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Leveraged Buyout Transactions: A Comparative Analysis of Exit Strategies in UK and India

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Added on 2024/07/12

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This research paper delves into the intricacies of leveraged buyout (LBO) transactions, focusing on the exit strategies employed by companies in the UK and India. It explores the various sources of financing for LBOs, including bank debt, subordinated debt, seller financing, revolvers, and common equity. The paper examines the most common exit routes, such as initial public offerings (IPOs), selling shares after IPO, sales to third parties, and recapitalization and dividends. It then compares the LBO exit strategies in the UK and India, highlighting key differences in regulatory frameworks and market dynamics. The paper concludes by discussing the evolution of LBOs over decades, emphasizing the legal considerations and implications for both countries. This comprehensive analysis provides valuable insights into the complexities of LBO transactions and the strategic considerations involved in exiting these deals.

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Contents
Introduction................................................................................................................................................ 3
Section 1....................................................................................................................................................4
1.1 LBO and its Sources......................................................................................................................4
1.2 Exit Strategies....................................................................................................................................6
1.3 Process of exit from an LBO transactions and role of Portfolio Company.........................................9
Section 2: Comparison of UK scenario with major Indian LBOs......................................................11
2.1 Case study examples of LBO transaction exit strategies of UK.............................................11
2.2 Case study examples of LBO transaction exit strategies of India..........................................13
2.3 Comparative analysis of exit strategies of both companies....................................................16
Section 3..................................................................................................................................................18
3.1 Development and evolution over decades of LBO..................................................................18
3.2 Legal considerations and implications....................................................................................... 21
References.............................................................................................................................................. 23
2

Introduction
Merger & Acquisition is a financial process which involves the consolidation of two or more
companies or combining the assets of two or more companies through legal and financial
transactions. This process has a wide scope and covers different types of acquisitions, buyouts
and mergers taking place in different forms12. In the present era of globalization the acquisitions
and mergers among companies is not confined to domestic companies but has extended to
cross border and international mergers3. The companies in one country are acquiring
companies abroad as a strategy of foreign investment and global business expansion4. Recently
a decision was announced on 7th August 2018 under the Competition Act by CMA5 for
acquisition of part of business of Airline Services Limited by Menzies Aviation (UK) Limited6.
Similar to this there are multiple examples of buyouts and acquisitions taking place in both
public and private sector in various areas7. The companies which intend to escape themselves
from losses and prevent themselves against insolvency are involving more in the buyout and
acquisition processes8. This is used as the financial strategy in order to deal with the financial
problems. This research aims at providing discussion and detailed analysis about the use of exit
strategies by various companies across India and UK in order to escape themselves from huge
losses and procure increased returns9. The process involved in the LBO transactions well as the
role of the portfolio and target company while entering an LBO transaction and exit from a LBO
transaction are the major research objectives of this paper. The first section of the study deals
with the meaning and explanation of LBO transactions including various examples of recent
LBO transactions, strategies used by companies to exit an LBO and the major ole of portfolio
company in LBO transaction and implementation of exit strategy. The second section compares
the exit strategies of UK and India for an LBO transaction with various examples. The third
section relates to the manner in which the use of excessive LBO transaction exit strategies by
the companies evolved over the period. The generally used methods and processes for exit
from an LBO transaction and the legal and regulatory implications and effect of Brexit in the
development of LBO processes have also been discussed in the third section of the study.
Steven and Per (2008), defines leveraged buyout as a specialized investment which is financed
by both private equity and long-term debt. However for financing a leveraged buyout, the portion
of debt is higher than the portion of equity. On the other hand private equity firms are those
companies which raise fund from investing in private equity. These funds have fixed life of ten
years and are generally closed-ended10. When a private equity firm agrees to buy a private
company then such type of transaction is referred to as the Private Equity Transaction. This
type of buyout is financed from 60 to 90% debt and is therefore regarded as leveraged buyout11.
1 Leveraged buyout is part of merger and acquisition.
2 Combinations can be in the form of investing or divesting strategies. Investing include mergers and
acquisitions and divesting include split-off, spin-off and carve out.
3 These mergers can be horizontal merger, vertical merger, conglomerate merger or extensive mergers.
4 Competition Act 1998 and Enterprise Act 2002 in UK.
5 Certified Management Accountant which is the apex body for controlling and monitoring management
accountants
6 Menzies Airlines (UK) Limited/Airline Services Limited v CMA [2018]
7 Discussed in DSection 2 of this paper
8 Breno Schmidt. ‘Costs and benefits of friendly boards during mergers and acquisitions.’[2015]
117 Journal of Financial Economics 424.
9 Competition Act 2002 and Restrictive Trade Practices Act 1969 in India.
10 Steven and Per [2008]
11 LBO can be in the form of takeover, merger under equals or low touch ownership.
3

