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Acquisition Finance in the UK (England and Wales): Overview

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Acquisition Finance in the UK (England and Wales): Overview Acquisition finance in the UK (England and Wales): overview November 2017 MARKET OVERVIEW AND METHODS OF lending funds and the US and European ACQUISITION private placement markets. For example, the "unitranche" product (that is, a single tranche Acquisition finance market loan provided by a direct lending fund) has 1. What parties are involved in acquisition become an increasingly popular way of finance? financing mid-market and smaller leveraged acquisitions. The volume of these products After a busy 18 months, the second half of are not significant enough to challenge 2016 saw the start of a slowdown in activity mainstream loans and bonds. However, they in the European M&A debt financing market, are finding their niche and there is a as the prospect of Brexit and the election of continuing focus on promoting these as an President Trump in the US, among other alternative to bank finance at both EU and factors, fostered a new wave of uncertainty member state level. in the financial markets. Transactions have involved a mix of corporate and private Methods of acquisition equity buyers, although the largest financings over the last couple of years have 2. What are the main methods used for predominantly been corporate transactions. acquiring business entities in your jurisdiction? Acquisition finance is mostly arranged and Asset acquisition underwritten by local and international Asset acquisitions are generally used where banks. The arranging banks may syndicate the buyer wishes to: the debt to other banks and in the case of a leveraged loan facility, institutional investors Select (cherry pick) the most valuable or (such as collateralised loan obligations desirable assets. (CLOs), hedge funds and other funds). However, in recent years larger acquisition Leave behind unwanted liabilities or assets that are not of use. loans have typically taken the form of a bridge facility which is refinanced in the Negotiating an asset acquisition can lead to public debt markets. higher costs, as the process can be more time consuming than a share acquisition, and Banks remain the dominant source of primary there may be a limit as to how many loans. However, since the financial crisis a undesirable assets can be left behind. Asset number of alternative sources of finance acquisitions may also require consents from have become available to European third parties who are not directly involved in borrowers, including loans from direct the transaction, such as suppliers, as Acquisition finance in the UK (England and Wales): overview 1 contracts will need to be assigned and and liabilities of the business to be sold are novated on an individual basis. transferred to a new subsidiary. The shares of the new subsidiary are then acquired by the Share acquisition purchaser. The use of hive-downs is typically The acquisition of the entire issued share tax driven. capital of the target company is generally the preferred method of acquisition of a STRUCTURE AND PROCEDURE company or group. When acquiring the Procedure target's shares, the buyer obtains the entire 3. What procedures are typically used for company and all of its assets and liabilities. gaining acquisition finance in your This can save time in terms of negotiation, jurisdiction? but can also result in the purchaser acquiring unwanted liabilities which it will have to The financing process and the documentation make provision for and conduct full due required prior to an offer being made or the diligence in relation to. sale and purchase agreement being finalised depends on the nature of the acquisition. Merger Mergers involving a UK company (for The City Code on Takeovers and Mergers example, where one entity absorbs one or (Takeover Code) permits the bidder to more entities, or where a new entity is announce a bid for a UK listed company only formed out of merging entities) are possible after ensuring that it can fulfil any cash under the Companies (Cross-Border Merger) consideration offered (see Question 12, Regulations 2007 (SI 2007/2974). An Funding). equivalent process is available across the EEA (the UK regulations implement Directive The offer document must include a 2005/56/EC on cross-border mergers of confirmation from an appropriate third party limited liability companies (Cross-border (usually the bidder's financial adviser) that Mergers Directive)). the bidder has sufficient resources available to carry out its bid. In practice, this As the operation of the UK Regulations are requirement for "certain funds" usually means underpinned by EU law, the extent to which that, even if the acquisition will be funded they will continue to apply in a cross-border from the proceeds of an issue of debt or context will depend on whether the UK is equity securities, the initial financing will able to or chooses to negotiate a reciprocal take the form of a bridge loan. The drawing and equivalent