Corporate Finance



Table of Contents

Introduction to Case1

Discussion1

Assessment of Management Buy-Out Offer2

Use of Cash from a Management Buy-Out Offer3

Conflict of Interests between the Shareholders and the Directors5

Possible Reduction of the Capital Gearing (Leverage) Structure6

References10

Corporate Finance

Introduction to Case

This case is based on a UK-based listed company, Outdoor World Plc, which is a retailer in hiking, campaigning equipment and related leisurewear. After presenting the products in almost all parts of the United Kingdom, the company now aims to extend its outreach with an online mail order operation by the name “eGo”. Some of the management personnel are not content with the idea while it appears to be in the best interest of the shareholders. Conflicting opinions and varying suggestions make the Chair skeptical about the feasibility of this order operation.

As a financial consultant, this confidential report aims to address the key issues associated with the launch of this online operation, based on an idea of a proposed management buyout. The uncertain future of eGo tends to raise questions whether it will be successful in meeting the expectations of the shareholders along with that of the management teams, while being profitable in the first place. This report aims to inform the chairman of all the possible consequences with the buy-out along with the discussion on the conflicts that may arise; and the possible reduction of the capital gearing structure.

Discussion

The discussion on this case covers four broad areas: the evaluation aspects of the management buyout decision, applications of the funds received from the buyout, conflict of interests and expectations between the directors and the corporate shareholders, and the possible reduction of the capital gearing (leverage) structure.

Assessment of Management Buy-Out Offer

MBO's almost invariably rely on a significant amount of debt capital to fund the purchase. Therefore, MBO's are appropriate for businesses with an established track record of cash generation. In some cases the distressed MBO will have a damaged short term record but a very clear plan to reverse the trend. The MBO is not appropriate for the purchase of early stage businesses that are cash flow negative or the need to make large capital infusions to gain scale or cost positions (McLaney, 2009).

In case the management team puts forth, a buy-out bid there can be a number of ways in which it is to be assessed for feasibility and efficiency in meeting stakeholders' requirements. In the case of a Management Buy-out (MBO), the seller-owner has selected an individual or group that the seller-owner wants to continue running the company (often a long-time trusted employee). The buyer-management group is able to work with a commercial lender to use the balance sheet of the company and subordinated seller-owner debt to finance the purchase. The seller-owner receives cash immediately and additional payments over time. The outcome is often a win-win because the seller-owner achieves liquidity and diversification and has their hand-picked successor running the business. The buyer-management group is able to purchase the company they work with everyday and achieve continuity of operations in spite ...