private equity club 2009 - pwc · private equity club 2009 facing today, tomorrow and the day...

Private Equity Club 2009Facing today, tomorrow and the day after*

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Private Equity Club 2009

PricewaterhouseCoopers LLP

October 2009

IPO readiness: Planning for exit

Ashley Coups

Private Equity Assurance Leader, PricewaterhouseCoopers LLP

October 2009

Recent headlines

““Aviva to raise EURO 1.1Bn In Delta Lloyd IPO”

“Private equity looks to float again in 2010”

“Ocado planning £350m sharesale”

“Pets at Home groomed for 2010 flotation”

“Plans for IPOs to be aired by BC partners”

October 2009

Introductions

Capital MarketsGroup Partner

Mark Hughes

Capital MarketsGroup Director

Sophie Rooke

M&A Private Equityand Tax Partner

Marissa Thomas

Human ResourceServices Partner

Julian Samsun

October 2009

Agenda

• Your objectives

• Managing the exit – key issues

• Which market?

• Identify the issues up front

• Overview of requirements

• Historical track record and IPO windows

• Common pitfalls

• Remuneration matters

• IPO readiness – an approach that works

October 2009

• Execution of strategyand development ofcompelling equitystory

• Strong cashconversion

• Initial Public Offering(IPO)

• Trade sale

• Sale or strategic dealwith another privateequity investor

• Refinancing

• Rigorous up frontplanning providingflexibility on timing ofexit

• Minimise need for topup work

Maximise valueon exit

Maintain flexibilityof exit routes

Minimise disruption tothe business andavoid delaysand surprises

Your objectives

October 2009

Managing the exit – key issues

ExitInvestmentAcquisition

Maximising value

Trade sale

Strategic deal/ PE sale

Experiencedmanagement

Clear strategyand compelling

equity story

Recognisablesustainable

Good trackrecord

Strong cashmanagement

Robustmanagementinformation

October 2009

Which market?

Where to list?

Market• Total market capitalisation and

turnover

• Number of companies listed

• Total money raised from IPOs

• Market liquidity

Profile• Core business location

• Stage of development of thebusiness

• Expectation other stakeholders

• Listing location peers

Regulation• Admission criteria

• Prospectus Rules

• Continuing obligations

Indices• Indices structure the stock

markets and channel investorattention increasing liquidity ofshares

• Certain indices are limited todomestic companies only

October 2009

Identify the issues up front

• Need for a compelling equity story and evidence ofsuccessfully managing business through the downturn

• Be ready to access market quickly when IPO marketreopens

• Selection of market

Strong equity story and track record

• Accounting complexities – including the conversion fromlocal GAAP to IFRS, availability of consolidated financialinformation

• Complexity of financial track record

- need for carve out financial information

- impact of acquisitions/disposals “buy & build”

- identification of issuer

- impact of refinancing structures

Complexity of financial track record

• Establish high quality corporate governance standardsunderpinned by robust management information andmanagement reporting systems:

- Building an experienced board of directors

- Implementing systems and processes to enabletimely reporting of information

- Developing appropriate risk management, audit,compliance procedures

• Other deal related matters: tax structuring, distributablereserves, incentive arrangements

Preparing for life as a public company

• Planning and good preparation are crucial for asuccessful flotation. Issues highlighted at this earlystage can be tackled prior to the offering commencing,thereby minimising potential unpleasant surprises andmaking the most of unexpected advantageous situations

• Identify a strong project manager who understands theprocess

• Ensure shareholder and management objectives aligned

• Anticipate political obstacles – including regulatory andcompetition clearances

Benefits of rigorous planning

October 2009

Overview of requirements

At least 25% shares in public hands

Sufficient working capital for at least 12 months from the date of the prospectus

Adequate financial reporting procedures

Adequate controls to meet continuing obligations

Interim financial information if document is dated more than 9 months after end of lastaudited financial year

Audited numbers must not be more than 6 months old

At least 75% of business should be supported by revenue earning track record for 3 yearperiod

Two years IFRS (or equivalent) – US GAAP accepted

Clean three year track record

Production of prospectus or admission document

Appointment of a sponsor/nominated adviser and broker

Eligibility conditions in London (similar to other jurisdictions) Main Market

PwC’s Which Market? publication

October 2009

A strong financial track record is key

Accounting considerations

• Availability of IFRS numbers

• Can disclosure requirements be met across all 3 years?

