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INAUGURAL WEIL, GOTSHAL & MANGES PRIVATE EQUITY GROUP SURVEY

SPONSOR-BACKED GOING PRIVATE TRANSACTIONS

WEILGOTSHAL

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Research Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Key Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Market Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Club Deals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Special Committees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Go-Shops . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Fiduciary Outs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Break-Up Fees and Reverse Break-Up Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Financing Outs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Material Adverse Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Key Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Jurisdiction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Market Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Club Deals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Break-Up Fees and Reverse Break-Up Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

UK Transactions – Type of Offer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

UK Transactions – Irrevocable Undertakings . . . . . . . . . . . . . . . . . . . . . . . . . 29

About the WGM Private Equity Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

Table of Contents

1

Introduction

Welcome to our inaugural survey of sponsor-backed going private transactions prepared by the PrivateEquity Group of Weil, Gotshal & Manges LLP. We hope that you will find this information thought-provoking and useful.

We believe that this survey is unique in that it analyzes and summarizes for the reader the material transaction terms of going private transactions involving a private equity sponsor in both the UnitedStates and Europe. We believe that Weil Gotshal is uniquely positioned to perform this survey given ourinternational private equity platform and network of offices throughout the United States and Europe.

We are happy to discuss with clients and friends the detailed findings and analysis underlying this survey at their request.

We want to pay special thanks to the many attorneys and consultants at Weil Gotshal who contributed tothis survey, including Andrew Bailey, Jean Beauchataud, Karen Brooks, Matt Cammack, Carolyn Dunn,Gautier Elies, Sachin Kohli, Katherine Krause, Allan Lai, Jimmy Liao, Marianna Lopez, Gaia Morelli,Trudy Moshodi, Harsh Pais, Mariana Pargendler, Marc Rosen, Jessica Ryan, Aabha Sharma, Bjorn Stehl,Christian Tappeiner, Jennifer Tsai and Steven Zielinski.

Michael WeisserSpecial Contributor

Christopher MacheraSpecial Contributor

Michael CubellSpecial Contributor

Doug WarnerEditor

Alison HamptonEditor

2

Research Methodology

The Private Equity Group of Weil, Gotshal & Manges LLP surveyed 85 sponsor-backed public-to-privatetransactions announced from October 1, 2005 through December 31, 2006 with a transaction value(i.e., enterprise value) of at least $250 million (excluding target companies that were real estate investment trusts). Fifty of these transactions involved a target in the United States and 35 involved atarget in Europe. The publicly available information for certain surveyed transactions did not discloseall data points covered by our survey; therefore, the charts and graphs in this survey may not reflectinformation from all surveyed transactions.

The 85 surveyed transactions include the following target companies:

ACE Cash Express, Inc.

Adesa, Inc.

Alain Afflelou SA

Aleris International, Inc.

Aramark Corporation

Associated British Ports

Holdings plc

AWG plc

Beverly Enterprises, Inc.

Biomet, Inc.

Borsodchem RT

Burlington Coat Factory

Warehouse Corporation

Caffé Nero plc

Center Parcs (UK) Group

Clear Channel

Communications, Inc.

Cornell Companies, Inc.

Countrywide plc

Dave & Busters Inc.

Direct General

Corporation

Duquesne Light

Holdings, Inc.

DX Services plc

Eddie Bauer

Holdings, Inc.

Education Management

Corporation

Eircom Group plc

ElkCorp

Encore Medical

Corporation

Enterasys Networks, Inc.

Freescale

Semiconductor, Inc.

Goody’s Family

Clothing, Inc.

Harrah’s Entertainment,

Inc.

HCA Inc.

Incisive Media plc

Intergraph Corporation

Jacuzzi Brands, Inc.

John Laing plc*

Kinder Morgan, Inc.

La Quinta Corporation

Linens n’ Things Inc.

Lone Star Steakhouse

& Saloon, Inc.

Matalan plc

Mayborn Group plc

McCarthy & Stone plc*

Michaels Stores, Inc.

NCO Group, Inc.

Open Solutions Inc.

OSI Restaurant

Partners, Inc.

Pages Jaunes SA

Parkdean Holidays plc

Party City Corporation

PETCO Animal

Supplies, Inc.

Polimoon ASA

Quick Restaurants SA

RailAmerica, Inc.

The Reader’s Digest

Association, Inc.

Realogy Corporation

Retail Decisions plc

Richmond Foods plc

Sabre Holdings

Corporation

Seitel, Inc.

Serena Software, Inc.

ShopKo Stores, Inc.

SIG Holdings AG

Somerfield Group plc

SOURCECORP,

Incorporated

Specialty Laboratories

The Sports

Authority, Inc.

Talarius plc

TDC A/S

Techem AG

Telent plc

Telepizza SA*

Thomas Nelson, Inc.

TransMontaigne Inc.

UICI

Univision

Communications, Inc.

Urbium plc

Viridian Group plc

VNU NV

Water Pik

Technologies, Inc.

West Corporation

WMF AG

Wyevale Garden

Centres plc

The Yankee Candle

Corporation

* These target companies were each the subject of two competing bids.

