Bénédicta: history of an LBO
Bénédicta is France’s second-largest producer of
mayonnaise and dressings sold in chainstores. The
company was formerly part of Unilever. After Amora’s
takeover by Unilever in 1999, the European
Commission ruled that Unilever held a dominant
position in the mayonnaise and dressing market.
Unilever responded by selling Bénédicta. This
divestment took the form of a leveraged buyout (LBO)
carried out by a subsidiary of Barclays investment bank
with the existing management team.
An LBO is specific takeover mechanism that consists in
financing the acquisition of a company through debt in
order to exploit a leverage effect. A holding company is
set up to carry the long-term debt. LBOs are typically
conducted as follows:
1. Initial stages
• Identification of investment funds with the
capability of engineering the takeover, and
initial meetings with them.
• Construction of an in-house team with all the
required competencies to develop a five-year
plan covering finance, sales, marketing, supply
chain, production facilities, and human
resources.
• Meeting between management team and
selected investment fund. The proposal must
be robust and well-argued: in an average year,
a private equity fund involved in transactions
on unlisted companies receives 200 proposals
but closes only ten deals.
2. After the fund has been selected
• Construction of business plan through an
iterative consultation procedure.
• Refinement and computation of acquisition-
price parameters such as multiple of Earnings
Takeovers: another form of business creation
Before Interest and Taxes (EBIT), internal rate
of return (IRR), etc.
• Definition of target valuation range.
3. Post-valuation
• Financial engineering and search for the right
equity-debt mix on basis of valuation range
and cash-flow and EBIT forecasts.
• Search for lead bank to manage debt
syndication.
• Debt packaging and structuring into senior
debt and mezzanine debt. (Senior debt is the
bank debt raised to finance an acquisition
through a leverage effect. The senior banker
has guarantees on the assets of the takeover
holding company. Mezzanine debt is hybrid
financing between senior debt and equity. It is
repaid after senior debt, but usually offers a
higher return.)
• Negotiation of lending rates with banks.
4. Negotiation with seller
• Negotiation, usually via a bank.
• Agreements on acquisition price and financial
arrangements (valuation of goodwill, fixed
assets, brand name, etc.).
• Definition of a timetable and performance of
acquisition audits (financial, environmental,
workforce). The purchaser’s auditors can
examine all relevant documents in a special
locale called the data room.
• Signing of deal at the “closing” meeting; if
need be, definition of a period in which seller
will receive support.
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 BÉNÉDICTA: HISTORY OF AN LBO

Olivier Marchand
Chief Executive Officer, Bénédicta

If I understood Jacques Bonneau correctly, leveraged buy-outs (LBOs) are not included in the statistics on
business creations. The LBO is a mechanism that consists in acquiring a company with borrowed money in order
to benefit from a financial leverage effect. A takeover holding company is set up to carry the long-term debt.

My account will focus on how Bénédicta left the Unilever group and was taken over via an LBO.

An example of an LBO takeover

Bénédicta is France’s second-largest producer of mayonnaise and dressings. We employ a total 260-270 people,
including production workers, non-production personnel, and sales representatives. Sales came to about €76
million in 2001. Until December 2000, the company belonged to the Unilever group.

Unilever was forced to divest Bénédicta after its September 1999 acquisition of Amora-Maille. The European
Commission argued that Unilever would find itself in a dominant market position, at least in France, and thus
had to sell its other subsidiary. Between November 1999 and March 2000, Unilever tried to explain to the
Commission that it had a right to keep the company, and that this would not infringe competition rules. But in
March 2000, Unilever had to resign itself to the divestment.

Several firms expressed their interest. An investment bank then received a memorandum of acquisition from
Unilever, setting out Benedicta’s profile (operations, history, asset values, etc.).

The divestment took the form of an LBO conducted by a subsidiary of Barclays investment bank with
Benedicta’s existing management team. Ten months were needed to close the deal.

