The Approach of a Private Equity in an M &A Transaction Andrea - - PowerPoint PPT Presentation

The Approach of a Private Equity in an M &A Transaction

Andrea Foti

11 November, 2019

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M y background

2017 Investment Banking Advisory | Milan 2013 Investment Banking Advisory | Milan 2004 Investment Banking Advisory | Milan 2001 FIG Investment Banking | London 2000 Financial Institution Strategy Group (Internship) | Rome 1999 Investment Banking | Rome 2000 Degree in Business | Rome

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• 1. The approach of a PE fund
• 2. From kick-off to Closing – A case study
• 3. Valuation metrics & M&A strategic variables

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Private equity funds play a growing role in the M &A market

üThe past 5 years have been ones of unprecedented success for the private equity ("PE") industry, with

more money raised, invested and distributed back to investors than in any prior period in the industry

üT

• day, PE represents one of the key asset classes in the financial industry, globally: notwithstanding a

slow decline toward public market average (during the period), returns are still strong relative to other asset classes

üA number of concerns, injecting a sense of uncertainty, exist

• Fear of potential recession
• Volatile capital markets
• US-China trade war
• Central Banks monetary policies
• Brexit
• The impact of technological change, which makes it harder to forecast winners and losers
• Persistent high prices / expectations

üPE funds play a role in >10% of the 40,000 M &A transactionscompleted globally each year

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The involvement of PE funds in corporate finance transactions

IPO Advisory & Fund Raising Financial Restructuring Dividend recapitalisation J

• int

Ventures & Partnerships Tender offers / De-listings Spin-offs PE fund Add-ons M ergers & Acquisitions

üPE funds represent a key player in a broad spectrum of corporate finance transactions, involving

either potential targets or portfolio companies

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The PE market is segmented by investment strategies, geographiesand sectors

Investment Strategy

Venture capital Growth equity Mezzanine fund Leverage buyout – Mid & large Leverage buyout – S mall Distressed

Geography

Global US S

• uth America

Western Europe Central & Eastern Europe China & India Middle East & Africa Asia Pacific

Industry / Sector

Generalist T elecom, Media & T echnology Healthcare Financial institutions Real estate Industrials Aerospace & Defense Infrastructure Consumer & Retail

üThere are many different types and sizes of PE firms and funds üThe same PE firm can raise multiple funds, each one focused on specific geographies and/or industries üThe figure below illustrates the types of investment strategy, geography and industry focuses a PE

fund can specialize in

Note: leveraged buyout funds can include club-deals and family offices

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Specific funds invest in different company stage, with different equity tickets

Ticket

üThe proposition of a fund depends on the PE firm’s size, stated investment strategy, and industry &

transaction expertise

Distressed Buyout Size Description Example industry focus Company stage (early > late) €2-100m >€100m Small-mid Large Venture Capital €50k-5m VC Companies in early stage of development and cash-flow negative Growth Capital €5-50m Small-mid Equity and/or debt, in growing companies requiring increasing working capital, capex or an acquisition M ezzanine Financing €5-50m Small- large Subordinated debt or preferred equity (between equity and senior debt on the balance sheet) Leveraged Buyout €2-100m >€100m Small-mid Large Acquisition of a company with use of financial leverage, to create value ahead

• f the exit

Equity and/or debt securities of financially stressed companies (and then turnaround of the business) Healthcare, T echnology, Software Most sectors Most sectors Most sectors Most sectors

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The key drivers in the agenda of a PE fund, when buying a company…

üWhen a PE fund analyses the attractiveness of a potential target, it strongly focuses on a number of

things that corporate buyers may put less emphasis on. Some include:

• Overall industry characteristics
• Growth prospects (both organic and through M&A) for the target
• Strong profitability and cash-flow generation
• Skills of senior management
• Existence of a clear strategic vision
• Level of reliability and consistency of the revenue base and/or potential to reduce costs
• Availability of a roadmap to address any short term / long term threats to the business
• Governance, reporting systems and control mechanism in place at the target (or possibility to

implement state-of-the-art ones)