3

United States

4

Key Conclusions

This past year was a banner year for sponsor-backed going private transactions in the US. It saw a dramatic increase in the number of going private transactions involving private equity sponsors. Mostexperts believe that the number of these transactions will remain strong given the receptivity of publiccompany management teams and boards to going private transactions, the large pool of committedequity capital available to private equity sponsors and the ready availability and low cost of debt capital.

Certain of the notable conclusions and trends in 2006 in the US based on this survey include:

n The increasing size of sponsor-backed going private transactions. Of the surveyed transactions,

68% involved a transaction value in excess of $1 billion and 22% involved a transaction value in

excess of $5 billion.

n Premiums to pre-announcement market value were relatively modest, particularly compared against

the 52-week high stock price for target companies.

n Larger buyouts generally resulted in modestly more efficient capital structures for sponsors, with

generally lower equity requirements and higher leverage ratios.

n High yield debt financing was not used in a majority of the transactions with a transaction value of

less than $5 billion given the strength of the second lien and mezzanine market.

n A surprising 34% of target company boards did not form a special committee to evaluate the going

private transaction.

n Target boards started negotiating for “go-shop” provisions, which appeared in 24% of the transac-

tions. Surprisingly, there was some form of pre-signing market check in 50% of the transactions

where a go-shop appeared.

n Two-tier break-up fees became increasingly common in transactions where a go-shop appeared,

with 50% of those transactions providing for a reduced break-up fee for successful competing

proposals solicited during the go-shop period.

n The reverse break-up fee is increasingly common at all transaction levels, with a significant

majority of transactions providing for a reverse break-up fee in certain circumstances.

n Financing outs are “out.” Only a minority of transactions in the $250 million to $5 billion transaction

value range and no transactions in the over $5 billion transaction range included a financing out.

n Material adverse change conditions to closing are common in virtually all transactions but continue

to be very limited in scope and offer limited protection to the buyer.

5

Market Information

Transaction values in our studyrange from $291 million to $33.1 billion. While there continues to be a strong appetitefor middle market going privateopportunities, there was a dramatic increase in larger transactions in 2006 compared to 2005. From July to December2006 alone, five going private transactions with a transaction value of at least $18 billion were announced. Two significant contributing factors were the willingness ofsponsors to participate in clubdeals and the ability of sponsorsto syndicate an increasing amountof equity to co-investors, limitedpartners and lenders.

0

5

10

15

20

25

&

Transaction Value (millions)

Section 1

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Font:ITC Stone Serif, medium 9pt

Number of Transactions

$250-$500 $500-$1000 $1000-$5000 Over $5000

Market Activity by Transaction Value

8 8

23

11

Deal premiums for the daybefore announcement have generally been in the 20% to25% range and are very similarbetween the day before and the30-day average beforeannouncement. Surprisingly,premiums over the target company’s 52-week high stockprice averaged a relatively modest 6%, which suggests that many going private opportunities emerge after disappointing stock marketresults for the target company.

0%

20%

40%

60%

80%

100%

Section 1

Premium

$250-$500 $500-$1000 $1000-$5000 Over $5000

Premium to Market by Transaction Value


2316 21 22

92123

7 10

0

209

1 day before announcement

30-day average before announcement

52-week high

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6

Club Deals

One consequence of the dramatic increase in transactionvalues in 2006 was the increasein the percentage of “club deals”involving two or more privateequity sponsors. A majority ofall going private transactionsabove $1 billion of transactionvalue (and 91% of such transactions above $5 billion of transaction value) were clubdeals. However, club deals werealso common in going privatetransactions where the transaction value was between$250 million and $1 billionwith a significant minority ofthose deals being club deals.Even in relatively smaller transactions, many sponsorselected to share the risk of thetransaction and to pool resourcesto achieve a favorable result.

Another trend seen in 2006compared to 2005 was a modestdecrease in the number of sponsors comprising the clubsas sponsors increasinglyobtained equity from co-investors, limited partners andlenders rather than from a larger group of sponsors. Forexample, in 2006 there was anaverage of slightly more thanthree sponsors in transactionsabove $5 billion of transactionvalue compared to an average of four sponsors in those transactions in 2005.

0%

20%

40%

60%

80%

100%

Section 1

Percentage of Transactions

$250-$1000 $1000-$5000 Over $5000

Percentage of Club Deals by Transaction Value

38

57

91


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7

Financing

Generally, the larger the transaction size, the lower thepercentage of equity used tofinance the acquisition. This accords with general expectations, as larger companiesfrequently have more stablecash flows and, thus, a greaterability to sustain higher levelsof debt. Although not apparentfrom this graph, some of thelargest transactions had equity investments approaching 40% of acquiror capitalizationdue to circumstances unique to those transactions. As aresult, there was a wide disparity(from 16% to 38%) in terms ofthe percentage of equity used tofinance those transactions.

