Presentation on theme: "Chapter 17 Restructuring a company"— Presentation transcript:
1 Chapter 17 Restructuring a company Corporate Financial Strategy 4th editionDr Ruth BenderChapter 17 Restructuring a company
2 Restructuring a company: contents Learning objectivesReasons for restructuring, and possible approachesSome warning signsDebt equity swapDetermining the shortfall for creditorsStakeholders have choicesTips for those planning a distressed acquisitionSpin-offsCarve-outsSome reasons why demergers can add value
3 Learning objectivesDiagnose when a company is in trouble, and identify ways in which its cash flow can be improved to stave off a cash crisis.Identify potential sources of finance for a troubled company, and evaluate how appropriate they are.Understand some of the regulatory mechanisms underlying company rescue or liquidation.Explain what spin-offs and carve-outs are, and how they differ.
4 Reasons for a restructuring, and possible approaches Wrong financial strategyWrong business strategyToo little debtToo much debtPay a special dividendUndertake a buy-backInvestImprove operating efficiencySell assetsRaise new financeRestructure existing debtChange strategy
5 Some warning signsThe 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.
6 Equity held by previous Debt holders Debt –equity swapBeforeAfterDebtDebtEquity held by previous Debt holdersEquityEquity
7 Determining the shortfall for creditors Shortfall to creditorsAssets are insufficient to meet all claimsClaims on the companyUnsecured creditorsShortfall on charged assetsAmounts loaned under a floating charge (value restricted to the value of those charged assets)Value breakRealizable value of business / assets (whichever is greater)Amounts loaned under a fixed charge (value restricted to the value of those charged assets)Costs of restructuring (professional fees)Based on: ICAEW Corporate Finance Faculty, Best-practice Guideline – Turnarounds
8 Stakeholders have choices Ordinary sharesPut in more moneyAccept dilutionDebtSwap to equityWrite-offsNote that all the different lenders will have different views on what should happenCreditors (unsecured)Write off part of the debtNegotiate payment termsTake equityEmployeesTrade-off between jobs and payManagementFight to be part of the deal? Payoff?Other stakeholders??
9 Tips for those planning a distressed acquisition Use advisers with previous experience of distressed acquisitionsBe prepared to undertake an accelerated due-diligence exercise, but on limited informationClarify and resolve the legal position regarding charges on the company’s assets, and retention of title clausesDetermine which contracts with customers, suppliers, and landlords include an automatic termination clause in the event of insolvency, and resolve thisEnsure you have the funding in place so that you can move quicklyIncorporate 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
10 spun off division of Company A Spin-offsOwned by existing shareholdersCompany APre-transactionOwned by existing shareholdersOwned by existing shareholdersCompany APost-transactionCompany Bspun off division of Company A
11 spun off division of Company A Carve-outsOwned by existing shareholdersCompany APre-transactionOwned by new shareholders and by Company AOwned by existing shareholdersCompany APost-transactionCompany Cspun off division of Company A
12 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’.