Abstract
EMI (UK), MEC (Canada), Kmart (US), Pages Jaunes (France), New Look (UK), Camaïeu (France), Naf-Naf (France), Toys “R” Us (US), André (France), Postmedia (Canada): the economic press regularly reports on emblematic restructurings involving companies under leveraged buy-out (LBO). In France, the French Association of Investors for Growth (AFIC), which became France Invest in 2018, representing financial professionals specializing in this field, emphasizes the contribution of its members “to economic dynamism” and “the creation of value for the company”, as well as their “leading position on environmental, social and governance issues”.
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Notes
- 1.
https://www.franceinvest.eu. At the European level, these professionals are grouped together within Invest Europe, initially EVCA, European Private Equity & Venture Capital Association (https://www.investeurope.eu/): “Private equity makes long-term investments into small, medium and large companies with the aim of making them bigger, stronger and more profitable”.
- 2.
“Financialization points to the increasing role of financial incentives, financial markets, financial actors and financial institutions in the functioning of national and international economies”. Epstein G.A., 2005. Introduction: Financialization and the World Economy, in G.A. Epstein (ed.), Financialization and the World Economy, Cheltenham—Northampton, Edward Elgar.
- 3.
“A model of accumulation in which profit is increasingly made through financial channels rather than through trade and commodity production”. Krippner G.R., 2005. The Financialization of the American Economy, Socio-Economic Review, 3, 173-208. DOI : 10.1093/SER/mwi008.
- 4.
Reinhart C., Rogoff, K., 2009. This Time is Different. Eight Centuries of Financial Folly, Princeton University Press.
- 5.
Modern portfolio theory (in which several financial theorists such as Harry Markowitz, James Tobin and William Sharpe participate) proposes an ‘objective’ measure of risk as well as ‘scientifically’ defined methods for investing and minimizing risk according to a given profitability objective. Instead of judging the risk of investments intrinsically, this theory advocates diversifying portfolios of securities: the latter are no longer judged according to their own risk, but according to the way their stock prices evolve in relation to other securities.
- 6.
This law, the Employee Retirement Income Security Act (ERISA), was passed by Congress in 1974 and incorporated by the Department of Labor in 1979. Until then, pension fund investments had to be managed according to the ‘prudent man’ investment rule, apprehending the risk of each security in an independent manner and according to the rules of a ‘good family man’. The new financial theories led to a change in practice by allowing, on the contrary, investment in ‘risky’ securities, provided that the evolution of their performance was decorrelated from that of other securities.
- 7.
This law, passed by Congress in 1933, is intended to protect ‘unsophisticated’ investors who place their capital on the stock market. It obliges fund managers to provide investors with all the necessary financial information and punishes fraud in securities transactions.
- 8.
This law, passed by Congress in 1940, requires that all necessary information be made available to informed investors (pension funds, etc.). It applies to insurance companies, for example.
- 9.
Like the recourse in the United States to junk bonds, ‘very’ high-risk bonds issued on the markets by companies that are extremely indebted and whose sustainability is in question.
- 10.
Minutes No 55, European Parliament Committee on Economic and Monetary Affairs, meeting of September 2, 2009.
- 11.
- 12.
In France, these funds can take the form of local investment funds (FPI), innovation investment funds (FCPI) or venture investment funds (FCPR), depending on the size and ‘innovative’ nature of the companies.
- 13.
American investment bank whose very serious financial difficulties in early 2008 led to a much-discussed intervention by the FED.
- 14.
The six largest global groups in the field are, respectively, Blackstone Group (American), Brookfield investments (Canadian), Schroders (British), Carlyle Group (American), Kohlberg Kravis Roberts é Co. (American) and Partners Group (Swiss)
- 15.
Two investigative journalists, Bryan Burrough and John Helyar, described the failure of K.K.R.’s now-famous LBO acquisition of RJR Nabisco in a book published in 1989 entitled Barbarians at the Gate: The Fall of RJR Nabisco. The rate of return achieved by the then-created fund was reportedly ‘only’ 10%.
- 16.
EBITDA: earnings before interest, taxes, depreciation and amortization.
- 17.
Obtained by deducting raw materials consumed, services used and personnel costs from turnover.
- 18.
Article L 225–26 of the Commercial Code for public limited companies and Article L 221–23 for private limited companies. One could also recall the definition of abuse of corporate assets: “the use of a company’s assets or credit, contrary to the interests of the company, for purposes favoring the director or companies owned by him”.
- 19.
There may be several shareholder funds; there may be different categories of employee shareholders.
- 20.
This procedure is allowed by the French tax authorities. It is likely that each country has tax peculiarities that produce similar tax relief.
- 21.
The social and economic committee is, in France, the employee representative body that succeeds and gathers since January 1, 2018, the prerogatives of the employee delegates, the works council (CE), and the health, safety and working conditions committee (CHSCT).
- 22.
The offence of obstruction is a criminal offense. It consists in carrying out an omission or an offence that prevents a staff representative or the whole committee from correctly carrying out its tasks.
- 23.
For further information, we refer the reader to Chap. 11.
- 24.
