Deal Structuring & Financing Acquisitions

Private & Confidential

-1-

Deal Structuring is of paramount importance

REGULATORY
CONSIDERATIONS

Open offer requirements, ownership norms, capitalization

norms

TAX CONSIDERATIONS

Capital gains impact to sellers, stamp duty and sales tax

issues, availability of past tax losses

ACCOUNTING
CONSIDERATIONS

Ability to consolidate, goodwill impact, provisioning in the

balance sheet, purchase consideration break-up between
assets

FINANCING
CONSIDERATIONS

Cost of capital, availability of funds on target vs. acquirer

balance sheet, tax benefit for interest expense, Crossborder jurisdictions

DEAL TIMING

Implementation time to financial closure

Private & Confidential

-2-

Commonly Used Deal Structures

Transaction Structures | Stock Purchase

Target
Shareholders

Target
Corp.

Target Stock
Acquirer
Cash

Target
Assets

Benefits
Simple and quick to
execute
Minimal transaction costs
Pricing benchmarks are
easier to establish

Some Potential Issues

May lead to tender offer
requirements
Potential capital gains
Implication for the seller
Inability to cherry pick select
assets of the business

Private & Confidential

-4-

Recent Examples
Vodafones acquisition of
the equity from Essar in its
telecom business
Mahindras acquisition of
Shares in Satyam Computers
Emamis acquisition of
shares in Zandu

Transaction Structures | Asset Purchase

Target
Shareholders

Target
Corp.

Acquirer
Shareholders

Cash
Target Assets

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

Private & Confidential

-5-

Recent Examples
Schneiders purchase of
the cabling business of
Smartlink
Indo Asian Fusegear Legrand
Abbotts purchase of
Domestic Formulations
business of Piramals

Transaction Structures | Mergers

Target
(merged)
companys
shareholders

Acquiring
companys
shareholders

Cash and/or other

consideration
Assets
Acquiring
company XYZ
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

Target
(merged)
company ABC
(dissolved)

Some Potential Issues

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

Private & Confidential

-6-

ABC
stock

Recent Examples
Centurion Bank of Punjab
with HDFC Bank
Bank of Rajasthan with
ICICI Bank

Financing Acquisitions

Some Key Considerations

Sources of Financing

Forms of Financing

Cost of Financing

Private & Confidential

-8-

Sources of Financing

Sources of Finance

Buyer

Seller

Commercial
Banks

Finance
Companies

Long term
Finance

Insurance
Companies

Private & Confidential

-9-

Venture
Capital Firms

Pension
Funds

Leveraged
Buyout Funds

Financing Considerations Differ

The buyer / management team provide the most critical portion of

the transaction
Management/
Buyer

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 of Target
Company

Seller may be willing to take back long term, subordinated debt and
occasionally preferred stock
Earn-out arrangements are also used for compensation

Private & Confidential

- 10 -

Financing Forms | Characteristics

DEBT
CHARACTERISTICS

SENIOR

EQUITY

SUBORDINATED

Tax-deductible finance costs

Covenants/ Restrictions

PREFERRED

Convertibility features

X (In specific cases)

Dilution of Ownership

X (In specific cases)

No required fixed payments

X

Not subject to redemption

EPS dilution of shares

X
X

Base for leverage

Cost of financing

COMMON

X
X

Low

Higher

Higher

Highest

X (In specific cases)

Private & Confidential

- 11 -

Financing Forms | Other Financial Instruments

Debt with Warrants

Debt securities with attached or detachable equity warrants

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

Junk Bonds

Paid-in-Kind Debt

Paid-in-kind
Securities

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

Private & Confidential

- 12 -

Financing Forms | Other Financial Instruments

Adjustable Rate
Preferred Stock

Preferred stock with interest rates that are reset at periodic auctions

Debt securities with

put option

Investors retain put option

Alphabet / Tracking
Stock

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

Sale-lease back
financing

Similar to Senior Debt

earnings of a specified subsidiary or group of assets

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

Private & Confidential

- 13 -

Acquisition Finance (Debt) | Structuring

FACTORS DRIVING ACQUISITION FINANCE

Companys Perspective

Minimum equity contribution

Appropriate leveraging through an optimal funding

structure balancing cost and risk

Lender s Perspective

Limited recourse to parent for repayment - Ring

Adequate security with commensurate

return

Protection against default

Promoter comfort and contribution

fencing liability associated with acquisition

STRUCTURING REQUIREMENT

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

Private & Confidential

- 14 -

Acquisition Finance (Debt) | Challenges

Objective

Issues / Challenges

Optimizing Cost

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.

Structuring
the
Transaction most
appropriately

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.)

Finding the most

suitable Lender

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

Whether to go for a Bilateral loan or Syndicated loan

Timely completion To complete the Transaction in a Short Time especially when there are multiple bidders for
of the Transaction /
the Target
Synchronize
the
entire process
To coordinate across different geographies, lenders and various advisors

Private & Confidential

- 15 -

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

Overseas brands

~USD 120 MN

revenue of ~ USD 40 MN

Owner of Dawaat and

Heritage brands

Has portfolio of strong brands,

With its milling and product

development capabilities, LT

Royal and Pari, with 40%

Overseas will be able to launch high

market share in the US

value add products in the US market

basmati rice industry

LT Overseas became the largest

basmati player in the US

Private & Confidential

- 16 -

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

DEBT TO OFFSHORE SPV WITH RECOURSE
Lending Bank
India Operations

Rupee
Loan of
Rs. 80
million

Acquirer
ONSHOR

The Lending Bank, through its offshore operations,

extended US$ 13 million financial assistance to
facilitate acquisition of the Target

OFFHORE
Corporate
Guarantee

Lending Bank Offshore Branch

Senior Debt
US$ 13
Million

Extended additional US$ 2 million to the Indian

operations through its Indian Balance Sheet

Equity Investment
US$ 2 million

Acquirer SPV
USA

Loan extended infused as Equity in the US SPV

Security

Pledge of SPV and Targets shares

Corporate Guarantee of the Indian Parent

Pledge of Promoters shareholders in the Indian

Parent company

Cash
flow
available for
Acquirer to be
utilized for
debt servicing

Acquisition
Consideration for 100%
stake

Target
USA

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

Private & Confidential

- 17 -

Contact Details

Corporate Executive Director

Email: director@lloydbancaire.com

Lloyd Bancaire Worldwide.

United States

Luxembourg

Hong Kong

www.lloydbancaire.com

Private & Confidential

- 18 -

United Kingdom

Singapore