Structured Finance:

• Leveraged and Acquisition Finance
• Securitization
• Hybrids

See Also:

DBS Workshop on Corporate Financial Restructuring

Background Materials on Corporate Finance

Financial Restructuring in Asia: Issues and Opportunities
 

By Lisa Meulbroek

A buy-out is the acquisition by a small investor group or private equity partnership of stock or assets of a target company. Buy-outs are financed largely with debt, and tend to be associated with operational improvements. This article discusses the type of businesses that undergo buy-outs, the financial structure of a buy-out, and the role and structure of the buy-out or venture capital firm that structures the deal.

The primary candidates for buy-outs are

• subsidiaries of parents companies (either local or foreign parents)
• family or private businesses
• privatizations of public sector businesses, and
• companies in receivership.

To finance a leveraged buy-out, a buy-out firm forms a new company and (with management and employees) provides the equity. It then arranges the debt financing, which includes senior debt (from commercial banks), mezzanine debt (from banks, insurance companies and mezzanine funds), and high-yield ("junk") bonds (bought by the public). The proportion of each financing component depends on the nature of the target company and how much debt its cash flows can support.

Sample Buy-Out Financial Structure
 

	United States	Europe
Senior bank debt	50%	55%
Subordinate debt (mezzanine and public)	30%	15%
Equity	20%	30%
of which, management stake	5-10%	5-10%
Debt maturity, senior	5-6 years	7-8 years
Debt maturity, subordinate	10 years	8-10 years

The article focuses on the common elements of European buy-outs, contrasting the European market with the U.S. market where possible.

The (Harvard Business Shcool Case Study # 9-296-051) article is available from Harvard Business School Publishing (hbsp.harvard.edu)