The Approach of a Private Equity in an M &A Transaction Andrea - PowerPoint PPT Presentation

The Approach of a Private Equity in an M &A Transaction Andrea Foti 11 November, 2019

M y background Investment Banking Advisory | Milan 2017 Investment Banking Advisory | Milan 2013 S trictly private & confidential 2004 Investment Banking Advisory | Milan FIG Investment Banking | London 2001 2000 Financial Institution Strategy Group (Internship) | Rome 1999 Investment Banking | Rome Degree in Business | Rome 2000 2

1. The approach of a PE fund 2. From kick-off to Closing – A case study S trictly private & confidential 3. Valuation metrics & M&A strategic variables 3

Private equity funds play a growing role in the M &A market ü The past 5 years have been ones of unprecedented success for the private equity ("PE") industry, with more money raised, invested and distributed back to investors than in any prior period in the industry ü T oday, PE represents one of the key asset classes in the financial industry , globally: notwithstanding a slow decline toward public market average (during the period), returns are still strong relative to other asset classes ü A number of concerns, injecting a sense of uncertainty, exist S trictly private & confidential • Fear of potential recession • Volatile capital markets • US-China trade war • Central Banks monetary policies • Brexit • The impact of technological change, which makes it harder to forecast winners and losers • Persistent high prices / expectations ü PE funds play a role in >10% of the 40,000 M &A transactions completed globally each year 4

The involvement of PE funds in corporate finance transactions ü PE funds represent a key player in a broad spectrum of corporate finance transactions , involving either potential targets or portfolio companies IPO M ergers & Advisory Acquisitions S trictly private & confidential & Fund Raising J oint Tender offers Ventures & / De-listings Partnerships PE fund Financial Spin-offs Restructuring Dividend Add-ons recapitalisation 5

The PE market is segmented by investment strategies, geographiesand sectors ü There are many different types and sizes of PE firms and funds ü The same PE firm can raise multiple funds , each one focused on specific geographies and/or industries ü The figure below illustrates the types of investment strategy, geography and industry focuses a PE fund can specialize in Investment Strategy Geography Industry / Sector S trictly private & confidential Venture capital Global Generalist Growth equity US T elecom, Media & T echnology Mezzanine fund S outh America Healthcare Leverage buyout – Mid & large Western Europe Financial institutions Leverage buyout – S mall Central & Eastern Europe Real estate Distressed China & India Industrials Middle East & Africa Aerospace & Defense Asia Pacific Infrastructure Consumer & Retail Note: leveraged buyout funds can include club-deals and family offices 6

Specific funds invest in different company stage, with different equity tickets ü The proposition of a fund depends on the PE firm’s size, stated investment strategy, and industry & transaction expertise Company stage Example Ticket Size Description (early > late) industry focus Healthcare, Companies in early stage of Venture €50k-5m VC T echnology, development and cash-flow negative Capital S trictly private & confidential Software Equity and/or debt, in growing Growth €5-50m Small-mid companies requiring increasing working Most sectors Capital capital, capex or an acquisition Subordinated debt or preferred equity M ezzanine Small- €5-50m (between equity and senior debt on the Most sectors Financing large balance sheet) Acquisition of a company with use of €2-100m Small-mid Leveraged financial leverage, to create value ahead Most sectors Buyout >€100m Large of the exit Equity and/or debt securities of €2-100m Small-mid Distressed financially stressed companies (and then Most sectors Buyout >€100m Large turnaround of the business) 7

The key drivers in the agenda of a PE fund, when buying a company… ü When a PE fund analyses the attractiveness of a potential target , it strongly focuses on a number of things that corporate buyers may put less emphasis on. Some include: • Overall industry characteristics • Growth prospects (both organic and through M&A) for the target • Strong profitability and cash-flow generation S trictly private & confidential • Skills of senior management • Existence of a clear strategic vision • Level of reliability and consistency of the revenue base and/or potential to reduce costs • Availability of a roadmap to address any short term / long term threats to the business • Governance, reporting systems and control mechanism in place at the target (or possibility to implement state-of-the-art ones) 8

The key differences between a PE fund and a strategic buyer ü The term "strategic buyer" refers to any purchasing entity which is engaged in an operating business (including public and private corporates, competitors, customers and distributors) ü PE funds and strategic buyers typically approach a transaction in different ways ü No synergies ü Profitability and cash-flow generation PE fund ü Level of potential indebtness Approach to S trictly private & confidential valuation ü Potential synergies (revenues and costs) Strategic ü Profitability ü Easier negotiation of Confidentiality Agreement ü Speed in decision making, during the process PE fund Sale process, ü Price driven by financial returns timeline and negotiation of ü Higher familiarity in understanding the business the deal ü Uncertainty in execution, due to different levels of internal approval Strategic ü Price driven by different factors, including strategic opportunity ü Attractive opportunities for the existing management team PE fund ü Minority shareholders and management required to have "skin in the game" Approach to the business ü Change in senior management team going forward Strategic ü Integration process with the buyer 9

The main partners of a PE fund in an M &A deal ü An M &A transaction is often complicated and numerous players are typically involved ü A PE fund (acting either as a buyer or aseller) interacts with a broad team of advisors (in addition to their internal team) ü In order to make everything work well, all advisors must act in concert S trictly private & confidential Financial Advisor Tax Advisor Legal Advisor PE Fund (Buyer or Seller) Environmental Strategic Advisor Consultant M &A Insurance Broker 10

1. The approach of a PE fund 2. From kick-off to Closing – A case study S trictly private & confidential 3. Valuation metrics & M&A strategic variables 11

The steps to a typical M &A process, involving PE funds and strategic buyers ü Seller • Assessment of strategic alternatives / Design of the process • Preparation of marketing materials • Execution of marketing programme S 4-8 months trictly private & confidential ü Buyer • Non-binding offer • Due diligence • Final bids ü Buyer & Seller • Negotiation and selection of buyer • Signing & closing On average, M &A processes take 4 – 8 months to execute 12

The different processes for an Acquisition / Disposal Process D Public § Long auction Process C S Controlled trictly private & confidential TIM E FRAM E auction Process B Targeted solicitation Process A Pre-emptive / One-to- § Short one deal § Low NUM BER OF BUYERS § High 13

M ultiversity-CVC: a private equity deal, involving numerous global PE funds (1/ 2) PE fund ü In August 2019, CVC acquired 50% of M ultiversity , owner of Italy's largest online university Università T elematica Pegaso and Mercatorum University The Target ü Multiversity and Pegaso founder Danilo Iervolino transaction retained a 50% stake S trictly private & confidential Resilience through cycles Market leadership with Growing market clear value proposition The investment thesis Multiple levers for Scalable business future growth model Strong financial track Proprietary e-learning record platform 14

M ultiversity-CVC: a private equity deal, involving numerous global PE funds (2/ 2) Process A ü Pre-emptive with a PE fund 2017 Pre-emptive ü Deal aborted Process C Apr. ü Launch of controlled auction, involving > 40 PE funds 2018 Controlled S trictly private & confidential ü Negotiation with a number of selected PE funds auction J ul.-Dec. 2018 ü A frontrunner stood out Dec. ü Deal blocked by a specific issue 2018 Process A ü Regulatory breakthrough, resolving the issue M ay 2018 ü One-to-one negotiation started again One-to-one ü Due diligence phase J un-Aug. ü Signing 2018 15