Another Leveraged Buyout Question

righton's picture
Rank: Baboon | 108

I know most LBOs are stock acquisitions, but are LBO transactions ever structured as asset sales? Where the sponsor only acquires certain assets & liabilities from the target.

Does the tax base ever change in LBO transactions?

Also, how do LBOs close when there are minority shareholders holding out? What % ownership is needed to actually delist a company and take it private?

Comments (11)

Oct 1, 2009

I'm not 100%, but I think they are generally stock sales, with occasional 338 election (which treats it as an asset sale for tax purposes). The reason being, despite the step up in assets for tax and book purposes, you'll likely also recognize a huge gain that will be taxed at the corporate level upon acquisition.

100% ownership is required to delist, you can't have some minority shareholders in the public and the rest private, everyone either needs to roll their shares into the newco or sell them to the sponsor.

Oct 1, 2009
mergerarb15:

I'm not 100%, but I think they are generally stock sales, with occasional 338 election (which treats it as an asset sale for tax purposes). The reason being, despite the step up in assets for tax and book purposes, you'll likely also recognize a huge gain that will be taxed at the corporate level upon acquisition.

100% ownership is required to delist, you can't have some minority shareholders in the public and the rest private, everyone either needs to roll their shares into the newco or sell them to the sponsor.

these come in two forms, a (g) section and a (h)(10)section... these are also a little rarer as the debate over the tax issue can heat up and requires either party to pay it in some form or another... ie if its a (g) election and acquirer pays it, then he wants a decreased purchase price... if its an (h)(10) and they both agree and the seller takes on the burden, he wants to be compensated for the increased taxes... usually settled by the NPV calc. of the tax benefit / cost for such action...

Oct 1, 2009

Right, and usually the squeeze-out provision allows the acquiror to take out any stubborn minority shareholders that won't sell.

Oct 1, 2009

if its a divestiture from a corporate parent of partial subsidiaries, like brands etc...

in an asset sale vs a stock sale, you write up the value of the assets to fmw for both GAAP and irs tax purposes... allows a bigger tax shield for cash tax payments...

downside is that in an asset purchase, each and every asset has to be listed and valued, down to the pens... really costly and tedious that's why they're rare... I've done only one of these and its a nightmare....

Oct 1, 2009

Thanks guys.. that's what I thought as well.

Oct 1, 2009

Some LBOs tend to be asset sales or fun things with subsidiaries. Think real estate, businesses with only IP (software firms), etc. I have been in a number of REIT LBOs that were structured as asset sales. In those cases, you aren't really assigning value to anything but the property anyway, so asset sales can be easy (you don't have to value office furniture or anything stupid like that).

Oct 1, 2009

Sorry to hijack the thread, but can someone please explain why LBOs always involve the establishment of a "NewCo" by the private equity company? Are there ever any direct acquisitions that do not involve the creation of a newco?

Oct 5, 2009

PEGs use "NewCo" to create a legal liability shield. Basically, NewCo is on the hook for consumating the deal, not the actual PEG.

The Delaware Chancery Court affirmed this structure in ADS vs Blackstone. A good summary of that decisions--and its importance for PEGs-- can be found at http://www.dorsey.com/files/Publication/d45eedff-0...

Oct 1, 2009

for simplicity purposes... this way it can be the holdco where the equity gets injected and there is a direct subsidiary to this called mergco where the debt goes... it eventually gets merged with the target, the mergco disappears and now holdco has the equity interest as a simple shell... its a way of structurally subordinating the equity...

Oct 2, 2009

Bankruptcy sale processes tend to be asset sales where certain assets are sold and others are excluded

Oct 5, 2009
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