0%

20%

40%

60%

80%

100%

Section 1

Percentageof Acquiror

Capitalization

$250-$500 $500-$1000 $1000-$5000 Over $5000

Equity Invested by Transaction Value

41.7 44.0

31.727.3


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0.0:1

0.5:1

1.0:1

1.5:1

2.0:1

2.5:1

3.0:1

Section 1

Debt-to-EquityRatio

$250-$500 $500-$1000 $1000-$5000 Over $5000

Debt-to-Equity Ratio by Transaction Value

1.4:11.3:1

2.1:1

2.7:1


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8

Financing

As one may expect, the largerthe transaction, the more likelythe buyer tapped the high yielddebt market for financing, with82% of sponsors in surveyedgoing private transactions over$5 billion doing so. In smallertransactions, the strong secondlien and mezzanine marketsmade strong in-roads againsthigh yield financing in 2006.0%

20%

40%

60%

80%

100%

Percentage of Transactions with a High

Yield Financing

$250-$500 $500-$1000 $1000-$5000 Over $5000

% of Transactions with a Change of Board Recommendationfor Reasons Other than a Superior Proposal

1325

48

82


66% 34%

Solely due to a superior proposal For reasons other than a superior proposal

High Yield Financings by Transaction Value

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Surprisingly, in 30% of thetransactions financed with high yield debt, the buyer wasnot contractually obligated todraw down bridge financingupon the buyer’s inability toraise high yield debt. This maybe a function of the increasingnumber of transactions wherethe buyer does not have afinancing condition to closingso the buyer will be incentivizedto draw down the bridge evenin the absence of a contractualobligation.

0%

20%

40%

60%

80%

% of Transactions with a High

Yield Financing

$250-$500 $500-$1000 $1000-$5000 Over $5000

Percentage of High Yield Financed Transactions with a Commitment to Draw Down the Bridge

14

33

48

71


70%

30%

Commitment to draw down the bridge

No commitment to drawdown the bridge


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9

Special Committees

A surprising 34% of target company boards did not form aspecial committee to evaluate,negotiate and approve the proposed transaction. The use of special committees will ofcourse be most prevalent inthose deals where directors areeither part of, or closely affiliat-ed with, the buyout group. Aprivate equity sponsor mustkeep in mind that it is normally“buying” the litigation thatmay, and often will, accompanygoing private transactions.Accordingly, it is in the interestof private equity sponsors to ensure that the target is following a defensible process in selling the company toreduce the settlement value ofany litigation.

Although not reflected in anygraph, a small minority of thesurveyed transactions had special voting arrangementsrequested by the special com-mittee to ensure that significanttarget shareholders participatingin the transaction could notundermine the ability of thepublic stockholders to approveor disapprove of the transaction.These arrangements includedincreasing the vote required bystockholder approval, nullifyingthe “super” voting rights of aparticular class of shares held by insiders and requiring thetransaction to be approved by a majority of the minoritystockholders.

0%

20%

40%

60%

80%


Yield FinancingCapitalization

$250-$500 $500-$1000 $1000-$5000 $5000 Over

Percentage of Transactions with a Special Committee

14

33

48

71


66%

34%

Special committee No special committee

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10

Go-Shops

With 24% of the surveyed transactions including a go-shop provision (12 of the 50 surveyed transactions), thispost-signing market check is stillnot the norm, but is certainlybecoming a more common feature of going private transactions. Surprisingly, one-half of the transactions with ago-shop had some form of pre-signing market check. Sponsorsneed to consider the risk-rewardcalculus of agreeing to a target’srequest for a go-shop. On the onehand, a go-shop provision is notlegally required. On the otherhand, sponsors need to deter-mine whether it’s a fight worthfighting with the target boardand may want to focus theirefforts on narrowing the scopeand duration of the go-shop.

0%

20%

40%

60%

80%



$250-$500 $500-$1000 $1000-$5000 $5000 Over

Percentage of Transactions with a Go-Shop

14

33

48

71


76%

24%

Go-shop No go-shop

Percentage of Those Transactions with a Pre-Signing Market Check

50% 50%

Pre-signing market check

No pre-signing market check

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0

1

2

3

4

5

6

Section 1


20-29 Days 30-39 Days 40-50 Days

Length of Go-Shop

6

2

4

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Go-shops in sponsor-backedtransactions have ranged from20 to 50 days. However, sponsors should make sure thatthe length of any pre-signing market check is factored intothe determination of the time period that the target needs tocomplete the sales process post-signing.

11

Go-Shops

In almost all of the earlier deals in 2006, a superior proposal entered into duringthe go-shop period did notresult in a lower break-up fee.However, the trend has recentlymoved toward a reduced go-shop break-up fee (typicallyranging from 40% to 67% of thenormal break-up fee) as targetboards take the view that thetraditional 2% to 3% of equityvalue break-up fee is not consistent with the spirit of thego-shop as a true post-signing“test the market” process. In afurther effort to preserve theintegrity of the go-shop, targetboards are often requesting andsome sponsors are agreeing toeliminate the matching rightduring the go-shop period. (See the December 2006 issue ofthe Weil, Gotshal & MangesPrivate Equity Alert for further discussion on this topic.)