regime that will apply post- of this bridge loan will be subject only to Brexit. Mergers conducted under the Cross- minimal conditions to satisfy the certain border Mergers Directive in any event, funds requirement (see Question 12, remain relatively rare. Funding). Other A purchaser can commit to a private A hive-down combines both assets and share acquisition subject to suitable financing, but sale techniques. In a hive-down, the assets usually the acquisition is agreed once the Acquisition finance in the UK (England and Wales): overview 2 financing is in place. If the sale proceeds are financed are referred to as leveraged buy- to be raised via auction, the purchaser will outs (LBOs). The business of financing these often seek to raise financing to support its transactions is referred to as leveraged bid on a similar "certain funds" basis as would finance. In an LBO, the acquisition is be required in the context of a public typically structured so that the seller has acquisition subject to the Takeover Code (see limited recourse to the financial buyers. The Question 12, Funding), to gain a competitive debt and equity financing for the acquisition advantage during the auction process and/or is contributed to a newly formed company (a to satisfy any requirement imposed by the "Newco") which is used to acquire the target. seller to provide "certain funds". The debt financiers' recourse is limited to their secured claims against Newco and its Loan finance is generally documented group (including the target group). initially in a term sheet and the documentation is often quite detailed. If Limited recourse is not usually a time is short, the acquisition financing can consideration in relation to corporate be committed using a short-form and short- acquisitions. Corporate buyers typically raise term interim facility agreement, which can funds and acquire the target directly. later be replaced with full-form documentation when practicable. EQUITY FINANCE 5. What equity financing structures are Stapled finance is sometimes used, most typically used in acquisition finance? commonly in auction sales. This involves the seller instructing a financial institution (or A UK listed company can issue shares to fund several institutions) to pre-package the an acquisition by a: acquisition debt finance and "staple" it (usually in the form of a term sheet) to the Rights issue. information memorandum. The information memorandum is then presented to all or a Open offer. certain number of potential bidders. The Placing. main aim is usually to: Rights issues and open offers are offers to Speed up the auction process. existing shareholders on a fully pre-emptive Minimise the seller's execution risk. basis. Placings involve the placement of shares on a targeted and non-pre-emptive basis. Placings are quicker and simpler and Vehicles are therefore a useful means of raising equity 4. What vehicles are typically used in finance for smaller acquisitions. acquisition finance? The equity component of a leveraged Acquisitions by financial buyers (often acquisition financing can take various forms private equity funds) where a significant including equity and shareholder loans. proportion of the purchase price is debt Acquisition finance in the UK (England and Wales): overview 3 DEBT FINANCE Leveraged acquisitions tend to involve more complex and secured debt structures. The Structures and documentation debt finance can take the form of senior 6. What debt financing structures are loans or a combination of senior and junior typically used in acquisition finance? (mezzanine) loans. Additional tranches including second lien and PIK loans are seen Debt financing structures occasionally. The type and complexity of the financing arrangements depend on the purchaser, the Currently, a combination of loans and high- target and the relevant business sector. yield bonds is often the preferred approach Corporate acquisitions are typically debt for transactions where the required volume financed using either: of debt is sufficient to support a bond issue. There are multiple possibilities for combining Pre-existing loan facilities. term loans and bonds. As in the corporate Newly arranged acquisition facilities. market, the term loan can be a bridge which is refinanced on or shortly after closing with the proceeds of a high-yield bond issue, Bonds can be used to finance large leaving any revolving credit facilities (which acquisitions, but are generally used in are usually conferred a super senior claim on conjunction with a bridge loan, which is any shared security) as the only loan refinanced out of the proceeds of the bond facilities in the structure. Alternatively, issue on or after the acquisition has been secured term loans may be drawn alongside a completed. pari passu senior secured high-yield bond, each with an equal claim on any shared Bridge loan facilities are intended to be short security package. Senior secured term loans term and are therefore structured to and/or senior secured bonds may also be encourage swift refinancing.
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