Deal Structuring & Financing Acquisitions

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Deal Structuring is of paramount importance

REGULATORY CONSIDERATIONS

TAX CONSIDERATIONS

ACCOUNTING CONSIDERATIONS

FINANCING CONSIDERATIONS

DEAL TIMING

• Open offer requirements, ownership norms, capitalization norms

• Capital gains impact to sellers, stamp duty and sales tax issues, availability of past tax losses

• Ability to consolidate, goodwill impact, provisioning in the balance sheet, purchase consideration break-up between

assets

• Cost of capital, availability of funds on target vs. acquirer balance sheet, tax benefit for interest expense, Cross-

border jurisdictions

• Implementation time to financial closure

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Commonly Used Deal Structures

P

Transaction Structures | Stock Purchase Target

Shareholders Target Corp. Target Assets

Benefits

Target Stock Acquirer

Cash

Some Potential Issues

Recent Examples • Simple and quick to • May lead to tender offer • Vodafone’s acquisition of

execute requirements the equity from Essar in its • Minimal transaction costs • Potential capital gains telecom business • Pricing benchmarks are Implication for the seller • Mahindra’s acquisition of

easier to establish • Inability to cherry pick select Shares in Satyam Computers assets of the business • Emami’s acquisition of

shares in Zandu

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Transaction Structures | Asset Purchase

Target Shareholders

Target Corp. Target Assets

Acquirer Shareholders

Cash Acquirer Corp.

Target Assets

Benefits

• Fairly quick to execute • Ability to cherry pick assets

(or a specific business) • No tender offer requirements • Could be slump sale or

Piecemeal transaction of assets

Some Potential Issues

• Potential implications of stamp duty and sales tax • Cash inflow into the company and not to the shareholders

Recent Examples

• Schneiders’ purchase of the cabling business of

Smartlink • Indo Asian Fusegear - Legrand • Abbott’s purchase of Domestic Formulations business of Piramal’s

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Transaction Structures | Mergers

Acquiring company’s

shareholders

Acquiring company XYZ

Target (merged)

company’s shareholders

Cash and/or other ABC consideration stock

Assets Target

(merged) company ABC (dissolved)

Cash and/or other consideration

Benefits

• Ability to consolidate operations into a single entity • Ideal in situations like JVs

wherein existing shareholders wish to continue

• Variants include reverse mergers and demergers

Some Potential Issues

• Time consuming - needs court approvals • Needs approval of lenders and majority shareholders

Recent Examples

• Centurion Bank of Punjab with HDFC Bank • Bank of Rajasthan with ICICI Bank

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Financing Acquisitions

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Some Key Considerations Sources of Financing Forms of Financing Cost of Financing

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Sources of Financing Sources of Finance

Buyer Seller

Commercial Finance Long term Banks Companies Finance

Insurance Companies

Venture Leveraged Capital Firms Buyout Funds

Pension Funds

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Financing Considerations Differ The buyer / management team provide the most critical portion of

the transaction

Management/ Buyer

Seller of Target Company

The amount of principal a buyer invests often dictates

The capital structure of the transaction

The terms of the transaction

The types of lenders that will participate

Seller may finance part of the transaction if the seller receives a

premium over an all cash price

Seller may be willing to take back long term, subordinated debt and

occasionally preferred stock

Earn-out arrangements are also used for compensation

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Financing Forms | Characteristics

DEBT EQUITY

CHARACTERISTICS SENIOR SUBORDINATED PREFERRED COMMON

Tax-deductible finance costs X X

Covenants/ Restrictions X X

Convertibility features X (In specific cases) X

Dilution of Ownership X (In specific cases) X X

No required fixed payments X

Base for leverage X X

Not subject to redemption X

Cost of financing Low Higher Higher Highest

EPS dilution of shares X (In specific cases) X X

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Financing Forms | Other Financial Instruments Debt with Warrants

Junk Bonds

Paid-in-Kind Debt Paid-in-kind Securities

Debt securities with attached or detachable equity warrants

Gives the debt holder participation in the future performance of the company

High-yield, high risk securities

General obligation bonds that have credit ratings below investment grade

Debt securities with interest and /or principal payable in cash or securities of

the issuer at the issuer's option

Preferred Stock which pays dividends in cash and /or additional shares of

preferred stock at the issuer's option

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Financing Forms | Other Financial Instruments Adjustable Rate Preferred Stock