0%

20%

40%

60%

80%



$250-$500 $500-$1000 $1000-$5000 $5000 Over

Percentage of Go-Shop Transactions with a Two-Tier Break-Up Fee

14

33

48

71


50% 50%

Two-tier break-up fee No two-tier break-up fee

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0

0.5

1

1.5

2

2.5

3

3.5

4

Number ofTransactions

40% 50%-56% 60%-67% 100%

% of Go-Shop Transactions with a Two-Tier Break-Up Fee

Size of Go-Shop Break-Up Fee vs. No-Shop Break-Up Fee

1

2

3

4

Go-Shop Break-Up Fee as a Percentage of No-Shop Break-Up Fee

60%

40%

Two-tier break-up fee No two-tier break-up fee

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12

Go-Shops

Many of the go-shop provisionsin recent transactions haveallowed the target board to effectively pay a lower break-upfee in respect of a competing proposal solicited during the go-shop period even though theproposal is entered into after theexpiration of the go-shop period.In these deals, the target boardcan make a determination that a specified party has made overtures that could reasonablybe expected to lead to a superiorproposal. However, in one of the surveyed transactions, thesponsors turned the tide and successfully negotiated a hard-stop on the go-shop time period,consequently limiting the target’scontractual right to pay areduced break-up fee.

0%

20%

40%

60%

80%



$250-$500 $500-$1000 $1000-$5000 $5000 Over

Percentage of Go-Shop Transactions with a “Hard-Stop” on any Reduced Break-Up Fee for Competing Proposals Solicited During the Go-Shop Period

14

33

48

71


92% 8%

“Hard-stop” No “hard-stop”

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0%

20%

40%

60%

80%



$250-$500 $500-$1000 $1000-$5000 $5000 Over

Percentage of Go-Shop Transactions that Eliminate a Matching Right During the Go-Shop Period

14

33

48

71


89% 11%

Yes No

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Of the 12 surveyed transactionswith a go-shop provision, ninehad a matching right. One ofthose nine transactions eliminated the matching rightduring the go-shop period.

13

Fiduciary Outs

Regardless of the size of thetransaction, a majority of private equity sponsors in thesurveyed transactions have successfully negotiated the rightto match a competing offer.However, this right was slightlymore common in the largesttransactions.

0%

20%

40%

60%

80%

100%

Section 1


$250-$5000 Over $5000

Right to Match Competing Offer by Transaction Size

74

91


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0

1

2

3

4

5

Section 1

Number of Calendar Days

$250-$5000 Over $5000

Time Period to Match Competing Offer by Transaction Size

3.6

4.8


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The time period to match forsurveyed transactions less than$5 billion in value was consis-tently around three to four calendar days. Interestingly, the time period to match acompeting offer for surveyedtransactions over $5 billion invalue was almost universallyfive calendar days. None of thetransactions surveyed providedmore than five calendar days tomatch a competing offer.

14

Fiduciary Outs

A significant majority of surveyed transactions allowedthe board of directors to change its recommendationsolely due to the receipt of asuperior proposal. One-third of the surveyed transactionspermitted boards to changetheir recommendations even in the absence of a superior proposal, although most ofthose transactions did not permit the board to terminateabsent a superior proposal.

0%

20%

40%

60%

80%


Yield Financing

$250-$500 $500-$1000 $1000-$5000 Over $5000

Percentage of Transactions Permitting a Change of Board Recommendation for

Reasons Other than a Superior Proposal

14

33

48

71


66%

34%


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For reasons other than a superior proposal

Solely due to a superior proposal

0%

20%

40%

60%

80%



$250-$500 $500-$1000 $1000-$5000 $5000 Over

Percentage of Transactions with a Forced Stockholder Vote Provision

14

33

48

71


88% 12%

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Forced stockholder vote provision

No forced stockholder vote provision

Not surprisingly, the vast majority of surveyed transac-tions did not include a forcedstockholder vote provision. A forced stockholder provisioneffectively neutralizes the target company’s ability to exercise its fiduciary out byrequiring a stockholder vote to be held even where the board has decided it can nolonger recommend the transaction to stockholders.

15

Break-Up Fees and Reverse Break-Up Fees

The reverse break-up fee hasbecome increasingly commonand now appears in a vastmajority of larger deals (including 100% of deals above$5 billion) and half of smallerdeals.

0%

20%

40%

60%

80%

100%

Section 1


with a Reverse Break-Up Fee

$250-$500 $500-$1000 $1000-$5000 Over $5000

Reverse Break-Up Fee by Transaction Value

50

6374

100


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0%

20%

40%

60%

80%

100%

Section 1

Percentage of Reverse

Break-up FeeTransactions

Lack of financing Failure to secureregulatory approval

Termination Scenarios Where Target Receives a Reverse Break-Up Fee

79

24


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The situations in which a reversebreak-up fee is paid by thebuyer are not as varied as thosesituations in which a break-upfee is paid by the target. Somedeals with increased regulatoryrisk had a reverse break-up feefor both a lack of financing anda failure to secure regulatoryapproval.

