Strategic Advisors. Marketing Presentation Recapitalizations May Middle Market Investment Bankers

Transcription

1 Marketing Presentation Recapitalizations May 2005 Strategic Advisors Middle Market Investment Bankers 400 Southpointe Blvd. Plaza I, Suite 120 Canonsburg, PA (724) An Affiliate of BPU Investment Group, Inc. Member NASD, SIPC 3 PPG Place, Suite 500, Pittsburgh, PA

2 Table of Contents Recapitalization Overview 1 Capital Markets and M&A Overview 2 Tab 2

3 Definition A form of restructuring designed to alter a Company s capital structure and equity ownership. Principal Forms of Recapitalizations Form Share Repurchase Summary Description A public company buys back its own shares through an open-market share repurchase, a targeted block repurchase or a self-tender. Special Dividend A private or public company pays a one-time, nonrecurring dividend, usually in cash, to shareholders. Leveraged Recapitalization Shareholders sell or exchange their stock for a package of cash, debt, and/or other instruments for shares in the company. In certain cases, especially in today s aggressive debt market, a recapitalization can be executed and a dividend can be distributed with no change in ownership. 3

4 Motivation behind Recapitalizations Motivation Comments Enhance Shareholder Value Often used when company s stock is perceived to be undervalued Distribute Excess Cash Receive cash while continuing to retain ownership Thwart Unwanted Takeover Threat Increase debt outstanding to make the company less attractive and use borrowing capacity Concentrate Equity Ownership Shrinks equity base and consolidates ownership in the hands of the remaining shareholders Alternative to Leverage Buyout Allows selling shareholders to liquify holdings and still retain a significant interest in the Company Business Transition Tool Facilitates generational transfers Portfolio Management Increase equity returns via leverage Diversify Risk and Facilitate Growth Shareholders can take chips off the table while using private equity to facilitate growth 4

5 Advantages and Disadvantages of Recapitalization Advantages Maximizes Client Value Disadvantages Allows shareholders to diversify wealth Can result in over-leverage and financial Selling shareholders can retain equity interest in company distress High leverage could constrain operating and financial flexibility Can provide new equity for growth Could send negative signal to market that investment options and growth are limited Enhances shareholder value Private company management will have to Concentrates equity to loyal shareholders Provides current return plus future upside Effective means to distribute cash Lowers company s cost of capital Increases shareholder return via leverage report to new shareholders 5

6 Perspectives: Senior Lender: Amount of dividend Amount of leverage Owner s motivation after dividend Owner s role in current and future success Depth of management Potential negative book net worth Sponsored vs. non-sponsored Junior Capital and Equity Investor: Amount of leverage Growth opportunities Market position Defensibility of cash flow Industry Corporate governance Owner: Diversification of wealth Right financial partner Tolerance for leverage Estate planning objectives Valuation/Effect on return Access to financial market Tax treatment of distribution 6

7 Attributes of an Attractive Recapitalization Candidate Stable and defensible cash flows Low levels of debt Experienced management Undervalued assets Strong company and industry dynamics Strong market position No regulatory risk Growing industry Minimal technology risk 7

8 Accounting Implications Special dividends reduce cash and therefore net worth Shares redeemed through a repurchase plan or a leverage recapitalization are typically redeemed at a premium to book value and therefore, it is not uncommon for the resulting shareholder s equity to be negative Tax Implications S Corp. s and LLC s Distributions and Share Repurchase Non-taxable to the extent of E&P then capital gain treatment C Corp. s Distributions Taxed as ordinary income to the extent of E&P. Treated as return of capital if distribution exceeds E&P Share Repurchase Taxed as ordinary income unless complete redemption Considered complete redemption if there is a meaningful reduction in the shareholder s proportionate interest in the company Dividend reduces E&P 8

9 Public Share Repurchase Techniques: Open Market Share Repurchase The company announces its intention to acquire up to a given number of shares of the company over a predetermined time period. No more than 25% of any given day s daily volume may be repurchased at any one time. The attractive aspects are (1) the signaling effect of the announcement; (2) the impact the buyout has on the company s financial ratios; (3) the flexibility in terms of the timing of the purchase and the price the company acquires the stock; and (4) no need to obtain shareholder approval. The draw back is it potentially sends a message to the market that the company has few alternative investments or growth opportunities. Self-Tender The company typically offers a premium over the current stock price to buy back shares. Self-Tenders must comply with certain rules set forth by the Securities Exchange Commission, most notably rules 13e 3&4. The following are examples of Self-Tender auction techniques. Fixed-Price Self Tender a company buys predetermined number of shares at a specific stock price. Dutch Auction a range of prices is set by the company, within which shareholders may tender their shares. Typically, like other tender offers it remains open for twenty days. The acquirer states the number of shares it wishes to repurchase. The order is then filled from the bottom up, with purchase price determined by the lowest price that can clear the entire amount that is proposed to be repurchased. The Dutch Auction forces the shareholder to make a decision at what price he/she is prepared to sell. If the shareholder sets the price too high, then there is the risk of the shares not being repurchased. Targeted Block Repurchase most helpful in eliminating a large shareholder that views his position as somewhat illiquid. While all of the above repurchase techniques are used in the public market, the private recapitalization generally uses the Fixed-Price Self Tender technique. 9