While the specific arrangements of this takeover cannot be replicated exactly elsewhere, they do give a good
illustration of how LBOs work. An LBO takeover comprises four major stages: (1) finding an investment fund
with the capability of engineering the takeover; (2) development of a five-year business plan; (3) leverage
calculation and financial engineering; (4) negotiation with seller and closing of deal.

Stage 1: Finding an investment fund

The first stage in an LBO is to identify the investment funds capable of taking part in such a deal and to select
the fund that will see the deal through to the close. Investment funds are ranked by the size of the transactions in
which they participate: €1.5 million, €15 million, €150 million and up, etc. A private equity fund, which handles
transactions involving unlisted companies, receives some 200 proposals a year but closes only about ten deals.

One also needs to define the structure of the management team that will run the company after the takeover. The
team must include all the competencies required to develop a five-year business plan: finance, sales, marketing,
production, logistics, and human resources. In the Bénédicta sale, the management team was set up in March-
April 2000.

The first investment fund we met handled no deals under €600 million—far above our proposal—and thus
turned us down. Then two funds that had already arranged deals in the food industry for several tens of millions
of euros said they were interested, and had decided to support us. We therefore had to choose which one would
be our partner.

We selected Barclays Private Equity, whom we felt would be in a better position to support us after the closing
of the deal.

Takeovers: another form of business creation 67

Stage 2: Developing the business plan
After the fund has been chosen, the second stage consists in developing the business plan. This is an iterative
process. In our case, we had to draft nearly a hundred versions, between May and July 2000, to satisfy the
acquisition criteria. Three months were needed to reach an agreement, in July, on the management team’s
commitments to investors over the five following years.

We then refined the acquisition-price parameters using fairly complex tools: multiples of EBIT (earnings before
interest and taxes), IRR (internal rate of return), etc. Tangible and intangible assets—plants, brands, goodwill,
and so on—were valued. We thus obtained a valuation range for the target.

Stage 3: Determining leverage and engineering the financial package

The most delicate part of the transaction is to determine the debt leverage. The principle of an LBO consists in
investing the least possible capital in the acquisition price and borrowing as much as possible. A balance
between debt and equity must be struck, taking into account the valuation range and the cash-flow and EBIT
forecasts. Once the debt is repaid, the modest capital acquired will be multiplied when investors pull out a few
years later.

The financial package includes a structuring of the debt into senior debt and mezzanine debt. Senior debt is the
bank debt raised to finance an acquisition through a leverage effect. Its maturity ranges from three to seven
years. The senior banker has guarantees on the assets of the takeover holding company. Mezzanine debt is hybrid
financing between senior debt and equity. It is repaid after senior debt, but usually offers a higher return.

The investment fund launches a search for the banks capable of syndicating and raising the loans. This is not an
easy task. The return for investors who lend funds in an LBO is minimal, but their risk exposure is high. The
banks involved in loan syndications receive 2-4% of the amount lent, for periods of five to seven years, with—in
some cases—a high risk that the company will not succeed. True, the bank collateralizes the loan on goodwill or
other assets, but its return is modest even as it exposes itself to risks in an area where it has no specialist
knowledge. When the lead bank is chosen, the management team must put on a true “balancing act” in order to
prove its motivation and demonstrate the robustness of its business plan.

Stage 4: Negotiating with the buyer and closing the deal

Once the debt has been structured, sellers and buyers set a final acquisition price. This is followed by a period of
several months in which the purchasers’ auditors examine the thousands of pages prepared by the seller to
present the enterprise. The auditors can peruse the documents in a special locale called the data room. After the
seller and buyer have agreed on an approximate price level—in our case, some adjustments were made between
August and December—a “due diligence” period begins, in which individuals and companies commissioned by
the buyer perform financial, environmental, sales, and marketing audits to test the robustness of the business plan
and the reliability of the business data produced by the seller.

When the negotiations are over, the deal can be signed at the “closing” meeting. If need be, a period is defined in
which the seller will receive support.

On closing day, December 29, 2000, Barclays Private Equity acquired Bénédicta. We have been running the firm
since.

68 Insee Méthodes