16


Break-up fees generally rangefrom 2% to 3% of the target’sequity value. However, the survey confirms that the size ofthe break-up fee as a percentageof the target’s equity value isdependent on the size of thetransaction and that smallertransactions frequently have abreak-up fee that is modestlylarger than 3% of the target’sequity value. 0%

0.5%1%

1.5%2%

2.5%3%

3.5%4%

Section 1

Percentage of TargetEquity

$250-$500 $500-$1000 $1000-$5000 Over $5000

Break-Up and Reverse Break-Up Fee by Transaction Value

3.6

3.02.8

3.0


3.13.4

2.22.5

Break-up fee Reverse break-up fee

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0%

20%

40%

60%

80%



$250-$500 $500-$1000 $1000-$5000 $5000 Over

Size of Break-Up Fee vs. Reverse Break-Up Fee

14

33

48

71


67%

12%

Equal Break-up fee is greater Reverse break-up fee is greater

21%

1st color - cmyk = 100/0/24/38

2nd color - cmyk = 0/10/50/0

3rd color - cmyk = 80/29/64/11



As this chart shows, the break-up fee and reverse break-up fee are frequently identical. Although the size of the break-up fee is subject to judicial scrutiny, the size ofthe reverse break-up fee is notsimilarly capped and the recentcorrelation in size betweenbreak-up and reverse break-upfees is a product of deal custom.Higher reverse break-up fees mayhave resulted in a minority ofcases due to the specifics of thetransaction (e.g., to compensatethe target company for anyadditional regulatory risk associated with a particularbuyer).

17


The five scenarios listed on the graph on this page arethe most common scenarios inwhich a break-up fee must bepaid. In addition to payment of a break-up fee, several transactions included target reimbursement of buyer’s transaction expenses (often subject to a cap) when theagreement is terminated due to a failure to get stockholderapproval, a target companybreach leading to the failure ofa closing condition or the passage of the drop dead date, in each case where nocompeting proposal isannounced and completed during any tail period.

0%

20%

40%

60%

80%

100%

Section 1


Target company terminates -

superior proposal/

fiduciary out

Buyer terminates -

drop dead date (competingtakeover

consummatedduring tail period)

Buyer terminates - target company closing condition breach

(competing takeover consummated

during tail period)

Termination Scenarios Where Buyer Receives a Break-Up Fee

98

8276

1st color - cmyk = 100/0/24/38

2nd color - cmyk = 0/10/50/0

3rd color - cmyk = 80/29/64/11


Font:ITC Stone Serif, medium 9pt0%

20%

40%

60%

80%

100%

Section 1


Either party terminates -no stockholder approval

(competing takeover consummated during

tail period)

Buyer terminates -change of

recommendation/competing takeover

recommendation/noticeof superior proposal

9286

1st color - cmyk = 100/0/24/38

2nd color - cmyk = 0/10/50/0

3rd color - cmyk = 80/29/64/11



18

Financing Outs

Not surprisingly, financing outsare “out.” Financing outs, onceprevalent in all deal sizes, arenow seen with decreasing frequency, particularly in the larger transactions. As a result,sponsors should ensure that any conditionality in the debtcommitment papers is limitedto the level of conditionality inthe merger agreement.0%

20%

40%

60%

80%

100%

Section 1


with a Financing Out

$250-$500 $500-$1000 $1000-$5000 Over $5000

Financing Outs by Transaction Value

25

38 35

0


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0%

20%

40%

60%

80%



$250-$500 $500-$1000 $1000-$5000 $5000 Over

Percentage of Transactions with a Financing Out Where the Buyer Had to Seek Alternative Financing

14

33

48

71


57%

43%

1st color - cmyk = 100/0/24/38

2nd color - cmyk = 0/10/50/0

3rd color - cmyk = 80/29/64/11



No obligation to seek alternative financing

Must seek alternative financing

Of the transactions with afinancing out, surprisingly onlya slight majority of those trans-actions required a buyer to seekalternative debt financing if thedebt financing contemplated by the original commitmentpapers was unavailable.

19

Material Adverse Effect

A small minority of transactionsincluded “prospects” in the MAEdefinition. In addition, a smallminority of going private transaction agreements defineMAE to include specified quantitative measurements (e.g., percentage decline in revenue or earnings).

0%

20%

40%

60%

80%



$250-$500 $500-$1000 $1000-$5000 $5000 Over

Percentage of Transactions with an MAE Definition that Includes “Prospects”

14

33

48

71


92%

8%

Prospects included Prospects not included

1st color - cmyk = 100/0/24/38

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20

Material Adverse Effect

Target companies have continuedto erode MAE protections forbuyers as evidenced by this graphwhere a significant majority ofdeals have material carveouts tothe MAE definition, including46% of surveyed transactionsthat explicitly provided that atarget company’s failure to meet the financial projectionsprovided to the buyer (eithercompletely or by up to a speci-fied percentage) would not constitute an MAE. Nevertheless,some of these transactions provide that the underlyingcause of the failure to meetfinancial projections (e.g., a lossof a key customer) could bedeemed an MAE. (See the July2006 issue of the Weil, Gotshal &Manges Private Equity Alert forfurther discussion on this topic.)

0%

20%

40%

60%

80%

100%

Section 1


Changes ineconomicconditions

Changes inindustry

conditions

Changes insecuritiesmarket

Changes inlaw

Carveouts from MAE Definition

90 8878

72

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0%

20%

40%

60%

80%

100%

Section 1


Announcementor consummation

of merger

Terrorismor war

Failure to meetfinancial

projections

88

68

46

1st color - cmyk = 100/0/24/38

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3rd color - cmyk = 80/29/64/11



21

Europe

22

Key Conclusions

The going private market varies widely across different European jurisdictions, as indeed do the rules andregulations applicable to takeovers in the many different jurisdictions covered by the term “Europe.” Thisperhaps reflects the fact that, in some jurisdictions, the public takeover market generally, as well as the private equity market, is still at an early stage of development and public takeovers are rare, making going private transactions the exception for sponsor-backed deals. That said, some of the largest European dealshave been going private transactions – the takeover of TDC A/S, a Danish telecom company, is one suchexample where the size of the deal dwarfs the remaining private equity activity in that jurisdiction.

