1. Chapter 17 Restructuring a company
Corporate Financial Strategy 4th edition
Dr Ruth Bender
Chapter 17 Restructuring a company

2. Restructuring a company: contents
Learning objectives
Reasons for restructuring, and possible approaches
Some warning signs
Debt equity swap
Determining the shortfall for creditors
Stakeholders have choices
Tips for those planning a distressed acquisition
Spin-offs
Carve-outs
Some reasons why demergers can add value

3. Learning objectives
Diagnose when a company is in trouble, and identify ways in which its cash flow can be improved to stave off a cash crisis.
Identify potential sources of finance for a troubled company, and evaluate how appropriate they are.
Understand some of the regulatory mechanisms underlying company rescue or liquidation.
Explain what spin-offs and carve-outs are, and how they differ.

4. Reasons for a restructuring, and possible approaches
Wrong financial strategy
Wrong business strategy
Too little debt
Too much debt
Pay a special dividend
Undertake a buy-back
Invest
Improve operating efficiency
Sell assets
Raise new finance
Restructure existing debt
Change strategy

5. Some warning signs
The company is trading close to the limit on its bank facilities.
Monthly management accounts continually show negative variances on sales and profits.
There are no monthly management accounts, or they arrive late, with inadequate explanation.
Several key people leave the company in a short period of time.
Loss of several customers.
Poor relationships with suppliers.

6. Equity held by previous Debt holders
Debt –equity swap
Before
After
Debt
Debt
Equity held by previous Debt holders
Equity
Equity

7. Determining the shortfall for creditors
Shortfall to creditors
Assets are insufficient to meet all claims
Claims on the company
Unsecured creditors
Shortfall on charged assets
Amounts loaned under a floating charge (value restricted to the value of those charged assets)
Value break
Realizable value of business / assets (whichever is greater)
Amounts loaned under a fixed charge (value restricted to the value of those charged assets)
Costs of restructuring (professional fees)
Based on: ICAEW Corporate Finance Faculty, Best-practice Guideline – Turnarounds

8. Stakeholders have choices
Ordinary shares
Put in more money
Accept dilution
Debt
Swap to equity
Write-offs
Note that all the different lenders will have different views on what should happen
Creditors (unsecured)
Write off part of the debt
Negotiate payment terms
Take equity
Employees
Trade-off between jobs and pay
Management
Fight to be part of the deal? Payoff?
Other stakeholders??

9. Tips for those planning a distressed acquisition
Use advisers with previous experience of distressed acquisitions
Be prepared to undertake an accelerated due-diligence exercise, but on limited information
Clarify and resolve the legal position regarding charges on the company’s assets, and retention of title clauses
Determine which contracts with customers, suppliers, and landlords include an automatic termination clause in the event of insolvency, and resolve this
Ensure you have the funding in place so that you can move quickly
Incorporate the new business to ring-fence the assets and make sure that if things don’t work out it doesn’t threaten your existing business.
When a management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact.
Warren Buffett

10. spun off division of Company A
Spin-offs
Owned by existing shareholders
Company A
Pre-transaction
Owned by existing shareholders
Owned by existing shareholders
Company A
Post-transaction
Company B
spun off division of Company A

11. spun off division of Company A
Carve-outs
Owned by existing shareholders
Company A
Pre-transaction
Owned by new shareholders and by Company A
Owned by existing shareholders
Company A
Post-transaction
Company C
spun off division of Company A

12. Some reasons why demergers can add value
Separation into clearly defined business segments leads to market transparency and greater understanding.
Raise money by taking advantage of the market pricing one particular sector very highly.
The different businesses can follow financial strategies more appropriate to their activities.
Improvements in corporate governance and efficiencies arise in companies which were subsidiaries but are now separately accountable to the markets.
Incentive structures can be put in place that link management performance directly to the unit’s share price.
Removal of the ‘conglomerate discount’.