The portfolio company is the company which is bought by the investors in order to invest their
funds and generate returns12. The decision about selecting the portfolio company is an
important part of entering or leaving the LBO transaction since the assets of the portfolio
company are used as security for the debt financing of the LBO transaction13.
The majority of private firms are leading towards the leveraged buyouts using the outside debt14.
Thus, this report aims at exploring the methods and exit strategies which are used by the firms
for leveraged buyout transactions and exit from such transactions15. This reports aims at
research about the factors and implications due to which the leveraged buyout deals in India are
easier as compared to those in UK16. Also this research empirically explains the manner in
which the exit strategies17 gained popularity among the private equity firms and companies in
the global market.
Section 1
1.1 LBO and its Sources
The leverage buyout is related to the acquisition of company in which the money is put by both
the buyer and the borrower but the amount of the buyer is less than that of the borrower18. In
other words, it can also be said that it is the financial transaction in which the organization
purchases the combination of both debt and equity so that the cash flow which is generated can
be used in future to pay off the borrowed money19. These transactions are also called as the
highly leveraged transactions as it leads to profitability by the generation of ample of cash. The
LBO’s are used for three purposes which are20:
 Taking a Public Company Private
 Financing Spin- offs
 For transferring the private property related to the changes in small business
Public to Private
In this the investor buys all the property or the outstanding stock of the public limited company
and turns the company into the privately held enterprise21. There may be two cases in the
management the one is friendly and another is hostile. In friendly, the management buys the
company for itself with the aim to operate it in future as the private entity22. The hostile involves
12 The portfolio company is selected on the basis of the net worth calculated on the basis of fair value of assets.
13 Portfolio company in a leveraged buyout transaction is the one which is acquired by the target company.
14 Rongbing Huang, Ritter Jay and Zhang Donghang. ‘Private equity firms’ reputational concerns and the
costs of debt financing.’ [2016] 51 Journal of Financial and Quantitative Analysis 29.
15 Leveraged Buyouts and Private Equity, u: Bratton, WW, McCahery,
16 In context of laws and legislations
17 Exit from an overseas LBO
18 The remaining amount is financed from equity
19 LBO’s are also called bootstraps
20 These are the main aim of the LBO so as to make changes accordingly.
21 100% ownership is acquired by investors which is private company
22 Street of Walls, ‘Leveraged Buyout Analysis’ [2013] Street of Walls <
http://www.streetofwalls.com/finance-training-courses/investment-banking-technical-training/leveraged-
buyout-analysis/> Accessed 10 August 2018
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the buying of company and then reorganizing it once this is done the last step is to resell the
organization so that the higher returns can be attained23.
Financing Spin-Off
In many of the cases the companies wish to sell the elements of the business so as to gain the
cash. But sometimes the management itself is the buyer of spun off elements so as to get the
cash and the amount can be paid to the investors back. The LBO’s are used to purchase the
subsidiary or the part24.
Private Deals for renunciation of ownership
This is the last case in which the privately held operations are brought by the investor’s group.
In this case the business owner has reached the retirement age but neither sells his company
nor approaches the corporate buyer but likes to dissociate him/ her from the organization25. The
buyers are the employees of the organization or some other person associated with owner and
them wishes to organize the LBO’s as they have the limited amount of equity26.
Sources of LBO
The financing of the Leverage buyout are generally executed by the private equity groups. The
equity is also used when the existing ownership of the business is about to exit27. With the
equity which is provided by the private equity they also use the borrowed funds to negotiate the
total purchases price while the buyout is done28. The multiple sources of debt29 which are
commonly used to finance LBO’s are as follows:
Bank Debt: The bank debt is the lowest interest rate security than that of the subordinated
debt. It usually requires full payback within a period of 5-8 years30. The private equity sponsors
use the borrowed funds from the bank to finance their business. The bank debts have the
financed maintenance covenants which are secured by the assets by the borrower and the tests
are also performed quarterly to measure performance31.
Subordinated Debt: These are also known as Mezzanine Debt or the Junior Debt32. This
method is one of the common methods which are used for borrowing during an LBO. These are
the high yield debts so are taken into the conjunction with the senior debts. They have the
feature of both equity as well as debt. The subordinate debt is issued to bridge the gap between
IRR and the investment so that the investors can get attracted by the hedge fund investor.
23 This is the process through which the leverage buyout is performed.
24 In these types of LBO transactions, only a part of business is acquired.
25 Investment Banking, 2014
26 Axelson, Strömberg, & Weisbach. ‘Why are buyouts levered? The financial structure of private equity funds’
[2009] 64(4)The Journal of Finance 1549.
27, Shai Bernstein, Lerner Josh, Sorensen Morten and Strömberg Per. ‘Private equity and industry
performance.’ [2016] 63(4) Management Science 1198.
28 Also known as private equity Leveraged buyout
29 Outside debt
30 Macabacus, ‘Capital Structure of an LBO’ [2018] Macabacus <
http://macabacus.com/valuation/lbo/capital-structure> Accessed 10 August 2018
31 It covers 30-50% of the capital structure
32 These are both secured and unsecured by some of the assets which are secured by more senior debts.
5

Seller Financing: In this the actual company ownership lends the money to the company to
which the organization needs to be sold. The delayed payment is taken by the seller by creating
the obligations that of debt for the company which in turn creates financing for the buyout.
These can also be said as the seller notes. These notes are attractive to the financial buyer as
they are cheaper than the other source and also can easily be negotiable with bank or other
sources.
Revolver: This is the revolving credit facility which is in the form of senior bank debts and acts
like the credit card for companies. It is basically used to finance the working capital
requirements of the organization. There are basically two costs available with the revolving lines
of credit. This financing is done so that the flexibility can be taken in the credit needs of the
customers. With this facility it allows the company to access their cash without looking forward
for any of the additions funds through debt or equity33.
Common Equity: This is contributed through the private equity fund which helps in raising the
capital from various sources such as the insurance companies, the wealthy individuals, pension
and endowments34.
These are the various ways through which the financing of LBO’s are done and the growth has
been achieved35. These sources provide the funds so that the operations of the business may
not harm and the profitability of the firm can be enhanced36.
1.2 Exit Strategies
The private equity fund when makes investment which is controlled in the portfolio through the
leveraged buyout are financed through debts. The remaining amount comes from the equity
contributions through the owner’s capital or funded by the investors37. The investment is done
with the view of increasing the company’s value also getting the positive returns. The exit occurs
after many years of investment when the company is not getting many returns38. The most
common exit routes include initial public offerings, selling of shares after the IPO to registered
secondary offerings or Rule 144 under Securities Act of 1933 and sales to third party39.
Initial Public Offerings: When the completion of LBO is done the sponsor must ensure that it
has proper control and the registration rights to participate in an IPO40. The IPO allows the LBO
sponsors to make the cash in the investment of the firm and also provides the cash flow to the
investors in the private equity firm41. The help of the lead investment bank is taken by LBO so
that the company can be public. When the exit of the funds is done through IPO, it offers the
shares to public which are of Portfolio Company or the parent holding company42.
33 These are generally for small buyout transactions.
34 This involves fund raising from general public
35 The selection of debt financing is based on the factors influencing the LBO.
36 Blackman. ‘Private Equity Has More Than It Can Spend’ Wall street journal.
37 Didier Folus and Emmanuel Boutron, ‘Exit Strategies in Private Equity’ [2015] Research Gate 215
38 Presently exit from an LBO is also done to generate profits through arbitrage.
39 Securities Act, 1933
40 Shares of portfolio company are sold
41 It allows direct financing
42 Practice law, 2018
6