The most common jurisdiction for going private transactions within Europe is the most mature of the private equity markets, and by far the most mature public takeover market, the UK. Here, the story of2006 lies in the companies that were NOT taken private rather than the ones that were – there wererumors and even preliminary announcements issued for several FTSE 100 companies, but, as we go topress, none have yet had a formal offer launched by a private equity bidder. Whether this is because offears that such offers are increasingly unacceptable to institutional shareholders at the prices sponsors areprepared to pay, or are too difficult to structure in companies with significant pension deficits thatrequire shoring up, financially or otherwise, remains to be seen.

We have tried to examine those points on European going private transactions that illustrate the similaritiesand differences with respect to going private transactions in the US. Many of the areas of moving marketpractice in the US are not applicable to European transactions where the regulatory environment, generallyspeaking, does not permit public offers to be launched without full financing commitment and withextremely limited conditionality (e.g., financing outs, go-shop provisions and variations in MAE).

Despite the wide variety of deal sizes and jurisdictions covered, it is noteworthy to find some commonfeatures and trends – for example, in the size of break-up fees, which nowhere was greater than 1%, and in the average amount of equity financing in deals, between 36% and 37% for deals below $5 billion.

One particular area of contrast between the US and Europe is the reverse break-up fee. In the US, a significant majority of all going private transactions featured a reverse break-up fee. In Europe, there wasonly one deal with a reverse break-up fee and it will be interesting to see if this is the start of a trend.

Another potentially significant difference revealed by the survey is the average equity percentage of deals and the levels of debt, where for transactions below $1 billion, the level of debt in going privatetransactions is higher on average in Europe than in the US. This reverses in transactions above $1 billion,where European transactions have a lower level of debt on average.

One large transaction also contained an unusual and interesting feature – a form of additional considerationpayable if the sponsors dispose of the target within twelve months. This reflects the type of “anti-embarrass-ment” clauses more usually negotiated by governments for privatisations (or occasionally in private deals)and this deal involved the sale of a majority stake by France Telecom that was then followed by the mandatory tender offer for the remaining shares. The circumstances in which an additional payment can be negotiated will be rare, and dependent on the existence of a significant controlling shareholder withthe appetite to negotiate such a clause. However, it may be an interesting precedent for those looking tostructure a transaction to appeal to reluctant institutional shareholders.

23

Jurisdiction

The majority of going private transac-tions during the period surveyed tookplace in the UK, with a significantnumber of deals in each categorysize. This is a reflection both of themarket generally, as well as the moredeveloped going private market inthe UK, where such deals have beencommonplace for a number of years.

Going private transactions make up asmall but still significant percentageof the private equity market generally.With an average of 15% of the market by volume and 25% by valueacross those jurisdictions where agoing private transaction took place,these transactions tend to dominatethe larger end of the buy-out spec-trum (although at 13% by volumeand only 9% by value of all publicM&A, are still at the lower end onaverage of the public deal market).

In some jurisdictions (such as Norwayand the Netherlands), one or twomega-deals have dominated the local market. Interestingly, Germanyis the jurisdiction with the lowestproportion of going private transactions as a percentage of the overall private equity market,reflecting perhaps both the legal risksinherent in the taking private processin Germany and the unattractivenessof a taking private transaction incomparison to other forms of majority shareholder control.

0

1

2

3

4

5

6

7

8

Section 1


$250-$500 $500-$1000 $1000-$5000 Over $5000

Target Jurisdiction by Transaction Value

8


1

UK

Germany

FranceHungary

Switzerland

Netherlands

Germany

1st color - cmyk = 100/0/24/38

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1

4

111 1 11

2 2

111

8

0

Other Western Europe

Northern Europe

Southern Europe

Central Europe

0%

20%

40%

60%

80%

100%

Section 1

1st color - cmyk = 100/45/0/40

2nd color - cmyk = 0/10/50/0

3rd color - cmyk = 80/29/64/11



Percentage of Private

Equity Deals

Going Private Transactions as a Percentage of Private Equity Deals of at least $250 Million

Transaction Value by Jurisdiction

15

40

14

2534


25 27

9

36

Volume Value

Cen

tral Europ

e

Oth

er Western

Eu

rope

Germ

any

North

ern Eu

rope

South

ern Eu

rope

France

Total

28

7

19

7 6

0

20

40

60

80

100

7 8

UK

24

Market Information

Transaction values in our studyrange from $257 million to$16.8 billion. As with the findings in the US, there is anincreasing trend towards largergoing private transactions, asprivate equity sponsors formclubs that enable them toacquire higher value target companies. Although during the period of our survey therehad yet to be a going privatetransaction involving a FTSE 100 company in the UK, marketcommentators believe that sucha transaction is inevitable.

