Combining entrepreneurial ambitions and shareholder value
A Leveraged Buyout (LBO) is the acquisition of a company by a small group of investors. It is called ‘leveraged’ because most of the acquisition price (50% or more) is financed by borrowing. The amortisation of the debt is typically scheduled within a period of less than ten years, using the cash flows generated by the company or the sale of disposable assets.
When the small group of investors is made up of managers from the company itself, the operation is referred to as a ‘Management Buyout’ (MBO), a very common form of LBO. If it is composed of managers from another company, the operation is called a ‘Management Buy-In’ (MBI).
The purpose of an LBO can vary widely, depending on each individual situation and structure: divestment for current shareholders; enhancing the profitability of the company; paying off the debt; and exiting with a substantial gain. In the case of an MBO, management might also want to satisfy its entrepreneurial ambitions without taking the risk of starting a company from scratch.
Financing sources
The financial structures involved in an LBO are extremely varied, depending on the company, the sector in which it operates, its revenues, cash flows and other factors:
- Debt: subordinated and non-subordinated debt (bank loans, bond issues, etc.);
- Equity: relatives and associates of management, investing partner, venture capitalist, etc.;
- Sale of assets: non-strategic assets can be disposed of to pay back part of the debt immediately;
- Mezzanine: hybrid financing ranked between senior debt and equity;
- Working capital: effective management of working capital can generate additional cash for future payback;
- Terms of payment: the seller can grant terms of payment to the buyers.
Once the deal has been concluded and the new financial structure is in place, the new management aims to capture maximum cash flows in order to redeem the debt incurred to finance the acquisition of the target.
BNP Paribas Fortis is an active participant in the leveraged finance market. Our teams of experienced specialists, present in major markets and operating globally, are ready to provide your company with expert advice and financing services for all kinds of debt financing. As your committed financial partner, BNP Paribas Fortis can also make investments in the form of equity.