On 5 November 2009, TPG Capital (TPG) and the Canada Pension Plan Investment Board (CPPIB) announced the acquisition of NYSE-listed IMS Health for US$5.2 billion (about EUR3.8 billion), including US$1 billion (about EUR727 million) of existing debt. As at 1 May 2010, this transaction remains the global high water mark in LBOs since the worsening of the financial crisis in mid-2008.

For a summary of this transaction, see PLC US What's Market, TPG Capital and IMS Health Incorporated merger.

Decreasing debt-to-equity ratios. The IMS acquisition was partly financed with US$3 billion (about EUR2.18 billion) of debt, divided into:

TPG and the CPPIB financed almost half of the deal with their own equity. The level of gearing in recent US and European public-to-private transactions has fallen to around 50%, compared to about 70% debt to 30% equity before the credit crunch.

Deal certainty provisions. The IMS merger agreement included a reverse break-up fee of 5.29% of the total deal value, which was considerably larger than the target's break-up fee, which ranged between 1.54% and 2.21%. The widening gap between break-up fees and reverse break-up fees in some large-cap US M&A indicates a trend among certain US sellers to negotiate contractual provisions that enhance deal certainty.

Other clauses in the IMS agreement also evidence the seller's pursuit of certainty, including:

As further evidence of this trend, the US$2.4 billion (about EUR2.72 billion) proposed acquisition of Cedar Fair LP by affiliates of Apollo Global Management LLC, contained deal certainty provisions broadly similar to those in the IMS agreement, including:

The Cedar Fair transaction ultimately collapsed due to pressure from a group of activist shareholders who believed that the offer price was too low.

For a summary of this transaction, see PLC US What's Market, Apollo Management and Cedar Fair, L.P. merger.

For additional information on recent trends in the US buyout market, see Article, Private Equity in 2009: A Year of Transition, 7 January 2010, IMS Health: Reverse Break-up Fees, Financing and Deal Certainty in a New Era of Private Equity, 23 November 2009 and Article, Reverse Break-up Fees and Specific Performance: A Survey of Remedies in Public Deals.

A similar trend in Europe? European practitioners have not encountered similar deal certainty clauses so far. David Sonter, a private equity partner at Freshfields Bruckhaus Deringer, suggests that this could be because European LBOs tend to be structured in a different way: "In the US, completion is generally subject to a financing condition. If this condition is not met, the buyer pays a reverse break fee as compensation to the seller. In contrast, European buyouts are stricter in requiring that unconditional debt and equity financing are in place on exchange, partly due to the influence of the 'certain funds' requirement in the UK Takeover Code having become widely applied even in private deals." For background on the certain funds requirement, see, Practice note, Financing an offer for a public company: the certain funds requirement.

Sonter further notes that during the height of the crisis, there was speculation as to whether the UK market would move closer to US-style deals. However, ultimately it appears that European sellers "simply do not want to be exposed to the possibility of the transaction not closing," he says.

According to David Innes, a private equity and M&A partner at Travers Smith, the terms of UK buyouts, particularly those arising out of a competitive auction process and involving high quality businesses, have not changed much despite the developments of the past two years. Innes notes: "Buyers will always compete for high quality assets, which will ultimately allow sellers to achieve good exits." For background on the key stages and documentation of a private equity transaction, see Practice note, Acquisition of the business: private equity.

On 7 December 2009, a consortium comprising funds advised by Apax Partners (Apax) and the target company's management announced the acquisition of Marken from Intermediate Capital Group (ICG) for GBP975 million (about US$1.5 billion), at that time the biggest buyout in the UK for over a year.

Equity underwriting. A noticeable feature of the transaction was the fact that Apax underwrote the deal entirely with its equity from its EUR11.2 billion (about US$14.3 billion) Apax Europe VII fund . According to Hale, who was one of the lead partners advising the sellers, equity underwriting, whereby the buyer initially finances the deal on an all-equity basis and then obtains debt finance from banks and other lending institutions after completion, is becoming more common.

Apax subsequently raised GBP315 million (about US$486 million) in debt (roughly four times Marken's earnings before interest, taxes, depreciation and amortisation (EBITDA), which, according to Bloomberg, was divided into:

As Hale explains, "The advantage of the buyer assuming the risk of the debt not being available is that, instead of having to go cap-in-hand to potential lenders with relatively limited liquidity before the acquisition (which gives them greater control over the terms), it can do so after having acquired a very good company, which considerably improves the buyer's chances of driving more favourable terms from the different lenders."

Besides Marken, at least two recent private equity sponsors in the UK have used equity underwriting as an acquisition finance method, notably:

On 11 December 2009, EQT Partners AB and the Government Investment Corporation of Singapore (GIC) announced the acquisition of Springer Science and Business Media from Cinven and Candover for EUR2.3 billion (about US$3.1 billion), at the time the largest European buyout in over a year.