Depending on the sources and periods, this wall of debt of European companies under LBO is estimated in 2011 at €200 billion maturing in 2014 by the rating agency Fitch (source: La tribune 7 October 2011). Estimated in 2012, at €550 billion; in 2012 it is estimated at €416 billion maturing in 2016 according to the business law firm Linklaters (source: Alternatives économiques no 312- April 2012).
- 25.
Risky bonds with very high interest rates
- 26.
However, the quantitative research carried out by Nicolas Bédu and Jean-Etienne Parlard (see bibliography), which sought to measure the evolution of the risk of default following their acquisition by private equity funds, shows a positive correlation.
- 27.
The courts cannot make it compulsory to disclose shareholders’ agreements, which are fundamental to understanding the scope of the objectives and the related constraints.
Bibliography
Bédu Nicolas, Palard Jean-Etienne. (2014). “The impact of LBOs on corporate failure. The case of French targets (2000-2010)”, Finance Contrôle Stratégie [Online], 17-2.
Bédu Nicolas, Montalban Mathieu. (2009). “Une analyse de la diversité géographique des opérations de private equity en Europe : le rôle des configurations institutionnelles” in Claude Dupuy and Stéphanie Lavigne (eds), Géographies de la finance mondialisée, La documentation française, 2009, pp. 111-124.
Chambost Isabelle. (2013). De la finance au travail, sur les traces des dispositifs de financiarisation, Nouvelle Revue du travail, n°3. [online]
Durand Cédric, Benquet Marlène. (2016). La financiarisation de la grande distribution, la Revue Française de Socio-Economie, vol 1, n°16.
Judith, F., Colin, H., Sukh, J., & Williams, K. (2000). Restructuring for Shareholder Value and its implications for labour. Cambridge Journal of Economics, 24, 771–797.
Mazzucato Mariana. (2013). The Entrepreneurial State. Debunking Public vs Private Sector Myths, London: Demos.
Andrew, W., & Galgoczi, B. (2009). Financial capitalism and private equity-a new regime? Transfer, European Review of Labour and Research, ETUI, 15(2), 189–208.
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Appendices
Appendix 1: Background Information on the Acquisition by the Private Equity Fund
Private equity funds acquire companies with a view to reselling them within five years. Their acquisition decision is made on the basis of the calculated expected rate of return. This is an internal rate of return (IRR) which is calculated in the same way for a company as for an investment, based on cash flows incurred and received by the investment fund.
At the time of the acquisition of KEON, the private equity fund CLAYSBAR had hesitated as to the preferred financing structure. Based on a valuation using the multiples method, that is, six times the operating result (EBIT), it had carried out several simulations on the basis of situations a), b) and c), knowing that the price of the KEON acquisition was finally established at €6M:
-
a)
Financing only by own funds,
-
b)
50% financed by own funds and 50% by a loan A at 7% interest, over seven years, repayable in constant annual installments,
-
c)
35% financed by equity, 50% by an A loan at 7% interest, over seven years, repayable in constant annual installments and by a B mezzanine loan at 15% interest, repayable at the end of five years.
Five-year projections, completed by the end of 2022
k€ | P 2023 | P 2024 | P 2025 | P 2026 | P 2027 |
|---|---|---|---|---|---|
Turnover | 11,000 | 12,100 | 13,310 | 14,640 | 16,105 |
Depreciation and amortization | 295 | 345 | 395 | 445 | 495 |
Operating result | 1190 | 1290 | 1400 | 1530 | 1680 |
The loans would be held in a holding company with 100% of the capital of KEON. The private equity fund assumes that the maturities of the loans are covered by the cash flow from KEON.
Repayment plan for the senior debt taken out (A loan)
k€ | 2023 | 2024 | 2025 | 2026 | 2027 | Total |
|---|---|---|---|---|---|---|
Annuities | 556.7 | 556.7 | 556.7 | 556.7 | 556.7 | |
Amortization | 346.7 | 370.9 | 396.9 | 424.7 | 454.4 | 1993.5 |
Interests | 210 | 185.7 | 159.8 | 132 | 102.3 | |
Outstanding balance | 2653.3 | 2282.4 | 1885.5 | 1460.9 | 1006.5 |
Appendix 2 Realization—forecast end of 2024
k€ | 2023 | 2024 | P2025 |
|---|---|---|---|
Turnover | 11,000 | 12,100 | 13,310 |
Depreciation and amortization | 295 | 345 | 395 |
Operating income | 700 | 720 | 730 |
Investments made | 500 | 500 | 500 |
Financing (c) in Annex 1 has been put in place. Loan A (senior debt) was arranged with GENSOC Bank. The loan agreement includes covenants as follows:
2023 | 2024 | 2025 | |
|---|---|---|---|
Operating result of Kéon/financial costs | >2 | >2.5 | >2.7 |
Nominal loan A still to be repaid/Kéon’s free (or net) operating cash flow | <10.5 | <7.5 | <4.5 |
The tax rate (IS) is 33.33%. It will be considered that Keon is subject to tax and has not implemented any tax optimization.
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Chambost, I. (2023). Financialization, the Private Equity Industry and LBOs. In: Lagoarde-Segot, T. (eds) Ecological Money and Finance. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-031-14232-1_16
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