Leveraged recapitalization

One of our VC-A Members raised recently €270 million to provide debt solutions to the mid-market in Europe. Although his alternative source of funding claims to be more flexible that most lenders and is offering leveraged recapitalization, I suspect that he is looking for interests rates in the 7-8% range, which is currently much higher than what traditional ECB-backed banks are offering.

For example, CaixaBank in Spain is currently offering to healthy companies, debt at 2%-3% annual interest rates. Companies in special situations or new projects still struggle to raise funding and could be interested but our VC-A member wants to focus on companies with EBITDA in excess of €5 million.

Then, why would a sound company accept debt at 2-3 times the price of the market?

One possible  reason is Leveraged Recapitalization.

What is Leveraged Recapitalization?

Leveraged Recapitalization is a corporate strategy in which a company takes on significant additional debt with the intention of paying a large cash dividend to shareholders and/or repurchasing its own stock shares. A leveraged recapitalization strategy typically involves the sale of equity and the borrowing or refinancing of debt.

Dividend Recapitalisation

Dividend Recapitalization

Why leverage a company to recapitalize it?

I will discuss here 3 reasons why shareholders may want to execute a leveraged recapitalization:

  1. To repel sharks
  2. To re-invest the proceed of the dividends into another business
  3. To enjoy life now rather than in the future

1- Shark repellent strategy

By leveraging the company, it becomes less an attractive target for potential hostile take-overs. It is comparable to a poison pill to repel unwanted and/or unsolicited buyers.

2- Re-investment

This strategy may suit  Venture Capitalists (VC) or Private Equity (PE)’s objective, which is to maximise the profile of their companies portfolio.

If a VC/PE believes that the return on investment (ROI) from another asset will offset the additional cost of debt servicing, it may make sense to weaken one balance sheet in favour of the consolidated picture.

3- Enjoy life

Imagine that you own part or the totality of a healthy company and want some cash to fulfil your short term desires – or your partner’s desires 🙂 – but don’t want to sell your equity. One solution is a dividend recapitalization.

Why look for alternative sources of funding?

If you have decided yourself for a leveraged recap, you may now ask yourself, why paying an extra cost of debt servicing instead of getting a loan from a traditional bank?

The answer is simple:

 your traditionnal banker is upset with your anti-takeover strategy,  finds your re-investment strategy suspicious and is definitively against your enjoying life (his own life is miserable).

Conclusion, once you have been turned down by your banker, if you still want to refinance your debt, give me a call…

 

Other recent Thought Leadership articles by Mr. Christophe Schwoertzig:

Strategy Definition versus Strategic Planning
Banks’ digitalisation will affect us

 

 

Brexit: the British have not regrets….

From continental Europe, some people may think that the British are repentant for voting in favour of the Brexit.

Hum…! They are not.

British people's opnion on Brexit, after the Vote

According to the poll, the percentage of people thinking that leaving the EU is the right decision remains constant over time.

… but believe it or not, the Brexit is going to hurt

According to the Deutsch Bank, close to 45% of the UK exports go to the European Union, 3 times more than to the USA, whereas only slightly more than 5% of EU exports end up in the UK.

Relative importance of markets to UK exporters

I am not an economy pundit but in M&A, when a corporate wants to spin-off a business unit, as a rule of thumb, the % of functions and assets that overlap should account for less than 20% of the overall business to divert for the transaction to be successful.

If more than 40% overlap, the divestment is bound to fail, resulting most probably in the bankruptcy of the spin-off and in huge losses from the parent company.

Fortunately for the UK and for the European Community, the dynamics of countries are different from corporates, otherwise, many more countries would have already gone bankrupt.

Gobierno corporativo en la empresa familiar

On the 25th of May 2017, Dr. Josep Tàpies, Professor of Strategic Planning and owner of the IESE Family Owned Companies Chair gives a talk about corporate governance for private entities.

XVIII Congreso ASCRI


Join us at the XVIII ASCRI Congress in Barcelona on the 25th of May 2017.

Automobile Barcelona Connected Hub

Join us at the Automobile Fair in Barcelona on the 11-12 May.

Strategy

Strategy Definition versus Strategic Planning

One of the most overused word in consulting is probably the word “strategy”.

During my time at Capgemini, together with former AT Kearney consultants, we used to make fun of the “Techies” when they qualified decisions to buy computers as “Strategic Decisions”. Later, working together with former McKinsey and LEK consultants, they made fun of me for saying that “Strategy” consisted in leveraging the business through technologies.