Advantage: The main advantage is that it helps in higher valuation of Portfolio Company than
better in future exit as compared to the exclusively private valuation techniques.
Disadvantage: The drawback is that it is the lengthy process and takes at least four to six
months43. With this it also requires the underwriting agreement that the funds do not sell any of
the shares in the portfolio company for about 180 days which is also called as the lock up
period44.
Selling shares after the IPO: The sponsor after selling it through the IPO may not sell all the
funds invested in the portfolio company so to comply with the full exit the shares in the
unregistered sales are sold according to the rule 144 under the securities Act45.
 Under Rule 144: When the private company shares are purchased by the funds then it is
called as the restricted securities46. These securities are only resold in the transactions
which are registered with the SEC47. Under rule 144 the resale of the restricted securities
are exempted from the registration.
 Secondary Registered offerings: The secondary offerings are the resale of the shares
which are held with the shareholders instead of the primary offering of shares by company
itself. The sponsor has to first file the registration statement with the SEC for selling the
shares48. These are less time consuming but the registration process is expensive than the
IPO. This exit option is preferred because of its flexibility and speed49.
Sale to a Third Party: This is another exit option for the LBO that the portfolio of company is
sold to the third party. The third party may include the strategic buyer such as the competitor or
the supplier of the portfolio company or the financial buyer such as such as the other financial
purchaser. The selling to the strategic buyer is one of the most common strategies which are
preferred for the exit as it’s quick and simple50. From the point of view of the seller this strategy
is clean as the sponsors of LBO are directly negotiating with the buyers as well as the advisors
of bank. The premium is also paid by the strategic buyer for the purchase51. The strategic buyer
thinks that the synergy is offered by the targeted company to the business line.
Another Leveraged Buyout: This is the exit strategy in which is used for the alternative equity
deals. In this the portfolio of the company is sold to another private equity firm which will put the
firm through the secondary LBO. This is basically used when the LBO sponsor needs to exit the
deal and the amount of the capital is returned to the limited partners52.
43 It varies as per the legislations of different countries
44 The 180 days are determined in which the shares of the portfolio company are kept locked and which in
turn the lengthy process becomes.
45 Macabacus, ‘Capital Structure of an LBO’ [2018] Macabacus <
http://macabacus.com/valuation/lbo/capital-structure> Accessed 10 August 2018
46 Due to prohibition under Companies Act of UK
47 Under Section 5 of Securities Act of 1933 rule 144 provides the exemption as well as the permits for the
resale of securities which are restricted and controlled.
48 It includes the strategies of public offerings under Rule 144, resale.
49 Converted into equity
50 This process involves selling of the firm to the third party.
51 According to Laurence Levy, Frank Miller and Jeremy Kutner, 2018
52 20-35% of the capital structure are the common equities.
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The main disadvantage is of the hard bargain as the sponsor of the one equity firm will the
another professional of the equity form so sell its portfolio which will involve the great bargain
and the company wishing to exit may get the disadvantage.
Some of another exit strategies are also involved which are as follows:
Recapitalization and Dividends: The partial capital recovery may be achieved by the sponsors
from the investment in the portfolio company by the dividends issued or by the holdings of the
company itself. These types of the dividends are used to finance:
 A non-leveraged dividend recapitalization which are financed by the company using
cash that has already been on hand.
 The leveraged dividend recapitalization is also financed by the company for incurring
the additional debt.
Non- leveraged dividend recapitalization: These are smaller than that of the leveraged
recapitalization dividends as it relies on the cash which is already in the balance sheet.
Therefore, it may lead to the full capital recovery of the investments which are done for the
funds. These dividends do not lead to the increase in Portfolio Company’s risk or does not
increase in the size of debt service payments53.
Leveraged Dividend recapitalization: These are funded by the patent holdings company
which is taken out of the secured debts by its share in the portfolio of company54. These are
basically preferred by the lenders to issue debts that are incurred by significant amount of debt
in LBO.
Advantage:
Ability to maintain control: These do not require any funds to give up the control to realize its
capital.
Disadvantage:
Market Limitations: In the credit market which is tight it is difficult for the patent holding
company and the portfolio company to secure its finance for recapitalization by forcing the
sponsors to use different strategies so that the liquidity can be gained55.
53 The act of the pubic traded company borrows the capital and the pays the dividends where the use of
the leveraged dividends is to measure the anti-takeover.
54 The dividend recapitalization is the type of the recapitalization in which the payment is made is to the
shareholders.
55 The volume of leveraged buyouts for different variables in Europe is compared with the leveraged
buyouts of UK t estimate the level of buyouts in UK.
8

Image: Leverage Buyout Volume
Source: Leveraged Loan.com, 2018
The UK buyout accounted for €2.33 billion56 of the LBO volume in 2016 through which the
sponsors expected the LBO activity to continue in the second half of 2016 even though the UK
decided to leave the European Union by leaving the market participants in the new financing by
picking up the new valuations57.
1.3 Process of exit from an LBO transactions and role of Portfolio Company.
The portfolio in the LBO can be defined as one that includes some of the securities which are
brought with the borrowed money. A Leveraged portfolio is one of the risky ones as it securities
resulted may result a loss and which in turn may increase the liability of the borrower for the
borrowed funds58. There are various processes which are used for the exit of the transactions
which are of leveraged buyout. The process is started from the assumptions related to the
purchase price and ends at the exit from transactions.
Purchase Price Assumptions: the first step is related with making the assumption which is of
the purchase price, debt interest rates and many more59. Such decisions are taken so that the
availability of the cash is made standardized for the repayment of debt over the investment
horizon. The key leverage levels are also determined which provides the actual status of
financial coverage and the credit statistics60.
Create Sources and Uses: The sources involve the decisions which are related to the
availability of the various sources through which the transactions will be financed and the
operations will be made smooth61. This relates to identification of sources of finance of LBO and
56 www.leveragedloan.com
57 LeveragedLoan.com, ‘Leveraged Loan Buyout Volume’ [2018] LeveragedLoan.com <
http://www.leveragedloan.com/in-shadow-of-brexit-ukeuropean-lbo-loan-market-proceeds-with-caution/>
Accessed 10 August 2018
58 Tim Jenkinson and Miguel Sousa, ‘What determines the exit decision for leveraged buyouts’ [2015] 59
Journal of Banking & Finance 399.
59 Buchner, Kaserer, & Wagner. Modeling the cash flow dynamics of private equity funds: Theory and empirical
evidence. The Journal of Alternative Investments, 13(1), 41.
60 The price related assumptions helps in determining the financial leverage of the firm.
9

the exit strategies for the LBO. The purpose of entering and exit from an LBo needs to be
specified.
Financial Projections: The projections of the finances are necessary as they helps in
determining that how the repayment will be done to pay back all the debts and also to determine
the value that is paid for the debt every year62. These also help in determining the amount of the
equity that the organization is having.
Balance sheet adjustments: At this stage of exit the transactions of the debt and equity which
are new are adjusted in the balance sheet63 so that the analysis can be made accordingly64.
These are done by the LBO who has the great knowledge about amount of leverage, revenue
growth rates and multiple exits.
Exit: In this stage the exit from the LBO transactions are made which means to evaluate the exit
value which is based on EBITDA for the 5 years and then the net debt is subtracted from the
company’s equity value so that the actual value of the firm can be determined and accordingly
the decision related to exit is taken65.
These were the process steps which are being followed to exit the LBO transactions but the
portfolio company also plays the significant role through which they get influenced and decide to
exit the organization. The portfolio company is the one in which the investors own the equity in
company. The main aim is to increase the value of portfolio and also earns the return in initial
investment. The portfolio company plays the significant role in the LBO as they helps in
enhancing the capital also keeps the short track records of the needs of capital66. These
companies not only help to bring the new business into the market but also help in creating the
jobs so as to boost the economy. The responsibility of the portfolio company is to make the
financial gain as the money is raised by selling the company or growing to through the IPO
process. The private equity firms are not directly involved in the daily operations of the portfolio
company67. The role of them is to add value to the success and the growth of the business by
providing various new inputs into various functional, operational and the strategic aspects of the
business68.
There are various approaches to invest in the portfolio company. The portfolio company had the
major role which helped in the exit from the transactions of LBO. This is due to the reason as it
is already said that many approaches are been adopted so that investments can be made and
the capital of the organization can be enhanced69. The approach can be of the developing an
equity in a company. This option is looked by the company as it helps in adding the diversity
61 Madhu Iyengar, Dimple Pandey and Ninad Jadhav, ‘Different exit modes for PE/VC – A comparative
analysis’ [2016] 12 International Journal of applied research 82.
62 Equities- Debt
63 Fair reporting as per the applicable accounting framework
64 Various adjustments are made in balance sheet related to the new equities as well as debt.
65 Jonathan B. Cohn, Lillian F. Mills and Erin M. Towery, ‘The evolution of capital structure and operating
performance after leveraged buyouts: Evidence from U.S. corporate tax returns’ [2014] 111 Journal of
Financial Economics 469.
66 The growth is enhanced and the capital is increased through the portfolio company.
67 Takeover of ownership is done and not the management of company affairs
68 EBITA= Net Equity-Net Debt
69 An approach adds the diversity which helps in reducing the risk and increasing the opportunities for
growth and development.
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and the potential of growth to the business. In this the middle market firms are usually favored
as these are less risk and there is the room for growth. The buying out of the company is
another approach in which the shares of the company are purchased so that the interest can be
controlled. The buyers of company think that the assets are undervalued and can be sold so as
to make the profit70. This approach is also preferred as it provides the ability to easily enter into
the market the revenues are high and the competition level is less. The portfolio plays the
important role so that the exit from that of LBO can be provided and the sustainability as well as
the growth within the leveraged buyout can be maintained71.
What is the usual way to exit an LBO? Another LBO?
Generally the leveraged buyouts are carried out using the various exit strategies discussed in
the previous sections. But recently entering into another leveraged buyout to exit from an
existing leveraged buyout is also gaining popularity in various countries all over the world
including UK and India72. This strategy includes forming a new company by acquiring outside
debt for transferring the assets of the previously acquired company through previous LBO. This
is also known as dual track strategy. This strategy is mostly used in volatile and frequent
markets and industry.
Section 2: Comparison of UK scenario with major Indian LBOs
2.1 Case study examples of LBO transaction exit strategies of UK
Acquisition of Nature’s Bounty by KKR
The Kohlberg Kravis Roberts & Co. or KKR & Co.’s has purchased a majority control of Nature’s
Bounty, marketer and distributor of health and wellness products73. The KKR & Co. is
purchasing this from the Global alternative asset manager, The Carlyle Group74. This purchase
was made after Nature’s bounty sold its UK based Holland and Barrett retail chain to the L1
retail. Now the KKR & Co. has purchased Nature’s Bounty, consumer-based products Group.
The business of Nature’s Bounty is to manufacture nutrients and vitamins supplements75. The
company is committed to keeps science and quality standards at the core of its business76. This
will allow the company to develop better products to serve the needs of its customers and
increase the sales of Nature’s Bounty. Additionally, the company has to ensure that the
products sold are of the best quality and the customers are satisfied with these products. This
also makes Nature’ Bounty a leading competitor in the field and will ensure that the company is
able to face competition effectively. The financial position of Nature’s Bounty is positive and the
sale of the company is growing. This will enable the firm to expand its operations and increase
its profitability77. This will also enable The Carlyle Group to secure a better price for its holding in
70 The acquisition is not made on the fair value of assets in this case.
71 Axelson, Jenkinson, Strömberg & Weisbach. ‘ Borrow cheap, buy high? The determinants of leverage and pricing
in buyouts.’ [2013] 68(6) The Journal of Finance 2223.
72 Femino. ‘Ex Ante Review of Leveraged Buyouts’. [2013] 123 Yale Law Journal 1830
73 www.naturesbounty.com
74 www.cartyle.com
75 Bathurst Regional Council v Local Government Financial Services Pty Ltd [2012] FCA 1200
76 Michael C Jensen. ‘Active investors, LBOs, and the privatization of bankruptcy.’[2010] 22 Journal of
applied corporate finance 77
77 Tim Jenkinson and Miguel Sousa. ‘What determines the exit decision for leveraged buyouts?’ [2015]
Journal of Banking and Finance 399.
11

