Article by Joseph Skrzynski
MBO: A SERIOUS ALTERNATIVE

Australia has finally caught up with the US and the UK, so that today a private equity backed buy out is a serious alternative sale strategy for businesses of all sizes. Private equity has backed MBOs with a total enterprise value of over $3.5 billion in Australia since 2000. These buy outs have ranged from individual enterprise values of $10 million to $800 million, and have been in a wide range of industries, including retail, wholesale, automotive parts, engineering, textiles, consumer products, media, financial services, healthcare, food, transport and logistics, and distribution. The vendors have been multinationals, conglomerates, private and publicly listed companies. Some of the more recognisable businesses have included Pacific Brands, Bradken, Just Jeans, Sheridan, Austar,
Repco and Mayne Private Hospitals.

From a vendor's perspective, and that of its directors, the private equity option provides features which may be advantageous compared with the other exit options. For example, it is often the case in a small market such as Australia, that the logical trade buyers are fierce competitors to the business. We have recently completed a transaction where the vendor was loathe to allow such competitors to come in and examine the books, customer contracts, supply arrangements, and so on, and then leave it vulnerable to an inadequate price and/or unfair competition based on that information, notwithstanding confidentiality agreements. The vendor preferred to get an independent valuation of the business, and allow management to do a buy out with our backing at that valuation, thus avoiding risks to goodwill whilst achieving fair value.

There are also situations where a float is not an appropriate solution. The market, of course, has its cycles and, whilst it is currently very supportive of IPOs, this is not always the case. Additionally, institutional investors' requirements regarding liquidity and index benchmarks, means that many businesses will not have sufficient size, stability of earnings or free float to be suitable candidates for listing. In boom times, there may be sufficient retail support to get some of these away, but that can be a very unpredictable situation. As against that, private equity funds are a constant presence in the market, and can quickly assess whether the subject business is suitable for a buy out solution.

Directors have found that a confidential exploration of a buy out opportunity allows them to obtain a firm offer without disturbing the business’ position in the market with its customers, suppliers and bankers. Good precedents have been established as to how directors can acquit their governance responsibilities and, at the same time, examine the benefits of a buy out solution.

Protocols have been established overseas, and now also in Australia, regarding access to information, management integrity and cost considerations. Whereas in the past directors have worried about whether these matters could be comfortably handled, there is now appropriate precedent in both the private and public company spheres. Sometimes a situation can be quite complex where, for example, the need for restructure in corporate and debt arrangements itigates against a simple auction based disposal. Private equity funds can often tackle these complexities and come up with novel solutions.

We have had recent experience of such a situation with a public company where the company had difficult and stressed relations with its banking syndicate, defaults on overseas bonds, and complex hurdles in terms of regulatory requirements, both in Australia and verseas. By adopting a patient and constructive engagement with the management and directors of that company, our private equity fund was able to come up with a solution which stabilised the ownership of the company, as well as injecting much needed new funds to enhance value for new and old shareholders.

Such a corporate reconstruction would not have been possible without private equity participation. Family owned companies facing succession planning problems or pressures to distribute the capital freed up, can also benefit from a buy out solution. It can enable orderly transition of control and ownership to the management executives, or to the family members who wish to stay involved, releasing capital to the other members.

The partners of Castle Harlan Australian Mezzanine Partners group (CHAMP), and its
associated funds in Australia and the United States, have been pioneers in private equity
investment during the past 30 years, and have managed over $A3.7 billion in private equity funds. In Australia, CHAMP manages the largest dedicated MBO fund, CHAMP I MBO, for large transactions, as well as the CHAMP Ventures Fund, which addresses small to medium sizebusinesses, public and private.

'A private equity buy out is a vital addition to the traditional trade sale or float options for disposal of the whole or part of a business,' says Joseph Skrzynski.

For further information, please contact:

Joseph Skrzynski, Managing director
Castle Harlan Australian Mezzanine Partners
Phone: (02) 9241 4444 Fax: (02) 9247 5551
E-mail: champ@champequity.com.au

Company Director Magazine : M E R G E R S & A C Q U I S I T I O N S 2003