Another Leveraged Buyout Question

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?

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Comments (11)

Oct 1, 2009 - 4:52pm

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 - 5:20pm
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 - 5:13pm

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....

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Oct 1, 2009 - 6:11pm

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).

--There are stupid questions, so think first.
Oct 1, 2009 - 7:22pm

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?

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