INVESTMENT BANKING (ISP)

Leveraged Buyouts (III)

Autumn Term 2023 – Unit 9

Prof. Dr. Morkötter
 Content
Investment Banking
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1. Exit strategies
2. Reversed leveraged buyouts
3. Bain’s Exit of Brenntag

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 Types of Exit Strategies
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Liquidation
B Disadvantages and advantages
depend on several parameters:
Buyback
− Condition of capital markets
C
− Condition of the economy
IPO
− IPO windows
D − M&A activity and number of potential
Trade Sale buyers

E
Secondary Sale

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 Considerations on Exit Strategies
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− How does an exit strategy fit with the company’s original business plan
objectives?
− Is the company approaching an exit in a position of strength or one of
weakness?
− What are the financial motives behind the pursuit of an exit strategy?
− What is the risk/reward trade-off of conducting an exit strategy vs.
remaining a stand-alone entity?
− Is the company able to manage itself throughout the process?
− What is the state of public markets?

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 Next Exit: IPO
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Pros

• Normally higher valuation, although dependent on market conditions

• Preferred exit for the management as control of the company is kept within
the firm
• Programs for incentivizing the employees increase the attractiveness of the
company
• Increased publicity increases attractiveness of the company for customers
and suppliers
• Access to growth financing through additional stock issue
• Extended access to debt as well as the possibility to use own shares as
payment instrument in acquisitions

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 Next Exit: IPO
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Cons

• Complex process, lasting at least 4-6 months and which considerably

influences the daily business of the management
• Liability of issuer, intermediaries, and investment bank concerning
information contained in brochures
• Only partial exit for private equity investors, because, usually, legal and
contractual lock-up obligations exist
• After stock quotation:
− Compliance with extensive obligations regarding periodical publishing
requirements, ad-hoc publishing requirements, investor publishing requirements,
directors dealings, compliance and corporate governance

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 Private Equity-Backed IPOs 2000-2022
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Value of PE deals (US$bn)

Source: Preqin (2023)

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 Trade Sale
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Sale of portfolio company to a corporate / strategic buyer

Pros:
• Simple selling process as well as flexibility regarding the structuring of the
transaction
• Normally complete exit of the investor
Cons:
• Loss of independence of the company and therefore lack of acceptance in
the management
• Risk that company secrets are revealed throughout the selling process
• Tedious search for appropriate buyers

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 Secondary Sale
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Sale of portfolio company to a financial sponsor (PE firm)

Pros
• End of lifetime of the private equity fund of the initial investors
• Initial investor has already reached the scheduled return on investment
• Viable exit if conditions of financial markets do not allow IPOs or
acquisitions of strategic investors
• Simple selling process as buyer and seller work in the same industry
Cons:
• Lower valuation than for an IPO or trade sale
• Uncertainty of the management due to the changes in ownership structure

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 Buy Back
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Pros
• Tends to be the result of unfavorable developments in the corporate
performance. This type of exit is usually chosen, if IPO, trade sale, or
secondary sale are not available
• Partly used as defensive mechanism against hostile takeovers or prevention
of changes in the shareholder structure
• Buy Backs are commonly the result of call options that were agreed upon in
the initial stages of the company's development. The call options are
supposed to grant the founders the right to buy back their company in a
certain period of time for a fixed price.
• Fast and un-bureaucratic execution
Cons
• Buy back by re-leveraging, an increase in the level of debt, might be
dangerous due to the additional withdrawal of liquidity

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 Sales to Strategic Buyers Remain a Key Pillar of
Exit Activities
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Aggregate exit values (US$bn)

Source: Preqin (2023)

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 PE Funds receive the highest exit valuation levels
when selling to strategic acquirers …
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Trade Sale EV/EBITDA Multiples over Time (1995-2015)

Source: Vogt (2016)

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 … whereas sales to competitors …
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Secondary Sale EV/EBITDA Multiples over Time (1995-2015)

Source: Vogt (2016)

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 …. and IPO-driven exists lead to lower valuaton
levels
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IPO EV/EBITDA Multiples over Time (1995-2015)

Source: Vogt (2016)

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Investment Banking
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Exit Strategy of Brenntag

Section 6

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 To Make Brenntag's Debut
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LBO by Bain Capital (2004)

