Private Equity Case Study: Add-on Acquisition

June 20, 2014 Parke Shissler

Private Equity Case Study: Add-on Acquisition

Our Client:

A large private equity firm completing an add-on acquisition for one of its portfolio companies.

Situation:

A portfolio company acquired a public firm via a refinancing of its existing debt, contingent on a shareholder vote scheduled to take place several months in the future. The target company had existing swaps in a liability position facing a member of the new lending group, and the acquirer found the then-current interest rate environment attractive and wanted to protect against rising rates.

Summary:

The acquirer and private equity sponsor wanted to understand its hedging alternatives, and ensure that any hedging that was executed left the company in position to take advantage of an IPO in the coming years by ensuring low earnings volatility as a result of any hedges. Chatham Financial explored various hedging alternatives, including deal-contingent structures and explained the accounting implications of each of these alternatives. In addition, we quantified the risk of hedging if the deal did not close, and negotiated the ability to move swaps between entities in order to preserve the desired hedge accounting treatment.

Outcome:

The acquirer was able to keep the target’s swaps in place, reducing the frictional cost of terminating the transactions. In addition, a competitive transaction execution process saved over 3x Chatham’s fee on the new hedging.

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