the company78. This will raise the cost of investment for the KKR & Co. The benefit of the
majority control to the KKR & Co. is that it will enable the firm to exercise complete control over
Nature’s Bounty. This will allow them to make a strategic decision for the company without
anyone limiting their ability to do the same79. At the same time, the KKR & Co. has purchased
the company because it is optimistic about the future of Nature’s Bounty. This will allow the KKR
& Co. to fulfill the plans it has with the company without any hurdles from the board of
directors80.
As per the internal sources the value of the deal is about $3 billion and this value has been
calculated at ten times the value of net profit before interest, tax, depreciation, and amortization.
The KKR & Co. has named Paul Sturman as the new CEO of Nature’s Bounty81. The investment
in Nature’s Bounty will allow the KKR & Co. to increase its return from investment as the future
of the company is positive. The KKR & Co. believe that Paul Sturman will be able to effectively
lead the firm as he has more than 30 years’ experience in the field. He has spent six years,
magnificently leading Pfizer’s. Apart from this he is Trustee of the Foundation for Morristown
Medical Centre that is one of America’s top fifty hospitals and he also holds a board seat in
Tyme Inc., this is the clinical stage of a biotechnology company that is using the cellular
metabolism to develop cancer therapies that have low toxicity levels82. This Nature’s Bounty can
use his experience and connections for increasing the sales and developing better products in
the future. At the same time, the company will be able to get more contracts and increase its
sales and profitability. After the acquisition of Nature’s Bounty, the plans of the KKR & Co. for
the company includes increasing the investment in the company, this will allow Nature’s Bounty
to expand its operations. Further, the KKR & Co. will provide support managerial support to the
company that will assist the current management to perform their duties effectively. Additionally,
they can further enhance the operating ability of Nature’s Bounty by providing them special
contacts and using their influence to help them secure sales. There is high competition in the
industry and the KKR & Co. wants to continue the business of Nature’s Bounty. The company
will be able to face the competition effectively by using the help of the parent company that is
KKR & Co. This will allow Nature’s Bounty to improve its performance and maximize the profits
of the company. This will also allow the KKR & Co. to increase its return on investment83.
Acquisition of Calsonic Kansei by KKR
Additionally, the other leverage buyout by the KKR & Co. is of the Calsonic Kansei from the
Nissan Motors84. The company spent 498.3 billion yen that is $4.5 billion. The KKR & Co. made
a public announcement that it will pay 1,860 yen per share that is 28.3% premium over the
closing price of the stock. The shares of the Calsonic Kansei closed at 1,450 yen, up 9.7%.
After making a successful deal the KKR & Co. will be holding around 95.21% shares in the
Calsonic Kansei. Now the KKR & Co. holds the majority of the shares in the company including
41% of the shares previously owned by Nissan85. Further, the KKR & Co. will also have control
78 Cartyle group invests across four segments including Corporate Private Equity, Real Assets, Global
Market Strategies and Investment Strategies across different countries.
79 Puliyur Sudarsanam. ‘Exit Strategy for UK Leveraged Buyouts: Empirical Evidence on Determinants’
[2005]
80 Voting rights attached to ownership
81 www.businesswire.com
82 www.tymeinc.com
83 Investment made in acquiring the portfolio company.
84 Nissan Motors based at Japan was the parwent company of
85 Nissan Motors is a Japanese company.
12

