Acquisition Finance
Leveraged buy-out can jeopardize operations if the debt obligation is not in conformity with servicing ability. The fund raise structure should ensure twin condition of “pay as you earn” and “pay where you earn” while leveraging existing structure.
Case Study:
Pharma Co. wanted to acquire an entity in Japan. Japanese entity had “probable patents” & manufacturing facility but no legacy of income or surety for future income. Further, it was a high-priced acquisition valuing ~45% of existing revenue of acquirer.
Analysis :
- The existing business was well established; however, without the additional cashflow generation from acquired entity the existing business would experience a drag.
- It was important to demonstrate synergies to acquirer prior to income from patents.
Solution :
- Lender’s comfort was established by demonstrating incremental cashflow to acquirer from synergies prior to patent. The lenders were convinced to lend in the territory of the acquirer for overseas acquisition. These efforts ensured “pay where you earn”.
- Elongated credit line was negotiated to ensure “pay as you earn”.
- Partial foreclosure at par was negotiated to create room for future leverage.