With more than 15 years of consulting experience, I have now seen most of the ways of declining the word “Strategy”. I will highlight here the differences between Strategy Definition and Strategic Planning, two assignment qualifiers whose semantic similarities may be misleading.

Both assignments seem alike. Indeed, in both cases, we will be defining the strategy of the company and designing a road map.

Oversimplified view of a strategic road map.

However, “Defining the Strategy” consists in defining the “who”, the “what” and the “how”:

  1. Defining the customers that we want to serve “who”
  2. Defining the products and services that we want to sell “what”
  3. Defining ways to go-to-market “how”

It may sound easy but making decisions about the “who”, the “what” and the “how” is in practice very tricky because most companies what it all. They want to address all the market, sell as much as possible and follow as many routes as possible.

Defining the Strategy is about making decisions and voluntarily discarding customer segments, products, services and potential market opportunities.

To make informed decisions, companies need to understand their competitive landscape, their customers, their addressable market, their competitive advantages, market regulations, internal constraints, financial issues and market trends.

PSP Players' map

Example of a sector’s competitive landscape

Performing such an analysis comprehensively requires a lot of desk research, gathering direct information from interviews and questionnaires and above all, a strong methodology and a team of bright and very well prepared people.

Designing a company’s Strategy properly is a high-value added exercise.

By contrast, a “Strategic Planning” only requires the company’s decision makers to agree on the compass that they want to follow moving forward.

The framework is similar, you start with a current situation, the “As-Is”, you define your objectives, the “To-be” and in between, you have to define a series of activities to hit a number of milestones that will take the organisation from the “As-is” to the “To-be”.

What differs is the process to complete the exercise.

Inputs from a Strategic Planning do not have to come from the market or external sources but from the company’s leaders.

In other words, company’s leaders are the ones to decide what to write in the Strategic Planning based on their vision of the future. It is down to the decision makers to run their own research to make informed decisions, or not. Some may prefer to follow their “guts feeling”, or to take decisions based on internal forces, such as “messages” they want to send to their employees or “conflicts” between departments that they want to address. Chances are high, that internal decision makers be biased, or simply too lazy to challenge their beliefs.

A Strategic Planning is a wish list from Governance.

The output is also different.

Whereas a company’s strategy must be summarizable in half a page, the executive summary of a Strategic Planning is likely to expand over 50+ pages. Its format could be a list of 8-12 “Strategic Visions”, each of them broken down into 2-4 “Strategic Missions”, who in turn are broken down into 2-4 “Strategic Actions”. Strategic Visions can eventually be grouped by workstreams as illustrated below:

WORKSTREAM: New Business Models

  1. Strategic Vision: “Incorporate a collaborative platform to offer specialised legal services of high quality to cover the entire spectrum of the Roman law”.
    1. Strategic Mission: “Guaranty the right balance between…”
    2. Strategic Mission: “Develop and promote the use of the platform”.
      1. Strategic Action: “Prepare…”.
      2. Strategic Action: “Find…”.
      3. Strategic Action: “Join…”.
    3. Strategic Mission: “Foster cross-selling between the stakeholders…”.
  2. Strategic Vision: “…”.

In my opinion, the overuse of the word “strategy” in Strategic Planning conceals the little value added of the exercise. It is just a tool to organise the thoughts of the governing team.

Even if the exercise adds little value, every company should have a Strategic Planning up-to-date.

To quantify the value difference between a Strategy Definition and a Strategic Planning, I would quote that, for a mid-sized company, acquiring a Strategic Planning externally shall cost between $15,000 and $40,000, whereas hiring consultants to define a Strategy shall range from $60,000 to $200,000.

Companies should not embark on a Strategic Planning without having a clear Strategy already defined.

In addition, I would strongly recommend every company to challenge their existing Strategy – when they have one – before redacting their Strategic Planning. Too many companies surf on historical decisions that no one ever dares challenge anymore.

The market is changing rapidly and decisions taken a few years ago may no longer be appropriate. Failing to rethink the company’s Strategy periodically is a recipe for failure.

Hackers de innovación: ¿Cómo innovar al diseñar nuevos productos y servicios?

Pablo Foncillas from IESE Business School has presented a set of tools to foster innovation in Digital Marketing.

Sant Jordi’s day in Catalonia is a closed-end business model

Yesterday, I wanted to help my 16-year-old daughter to sell roses during the Sant Jordi’s day in Catalonia. She and a girl friend had set up a booth at the heart of the city and had a compelling market offering. For each rose purchased, the buyer would also get a €10 discount per person for up to 4 people at theatre shows. In addition, roses were sold as “social roses” because a fraction of the benefit was redirected to the humanitarian organisation “Save the children”.

