANAGERS
CERCLE 3
EMPLOYEES

CERCLE 1
EXECUTIVES OR TOP
MANAGEMENT
1 3
2
INVESTMENT IN REALLOCATION OF WAGES FIXED PART

EQUITY ONE PORTION OF THE
FINANCIAL GAIN (PORTION OF + PREMIA
INSTRUMENTS EXIT VALUE OR IRR)
USED AS AMOUNT IS LOWER
INCENTIVES FOR THAN DIRECT
PERFORMANCE OF EQUITY RETURN
MANAGEMENT
SWEET EQUITY SWEAT EQUITY

RATCHET
32
SWEAT EQUITY ENVY RATIO

EX1 FINANCIAL INVESTOR GIVES 9 EUR FOR 1
SHARE AND MANAGEMENT GIVES 2 EUR FOR
WORK OF THE MANAGERS THEY GET AN
1 SHARE ENVY RATIO IS 9/2=4.5
ISSUANCE PREMIUM WHICH ENABLES
THEM TO HAVE ACCESS TO THE CAPITAL
EX2 EQUITY IS 340 FINANCIAL INVESTORS
WITH BETTER TERMS THAN FINANCIAL
BRING 280 (STAKE 70%) AND MANAGEMENT
INVESTORS
BRINGS 60(STAKE 30% )
ENVY RATIO IS ( 280/70%)/(60/30%) = 2
SWEET EQUITY RATCHET AND RATCHET GRID

RELUTION MECHANISM TRIGGERED BY
STAKE BOOSTER FOR THE MANAGERS WHO PERFORMANCE INDICATORS (IRR,EBITDA)
HOLD ONLY SHARES USE OF STOCK WARRANTS FREE SHARES
CB….
MAIN PROS=RISK OF FISCAL
REQUALIFICATION IS LIGHT RATCHET MAY BE LINEAR OR INCREMENTAL
THE SWEET EQUITY IS BASED ON THE ENVY
RATIO IT IS DILUTIVE FOR FINANCIAL INVESTORS
33

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MERGERS & ACQUISITIONS

AND PRIVATE EQUITY

PRIVATE EQUITY AND LBO

4PRIVATE COMPANIES 4EQUITY

4PUBLIC COMPANIES FUNDING PROVIDED BY

TURNAROUND TRADE PE SECONDARIES

FUNDS WORK ON THE BASIS OF CONTRACTS BETWEEN INVESTORS AND

©SPOC Essec Buisson Reproduction 5

©SPOC Essec Buisson Reproduction 6

©SPOC Essec Buisson Reproduction 7

©SPOC Essec Buisson Reproduction 8

©SPOC Essec Buisson Reproduction 9

©SPOC Essec Buisson Reproduction 10

©SPOC Essec Buisson Reproduction 11

 THE VINTAGE YEAR RETURN

 THE ALPHA OF JENSEN

 THE RATIOS OF FPERFORMANCE:

- DISTRIBUTED OVER PAID IN

- RESIDUAL VALUE TO PAID IN

- TOTAL VALUE TO PAID IN Source Calper

©SPOC Essec Buisson Reproduction 12

©SPOC Essec Buisson Reproduction 13

©SPOC Essec Buisson Reproduction 14

ACQUISITION OF A PRIVATE COMPANY BY ONE OR SEVERAL PE FUNDS

COMPLETED THROUGH A HOLDING COMPANY (NEWCO) THAT GETS THE

MINIMIZING LAY-OUT OF CAPITAL AND MAXIMIZING DEBT AGAINST

LBO PERIOD = UP TO 10 YEARS

©SPOC Essec Buisson Reproduction 15

CASH & SHARES

©SPOC Essec Buisson Reproduction 16

1) LBO = AN EXTERNAL ENTITY (A FINANCIAL INVESTOR OR FUND)

3) MBI = LBO IN WHICH THE INVESTORS HIRE NEW MANAGERS FOR

4) OBO= THE COMPANY IS ACQUIRED BY ONE OR MORE OF ITS

©SPOC Essec Buisson Reproduction 17

5) LBU LEVERAGE BUILD-UP

A FIRST LBO ON A TARGET COMPANY AND OTHER LBOS WITH THIS

6) BIMBO= (L)BI+(L)BO EXTERNAL MANAGERS BUY THE TARGET

7) PIPE PRIVATE INVESTMENT IN PUBLIC EQUITY (…)

©SPOC Essec Buisson Reproduction 18

3) FISCAL LEVERAGE OR LEVERAGED TAX OUT

5) MANAGERIAL AND SOCIAL LEVERAGE(LEVIER MANAGERIAL )

©SPOC Essec Buisson Reproduction 19

EXAMPLE OF WATERFALL HOLDINGS( ORDINARY SHARES)

DRAWBACKS= LOSS OF FISCAL LEVERAGE AND RISK FOR THE INVESTOR

©SPOC Essec Buisson Reproduction 20

ROE = ROCE + (ROCE-iat)* NET FINANCIAL DEBT/EQUITY

iat COST OF DEBT AFTER TAX

ROCE >iat ROCE < iat

©SPOC Essec Buisson Reproduction 21

3) FRENCH FISCAL LEVERAGE

a)PARENT COMPANY REGIME (REGIME MERE-FILLE)

➔ THE HOLDING AND THE TARGET OR DAUGHTERCOMPANY MUST BE

➔ THE HOLDING MUST HOLD AT LEAST 5 % OF THE TC

INCOME FROM EQUITY INTEREST( DIVIDENDS )OF THE OPCO

(EXCEPT FOR A SHARE OF COSTS AND EXPENSES REPRESENTING 1% TO 5% OF THIS INCOME)

©SPOC Essec Buisson Reproduction 22

a)PARENT COMPANY REGIME :EXAMPLE(1st YEAR)

Stand alone TC income before tax 100

©SPOC Essec Buisson Reproduction 23

b)TAX CONSOLIDATION(REGIME D’INTEGRATION FISCALE)

➔ THE HOLDING MUST HOLD AT LEAST 95% OF THE CAPITAL OF ITS

CORPORATE TAXES COMPENSATE EACH OTHER WITHIN THE GROUP :

1.THE OPCO GIVES ITS TAX TO THE HOLDING

2.THE HOLDING PAYS THE TAX FOR THE GROUP

M&AANDPEPEANDLBOMARCH2022

M&AANDPEPEANDLBOMARCH2022