over the offshore plants of the Calsonic Kansei in Mexico. These include three facilities in
Aguascalientes manufactures Air conditioning systems, Exhaust Systems, Plastic Components,
Meters, and Wiring Harness Components. The two others are in Durango and Mexico City. The
shares of the KKR & Co. closed down 0.13% down after the proposal became public. The sales
revenue of the Calsonic Kansei is continuously rising and this shows that the company is able to
effectively sell its products. At the same time, the Gross income of the company is also rising
and this shows positive signs of growth. This shows that the investment made by the KKR & Co.
will yield higher returns in the future. The earning per share is also stable and this will provide
the KKR & Co. stable returns on the investment made by the firm. The KKR & Co. further said
that it will assist the Calsonic Kansei in expanding in the international market as the domestic
market of the company is shrinking. This will allow the Calsonic Kansei to benefit from the
experience of the KKR & Co. in managing an enterprise86. The KKR & Co. has an experience of
more than 42 years87. This experience has allowed the company to know about different tactics
to manage a company and how to promote the products of the company. The skills will be
advantageous for the Calsonic Kansei. The KKR & Co. also has a number of contacts in the
industry. The Calsonic Kansei can take the assistance of the KKR & Co. for convincing these
companies to buy the products of the company. This will assist the Calsonic Kansei in
increasing its sales and maximizing the profitability88. The Calsonic Kansei can now raise the
debt easily as the company has the name of KKR & Co. attached with it. The KKR & Co. has a
high reputation among the financial institutions and this reputation will also benefit the Calsonic
Kansei in raising finances for the company89
The information regarding the Calsonic Kansei which is in the public sphere is that the KKR &
Co. will make a series of investments in plants and equipment90. This will allow Calsonic Kansei
to increase its customer base and also increase the overall profitability of the company. This
shows that the KKR & Co. has future plans for the Calsonic Kansei and they are interested in
running the business. This will also enable the KKR & Co. to increase the effectiveness of its
purchase. The financial support provided by the KKR & Co. is a clear indication of the interest of
the KKR & Co. in continuing the business of the Calsonic Kansei. The Calsonic Kansei will
benefit from this investment and the company will be able to expand its operations and increase
the efficiency of the current machinery used by the Calsonic Kansei. This will allow the company
to produce more automotive products at lower costs. This will give Calsonic Kansei competitive
advantage over other manufacturers in the industry91. This will enable the Calsonic Kansei to
increase its sales. Finally, it can be said that the above-leveraged buyout made by the KKR &
Co. is made after deliberation. The value of the investment has positive future prospects92.
86 Eric Fellhauer and Berg Cai. ‘Asiatische Investoren in Distressed M&A Transaktionen–Key Takeaways.’
[2013] 2.020 Insolvenzrecht 29
87 www.kkr.com
88 Ranko Jelic and Mike Wright. ‘Exits, Performance, and Late Stage Venture Capital: the Case of UK
Management Buy-outs’ [2007]
89 Brian Yap. ‘DEAL: KKR's largest Japanese acquisition.’ [2017] International Financial Law Review.
90 www.calsonickansei.co.jp
91 Merger results in increase in net value of assets
92 Yanqing Jiang, Yuan Jian and Zeng Mengmeng. ‘A Game Theoretic Study of Enterprise Mergers and
Acquisitions: The Case of RJR Nabisco Being Acquired by KKR.. [2016] 2 Business and Management
Studies 21
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2.2 Case study examples of LBO transaction exit strategies of India
The Kohlberg Kravis Roberts & Co. or KKR & Co.’s recent leverage buyout is of US$ 951.6
million of Bharti Airtel Ltd. The KKR & Co. has purchased 10.3% stake. The KKR & Co. and
Canada Pension Plan Investment Board have carried out this buyout together. Bharti Airtel is
India’s largest telecom operator has net debt of Indian Rupees (INR) 973.95 billion in the year
ended December 201693. The purchase price of the share was Indian Rupees 325 per share
and after the purchase, the company share rose by 1.8% to INR 318.25. the company has
90,000 telecom towers and revenue of INR5,595 crore. The investment of KKR & Co. in the
Bharti Airtel was about $250 million in December 2007. After the recent investment, the
company also merged with the Indus Towers Ltd. This will create the world’s second largest
telecom company. Now the merged company has over 163,000 towers across 22 telecom
service area in India. After studying the above buyout and merger it can be said that the Bharti
Airtel has positive future aspects. It will allow the owners of the Bharti Airtel who are interested
in exiting from the company to carry out the exit strategy easily. This will allow the owners to
liquidate their holdings and this will free their funds94. This can be further used for other
purposes. This strategy is most likely initiated because the owners think the Bharti Airtel is not
generating enough revenue or the profits are low95. After seeing the potential new investors, it
can be said that the other companies are interested in buying their business of Bharti Airtel. This
will allow the owners of the firm to make a simple exit. After seeing the financial statements of
the Bharti Airtel it can be said that the future prospects for the company are positive. This will
enable the KKR & Co. to increase the value of its investment and also to get stable returns on
the investment. Additionally, the sales and the operating profit of the company are rising and
this will enable the company to ensure long-term growth. The Bharti Airtel is facing one serious
issue which the KKR & Co. as an investor will be aware of and this is low profits due to rising
expenses of amortization of the spectrums. Additionally, the Indian Government has changed
the pattern of the sale of spectrum from first come first serve basis to auctions and this has
raised the cost of buying spectrums. This has impacted the Bharti Airtel’s profitability in a
negative manner.
The Bharti Airtel has decided that the company will continue to carry out its business activities
even after the buyout. The company has recently merged with Indus Tower Ltd. this shows the
commitment of the company is continuing its business and providing services to the consumers.
The Bharti Airtel has become the largest telecom service provider in India with over 163,000
towers and reaches over 22 telecom circle across India96. This will allow the Bharti Airtel to
attract more customers and expand its customer base. The company has planned to raise INR
30 billion through non-convertible debentures and this will allow the company for future
expansions. Further, the Bharti Airtel has planned that it will make significant investments the
North Eastern parts of the country by installing new towers and laying down optic fiber wires and
this will enable the Bharti Airtel to make expansion and carry out its business activiti3es
effectively. After seeing the future plans of the Bharti Airtel it can be early said that the company
will continue its operation in the future. The above steps will enable the company to make future
expansions and attract more customers. This will ensure the growth of the profitability of the
company. Another Leverage buyout transaction in the Indian market is between Flipkart and
eBay. The Flipkart Pvt. Ltd. recently gave the Ebay Inc. shares of 5.4% in the company. The
93 www.airtel.in
94 Ottorino Morresi and Pezzi Alberto. ‘Cross-border mergers and acquisitions: Theory and empirical
evidence’ [2014] Springer. .
95 Airtel [2017] Annual Report
96 www.airtel.com
14