Image of a booth selling roses during Sant Jordi's day in Catalonia

  • Grabber: “Hello, may I beg for your time and ask you 3 questions?” [educated people should say YES]
  • Raise interest: “Would you be interested in winning 40€” [only the fools would say NO]
  • Build relationship: “Do you know someone who would be interested in theater shows” [open question to avoid a NO if the person I am talking to happens not to like theater shows].
  • Create emotional link: “Would you like to make a good action today and help resourceless children”? [expecting another YES]
  • Once I had collected all my YESES, following the theory that says that people are more likely to say another YES if that have already said YES several times before, I thought that selling the package rose + theater discount + save the children, would be a piece of cake.

    So I tried my luck with a dozen passersby. Do you know how many roses I sold?

    NONE!

    In fact, I did not even get pass the first question.

    I retreated humiliated and watched the process trying to understand customers’ behaviour.

    A man that I instantaneously disliked came to the booth and asked for a rose. He wanted a rose because, at Sant Jordi’s day in Catalonia, men ought to offer a rose to the women they love and women ought to reciprocate with a book.

    My daughter explained that in addition to the rose, he was entitled to a discount at the theater.
    The half-wit replied that he only wanted a rose because, at Sant Jordi, men ought to offer a rose to the women they love and women ought to reciprocate with a book.
    My daughter went on explaining that with the rose, he was helping the association “save the children” but the nervous little sod interrupted her briskly and said that he was only interested in the rose because at Sant Jordi’s day, men ought to offer a rose to the women they love and… you already know the story.
    Brainwashed.

    In Catalonia, at Sant Jordi’s day, if you are a man, you are programmed to buy a rose.

    The lesson learned from that experience is that if your customer wants to buy a rose, do not try to sell him theatre show tickets, sell him a rose.

    Image of gold bullions

    Gold refining. How to avoid scammers, fraudsters, smugglers and bandits

    On Friday the 21st, I visited the only gold refinery in Europe located in a free trade zone. VC-A has got a buy-side agreement with them to channel sellers of raw gold.

    If you have some sort of expose to the gold-trading market, you already know that 99% of leads fail to materialise. 98% are scams or frauds whereas the remaining 1% fail because of misaligned procedures, disagreements on price, unexpected changes of the LBMA fixing or inflated egos.

    By having a refinery located in a free trade zone, it is not part of any country and therefore, there is no tax or excise.

    And the other good news is that you can easily frame bandits by asking them to refine the gold “in transit”.

    All other refineries in Europe must acquire the gold “for consumption”, which implies a change of ownership between the seller and the refinery or the end-buyer, prior to the refining process. Therefore the risk lays on the seller, who often asks for proofs of funds and banks guarantees, which protects himself but complicates the transaction.

    In the case of gold “in transit”, the gold is in the custody of the refinery in the free trade zone during the refining process but remains the property of the seller. The risk is therefore on the refinery because the seller could withdraw the  gold once refined and decide not to sell. In that case, the refinery would have to cover the cost of refining and get no benefits. Given the liquidity of the gold market, gold refined with a 999.99% purity will always find a buyer, so there is no risk to the seller to be stuck with an illiquid asset.

    And the very good news is that smugglers will freak out at the idea of bringing gold to the a free trade zone because they would have to go through customs and disclose their identity.

    So, if you are a real owner of doré bars or gold bullions, favour refineries located in free trade zones to refine them.

    And if you are a buyer and want to vet a seller, ask him to bring his gold to a free trade zone. If he gets nervous and at the same time swears that he is honest but declines the offer, good chances are that he is a fraudster.

    Panoramic view of the Coliseum

    Tightening up relationships with Italian universities and businesses

    VC-A’s managing director, Christophe Schwoertzig and VC-A Member, Kerem Gurses, met in Rome on the 11th day of April 2017 to discuss alternative ways of developping transactions with Italian universities and businesses.

    Kerem is professor of Organisation Theory at leading Italian Luiss University and former Strategic Lecturer at ESCI Barcelona.

    Kerem Gurses (left) and Christophe Schwoertzig (right)

    Kerem Gurses (left) and Christophe Schwoertzig (right)

    Christophe and Kerem discussed digital strategies, M&A services and the possibility of developing international partnerships with Luiss university.

    We will look at ways to develop partnerships between Luiss university and universities in the US and China the like of the New Jersey Institute of Technology or Hubei Polytechnic University by leveraging the relationships that we are developing through the Council for Trade and Investment Promotion (CTIP) said Christophe Schwoertzig

     

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