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The key differences between a PE fund and a strategic buyer

üThe term "strategic buyer" refers to any purchasing entity which is engaged in an operating business

(including public and private corporates, competitors, customers and distributors)

üPE funds and strategic buyers typically approach a transaction in different ways

Approach to valuation

ü No synergies ü Profitability and cash-flow generation ü Level of potential indebtness

Strategic PE fund

ü Potential synergies (revenues and costs) ü Profitability

Sale process, timeline and negotiation of the deal

ü Easier negotiation of Confidentiality Agreement ü Speed in decision making, during the process ü Price driven by financial returns

Strategic PE fund

ü Higher familiarity in understanding the business ü Uncertainty in execution, due to different levels of internal approval ü Price driven by different factors, including strategic opportunity

Approach to the business going forward

ü Attractive opportunities for the existing management team ü Minority shareholders and management required to have "skin in the game"

Strategic PE fund

ü Change in senior management team ü Integration process with the buyer

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The main partners of a PE fund in an M &A deal

üAn M &A transaction is often complicated and numerous players are typically involved üA PE fund (acting either as a buyer or aseller) interacts with a broad team of advisors (in addition to

their internal team)

üIn order to make everything work well, all advisors must act in concert

Financial Advisor PE Fund (Buyer or Seller) Legal Advisor Tax Advisor Strategic Consultant Environmental Advisor M &A Insurance Broker

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• 1. The approach of a PE fund
• 2. From kick-off to Closing – A case study
• 3. Valuation metrics & M&A strategic variables

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The steps to a typical M &A process, involving PE funds and strategic buyers

On average, M &A processes take 4 – 8 months to execute 4-8 months

üSeller

• Assessment of strategic alternatives / Design of the process
• Preparation of marketing materials
• Execution of marketing programme

üBuyer

• Non-binding offer
• Due diligence
• Final bids

üBuyer & Seller

• Negotiation and selection of buyer
• Signing & closing

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The different processes for an Acquisition / Disposal

§Short §Long §Low §High

NUM BER OF BUYERS TIM E FRAM E Pre-emptive / One-to-

• ne deal

Targeted solicitation Controlled auction Public auction Process A Process B Process C Process D

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M ultiversity-CVC: a private equity deal, involving numerous global PE funds (1/ 2)

PE fund

üIn August 2019, CVC acquired 50% of M ultiversity,

• wner of Italy's largest online university Università

T elematica Pegaso and Mercatorum University

üMultiversity and Pegaso founder Danilo Iervolino

retained a 50% stake The transaction Target The investment thesis

Resilience through cycles Growing market Market leadership with clear value proposition Multiple levers for future growth Scalable business model Strong financial track record Proprietary e-learning platform

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M ultiversity-CVC: a private equity deal, involving numerous global PE funds (2/ 2)

2017

üPre-emptive with a PE fund üDeal aborted

Apr. 2018

üLaunch of controlled auction, involving > 40 PE funds

J ul.-Dec. 2018

üNegotiation with a number of selected PE funds üA frontrunner stood out

Dec. 2018

üDeal blocked by a specific issue

M ay 2018

üRegulatory breakthrough, resolving the issue üOne-to-one negotiation started again

J un-Aug. 2018

üDue diligence phase üSigning

Pre-emptive Controlled auction One-to-one Process A Process C Process A

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M ultiversity-CVC: an exciting deal, which required strong skills to face complexity

üThe sale process was complicated by the possibility, for potential investors, to submit offers for either a

minority or majority stake

üThe Controlled Auction came few months after the aborted Pre-emptive Process üMultiversity enjoyed many very attractive features for a PE fund (incl. exceptional growth; strong cash

conversion; sector underpinned by solid macro-trends; potential for add-ons)

ü…

T

• gether with a number of issues(e.g. universities are non-profit companies; PE funds mainly invest

in Northern Italy; valuation increasing over the process; strong competition between potential buyers)

üThe buyer presented a number of distinctive features:

• Prior experience in the education sector (including the recent acquisition of Universidad Alfonso