10 Miscellaneous Facts: A Fleet Bank Survey reveals that over two-thirds of business owners expect their business to remain in family hands when a transfer occurs A leveraged recapitalization has become a common business succession planning tool Sponsors tapped $23.2 billion of loans for recaps in 2004, issued at an average debt to EBITDA multiple of 4.5x Loans for all recaps totaled $27.4 billion in 2004 An average of 119% and 94% of the sponsors initial contributions were recouped in 2004 and the 1 st quarter of 2005, respectively Historically, the average time from LBO to dividend has been approximately four years. In the 1 st quarter of 2005, the average time between the initial LBO and dividend was 11months. Financial advisors are more regularly being retained In 2000, 2001, and 2002, the percentage of sellers in the middle market that retained a financial advisor during the three periods was 28.7%, 31% and 42.1%, respectively 10

11 Sponsored Recap Dividend/Stock Repurchase Loan Volume 1Q97 1Q05 $9.0B $8.0B $7.0B $6.0B 5.2 $5.0B $4.0B $3.0B 2.4 $2.0B $1.0B $0.0B Q97 2Q97 3Q97 4Q97 1Q98 2Q98 3Q98 4Q98 1Q99 2Q99 3Q99 4Q99 1Q00 2Q00 3Q00 4Q00 1Q01 2Q01 3Q01 4Q01 1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04 1Q05 Source: Standard and Poor's Portfolio Management Data

12 Recap Dividend/Stock Repurchase Sponsored Loan Volume Q 2005 $25B $20B $15B $16.2B $10B $5B $0B $0.0B $5.6B $5.1B $5.8B $1.2B $2.9B $1.0B $0.8B $0.3B $1.5B $0.9B $1.0B $0.2B $0.1B $0.4B $0.7B Grand Total Q-4Q Q Q 2Q-4Q Source: Standard and Poor's Portfolio Management Data 12

13 Recap Dividend/Stock Repurchase Loan Volume Q 2005 Capital $30B Market Overview Leveraged Buyout Loans Pricing $24B $18B $21.6B $12B $6B $0B $8.3B $6.7B $10.2B $7.2B $3.0B $1.7B $6.1B $3.8B $0.3B $0.1B $1.2B $1.1B $1.5B $1.7B $2.7B $0.2B Q 2Q-4Q Source: Standard and Poor's Portfolio Management Data 13

14 Average Pro Forma Credit Statistics of Sponsored Recap Dividend/Stock Repurchase Loans Q x 4x x x 1x 0x Debt/EBITDA Senior Debt/EBITDA Q 2005 Source: Standard and Poor's Portfolio Management Data 14

15 Average Pro Rata Spread of Sponsored Recap Dividend/Stock Repurchase Loans L+400 L+300 L+267 L+261 L+257 L+325 L+275 L+322 L+296 L+291 L+200 L+204 L+100 L Q 2005 Source: Standard and Poor's Portfolio Management Data 15

16 Transaction Overview Actual Strategic Advisor Transaction Recapitalization Company Environmental Reclamation Services, Inc. (Funding Factory) Description Collector, aggregator and de-aggregator of empty printer cartridges Finanicals Sales $33.7 MM EBITDA $3.6 MM (Normalized) Situation High growth revenues tripled over three year period Company owned equally by three shareholders Very entrepreneurial lacked sophisticated strategy, financial reporting systems and performance metrics One shareholder wished to exit from business Low Leverage Strong market position with defensible cash flow Collateral light Solution Assisted company in determining a focused growth strategy Determined value of company Structured recapitalization plan to buy out exiting shareholder Raised $9.5 million to enable the buyout Worked with management to improve financial reporting systems, add key personnel and install performance metrics to analyze operating performance Outcome $4 million secured Revolving Line of Credit, $2 million senior Term Loan A and a $3.5 million senior Term Loan B Remaining shareholders inceased ownership from 33.3% to 50% 16