Corporate Financial Strategy
4th edition
Dr Ruth Bender
Chapter 17
Restructuring a company
Corporate Financial Strategy
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
Corporate Financial Strategy 2
Learning objectives
1. Diagnose when a company is in trouble, and identify ways in which its
cash flow can be improved to stave off a cash crisis.
2. Identify potential sources of finance for a troubled company, and
evaluate how appropriate they are.
3. Understand some of the regulatory mechanisms underlying company
rescue or liquidation.
4. Explain what spin-offs and carve-outs are, and how they differ.
Corporate Financial Strategy 3
Reasons for a restructuring, and possible approaches
Wrong Wrong
financial business
strategy strategy
Too little debt Too much debt
Pay a special Improve Change strategy
dividend operating
Undertake a efficiency
buy-back Sell assets
Invest Raise new
finance
Restructure
existing debt
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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.
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Debt –equity swap
Before After
Debt
Debt
Equity held by
previous Debt
holders
Equity Equity
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Determining the shortfall for creditors
Assets are insufficient to meet Claims on the company
all claims
Unsecured creditors
Shortfall to creditors
Shortfall on charged assets
Amounts loaned under a floating VALUE BREAK
charge (value restricted to the
value of those charged assets)
Realizable value of Amounts loaned under a fixed
business / assets charge (value restricted to the
value of those charged assets)
(whichever is greater)
Costs of restructuring
(professional fees)
Based on: ICAEW Corporate Finance Faculty, Best-practice Guideline – Turnarounds
Corporate Financial Strategy 7
Stakeholders have choices
Ordinary shares Creditors (unsecured)
− Put in more money − Write off part of the debt
− Accept dilution − Negotiate payment terms
− Take equity
Debt
− Put in more money Employees
− Swap to equity − Trade-off between jobs and pay
− Write-offs
− Note that all the different lenders
will have different views on what Management
should happen − Fight to be part of the deal?
Payoff?
Other stakeholders??
Corporate Financial Strategy Page 8
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
Corporate Financial Strategy 9
Spin-offs
Owned by existing
shareholders
Company A
Pre-transaction
Owned by existing Owned by existing
shareholders shareholders
Company B
Company A spun off
Post-transaction division of
Company A
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Carve-outs
Owned by existing
shareholders
Company A
Pre-transaction
Owned by new
Owned by existing shareholders and by
shareholders Company A
Company C
Company A spun off
Post-transaction division of
Company A
Corporate Financial Strategy 11
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’.
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