Presenting a live 90-minute webinar with interactive Q&A Private Equity M&A Key Deal Terms: Reverse Break Fees, Seller Remedies, Post-Closing Indemnity Negotiating and Structuring Closing Conditions, Termination Rights and Post-Closing Indemnification in a Changing Market WEDNESDAY, JULY 29, 2015 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: John J. McDonald, Partner, Troutman Sanders , New York Michael Weinsier , Partner, Troutman Sanders , New York The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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PRIVATE EQUITY M&A KEY DEAL TERMS: FIDUCIARY OUTS, REVERSE BREAK FEES, SELLER REMEDIES, GO-SHOP DEALS AND POST-CLOSING INDEMNITY John McDonald Michael Weinsier Partner Partner Troutman Sanders LLP Troutman Sanders LLP john.mcdonald@troutmansanders.com michael.weinsier@troutmansanders.com
CURRENT TRENDS IN PRIVATE EQUITY M&A DEALS Pluses for M&A Deals M&A deal volume continues to increase. Announced deals through March • 2015 were $746B, up 9% from $685B in the same period in 2014. Improving consumer confidence and steady, albeit slow, economic growth. • • Continued favorable credit markets, although regulatory limitations on leverage ratios has pushed down the amount of bank debt available for deals. • Strategic investors hold large cash reserves, which they are using to make acquisitions, given relatively limited prospects for organic growth. Private equity firms have significant "dry powder" and are coming up against • the ends of their funds' investment periods. Shareholder activism has encouraged companies to focus on core operations • and “unlock value” by making strategic spin -offs and corporate divestures. Historically high EBITDA multiples have motivated private equity firms to sell • their portfolio companies now. 6
CURRENT TRENDS IN PRIVATE EQUITY M&A DEALS Negatives for M&A Deals BASEL III (Europe) and US bank regulatory (OCC, FRB, FDIC) restrictions on • leverage ratios have reduced the availability of bank debt financing for M&A transactions, particularly from “systematically important” banks. 6x EBITDA has become the effective limit on leveraged loans from banks. Non-bank lenders (e.g., hedge funds, BDCs) have only partially filled the void. • Historically high valuations, combined with the new leverage restrictions, have resulted in lower private equity participation in M&A. • Continued uncertainty in Europe, particularly as a result of fear of “contagion” from the Greek debt crisis. • The Obama administration’s September 2014 executive action significantly reduced “inversion” transactions, which had been a significant contributor to M&A transaction volume. • Interest rates are expected to start rising toward the end of the year. 7
CURRENT TRENDS IN PRIVATE EQUITY M&A DEALS M&A Deal Statistics Q1 2015 deal volume up 15.2% versus Q1 2014 and up 57.7% versus Q1 2013. 1/ • • Strategic buyers, rather than private equity buyers, represent an increasingly large percentage of overall M&A transaction value, constituting 85% of overall M&A value ($418B) of deals in Q1 2015. 2/ The average purchase price multiple for Q1 2015 was 7.9x EBITDA, down • from 8.3x in Q1 2014. 2/ Average YTD 2015 purchase price multiple is 7.3x EBITDA, down from 10.0x EBITDA for 2014. 3/ • The average leveraged loan has declined to 6.3x EBITDA this year from 6.6x in 2014. 4/ In Q3 and Q4 2014, ~60% of buyout loans exceeded 6x EBITDA. In Q1 2015, it was down to 21%. 5/ 1/ Bloomberg Global M&A Market Review Q1 2015 2/ Pitchbook M&A Report Q2 2015 3/ Pitchbook US PE Breakdown 3Q 2015 4/ Thompson Reuters 5/ S&P Capital IQ LCD 8
CURRENT TRENDS IN PRIVATE EQUITY M&A DEALS Private Equity Trends 2,955 US-based PE investments closed in 2014, representing $522.6B in value, • versus 2,947 and $501.5B in 2013.* Because of high stock market prices, PE- led “going private” transactions of • large-cap public companies have declined substantially. Instead, takeovers of such companies are almost all by other public companies. • “Secondary buyouts”, in which a PE sponsor sells a portfolio company to another PE firm, are on the rise. • PE firms are increasingly employing a “buy -and- build” strategy using “bolt on” acquisitions by existing portfolio companies, which enables them to take advantage of economic synergies with targets, similar to strategic buyers. AlSuch transactions constituted 60% of PE control investments in 2014, versus 40% in 2013.* • Because large-cap public companies are expensive to buy and have limited room for improvement, large PE firms have migrated into the middle market. * Pitchbook/Merrill Datasite 2015 Annual US PE Breakdown 9
BEST PRACTICES FOR NEGOTIATING DEAL TERMS — BUYER AND SELLER PERSPECTIVE “Fiduciary Outs” "No-Shop" Provisions - To induce the Buyer to enter into the purchase • agreement and commit itself to buy the Target company, the Target company and its stockholders will agree to not sell the Target company to another buyer during the time period between signing and closing. "Fiduciary Outs” – In acquisitions of publicly-traded companies there is • usually a “fiduciary out” exception from the no-shop provision, particularly where the Target company hasn't conducted a full "market check": if Target company receives an unsolicited offer to buy the company at a price that is so superior to the existing deal that it would constitute a breach of the Target company board members’ fiduciary obligations to its stockholders… then, Target company can terminate the existing transaction or change its Board’s recommendation to stockholders to advise against the pending transaction (which will have the same practical effect) and instead sell the Target company to the other buyer. 10
BEST PRACTICES FOR NEGOTIATING DEAL TERMS — BUYER AND SELLER PERSPECTIVE Fiduciary Outs (cont.) Although privately-held company boards also have fiduciary duties to • stockholders, fiduciary outs are not commonly seen in acquisitions of privately-held companies. • If “ Superior Proposal,” Target company has to notify the original buyer and give it the opportunity to improve its offer so that it is superior to the new offer (a “topping” bid ). Although the Target company’s board will take into account all aspects of the • new offer in deciding whether it is superior to the existing offer, price is the predominant consideration ( Revlon duties). • Original buyer receives termination fee (usually 2.5-3.5% of transaction consideration) and reimbursement of its transaction-related expenses (usually capped at a specified amount). 11
BEST PRACTICES FOR NEGOTIATING DEAL TERMS — BUYER AND SELLER PERSPECTIVE Reverse Break Fees Typically Buyer is obligated to close the acquisition as long as Target company • has satisfied its closing conditions. However, some deals allow Buyer to pay a “reverse” termination fee to Target company (essentially a liquidated damages payment) and terminate the transaction. Has become the norm since the 2008 financial crisis, particularly in deals in • which Buyer is a private equity fund, since fund sponsors want to protect themselves from a lawsuit and potentially substantial liability if the necessary debt financing cannot be obtained. Sometimes Buyer can terminate only if a specified event happens. Less • frequently, there is “pure optionality,” in which Buyer can exercise the termination right for any reason. 12
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