July 14, 2017
Going Private: A Decade of Deals
Weil Gotshal recently published its 10th annual “Sponsor-Backed Going Private Survey”. A related blog reviewed how going private transactions have evolved over the past decade. Here’s an excerpt highlighting some of the key differences between pre-financial crisis deal terms and those prevalent today:
– Before the financial crisis, the risk of a sponsor not being able (or willing) to close a deal was not on people’s radar in a meaningful way. In 2006, reverse termination fees were generally around 2-3% of enterprise value, a relatively small amount that became very relevant when sponsors (and banks) soured on certain signed deals in 2008 and 2009. After the trauma of the financial crisis, target companies and their advisors began to insist on higher reverse termination fees and the market is now 5-6% of enterprise value (slightly higher for smaller deals). A review of relevant agreements from 2006 and 2016 also reveals that the situations in which the reverse termination fee is payable has been made much more clear.
– The amount of conditionality in pre-crisis deals is striking. Although we noted in 2006 that financing outs were increasingly “out”, over 25% of deals under $5 billion actually included financing outs (which allowed sponsors to walk from a deal without paying any fee if the debt financing was not there). Today, the prevailing construct in sponsor-backed take privates is specific performance lite, where a company can force the sponsor to close if the debt financing is available but in other cases can only receive a reverse termination fee. In 2016, 73% of transactions featured the specific performance lite construct. No deals in 2016 (or 2015 or 2014) included a financing out.
Deals are financed very differently today too – in 2006, deals over $5 billion in value averaged only 27% equity financing. Today, leverage is much lower, & a quarter of all going private deals in 2016 were financed entirely with equity. But maybe the most striking difference is how many fewer deals there are today. In 2006, there were 50 going private transactions included in the survey – compared to only 22 in 2016.
– John Jenkins