0

3

6

9

12

15

Section 1


$250-$500 $500-$1000 $1000-$5000 Over $5000

Market Activity by Transaction Value

10

7

13

5


1st color - cmyk = 100/0/24/38

2nd color - cmyk = 0/10/50/0

3rd color - cmyk = 80/29/64/11



0%

20%

40%

60%

80%

100%

Section 1

Premium

$250-$500 $500-$1000 $1000-$5000 Over $5000

Premium to Market by Transaction Value

2719

2530

10 12


31

1322

0

20

7

1 day before announcement

30-day average before announcement

52-week high

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Deal premiums prior to the commencement of the offer period (generally speaking, when the target first announcedthat it was in talks, which mightor might not lead to an offer)vary by deal size, unlike the US findings, which demonstrate premiums generally in the 20%range. As in the US findings, premiums over the 52-weekhigh are relatively modest.

25

Club Deals

0%

20%

40%

60%

80%

100%

Section 1

1st color - cmyk = 100/45/0/40

2nd color - cmyk = 0/10/50/0

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$250-$1000 $1000-$5000 Over $5000

Percentage of Club Deals by Transaction Value

10

28

100


Transactions at the top end are all club deals (defined asinvolving two or more privateequity sponsors), reflecting thedesire and need of the sponsorsto share the risk and spread theequity check required by thelarger deals. This is similar tothe findings in the US survey.What is more surprising is that the percentage for thetransactions at the mid level isnot higher. Five of the 13 dealswithin this transaction sizeband were club ones, but thepercentage by transaction valuereflects the fact that there werethree deals of over $4.5 billiondone by single sponsors in the infrastructure sector – perhapsmore a reflection on thedynamics of that sector than onthe popularity of the club deal.

At the lower end of the scale,only one transaction out of the 17 in the $250 million to $1 billion range involved morethan one private equity sponsor, giving a very low percentage of9.6% of deals in that size rangein contrast to 38% of equivalentsize deals in the US survey. This indicates that deals below$5 billion are less likely to beclub deals in Europe than in the US.

26

Financing

The average percentage of equitycommitment diminishes as thetransaction size increases, aswould be expected. However,the averages mask some signifi-cant swings (for example, in thethird level of deal size, the rangeof equity percentage was from11% to 75.8%). Interestingly,the average equity percentagesare higher than the equivalentin the US for deals above $1 billion. This indicates thatbelow $1 billion, deals inEurope have more leverage, butabove $1 billion, US deals carrya greater level of debt.

0%

20%

40%

60%

80%

100%

Section 1

Percentage of Acquiror

Capitalization

$250-$500 $500-$1000 $1000-$5000 Over $5000

Equity Invested by Transaction Value

37.1 38.5 35.830.4


1st color - cmyk = 100/0/24/38

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0.0:1

0.5:1

1.0:1

1.5:1

2.0:1

2.5:1

Section 1

Debt-to-EquityRatio

$250-$500 $500-$1000 $1000-$5000 Over $5000

Debt-to-Equity Ratio by Transaction Value

1.7:1 1.6:1 1.8:1

2.3:1


1st color - cmyk = 100/0/24/38

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3rd color - cmyk = 80/29/64/11



27


Break-up fees in the UK areeffectively capped at 1% of target equity value. Althoughsuch limitations do not expresslyapply elsewhere in Europe, itappears to be a widely heldstandard, and no fee in oursample was greater than 1%.Occasionally fees are below 1%where a fixed fee has beenagreed and the offer price hassubsequently been increased.One target company agreed to amuch lower fee of 0.45% as a“due diligence” fee payable in all circumstances given toencourage the bidder to launcha competing offer.

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

Section 1

Percentage of Target Equity

$250-$500 $500-$1000 $1000-$5000 Over $5000

Break-Up Fee by Transaction Value

1.0

0.8 0.8

1.0


1st color - cmyk = 100/0/24/38

2nd color - cmyk = 0/10/50/0

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0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

Section 1


with a Reverse Break-Up Fee

$250-$500 $500-$1000 $1000-$5000 Over $5000

Reverse Break-Up Fee by Transaction Value

0 0 0

1.0


1st color - cmyk = 100/0/24/38

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3rd color - cmyk = 80/29/64/11



Reverse break-up fees are a relatively unknown concept inthe European market, althoughtheir use is beginning to growin private transactions.However, only one transactionin our sample contained areverse break-up fee, set at0.98% of the total transactionvalue (the amount of equity inthis deal was not disclosed).Within the UK market, sucharrangements are unlikely in the context of a going privatetransaction as the bidder isrequired to be fully committedto the offer, with committedfunds, at the point of makingan announcement.

28

UK Transactions – Type of Offer

There are two ways in which a goingprivate transaction can be structuredin the UK – either by way of an offermade to all shareholders, or using atechnique known as a scheme ofarrangement, whereby all the sharesof the target are cancelled or trans-ferred, and new shares are issued tothe bidder in exchange for the payment of consideration to the target company’s shareholders.

A scheme has the advantage both thatno stamp duty (at a rate of 0.5% of thevalue of the transaction) is paid, andalso that once the threshold for thescheme is reached (75% of the sharesnot already held by the bidder and itsassociates), 100% control is obtained.

