Can a company survive perpetually under successive LBOs?

Hey monkeys, I wanted to gather your thoughts on this question that has been recently asked to me.
Many companies are experiencing succesive LBOs and I was asked if this could be perpetrated ad vitam æternam. Can the LBO be a form of long term control?
I know this does not seem viable in practice, but what about the theory? What are the pitfalls of such a model?
What are the companies that have experienced the most sucessive LBOs?

Thanks all.

 

LBOs can have so many different structures that any company that grows in cash flow from entry to exit and/or is sold at a high enough turn of EBITDA in that the LBO debt is covered can "survive" if this is repeated perpetually. If a company was LBO'd frequently enough that the leverage just kept increasing over time without stopping, a dip in cash flow would probably force a bankruptcy at some point (or at least tripping of debt covenants), in which case if you define "survive" as not experiencing a credit event it would not survive

 
Axiol:
Hey monkeys, I wanted to gather your thoughts on this question that has been recently asked to me. Many companies are experiencing succesive LBOs and I was asked if this could be perpetrated ad vitam æternam. Can the LBO be a form of long term control? I know this does not seem viable in practice, but what about the theory? What are the pitfalls of such a model? What are the companies that have experienced the most sucessive LBOs?

Thanks all.

It has been done before. As zanderman mentioned, I think debt paydown is beneficial, but as long as cash flow is steady or growing, why not? It all comes down to being able to service the new debt load for the assumed higher EV.

A good example would be Advantage Sales & Marketing (Ticker: ADV) out of L.A.

Background:

  • LBO by Allied Capital in 2004
  • SBO by JW Childs in 2006
  • SBO by Apax in 2010
  • SBO by Centerview/CVC in 2014
  • IPO exit in 2017

So 4 different sponsor ownership groups in 13 years before going public.

 

A good way to think about it is is this: You're basically asking if it's possible for a company to be moderately to highly-levered perpetually. There are plenty of companies that do that whose cost structures, asset bases, and cash flow allow for it. The main difference is the shakeup of potential management/ownership transitions and the strategy changes that come with it

 
Best Response

In an LBO, the post-closing buyout structure is completely independent from the pre-closing buyout structure. When the transaction occurs, the entire existing capital structure is wiped out and a brand new structure is put in place. Note: The buyer may elect to retain some of the seller's debt or equity, but not required for it to be considered an LBO. So what does this mean?

Any company, regardless of its capital structure, is an LBO candidate. Furthermore, a company could absolutely sustain itself while undergoing perpetual LBOs. The challenge that exists is that a company's debt burden is typically the highest at the time it is bought and then reduced over the life of the hold period. If a company struggles soon after an LBO, it is likely to run into both covenant and cash flow issues. So while perpetually LBOing the same company can generate great returns for all the owners along the way, statistics would suggest a sponsor will eventually get upside down on their investment at some point.

Some other things to consider that may help illustrate the point. First, a new owner may elect to use LESS leverage than is currently on the company. This could be due to all sorts of things, but common explanations might include: (1) the new owner may be more conservative than the former owner, (2) the company recently underperformed and the banks are forcing a sale to get their money back while the equity owner is wiped out, (3) the new owner needs to put more hard dollars to work and is willing to accept a lower IRR.

Second, just because a company is highly levered and struggles doesn't mean the company doesn't survive. Unless the business model is essentially no longer viable and the company is losing money, usually just the equity ownership changes. In some cases the banks takeover and force a sale, or some banks takeover and serve as a pseudo private equity firm themselves. In some cases the PE firm just needs to put more equity in to satisfy the bank. None of these outcomes requires a company to close its doors, it's just a restructuring. That's another reason why companies can be LBOed all-day every-day even if they aren't growing or paying down debt.

CompBanker’s Career Guidance Services: https://www.rossettiadvisors.com/
 

depends on the company and business model. Take a look at vismar - its the asset that keeps on giving and allows everyone to make performance and raise funds...

If you know the economics and macro impact (including interest etc.) and do it right, with the right ROA, why shouldn't it work? You could keep LBOing Saas companies without a problem. Its just recapping effectively

 

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