X in Spain which represents an attractive opportunity for potential cooperation)

• Strong track-record in supporting companiesin growing organically and through M&A
• Global reach, with international presence in areas potentially attractive for Multiversity
• Large Italian team, including seasoned / experienced professionals
• Patience and persistency, having developed – over 12 months – a relationship of trust with the

entrepreneur

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Started as a pre-emptive / one-to-one process…

üScreen and identify most likely buyer ü4-5 months to Signing

Description

▲Maximum confidentiality ▲Speed of execution ▲Minimum business disruption

Pros

▼May not maximize value ▼Tied to result of one negotiation

Cons

üClear sense of most logical buyer / strong fit with one buyer üConfidentiality is critical üSeller in strong negotiating position

Rationale Process A

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… becoming a controlled auction

üRange of logical buyers contacted and pre-sounded üTypically involves formal guidelines on sale process üPublic disclosure not required ü6-7 months to Signing

Description

▲Accurate test of market price ▲High degree of control over process ▲Creates strong sense of competition

Pros

▼Risk of public leak ▼May “turn off” some buyers ▼May lengthen sale process

Cons

üLarger group of potential buyers üProvides good balance between confidentiality and value

Rationale Process C

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• 1. The approach of a PE fund
• 2. From kick-off to Closing – A case study
• 3. Valuation metrics & M &A strategic variables

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Valuation metrics

The business plan of the company plays a key role during the whole M &A process and it is the key instrument for valuing a business Standard market practice M ainly used by PE funds M ainly used by listed companies

üDiscounted Cash Flow models üM&A transactions üTrading comparables üLeveraged Buyout (LBO) returns analysis üEPS accretion / dilution

Commonly used by PE funds

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M &A – marketing materials

Info M emo

▲Optimises positioning of investment thesis,

highlighting selling points

▲Helps buyers in understanding the story ▼Discloses information to

competitors / clients

▼Absorbs management time ▲Limits the disclosure of confidential information ▲Compresses the timetable ▼Risks positioning the story in

sub-optimal fashion

Info Package Teaser

▲First marketing material ▲No confidential information disclosed ▼No particular risks

The Info M emo is a key instrument in most M &A deals

1. Executive summary 2. History & Ownership 3. Industry 4. Business & Strategy 5. Organisation 6. Other administrative information 7. Financial information

An example of Table of Contents

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M &A – Vendor Due Diligences (“VDD”)

üNot interesting for trade buyers üIt can help private equities, but much less of a priority than in pre-2008 sale processes üPrivate equities tend to be focussed on understanding the business and the drivers of

growth during the due diligence, alongside the management team

üHelps both trade buyers and private equities during the due diligence üLimits the flow of questions that would absorb management time üShortens the timetable üWould help to negotiate reps & warrs

Business VDD Accounting VDD

üCan support both trade buyers and private equities, shortening the timetable üBut, post-2008, buyers tend to be much more careful, also in this space

Legal VDD

üLowest priority for both trade buyers and private equities

Tax VDD

üWould give preliminary comfort to buyers and would help to negotiate reps & warrs üDepends on how significant environmental issues are in the deal

Environ- mental VDD

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M &A – data room

Virtual Data Room

▲Multiple due diligence at the same

time, making data room available for a longer period

▲Availability 24/ 7 ▲Optimises involvement /

commitment of international buyers

▲Monitoring the interest of potential

buyers, real-time reports

▼Risk of diffusion of the documents ▲Higher level of control on the

documents

▲Can be an add-on to virtual data

room, limited to selected information only

▼Binding offers likely to be subject to

supplementary due diligence

▼Time inefficient

Physical Data Room

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M &A – bidding round process

One bidding- round

▲Speed / Efficiency ▲Pre-emptive value captured ▲Confidentiality maximized buyers ▼Risk of missing bidders ▼Limits ability to manage information flow ▼Issues on getting financed bids ▲Maximizes competitive tension ▲Ability to screen buyers ▲Manage information flow more

effectively

▼Time-consuming ▼Risk of tactical first round bids

Two bidding- rounds

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Thank you!