The Management Buyout — Anatomy of a Deal

The Management Buyout — Anatomy of a Deal
By Peter V. Anania
Principal, Leaders LLC
Amanagement buyout, known as an MBO, is the pur-
cial risk should things not turn out well. In the GT&S transac-
chase of a business operation from its owners by its
tion, the bank is Sovereign and the PEG is PNC Equity.
existing management team usually with the help of
The GT&S MBO used additional levels of funding making
financial backers. An MBO presents management with the
it more complicated than most. For example, the real estate in
opportunity to acquire the division, subsidiary or company
the GT&S deal was purchased separately, through a sale-lease
they are already running and is typically financed by money
back arrangement with a specialized lender, requiring its own
provided by external sources. Sometimes the current owner is
negotiations to coordinate the banks and their collateral.
involved with the financing. The profits and cash flow of the opera-
In a more typical MBO, one bank has the senior security in all of
tion usually provide the basis for the purchase and for the repayment
the assets being acquired and provides 50 to 60 percent of the fund-
of outside financing.
ing. The bank will generally look to provide financing of no more
In general, an MBO is an acquisition of, or a divestiture from, a
than four times the operation’s EBITDA (earnings before interest,
large or public company by all or some of its current management
taxes, depreciation & amortization). The bank will require that it is
team. In our industry, the MBO is often the choice for a select man-
repaid in priority over the other funding and equity sources. Given
agement group, together with additional outside financing, to buy a
this priority the bank’s downside risk is lower and, therefore, has a
privately owed company from its current owners.
lower reward/pricing structure.
An ESOP (employee stock option plan) is an alternative to the
The next levels of funding (from the PEG) will provide funding
MBO and is best suited when acquisition
equal to two times the EBITDA, typically
of the business is desired by most/all of
split into a mezzanine layer with junior
the employees. While an ESOP opens up
security behind the bank, and an equity
the acquisition to a larger pool of
layer of financing. The expected annual
employee/buyers, it can be the more
An MBO presents management
returns are usually 25 to 35 percent depend-
expensive way for employees to achieve
ing on the mix of the assets providing the
with the opportunity to acquire
an ownership stake. Also, an ESOP
security, the governance structure of the
leaves the current owners with continu-
the division, subsidiary or company
new entity, and the amount of equity pro-
ing fiduciary duties, liabilities and other
vided by the management. The annual
they are already running and is
risks. These factors often make the MBO
expected return for the PEG is achieved by
a more attractive type of purchase deal
typically financed by money
a “guaranteed” return (14 to 16 percent) on
for employees to acquire their company.
their capital, prior to any payments to man-
provided by external sources.
An MBO can also reward a competent
agement, and warrants for a percentage of
and loyal management team, assure
the common stock. The PEG would expect
employees that the operations will
to exit their investment in five to seven
remain stable, and generally keep the
years through a private sale of the company,
existing business intact to increase its size, scope and profitability.
a refinancing by the management team, or the company going public.
Recently, Leaders LLC (together with J. R. “Buzz” Campbell)
The reason management teams undertake an MBO, and agree to
assisted a management team, lead by Bryan Gentry, in the purchase of
all of the costs and restrictions associated with a leveraged transac-
its division, Messer GT&S, from Air Liquide. Air Liquide had
tion is because an MBO gives management the ability to make a sig-
acquired Messer GT&S as part of its acquisition of MG Industries
nificant gain from a relatively modest personal investment. The
USA from Germany’s Messer Griesheim in 2004. In the GT&S
management team typically invests 5 to 10 percent of the funds
MBO, the Seller, Air Liquide, recognized that there would be signifi-
required to make the acquisition and is expected to demonstrate a
cant benefits in dealing with the existing management. For example,
high level of commitment to back up their limited personal invest-
in an MBO, due diligence can be completed faster by selling to man-
ment. But even 5 percent of an acquisition can be a large figure to an
agement rather than to an outside entity, thereby making such things
individual in an MBO, and it is not uncommon for members of the
as representations and warranties less onerous. And important in the
management team to borrow money from a bank in a personal capac-
GT&S deal, was the opportunity for the seller, Air Liquide, to negoti-
ity to finance their investment. This, of course, adds yet another layer
ate a contract with the buyer, to continue the sale of a significant vol-
of financial complexity to the MBO.
ume of gases to the new company.
