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Going private is not always the easy option for struggling public companies Back  
Public to private transactions are an attractive option both for shareholders and management of companies who are suffering from a lack of investor interest but the route is not always easy says Eithne Fitzgerald.
According to their predictions at the start of 2002, a number of Dublin’s corporate financiers believed that some of Ireland’s publicly quoted companies would fail to see out the year on the stock exchange. It has been said that up to 20 quoted companies may be unsuited to public life. Jefferson Smurfit Group is currently under the spotlight as the subject of a take private buyout by Madison Dearborn. Over the last few years, a considerable number of public to private deals have been done in the UK and there has been an increase in such transactions in Ireland with companies such as Clondalkin, Adare Printing and the Jones Group all going private. Despite predictions last year that many companies would go private, ultimately few made this move. Eircom did of course exit the stock exchange via the sale to Valentia and the packing company, IreTex, and Capital Bars were also taken private.
However, even for those companies where ‘going private’ seems to be the best option, this route is not always easy. What prompts a company to consider going private and what are the issues that arise in a typical public to private transaction?

Why go private?
The lack of interested investors in many small to medium sized Irish public companies has limited their ability to raise capital required for expansion. Low share prices and poor returns on investment is frustrating for management who have to contend with the additional layer of corporate governance rules imposed on public over private companies.
Adding value to the shares is often very difficult and this may encourage management to look at alternative structures. Trade sales exits have often been previously tested and rejected. A public to private takeover is increasingly seen as a favoured means of unlocking shareholder value. Restructuring a company is easier to achieve in the private rather than in the public arena. Furthermore, the availability of funding which, despite the economic slow-down, was recently reported to be in or about US$500 million for technology investments, buy-outs and take privates, makes the go private route increasingly attractive.
Some investors have expressed concern at the go private trend as they feel that if management sees value in the business, it should deliver this value to existing shareholders. Venture capitalist backers will need to be convinced that there are good reasons to pay a premium over market value. Despite this, taking a public company private may often be the best option for all concerned.

Management buy-out
A public to private transaction is, in effect, a combination of a management buy-out and a public take-over governed by the Irish Takeover Rules. It is not something to be embarked upon lightly as it does have the effect of putting the target into play and abort costs (which are principally incurred prior to an announcement) can be significant.
Most public to private transactions involve a new bidder whose shareholders comprise certain of the target company’s management and equity providers. Additional financing of the bid will normally come from a debt provider (usually a bank but may include a private equity backer). Any transaction has a greater chance of success if the target has a significant shareholder or shareholder group prepared to give an irrevocable undertaking to accept the bidders’ offer.
In a public to private transaction, the bidder will wish to pay as little as possible for the target company whilst still obtaining the recommendation to shareholders from the target company to accept the offer. Conversely, the target company’s board will wish to get the best price from the bidder. As a result the target company should at the outset appoint a committee of its board comprising directors who are completely independent of the MBO team to evaluate proposals made by the bidder.

Financial backers of a public to private transaction will usually want to conduct some form of due diligence exercise on the target so thought must be given to the information which can be made available to them.
The Irish Takeover Rules require that, irrespective of any preference which a target board may have for one bidder over another, any information generated by the target company, which is provided to the backers of the MBO team is, on request, to be equally and promptly provided to other bidders or potential bidders. The independent committee will therefore be advised to carefully consider any request for information from the MBO bidder.

Special deals
The Irish Takeover Rules provide that, except with the consent of the Panel, all the shareholders within the same class must be treated equally. However, in an MBO, investors usually require the MBO team to take a stake in the target company and the members of the MBO team usually wish to do so. An offer on the same terms is not likely to be extended to all other target shareholders. Accordingly the Panel must always be consulted and its consent obtained in respect of such differing arrangements.

Financing the offer
As required in any public offer, the bidder must have sufficient resources to meet acceptances in full of the offer and the bidders financial advisers must satisfy themselves in this regard. MBO’s tend to be highly leveraged and so the principal source of financing is usually from a debt provider such as a bank.
The funding documents in an MBO of a public company will need to be signed up prior to the announcement of a firm intention to make the offer but will not complete until some time later when the payments need to be made. It is vital that close attention is paid to the financing documents to ensure that funds are available when needed.
Usually the bank will seek to retain some element of control over the conduct of the offer and in many cases will insist on an 80 per cent acceptance condition so that compulsory acquisition provisions in Irish legislation can be invoked and financial assistance provisions gone through.
A number of small to medium sized companies on the Irish market are vulnerable to either takeovers or management buy-outs given that many of them are too small to register on the radar screens of some fund managers who are interested primarily in companies with a stock market value of E1 billion or more.
For management who have become frustrated by institution’s lack of interest in their companies and their companies consequent inability to raise funds, who can convince an equity backer that there is sufficient future upside, public to private transactions can represent an attractive option. Shareholders get an opportunity to sell out at a potentially higher value than that attributed to the company by the market, and management are afforded the opportunity to take a greater role, economically and strategically in the future direction of their business.

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