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Corporate Financial Strategy 4th edition Dr Ruth Bender. Chapter 17 Restructuring a company. Restructuring a company: contents. Learning objectives Reasons for restructuring, and possible approaches Some warning signs Debt equity swap Determining the shortfall for creditors

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restructuring a company contents
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
learning objectives
Learning objectives
  • Diagnose 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.
reasons for a restructuring and possible approaches
Reasons for a restructuring, and possible approaches

Wrong financial strategy

Wrong business strategy

Too little debt

Too much debt

Pay a special dividend

Undertake a buy-back

Invest

Improve operating efficiency

Sell assets

Raise new finance

Restructure existing debt

Change strategy

some warning signs
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.
debt equity swap
Debt–equity swap

After

Before

Debt

Debt

Equity held by previous Debt holders

Equity

Equity

determining the shortfall for creditors
Determining the shortfall for creditors

Assets are insufficient to meet all claims

Claims on the company

Shortfall to creditors

Unsecured creditors

Shortfall on charged assets

Value break

Amounts loaned under a floating charge (value restricted to the value of those charged assets)

Realizable 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

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?

Otherstakeholders??

Stakeholders have choices
tips for those planning a distressed acquisition
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

spin offs
Spin-offs

Owned by existing shareholders

Company A

Pre-transaction

Owned by existing shareholders

Owned by existing shareholders

Company A

Post-transaction

Company B

spun off division of Company A

carve outs
Carve-outs

Owned by existing shareholders

Company A

Pre-transaction

Owned by new shareholders and by Company A

Owned by existing shareholders

Company A

Post-transaction

Company C

spun off division of Company A

some reasons why demergers can add value
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’.