By contrast, under an offer, the bidder will set the threshold for acceptances for the offer to becomeunconditional (usually set at 90% but often later relaxed to a lower level). Statutory provisions applyunder which the bidder can squeeze out minority shareholders if certain percentages are acquired (90% in the UK), but if this threshold is not reached, the bidder will have to deal with any remainingminority shareholders who have not accepted the offer.

As a consequence of the advantages of the scheme of arrangement, this is the most popular route for bidders to choose. However, a word of caution: this method is primarily suitable for uncontested, recommended bids. The small but significant use of the offer route rather than a scheme reflected in the numbers set out above demonstrates the increased willingness of private equity sponsors to mountrival bids for public target companies, which by necessity must be carried out by way of offer (and indeed within our sample, three companies were the subject of two competing bids).

0

1

2

3

4

5

6

Section 1


$250-$500 $500-$1000 $1000-$5000 Over $5000

Type of Offer (UK Transactions Only)

6

2

6

1


2 2 2

1

Scheme Offer

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29

UK Transactions –Irrevocable Undertakings

Irrevocable undertakings are usedin UK transactions for bidders toget comfort in advance of makingan offer that they will have target shareholder support for theirbid. In a recommended offer, a bidder will usually expect the recommending directors to enterinto some form of irrevocableundertaking in respect of theshares held by them personally.

Similarly, any shareholders withsignificant stakes will also beapproached to gauge their interestin the bid. However, bidders mustpay heed to the rules set out in the UK Takeover Code, requiring

disclosure of the full terms of any irrevocable, and also be aware that the seeking of an irrevocable willmake the counterparty an insider to the offer. Due to the need to limit the number of parties who areaware that a potential offer may be made, in practice this means that only a very limited number of parties should be approached to give such an undertaking.

The different types of commitment that can be given are: hard undertakings – being genuinely irrevocable commitments, which will be binding unless the offer lapses; soft undertakings – which will be binding only if there is no higher competing offer made; and in the middle so-called semi-soft undertakings – which are binding until an offer is made that is higher by a threshold amount. In our survey, the range for a semi-soft undertaking was between 2% and 10% higher than the original offer.Non-binding letters of intent were also given in six out of the eight transactions in the lowest transaction bracket.

The results of our survey show very clearly that irrevocables are a feature of smaller going private transactionsbut are uncommon in larger transactions. This reflects the much more disparate shareholder base of largertarget companies.

0%

20%

40%

60%

80%

100%

Section 1

Percentage of Target Equity

$250-$500 $500-$1000 $1000-$5000 Over $5000

Irrevocable Undertakings and Letters of Intent (UK Transactions Only)

33

16

0


313 11

0 00

Semi-soft Soft Letter of Intent

Total Hard

1st color - cmyk = 100/0/24/38

2nd color - cmyk = 0/10/50/0

3rd color - cmyk = 80/29/64/11



049

2 0011

05 1

6

30

About the WGM Private Equity Group

Weil Gotshal provides private equity clients with one-stop, global service for both fund formation and transactional work. With over 200 private equity lawyers worldwide, including a number of ChambersGlobal’s highest ranking lawyers, we represent private equity sponsorsand investors on the full range of private equity matters.

We represent a number of first-tier private equity sponsors in establishing a wide variety of funds, including buyout, infrastructure, distressed debt, mezzanine, real estate opportunity, venture and hedgefunds. We design structures and terms to facilitate fundraising on atax-efficient basis and to withstand the challenges of difficult economicand regulatory environments. Our experience is enhanced by extensiverepresentations of large institutional investors.

On the transactional side, our integrated international experience covers the entire range of legal areas relevant to the successful completion of complex regional and cross-border transactions, including corporate/commercial, banking and finance, tax structuring,structured finance, capital markets, executive compensation and benefits, ownership incentives, regulatory, intellectual property, corporate governance and restructuring.

We understand the changing environment of the private equity marketand can respond quickly with innovative structuring and financing for all types of transactions. Our lawyers have extensive experiencewith acquisitions and financings of public and private companies and with a variety of exit strategies, including spin-offs, divestitures, recapitalizations, mergers and IPOs. We also have extensive experiencewith “club” transactions involving the representation of multiple private equity sponsors.

BOSTONJames Westra+1 617 772 8377

BRUSSELSStanislas DePeuter+322 543 7460

BUDAPESTDavid Dederick+36 1 302 9100

DALLASGlenn West+1 214 746 7780

FRANKFURTGerhard Schmidt+49 69 21659 700

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MUNICHGerhard Schmidt+49 89 242430

NEW YORK Thomas Roberts+1 212 310 8479Barry Wolf+1 212 310 8209Doug Warner+1 212 310 8751

PARISDavid Aknin+33 1 4421 9797

PRAGUEKarel Muzikar+420 22140 7300

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www.weil.com

©2007. All rights reserved. Quotation with attribution is permitted. This publication provides generalinformation and should not be used or taken as legal advice for specific situations which depend onthe evaluation of precise factual circumstances. The views expressed in these articles reflect thoseof the authors and not necessarily the views of Weil, Gotshal & Manges LLP. If you would like toadd a colleague to our mailing list or if you need to change or remove your name from our mailinglist, please email [email protected], or call +1 646 728 4056.

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