The sale of Springer was, reportedly, partly motivated by the sellers' goal of reducing the target's EUR2.2 billion (about US$2.9 billion) of debt, some of which was due to mature in 2010. Cinven and Candover had refinanced the company three times prior to disposal, which enabled them to generate returns of about 1.6 times their combined EUR600 million (about US$808.5 million) initial equity investment.

Reducing debt has been one of the key motives behind several recent private equity exits and, according to some practitioners, one of the reasons behind the tepid reaction of institutional investors to some recently-announced IPOs of companies backed by private equity in the UK.

EQT and the GIC financed the Springer buyout through a combination of the following:

Springer's new capital structure has several advantages:

Pre-deal syndication. Ian Frost, a finance partner at Freshfields Bruckhaus Deringer who advised on the financing aspects of the Springer buyout, notes that, due to the current limited availability of investors (in particular) collateralised loan obligation (CLO) and collateralised debt obligation (CDO) structures, lenders are increasingly pre-distributing M&A deals before buyers and sellers begin negotiating: "The Springer buyout was heavily pre-sounded and pre-syndicated. Moreover, the parties began negotiating without relying on term-sheets, which made the documentation process much more complex and marked by the use of several heavy flex-type arrangements".

According to Sonter, the Springer acquisition evidences the trend towards greater integration between the corporate, financing and M&A elements of LBO transactions. "Before the crisis, you used to be able to do the equity, financing and M&A aspects of buyouts in almost separate streams. However, current financing conditions have given rise to a greater need to coordinate all aspects of the transaction. You need a fully formed acquisition finance process before considering the share purchase agreement. Acquisition finance is much more prominent and is becoming relevant at earlier stages in the transaction".

Stapled financing. Springer's existing senior lenders played a key role in its acquisition. The financing of the transaction was, however, more complex than a straightforward deal involving old lenders providing new leverage. "The acquisition finance was effectively developed from the company's existing debt, which enabled the parties to use existing terms," explains Frost.

According to Frost and Sonter, this kind of stapled finance arrangement is the order of the day in European private equity deals. As Frost explains, "Three years ago, a seller in a competitive auction could expect half a dozen fully-financed bids, whereas nowadays they cannot usually get more than one or two bidders with underwritten debt packages. The relative thinness of the debt markets has caused a move towards arranging the debt on the sell-side. Against this background, stapled financing ensures that competitive tension is maintained throughout the auction."

Kohlberg Kravis & Roberts's (KKR) acquisition of Pets-at-Home (Pets) for GBP955 million (about US$1.45 billion) in late January 2010, offers a practical illustration of the relative merits of a secondary buyout over an IPO from a private equity seller's perspective. The acquisition followed an intensely competitive auction process, which the sellers, Bridgepoint, ran alongside IPO preparations.

The GBP955 million (about US$1.45 billion) consideration, which included GBP233 million (about US$354.9 million) of existing debt, valued Pets at 2.4 times annual sales and was reportedly at the top end of the company's IPO valuation range. It also generated a return of eight times its initial equity investment for Bridgepoint, which acquired Pets for GBP230million (about US$350 million) in 2003.

KKR raised acquisition debt to the value of GBP485 million (about US$676 million), divided into:

Sponsors underwriting LBO debt. KKR Capital Markets, the buyer's debt division, was one of the deal's underwriters. Some of the largest private equity houses have recently diversified into areas such as debt investing and capital markets advisory work and regularly provide these services for their funds and portfolio companies (and occasionally for external clients). Whereas KKR chose to diversify organically, Blackstone, another major private equity house, did it indirectly through its 2008 acquisition of GSO, a hedge fund specialising in leveraged finance.

IPO versus an auction process. Bridgepoint's decision to sell Pets instead of floating it illustrates the commercial advantages of an auction process over an IPO from a seller's point of view. These advantages include price certainty and a clean exit. The outcome of the Pets transaction was influenced by the fragile state of the public markets throughout late January and February 2010, a fragility which coincided with the point at which the company had to decide which track they were going to follow. As Hale explains "If there is uncertainty in the equity markets and a seller receives a very good offer for a sale, it is quite difficult to turn it down because a sale will give the seller certainty and a 100% exit, normally very quickly". He contrasts this position with an IPO, where the private equity owner will usually be required to enter into a lock-up agreement with the underwriter(s) barring the disposal of shares in the company for a given period post-IPO (generally between six and twelve months). For further background on lock-up agreements see Practice Note, Private equity exit routes.

In addition, an auction process gives the seller greater certainty and control over the final price, unlike in an IPO, which leaves the company vulnerable to the fluctuations of the public markets. Market volatility was one of the reasons cited by several private equity-owned companies, such as Travelport, which were expected to launch an IPO during early 2010, but did not (see Travelport Holdings (Jersey) Limited IPO - IPO aborted announcement).