• LBO in 2004
− Bain Capital acquired Brenntag, the chemical distribution company sold by Deutsche
Bahn for €1.4bn. Interfer, a steel distributor, also changed hands as part of the
acquisition
− The equity sponsor, Bain Capital Partners, invested about €52 million cash equity and
almost €300 million preferred equity certificates, which are close to equity.
− Brenntag's senior secured facilities--A, B, C, revolver, and acquisition facilities-- about
€1,162 million in total (about €810 million of which were used for the LBO)
• Aggressive financial leverage following the LBO transaction
Brenntag AG – Credit Facility Distribution Debt Maturities (in million Euro)
Senior Facilities Amount Margin Term Repayment Loan 2004 0
(Mil. €) (%) (Years) Rating
2005 8
Tranche A 335.0 2.25 7 Amortizing BB-
2006 20
Tranche B 367.4 2.75 8 Bullet BB-
2007 42
Tranche C 124.6 3.25 9 Bullet BB-
2008 59
Tranche D 60.0 5.00 9.5 Bullet B
2009 70
Acquisition Facility 150.0 2.38 7 Amortizing BB-
2010+ 900 (including
Revolver 200.0 2.25 7 Bullet BB- mezzanine capital)

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 To Make Brenntag's Debut
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Group Structure (2004)

Interfer management €
Bain Capital 1.25 mil. equity /
shareholder loans
Brenntag management €8.0
mil. of equity / shareholder €339 mmil. of equity
loans Luxco Holding shareholder loans

€125 mil. senior Brenntag Luxco Interfer Luxco

facility
€97 mil.
mezzanine Brenntag Holdco Interfer Holdco
facility
€10 mil. senior facility €63 mil. senior
Acquisition Co €76 mil. mezzanine facility facility
Acquisition Co

Finance Co
Luxembourg €256 mil. senior €212 mil. senior €206 mil. senior
facility facility facility

Other Interfer
Germany Austria Spain U.S. Netherlands France Subsidiaries Subsidiaries

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 Private Equity Exit-Strategy
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Brenntag AG – The IPO (2010)

• Bain Capital sells (parts of) Brenntag to other PE funds in 2006 (Secondary Sale)
− Shares are bundled in Brachem Acquisition S.C.A.
− Major shareholders are BC Partners, Bain Capital & Goldman Sachs
• IPO of Brenntag AG took place on March 29, 2010 with the debut on the
German stock exchange
• Brachem Acquisition S.C.A. reduced its percentage of shares from 100% to 70%
throught the IPO
• IPO: Successful exit-strategy for investors
− Proceeds of capital increase were used to reduce debt  greater financial flexibility
− Free CF and low costs  growth strategy
• Acquisition of EAC Industrial Ingredients Ltd.
− Increasing free-floating ratio from 29% to 50% in 2010 due to the placement of further
shares to institutional investors
• In February 2012 Brachem’s stake (still): 13.7%

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 Private Equity Exit-Strategy
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Brenntag AG – Accounting Performance (2006-2011)

Year 2006 2007 2008 2009 2010 2011

Total Revenue 6'256.8 6'671.4 7'379.6 6'364.6 7'649.1 8'679.3
EBITDA 334.8 405.1 479.4 472.0 593.5 658.0
Margin % 5.4% 6.1% 6.5% 7.4% 7.8% 7.6%
EBIT 127.2 199.4 276.7 267.8 405.1 546.2
Margin % 2.0% 3.0% 3.7% 4.2% 5.3% 6.3%
Net Incom e (142.0) (64.0) (42.1) (0.1) 143.6 277.4
Margin % (2.3%) (1.0%) (0.6%) (0.0%) 1.9% 3.2%
in m EUR

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 Development of the Brenntag share price
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Indexed to 100 (2010)

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Investment Banking
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Exit of HCA
Section 3

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 The exit: HCA IPO
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• HCA went public (IPO) on NYSE in March 2011: it was the largest PE-backed IPO
in US history
• Size of the IPO: $3.79 billion, shrugging off the hospital operator's high debt levels
• IPO details:
− HCA sold 126.2 million shares for $30 each, exceeding an expected 124 million
shares at $27 to $30 each
− Shareholders sold another 38.5 million shares, or 6 percent more than originally
planned
• Why was the IPO risky?: HCA's debt averaged nearly $27 billion in 2010. The
company's liabilities exceeded its assets on the books by more than $12 billion.
• Why did investors still buy the stocks?: HCA was profitable and had stable cash
flows, making debt less of a concern for potential investors

SOURCE: Reuters

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 HCA today
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Share price

Share price
USD
Current:
100 • Market cap: $ 27bn
90 • P/E (ttm): 13.6
80 • EPS (ttm): 5.0
70
60
50
40
30
20
10
0
01/01/2012 01/01/2013 01/01/2014 01/01/2015 01/01/2016

SOURCE: Yahoo Finance

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