Take-Privates: A 10 Year Look

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Weil recently released its tenth annual Going Private Survey.  As the math would suggest, our first Going Private Survey, released in 2007, covered deals that were signed up in 2006.  Suffice to say a lot has happened between now and then and I thought it would be interesting to take a look at the initial Survey and the most recent Survey (both linked above for your reference).  Some specific and general observations (note that most of the developments are target company-favorable, as one would expect given recent trends in the market):

  • Before the financial crisis, the risk of a sponsor not being able (or willing) to close a deal was not on people’s radar in a meaningful way.  In 2006, reverse termination fees were generally around 2-3% of enterprise value, a relatively small amount that became very relevant when sponsors (and banks) soured on certain signed deals in 2008 and 2009.  After the trauma of the financial crisis, target companies and their advisors began to insist on higher reverse termination fees and the market is now 5-6% of enterprise value (slightly higher for smaller deals).  A review of relevant agreements from 2006 and 2016 also reveals that the situations in which the reverse termination fee is payable has been made much more clear.
  • The amount of conditionality in pre-crisis deals is striking.  Although we noted in 2006 that financing outs were increasingly “out”, over 25% of deals under $5 billion actually included financing outs (which allowed sponsors to walk from a deal without paying any fee if the debt financing was not there).  Today, the prevailing construct in sponsor-backed take privates is specific performance lite, where a company can force the sponsor to close if the debt financing is available but in other cases can only receive a reverse termination fee.  In 2016, 73% of transactions featured the specific performance lite construct.  No deals in 2016 (or 2015 or 2014) included a financing out.
  • In another sign of the times, a primary focus of take privates in the heady days before the financial crisis was on deal protection and the manner in which target companies could get out of a signed deal and accept a better offer.  Deal-jumping – once anathema to sponsors – had in 2006 only recently become a viable option.  In 2006, the two-tier Company termination fee, where a lower fee is payable if an interloper is identified in the go-shop period (thus making it less costly for the interloper to make a topping bid) had just been introduced.  In 2006, we noted that almost none of the earlier deals in 2006 had this two-tier fee, but it caught on as the year progressed, with 50% of deals in 2006 ultimately including this feature.  In 2016, 100% of deals included it.
  • In 2006, we noted the explosive use of debt in take privates (for example, deals over $5 billion averaged only 27% equity financing).  While up from the financial crisis, sponsors used much less leverage in 2016, and in fact a quarter of transactions were all equity deals (or at least risk was allocated on that basis), reflecting a trend that has prevailed in private markets as well (driven at least in part by competitive auctions).
  • One of the striking take-aways is that there were 50 surveyed transactions in 2006 and only 22 in 2016.  There have been signs of life in the take private market recently, including the recently announced take private of West Corp by Apollo, which is the first $5 billion plus take private of 2017 (there were 11 in 2006).

This may be more interesting for lawyers than business people, but I think everyone should reflect upon how the risks that we focus on can change dramatically based upon recent memory.  I think the above also shows the extent to which trends can very quickly become a prevailing standard.  This is particularly true with take privates, where purchase agreements are available for all to see.  It may be an apt time for us to think about whether we are still solving for the right risks and also whether there aren’t some transactions where it is okay to not follow the market on every material provision.