money raised by selling these shares has been used by the Flipkart to acquire the Indian
business of the eBay. Additionally, Flipkart raised a total of $1.4 billion from eBay, Tencent, and
Microsoft. After the Flipkart acquires the business of the Ebay the Flipkart will remain an
independent entity.
The Flipkart has registered an increase in annual revenue of 29% and now it stands at $3.09
billion97. Despite the increase in the revenue, Flipkart records high losses which have reached
$1.3 billion which has increased by 68%98. The future of the Flipkart is positive as the company
is one of the leading e-commerce sites in India and the company is continuously improving its
profitability by controlling costs and increasing the revenue. After the completion of this
acquisition, the Flipkart will be able to sell used goods on the eBay platform. Additionally, the
Flipkart will be able to get access to the foreign product in which eBay holds expertise. At the
same time, the eBay will benefit from the local products in which the Flipkart holds expertise.
Both of the companies will benefit from each other expertise and it will allow them to expand
their business. The recent survey in the festival season pointed out that Flipkart was able to
secure 50% of the market sales, Amazon stood at second followed by Alibaba backed Paytm. In
an official statement given by the Flipkart said that the Ebay will be carrying out its business
after the acquisition and the parent company will assist the Ebay in performing its duties. The
purpose of the Flipkart after carrying out this purchase is to expand its operations. This will
enable the Flipkart to expand into new markets where the Ebay dominates and has expertise.
The eBay will allow the Flipkart to sell foreign products which were previously not available on
the Flipkart website. Further, the Ebay has a large platform for selling used goods and a well-
developed bidding platform and this is an excellent source of revenue for the eBay. This will
attract new customers to the website99. Additionally, the new financial support will enable the
eBay to expand its operations and spend on advertising which will enable the eBay to increase
its sales.
The eBay and Flipkart have also signed exclusive across border trade agreement and this will
enable the customers on different platforms to access the inventory of each other100. The eBay
currently allow the sales of refurbished and used goods but the Flipkart only permits sales of
brand new products. Afar the merger the eBay and Flipkart will be able to join their power and
effectively compete with other e-commerce websites in India. By joining each other they will be
able to share the tactics and skills with each other that will enable them to increase their sales
and reduce the costs of selling products. This will give eBay and Flipkart competitive advantage
over other companies in the industry. The eBay and Flipkart will benefit from the basic principle
of economics that is economies of scale the sheer scale for activities will enable the companies
to outsell their competitors. The transportation costs will be minimized after opening joint
warehouses all over India and the companies can also bargain deals with the manufacturers
and can ensure they choose the websites of eBay and Flipkart to launch their products. This will
enable them to increase their competitive advantage and outpace their competitors. This
acquisition is to be more like the previous acquisition of the Flipkart that includes Phonepe,
Myntra and Jabong101. These companies work independently of the Flipkart but at the same
time, the Flipkart provides them support for carrying out their business activities. This includes
97 www.flipkart.com
98 https://inc42.com/buzz/flipkart-revenue-loss-fy17/
99 www.ebay.com
100 Scott Sims. ‘Acquisitions: Flipkart and Ebay.’ [2018].
101 Rajeshwari Malik. ‘Study of‗ Mergers & Acquisitions ‘Growth strategy in E-Tailing Industry (A case
Study of Flipkart-Myntra: The Online Giants).’ [2014] International Journal of Management Research and
Social Science.
15

support by using their services like Flipkart at times collaborate with Phonepe and provides their
users special discounts. This similar model can also be used in the Flipkart – Ebay deal as this
will benefit both the companies and allow them to expand.
The other examples of successful LBOs by the Indian companies include acquisition of UK
based Tetley by Tata Tea company of India for the price of 271 million pounds102. The purchase
of Tata Tea by Tetley was financed partially from equity and loan stock subscribed by the
institutional investors. These investors financial the debt for the LBO transaction included
vendor institutions such as Mezzanine finance, Intermediate Capital Group Plc and Rabobank
International. The acquisition of Whyte and Mackay company of UK by Indian company UB
group for an amount of 550 million pounds under LBO transaction is another example103. The
transaction was carried out through a special purpose vehicle which is United Spirits whose
equity was used to buy the 100% stake of Whyte and Mackay104. The debt equity ratio of the
new launched company is 1.336. Corus of UK was acquired by Tata Steel for $11.3 billion105.
The price of 608 pence per ordinary share of Corus was paid in cash in order to acquire
Corus106. The transaction was completed with regards to the Scheme of Arrangement which was
approved by High Court of Justice in England107. Apart from this, Tranmissions company of
Netherlands was acquired by Suzlon Energy Company of India at a price of 465 million.
American Axle of USA was acquired by Tata Motors Zoom Auto for $2 billion. Lombardini of
Italy was acquired by Ancllaries of Indua for $225 million. All these LBOs were carried on by
India at international level and are therefore overseas mergers.
2.3 Comparative analysis of exit strategies of both companies
After seeing the exit strategies of both the British companies it can be said that in the UK the
procedure of leverage buyout is different when compared with India.
UK
Out of the acquisitions discussed above the acquisition in the UK are complete acquisitions that
are the majority of the stake have been acquired by the KKR & Co. These include companies
like Nature’s Bounty and Calsonic Kansei. This will give the KKR & Co. complete control over
the working of these both companies and allow them to make strategic decisions regarding the
company. This will allow them to make decisions without any interference from any other
investor.
Nature’s Bounty acquisition will allow the KKR & Co.to expand its operations in health and
wellness products and the company has already purchased WebMD that supplies users with the
information regarding health and well-being. The decisions for acquisitions are right as Nature’s
Bounty has better long-term opportunities in the industry and these opportunities will increase
manifold with the KKR & Co.
102 Pooja Tripathi. ‘Leveraged buyout analysis’ [2012] 4(6) Journal of Law and Conflict Resolution 85.
103 Wolf Thes. ‘A tough year to succeed in M&A’.
104 KVVS Narayana Rao. ‘Acquisitionof White and Mackay by United Brewries - Case Study’ [2007]
105 Vishwanath, S. R. ‘Tata Steel: Financing the Corus Acquisition’ [2010] `14 Asian Case Research
Journal 295.
106 Shiv S Tripathi. ‘Tata Acquires Corus: A case Study.’ (2012).
107 Titman Sheridan. ‘Valuation: Analyzing Global Investment Opportunities’. [2011] Pearson Education
India,
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The acquisition of the Calsonic Kansei, on the other hand, will require KKR & Co. to make
additional investments in the assets of the company. This will allow the Calsonic Kansei to
improve their effectiveness and efficiency of the existing machinery but once this is done the
Calsonic Kansei will be able to increase its sales and profitability108. So, it can be said that even
this investment of the KKR & Co. will bring the company higher returns in the future.
Additionally, it can be said that the acquisition and merger are quite easy in the UK as the laws
are quite company friendly. This means that in the UK there is a high “Ease of Doing
Business”109. This will allow the companies to merge and acquire each other easily. This will
increase the competitive ability of the British companies not in their home country but also
globally110. If the British companies choose to merge or acquire companies in India they will be
caught up in the bureaucratic red tape and this will reduce their effectiveness and delay the
process of merger and acquisition. At the same time, Indian banks do not finance foreign
companies buying Indian companies111.
India
On the other hand, the KKR & Co. bought a stake in Bharti Airtel of 10.3%112. This will allow the
company to be part of the decision-making process but this does not ensure control over the
decisions made113. This means the KKR & Co. is not holding the majority of the shares. This will
not allow the KKR & Co. to make strategic decisions independently114.
The merger between eBay and Flipkart, in which Flipkart bought the EBay’s Indian business by
giving them shares of 5.4% in the Flipkart. This will allow the Flipkart to control how the
business of eBay is run and make the strategic decisions for the eBay. Additionally, the special
deals of the merger will allow the Flipkart and eBay access of each other customers, markets,
and sellers115. This will allow both of the companies to expand in the areas where they lack
expertise. This is business of used products and foreign made products for Flipkart and Indian
goods for the eBay116.
In India, most of the companies complain regarding the bureaucratic red tape. This slows down
the process of acquisition and merger117. This will negatively impact the company's profitability
and reduce the global competitive advantage118. Thus, it can be said that the Indian companies
will face serious disadvantages if they are carrying mergers and acquisitions in their home
country whereas if the Indian companies carry out merger and acquisition outside India they will
108 Goodwill = Purchase Consideration – net fair value of assets
109 Liberalisation
110 Overseas mergers and cross country takeovers
111 Foreiogn Direct Investment rules and legislations
112 In the form of leveraged buyout
113 The voting can be made to the extent of stake acquired.
114 Riddhi Dave and Reshmi Banerjee. ‘PRIVATE EQUITY IN INDIA AND ITS IMPACT ON INDIAN
BUSINESSES.’
115 Nirankush Dutta and Anil K. Bhat. ‘Flipkart: journey of an Indian e-commerce start-up.’ [2014] 4(7)
Emerald Emerging Markets Case Studies 1
116 Market strategies of e-commerce companies
117 Dalal, A S ‘Analysis of Takeover Defenses and Hostile Takeover’ [2011] 6(1) NALSAR Law Review 85
118 Raj S Dhankar and Kunjana Malik. ‘A Dynamic Panel Data Analysis: The Effect of Private Equity on
Investment and Financial Constraints of Indian Companies.’ [2015] 18(4)The Journal of Private Equity 65.
17

have advantages as they will be governed by foreign laws119. This will increase their competitive
advantage especially in other countries this also includes the UK.
119 Frost & Sullivan. ‘Industry Overview’ [2015]
18