Each MBO is obviously different, but typically it takes three to six
In an MBO, banks and/or a private equity groups (PEG) normally
months to complete a transaction. The various steps of an MBO
provide the majority of the financing required. In planning ahead to a
include:
successful exit strategy, the debt and working capital financing pro-
• Assemble the Management Team
vided by the bank will be the cheapest form of finance. The equity and
• Engage a Financial Advisor
secondary (“mezzanine”) debt provided by the PEG are more expen-
• Review the situation to see if it is suitable for an MBO
sive to the management team as the PEG takes on more of the finan-
• Evaluate the potential price and structure options
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• Approach the Seller to obtain an exclusive position
• Write a Business Plan
• Identify appropriate funding sources
• Obtain tax advice
• Obtain and negotiate offers of funding
• Negotiate the Letter of Intent
• Perform Due Diligence
• Negotiate the Purchase and Sale Agreement
• Negotiate the Closing documents and other Agreements
Performing and managing the above steps of the typical MBO can be
an emotional roller coaster so management will need to work very
closely with their financial advisor on a daily basis. It is therefore vital to
select an advisor who will provide the necessary industry experience and
support when the transaction becomes difficult — as they invariably do.
In the GT&S transaction, Leaders insight and its affiliation with
J.R. “Buzz” Campbell, proved to be invaluable to the success of this
MBO. Campbell’s industry expertise, personal knowledge of the play-
ers involved, and his ability to identify their overall needs, helped to
overcome many obstacles along the way.
An MBO can be costly with closing costs amounting to 5 percent or
more of the transaction value. Your financial advisor should be able to
structure most of these closing costs to be contingent upon completion
of the transaction.
Managing the business post-closing also needs careful advance
planning. A detailed plan for the first 100 days outlining the immedi-
ate tasks is a must to capitalize on the energy created internally and by
the external news of the deal. The PEG may want to appoint a chair-
man or other non-executive director to bring relevant experience
and/or plug any skill gaps in the management team. Positioning the
business and planning for a fruitful refinancing or exit needs to be part
of the MBO transaction from its inception. Assistance from your fund-
ing partners in formulating this plan and developing an effective busi-
ness position for all stages of the company’s development is critical.
Gentry and his team had such a plan for GT&S, as well as the nec-
essary skills to execute it from the beginning. (See related story,
“GTS — Combining the Capabilities of the Majors with the Charac-
teristics of a Distributor”, CGI, Aug/Sept, 2005.) The PEG with whom
they partnered, PNC Equity, also had experience in a similar industry
and understood the immediate needs of the GT&S business. All the
players involved were anxious to not only grow the company organi-
cally, but also through acquisitions. Acquiring additional businesses
that can be integrated quickly and cleanly into existing operations is
often the fastest way to increase the company’s EBITDA and, thus, its
value. So far, it appears this strategy has been successful for GT&S.
If you would like additional information on this subject, please
contact Leaders at 207-773-2200 or send an email to Anania@Lead-
ers-LLC.com. Leaders would be glad to discuss the many benefits of
an MBO to both buyers and sellers.
Peter V. Anania is a Principal of Leaders LLC, www.leaders-
llc.com, a mergers and acquisitions advisory firm, which advises
industrial gas and cryogenic equipment companies around the
world. Peter was recently elected to International Network of Merg-
ers & Acquisitions Partners’ Board of Directors and is Chairman of
the Membership Committee. He can be reached at 207-773-2200 or
Anania@Leaders-LLC.com.
❑
October 2005 — CryoGas International
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