Lecture 3

Question 1

2 stage process

Answer 1

2-Stage Process: 5-6 months – most common structure
- Preparation phase incl. marketing (6-10 weeks) – transaction documentation and logisitical preparations, with formal contracts initiated to potential buyers (confidentiality agreements sent)
- Round 1 (4-6 weeks) – Information Memorandum to form basis of indicative offers
- Round 2 (6-8 weeks) – Data room, VDD reports, management presentations, expert meetings and site visits for limited number of buyers
o SPA negotiations and finalisation
o Fully-financed binding offers to be received at end of the stage
- Structuring and negotiations (2-3 weeks) – 2-3 parties to be invited for last phase

Question 2

3 stage process

Answer 2

Until round two everything remains the same
- Round 2 (4-6 weeks) – VDD reports to form basis of educated offer after second round
- Round 3 (6-8 weeks) – Data room, management presentations, expert meetings and site visits for fully-financed binding offers at the end of the third stage
- The submission of an educated offer after the second round, provides an additional gauge of interest and price level monitoring within the auction process
o Allows for more complex business to be better explained
o Increases degree of bidder transparency
o Helps fin sponsors to secure financing in a difficult environment

Question 3

Flexibility with process

Answer 3

Flexibility:
1. Shifting/ sequencing of modules
a. Management presentation to preparation phase as roadshow
b. Site visits to preparation phase
c. VDD (if any) to Round I
d. Expert meeting/ worjships to Round I
2. Implement interim bids/ reconfirmation of bids
3. Stagger access to data and narrow down number of bidders (reasons: resource availability and/ or data confidentiality)

Question 4

IM

Answer 4

• The information memorandum provided detailed information about the target
• The information memorandum should enable the bidders to have a clear view of the target in order to submit an indicative non-binding bid
• Key content of an information memorandum includes

o Executive Summary (summary of target and transaction, background and inv highlights)
o Industry overview and market drivers
o Business overview (corporate structure/description of central functions)
o Strategy
o Operations (facilities/raw procurement strategy/logistics and distribution networks/IT)

Question 5

INdicative Bid

Answer 5

• Document submitted by the potential buyers containing a preliminary purchase price for the target to acquire the target. On the basis of the indicative non-binding bid the potential buyers are selected for the next phase – the due diligence process
• Potential bidders will usually condition the preliminary purchase price for the target to a comprehensive due diligence process
• Key content of the indicative non-binding bid includes

o Description of the acquiring entity
o Preliminary purchase price (EqV, EV, and bridge)
o Valuation methods applied
o Preliminary financing structure
o Investment rationale and strategic plan for the target
o Required internal approval to execute the acquisition
o Due diligence requirements
o Advisors and contact details

Question 6

VDD

Answer 6

• Vendor due diligence is an investigation commissioned at the very outset of the disposal process and undertaken by the seller to review the target
• Potential purchasers have traditionally carried out due diligence investigations to mitigate their own risks in a transaction. However, vendor due diligence could be beneficial when the target business model has a high degree of complexity or the vendor wants to accelerate the process
• The vendor due diligence has a number of advantages and disadvantages
  o Conducted by the vendor (sell-side advisors)
  o Asset business model has a high degree of complexity, which needs thorough explanation
  o The various agreements/relationships with third party investors or with another company and its subsidiaries allow for bad surprises/pitfalls, the seller would like to know before the process begins
  o Financing banks will need VDD in order to be able to approve the transaction funding
  o Potential buyer universe comprises bidders with little “pre” knowledge
  o Accelerate the transaction process
   Time and management capacity consuming
   Additional costs for the vendor
• Typical due diligence reports cover the following areas: commercial, financial, legal, tax, environmental, technical

Question 7

Binding BId

Answer 7

• Final and binding bid submitted by potential buyers upon completion of the due diligence phase
• Identity of the bidder, investor profile and track record
• Description of acquisition structure
• Deal rationale: Bidder’s investment case
• Strategy: Future development of company and expected synergies
• Acquisition price: Cash purchase price for 100% shares in no-cash/debt-free basis (EV) &Valuation of equity price and EV bridge – net debt & assumptions
• Valuation Method: Outline of methods, assumptions used to base offer on – in the case that a range is provided (lowest offer)
• Due diligence: A statement of completion and detailed description of any confirmatory due diligence buyer requires to execute the SPA
• Financing: Sources and uses of financing for acquisition & if external financing is required, the final term sheet of banks need to be provided
• Mgmt & Employees: Intensions with existing employees incl. management incentive programme
• Terms & conditions: Conditions that offer, financing or closing is subject to
• Timeframe: Confirmation that firm can execute SPA within specific period after offer is submitted
  Financing documentation: Provided by bidder
• Equity commitment letter from existing shareholders/ Commitment letter from financing banks
• Term sheets
• Loan documentation (to be prepared and executed shortly prior to transaction closing)