Section 3
3.1 Development and evolution over decades of LBO
The LBO came into the existence during the year 1980’s in the United States as they
contributed major ingredient to take over the boom at time. The activities of the LBO when
increased then the purchases of debt become dominant over the organization. The corporate
sector of America has experienced the drastic increase in leverage buyout with the 2000 LBOs
and the excess amounted to be $250 billion120. In 1989 the new phenomenon picked up as the
private equity firm Kohlberg, Kravis & Robert were leveraged buyout takeover of $25 billion
which was double as that which was took in 1985121. The investors, financers and the executives
regarded it as the strong alternative to the public corporations. After few years, the
extraordinary returns were achieved from the investments in LBO as there was the inflow of the
large amount of capital from the investor into the LBO funds122. The number of transactions has
also increased during 80’s. The global market crashed from October 1989. Therefore the market
which was high yield crashed and the various number of LBO’s led to the bankruptcy123.
Global Private Equity Transaction Volume 1985-2006
124
Source: Steven and Per [2008]
But in 1980’s there seemed to be the increase in LBO’s target which in turn increased the
profitability by cutting down the investment and by maintain the operating income as same125. It
was also seen that the LBO’s which were privately held reduced the wages as well as the white
collar employment126. The various sources through which wealth was gain from public to private
120 Tim Jenkinson and Miguel Sousa (2015) during the similar period there seemed to be no improvement
after the US LBO during the same period.
121 These two firms were the one which at the early stage examined the increase in the leverage buyout
transactions and the excess was amounted to be 2000 LBO’s.
122 The combinations of business treated the acquisition under the Accounting standards Codification 805
which restated most of the assets as well as the liabilities to the fair market value.
123 The market globally crashed in the late 90’s and the bankruptcy has been seen.
124 Global Private Equity Transaction Volume 1985-2006
125 Global level
126 The profitability was seen in 1980’s
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transactions were of the main focus during that era127. The aim of going private emphasized
more on the advantage of taxes and the non-equity stakeholders as they were the main source
of wealth gain. There were various other sources of wealth gain with the main focus on the
value and performance so that the wastage of resources can be reduced and the governance
structure of an LBO can be improved128. Going private eliminates the costs which is associated
with the maintenance of the stock market listing and will also motivate the defensive strategy
against the aggressive takeover129. In the beginning of 2000 there seemed to be the new turn of
the Private to Public transactions in UK, US and Europe as it was ran by the cheap debt. In the
end of 2007 the wave in value of LBO came to cut short with the securitized debt market.
The average time which is determined to exit the LBO is 5.25 years130. The percentage of the
common exit was also determined accordingly as 36% were of the strategic sales of the total
transactions, 24% of the public offerings and secondary LBO 28%131. This basically focused on
the capital markets and the credit needs of UK ad US132.
Image: European Buyout Trends from 2011-2016
Source: Private Equity trend report, 2017
This graph specifies that how the growth of the leverage buyout has been seen over years133.
The market seemed to be bifurcated according to the total deal volume in 2016 as it increased
by 5.1% to 1886 but the total deal volume was declined by 5.3% which amounted to be €199.9
billion134. After 2013 this was the first time when there seemed to be the increase in transactions
but the aggregate total value of the firm has fallen135. This was also seen in the exceptional year
127 Robin Johansson and Alexander Näsholm, ‘The transformation of private equity Value creation in the
second wave of private equity’ [2017] Department of Business studies <
http://www.diva-portal.org/smash/get/diva2:824626/FULLTEXT01.pdf> Accessed 10 August 2018
128 The proper utilization of the resources were done and hence the structure of the LBO enhanced.
129 The private equity firm reduces the cost and increases the overall value.
130 Average time to exit the LBO.
131 Office for National Statistics, 2018
132 High Growth, 2018
133 From 2011 to 2016
134 Private Equity Trend Report, ‘Rising above uncertainty’ [2017]. Private Equity Trend Report <
https://www.pwc.de/de/finanzdienstleistungen/assets/41733_Studie_PETR_2017_170224_SCREEN.pdf>
Accessed 10 August 2018
135 The transactions increased in 2013 which in turn decreased the total value of the market.
20

of 2015 in European private equity in which the deal value was high but the credit boom came
too declined or short cut in 2008136. The big leveraged buyout groups have got the access to
fund as the investors and also to look into the investment as the companies which are high
yields137. There seemed to be the turnover in 2008 but after 2012 there looked for the
improvements in the market of leveraged buyout138.
Andrey Malenko and Nadya Malenko, believed that the junk bonds pushed the burden on the
leveraged buyout139. It was also demonstrated that the debt was added so that the cost can be
reduced and the improvements in the various key areas can be made. Therefore, it was
predicted that the disappearance of the LBO was the helpful instrument for the firms which are
high yield to gain the competitive advantage in terms of the performance140. The post buyout
growth was also observed in debts which showed the growth in size and also the increase in
debts as well as the capital structure which in turn are the strongest when the targets of the
organization operates but only for those which are highly dependent upon the external
finance141. This showed that the LBO’s target invest less or downwards.
Despite of the slowdown in consumer technology there seemed to be another good year 2016
for the private equity firms. In the Year 2016, the value of the buyout declined to $257 billion
from that of 2015 level of $297 billion142. Despite of the slowdown in the buyout the sector
performed surprisingly well in terms of its strength and weakness143. The returns of the firms get
increasing which showed the great results for the investors and the limited partners had much of
the cash in hand which in turn indicates that the private equity cycle is operating sustainably.
The half of the total deal value was contributed by Banking, Financial, Services and Insurance
(BFSI), manufacturing and IT as they are the high growth sectors144. It was observed that the
fund raising was on the high priority by the investors during the year 2017, then the fund raising
environment will be seen more challenging during the current and the coming years. With the
increase in the number of participants the competition for the deals will also increase and which
in turn will increase the growth opportunities for the private equity firms145.
However, the price competition should not be much looked into by the private equity houses146.
The external environment such as the insurance companies and the pension funds are already
developing the taste for the LBO model which in turn will increase the pressure of competition.
136 European Private equity boomed during the shot cut in 2008
137 Growth rate of UK from 2011 to 2016
138 2008-2012 was the time when the improvements was seen in the LBO transactions.
139 Andrey Malenko and Nadya Malenko, ‘A theory of LBO activity based on repeated debt-equity
conflicts’ [2015] 117 Journal of Financial Economics 607.
140 In this era the high yield had been gained and which in turn increased the performance of the private
firms.
141 Private equity and debts
142 Arpan Sheth, Madhur Singhal, Srivatsan Rajan and Aditya Shukla, ‘Private Equity Report 2017’ [2017]
Bain & Company < https://www.bain.com/insights/india-private-equity-report-2017> Accessed 10 August
2018
143 The ratio of the private credit to that of the gross domestic product in France was.9 as compared to that
of the UK and US which was 1.4.
144 BFSI and NBFC registered under Companies Act 1956
145 The lack of improvement in the performance after the LBO is the affect of the financial crisis on the
private equity firms.
146 Firms have cut the cost without any intervention of external factors under the pressure of stakeholders
or the product market competitors.
21