Debt securities with put option Alphabet / Tracking Stock Sale-lease back financing

Preferred stock with interest rates that are reset at periodic auctions

Investors retain put option

Investors hold a company's stock but the shares participate only in the

earnings of a specified subsidiary or group of assets

Similar to Senior Debt

Complicated as to who receives the risk/benefit of the residual value

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Acquisition Finance (Debt) | Structuring FACTORS DRIVING ACQUISITION FINANCE

Company’s Perspective Minimum equity contribution

Appropriate leveraging through an optimal funding structure balancing cost and risk Limited recourse to parent for repayment - Ring fencing liability associated with acquisition

STRUCTURING REQUIREMENT

• Lender ‘s Perspective Adequate security with commensurate return Protection against default Promoter comfort and contribution

Myriad transaction specific structuring options available Different contemporary financial instruments for funding the acquisition including debt, mezzanine and equity Indian and offshore laws and regulations relating to acquisition, tax and investment BROAD STRUCTURING OPTIONS

• Target Vs. Acquirer (Leveraged Vs. Own Balance Sheet) • Recourse Vs. Non-Recourse • Off-shore Vs. On-shore SPV

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Acquisition Finance (Debt) | Challenges Objective Issues / Challenges

Optimizing Cost

Structuring the Transaction most appropriately Finding the most suitable Lender

Timely completion of the Transaction / Synchronize the entire process

• To minimize the Financing cost

• To minimize Transactions Costs like DD cost, Legal cost etc.

• To minimize Future Costs like Prepayment penalty, Commitment charges, Penal interest etc.

• To finalize the best suitable Financing instrument and provide the most appropriate Security

• To choose the best suitable Jurisdiction and most optimal Borrowing Vehicle

• To negotiate the Financial Covenants / other Restrictive covenants

• To structure the Repayment schedule as per the Cash flow

• To minimize the various kind of Tax (Withholding, Dividend Distribution, Income Tax etc.)

• To decide the most suitable Lender from a long-term perspective

• Whether to go for a Bilateral loan or Syndicated loan

• To complete the Transaction in a Short Time especially when there are multiple bidders for

the Target

• To coordinate across different geographies, lenders and various advisors

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Case Study - Acquisition Finance for L.T. Overseas Ltd. (1/2) Business Acquisition

USD 20 MN L T Overseas Ltd. Kusha, INC. Strategic Opportunity

• One of the largest • The largest basmati rice • Kusha has provided the marketing

basmati rice players in marketing and distribution and distribution platform for LT

India with a topline of company in the US, with

~USD 120 MN revenue of ~ USD 40 MN

• Owner of “Dawaat” and • Has portfolio of strong brands,

“Heritage” brands “Royal” and “Pari”, with 40% market share in the US

basmati rice industry

Overseas’ brands

• With its milling and product

development capabilities, LT

Overseas will be able to launch high

value add products in the US market

• LT Overseas became the largest

basmati player in the US

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Case Study - Acquisition Finance for L.T. Overseas Ltd. (2/2) ‘DEBT TO OFFSHORE SPV WITH RECOURSE’

Lending Bank Rupee The Lending Bank, through its offshore operations,

India Operations Corporate

Loan of Rs. 80 million

Acquirer

ONSHOR

OFFHORE

Equity Investment

extended US$ 13 million financial assistance to facilitate acquisition of the Target Extended additional US$ 2 million to the Indian operations through its Indian Balance Sheet Loan extended infused as Equity in the US SPV

Guarantee

Lending Bank - Senior Debt Offshore Branch US$ 13

Million

Cash flow available for Acquirer to be

utilized for debt servicing

US$ 2 million

Acquirer SPV USA

Acquisition Consideration for 100% stake

Target USA

Security Pledge of SPV and Target’s shares Corporate Guarantee of the Indian Parent Pledge of Promoters’ shareholders in the Indian

Parent company Mortgage of Target company brands

Repayment Cash flow accrued at the Target level Undertaking to capitalize the USA operations, if

required Time taken to conclude the financing: 2 months

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Contact Details Corporate Executive Director Email: director@lloydbancaire.com

Lloyd Bancaire Worldwide.

United States Luxembourg Hong Kong United Kingdom Singapore

www.lloydbancaire.com

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