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Corporate Financial Strategy Chapter 17 Restructuring a company Corporate Financial Strategy 4th edition Dr Ruth Bender.

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Presentation on theme: "Corporate Financial Strategy Chapter 17 Restructuring a company Corporate Financial Strategy 4th edition Dr Ruth Bender."— Presentation transcript:

1 Corporate Financial Strategy Chapter 17 Restructuring a company Corporate Financial Strategy 4th edition Dr Ruth Bender

2 Corporate Financial Strategy Restructuring a company: contents  Learning objectives  Reasons for restructuring, and possible approaches  Some warning signs  Debt equity swap  Determining the shortfall for creditors  Stakeholders have choices  Tips for those planning a distressed acquisition  Spin-offs  Carve-outs  Some reasons why demergers can add value 2

3 Corporate Financial Strategy Learning objectives 1.Diagnose when a company is in trouble, and identify ways in which its cash flow can be improved to stave off a cash crisis. 2.Identify potential sources of finance for a troubled company, and evaluate how appropriate they are. 3.Understand some of the regulatory mechanisms underlying company rescue or liquidation. 4.Explain what spin-offs and carve-outs are, and how they differ. 3

4 Corporate Financial Strategy Reasons for a restructuring, and possible approaches 4 Wrong business strategy Wrong financial strategy Too little debtToo much debt Pay a special dividend Undertake a buy-back Invest Improve operating efficiency Sell assets Raise new finance Restructure existing debt Change strategy

5 Corporate Financial Strategy Some warning signs  The company is trading close to the limit on its bank facilities.  Monthly management accounts continually show negative variances on sales and profits.  There are no monthly management accounts, or they arrive late, with inadequate explanation.  Several key people leave the company in a short period of time.  Loss of several customers.  Poor relationships with suppliers. 5

6 Corporate Financial Strategy Debt –equity swap 6 Debt Equity Before Debt Equity After Equity held by previous Debt holders

7 Corporate Financial Strategy Determining the shortfall for creditors Unsecured creditors Shortfall on charged assets Amounts loaned under a floating charge (value restricted to the value of those charged assets) Amounts loaned under a fixed charge (value restricted to the value of those charged assets) Costs of restructuring (professional fees) Realizable value of business / assets (whichever is greater) V ALUE BREAK Claims on the company Shortfall to creditors Assets are insufficient to meet all claims Based on: ICAEW Corporate Finance Faculty, Best-practice Guideline – Turnarounds 7

8 Corporate Financial Strategy Stakeholders have choices  Ordinary shares − Put in more money − Accept dilution  Debt − Put in more money − Swap to equity − Write-offs − Note that all the different lenders will have different views on what should happen  Creditors ( unsecured ) − Write off part of the debt − Negotiate payment terms − Take equity  Employees − Trade-off between jobs and pay  Management − Fight to be part of the deal? Payoff?  Other stakeholders?? Page 8

9 Corporate Financial Strategy Tips for those planning a distressed acquisition  Use advisers with previous experience of distressed acquisitions  Be prepared to undertake an accelerated due-diligence exercise, but on limited information  Clarify and resolve the legal position regarding charges on the company’s assets, and retention of title clauses  Determine which contracts with customers, suppliers, and landlords include an automatic termination clause in the event of insolvency, and resolve this  Ensure you have the funding in place so that you can move quickly  Incorporate the new business to ring-fence the assets and make sure that if things don’t work out it doesn’t threaten your existing business. When a management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact. Warren Buffett 9

10 Corporate Financial Strategy Spin-offs 10 Company A Pre-transaction Company A Post-transaction Owned by existing shareholders Company B spun off division of Company A Owned by existing shareholders

11 Corporate Financial Strategy Carve-outs 11 Company A Post-transaction Owned by existing shareholders Company C spun off division of Company A Owned by new shareholders and by Company A Company A Pre-transaction Owned by existing shareholders

12 Corporate Financial Strategy Some reasons why demergers can add value  Separation into clearly defined business segments leads to market transparency and greater understanding.  Raise money by taking advantage of the market pricing one particular sector very highly.  The different businesses can follow financial strategies more appropriate to their activities.  Improvements in corporate governance and efficiencies arise in companies which were subsidiaries but are now separately accountable to the markets.  Incentive structures can be put in place that link management performance directly to the unit’s share price.  Removal of the ‘conglomerate discount’. 12


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