The German strategic players have become the buyers rather than the sellers147. The private
equity houses if needs to generate the higher returns needs to focus on the operational
alignment of various portfolio companies148 rather than the increase in price levels149.
3.2 Legal considerations and implications
Legal consideration and implications for a Leveraged Buyout mean the legal conditions that are
applicable in that country for the purpose of carrying out a Leverage buyout150. Though the
conditions of leverage buyout are consistent in most countries there are still differences. These
laws ensure that such a buyout does not negatively impact the stakeholders of the company151.
This includes safety laws to protect them. These laws are made for guarding the interests of
investors, shareholders, employees, suppliers, creditors, etc.152 In this way the legislative
polices, regulations and statues in relation to the M&A deals will also be applicable on the
leveraged buyout transactions in both the countries.
The legal consideration and implication for an LBO in the UK and in India are –
In the UK
The acquisition of the company by an Indian company is quite easy as the Indian company is
guided by foreign rules and guidelines153. This means the debt raised by the company’s called
the foreign debt. The debt is secured by the assets of the foreign company. Thus, this saves the
company from providing any personal assets154. This also allows the Indian companies to
acquire companies that are much larger than their own size155. In UK a public company is
prohibited by law to provide financial assistance for acquiring the shares of the public company
or its parent company to any other company156157. However a private company is prohibited to
provide financial assistance only for the purchase of shares of the public parent company of the
company providing the assistance as per Section 679 of Companies Act 2006158. This
prohibition will also apply to the financial assistance which is provided in order to reduce or
discharge the liability in relation to acquisition incurred by any company or any third party159.
These liberated prohibitions have extended the scope of LBO industry in the country160161.
147 Madhu Iyengar, Dimple Pandey and Ninad Jadhav, ‘Different exit modes for PE/VC – A comparative
analysis’ [2016] 12 International Journal of applied research 82.
148 The companies with high net worth are most suitable
149 In US during 80’s the greatest number of UK buyout amounted for the M& A activity in 2005.
150 Statues, legislations and Acts
151 Capgemini. ‘Regulatory Changes in the Investment Banking Industry. (White paper)’.[2013].
152 These are regarded as the stakeholders of the company.
153 Ferran & Ho. ‘Principles of corporate finance law’. [2014] Oxford: Oxford University Press.
154 Depamphilis. ‘Mergers, acquisitions, and other restructuring activities: an integrated approach to process, tools,
cases, and solutions.’ [2014] Amsterdam: Elsevier/Academic Press.
155 Insolvency Act 1986, ss.110-111, on schemes of arrangement or reconstructions
156 Re Anglo-Continental Supply Co Ltd [1922] 2 Ch 723, per Astbury J
157 Bisgood v. Henerson's Transvaal Estates Ltd [1908] 1 Ch 743
158 Companies Act 2006, Parts 26 (ss.895-901) and Part 27 (special rules for public companies), on
arrangements, reconstructions, mergers (or amalgamations) or divisions (demerger or "scission"). The
rules here implement the Third and Sixth EC Company law directives.
159 https://redcliffetraining.com/corporate-finance/lbo/
160 Griffith v. Paget (1877) 5 Ch D 894, per Jessel MR
161 International Financial Law Review
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Whereas in India
If a Foreign company carries out a leveraged buyout in India, then the company faces more
challenges and most of the regulatory162. There are restrictions on borrowings by a foreign
company. In India, the foreign company cannot use the assets available in India for securing
foreign debts as they have no other choice that is the restrictions on borrowing in India. The
other is the rule of specialized entities in which the bank can give the loans to the company. The
position says the basic restrictions apply and after the borrowing, the debt to equity ratio must
stay below 3:1. The AIF regulations create restrictions on companies from acquiring loans in
any form that is directly or indirectly from banks or any other financial institution163. They also
make a restriction regarding engaging in any form of leverage. Further, the rule says that they
cannot borrow temporary funds for a period of more than 30 days and more than 4 times a year.
The Section 67(2) of the Companies Act, 2013164 creates restrictions on public companies from
providing any financial assistance to any private individual or any corporation for purchasing
shares in a foreign entity. They also cannot provide investor any guarantee or security in this
regard, whether it is direct or indirect165.Also the companies buying the portfolio companies are
required to make payment to the shareholders within the stipulated time166167.
In this way there are various restrictions and prohibitions in both the countries for LBO
transactions in order to protect the interests of the market and industry168. However some
liberation have also been recently granted in the laws of both countries in order to extend the
scope of LBO industry and promote overseas LBO transactions169.
162 Impact of legal and political factors
163http://www.greenworldinvestor.com/2013/03/14/list-of-successful-leverage-buyouts-by-6-indian-
companies/
164 Previously known as Companies Act 1956
165 Section 67 of Companies Act 2013
166 The Regulation 22(!2) of SEBI takeover regulations require the payment of interest at a specifierd rate
by the acquirer company in case of delay.
167 SEBI Takeover Regulations
168 Section 5 of Competition Act 2002
169 The objective is to promote FDI
23

References
 Andrey Malenko and Nadya Malenko, ‘A theory of LBO activity based on repeated debt-
equity conflicts’ [2015] 117 Journal of Financial Economics 607.
 Arpan Sheth, Madhur Singhal, Srivatsan Rajan and Aditya Shukla, ‘Private Equity
Report 2017’ [2017] Bain & Company < https://www.bain.com/insights/india-private-
equity-report-2017> Accessed 10 August 2018
 Didier Folus and Emmanuel Boutron, ‘Exit Strategies in Private Equity’ [2015] Research
Gate 215.
 Jonathan B. Cohn, Lillian F. Mills and Erin M. Towery, ‘The evolution of capital structure
and operating performance after leveraged buyouts: Evidence from U.S. corporate tax
returns’ [2014] 111 Journal of Financial Economics 469.
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 Madhu Iyengar, Dimple Pandey and Ninad Jadhav, ‘Different exit modes for PE/VC – A
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 Quentin Boucly, David Sraer and David Thesmar, ‛ Growth LBOs’ [2012] 102 Journal of
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 Street of Walls, ‘Leveraged Buyout Analysis’ [2013] Street of Walls <
http://www.streetofwalls.com/finance-training-courses/investment-banking-technical-
training/leveraged-buyout-analysis/> Accessed 10 August 2018
 Tim Jenkinson and Miguel Sousa, ‘What determines the exit decision for leveraged
buyouts’ [2015] 59 Journal of Banking & Finance 399.
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leveraged-buyouts> accessed 9 August 18
 Steven N. Kaplan and Per Stromberg, ‘Levergaed Buyouts and Private Equity’ [2008] 22
Journal of Economic Perspectives 4
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comparative analysis’ [2016] 12 International Journal of applied research 82.
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