• How might segmental presentation impact the presentation of the business?

• Is consolidated financial information available at level of issuer?

Complex financial track record

• Is carve-out financial information needed?

• Is the track record impacted by acquisition / disposals? (need to reflect 75% of businessacross the track record)

• Will interim financial information (including comparatives) be needed?

Financial track record in London (similar to other jurisdictions)

October 2009

IPO windows – IPO in 2010 using 3 years to December 2009

2010200920082007

1 Jan 2007 31 Dec 2007 31 Dec 2008 31 Dec 2009 30 Jun 2010

Conversionto IFRS

Dec auditedaccountsproduced

IPOwindow

FSAreview

At 30 June the 31 Dec2010 financials go staleunder UK Listing Rules(9 months underProspectus Rules)

Pre-IPO preparation complete.IPO preparation commences

October 2009

Common pitfalls: Prepare the business early for lifeas a public company – it takes time

• Early determination of which entity will list

• Creation of distributable reserves for futuredividends / elimination or reserves blocks

• Determination of appropriate capital structure,including debt level

Transaction structure

October 2009

• Unwinding and simplification of the acquisitionstructure

• Impact required restructuring and proceedsdistribution to investors

• Managing dividend withholding tax leakage

• Understanding the group future tax rate

• Understanding and disclosure of the inherent taxrisks

Tax considerations

October 2009

• Need to upgrade systems, procedures and controlspre IPO

• Difficulty in producing interim consolidated financialstatements within required time frame

• Need for robust budgeting and forecastingprocesses and cash flow management

• Ensure clarity of what needs fixing pre IPO andwhat enhancements are to be made post IPO

Financial reporting and control environment

October 2009

Common pitfalls: Be clear on the issues up frontand establish a strong project team

• Limited up front planningdoes not identify all issues upfront

• Lack of dedicated projectdrivers with sufficientinfluence across business

• Clear ownership of project atboard level

• Workstream owners haveinsufficient resources todeliver workstreams inaddition to performing theday job

• Management and ownerobjectives not fully aligned

• Will non-financial metrics be needed to market offerand enhance value and are they robust and verifiable

• Effective post IPO incentive plans notdesigned/implemented early enough

• Regulatory clearances not sought early enough in process

Corporate Governance

• Supervisory Board established late in the process

• Compliance with Corporate Governance standards

Investor Relations

• Ineffective communication with investors during and post IPO

Capital Markets Compliance

• Have procedures been established to ensure compliancewith transparency and disclosure rules

Project management Other considerations

October 2009

Agenda for remuneration

• What happens to existing incentives?

• Market practice

- How is the package structured in similar listed companies and how relevant is this?

- What quantum of package is market practice?

• Developing total reward packages

- Benchmark each element

- Incentives to be consistent with business objectives and investor requirements

- Taxation? Co-investment?

- Wider employee share plans

• Governance

- Remuneration Committee appointment, terms of reference, process

- Contracts

- Investor bodies

Areas to consider

October 2009

Key pay differences between listed and PE backed companies

• Fixed pay targeted around median,incentives geared to deliver upper quartile

• Have been big annual increases

• Annual bonuses based on mix of financialand personal performance

• Rolling annual awards made under LTIPs

• Very consistent performance conditionsacross companies (Relative TSR, EPS)

• Generally not tax efficient

Listed companies

• Fixed pay may be lower due to lowerincreases

• Financially driven bonuses

• One LTIP targeted at exit

• Tax efficient

Portfolio companies

But the typical listed model is flawed, careful consideration can provide a much betterremuneration structure

October 2009

Annual bonuses can have a range of performance conditions

FTSE 250, Source PwC Monks and IVIS

0 10 20 30 40 50

Financial, Individual

and non-financial

Financial and non-

financial

Financial and

individual

Financial only

% of companies

October 2009

Typical listed company LTIP – is this right for you?

• Half the payment is based on company’s TotalShareholder Return* versus a comparator groupover a 3 year period

• Nothing vests for below median performance

• 25% vests at median

• 100% vests for upper quartile performance

• EPS measure is anchored to inflation, eg 25%vests for EPS of RPI+5% pa, 100% vests forEPS of RPI+10% pa measured over a 3 yearperiod

50% Relative TSR*, 50% EPS

On IPO, businesses have a natural anchor to performance – the listing price – and abusiness plan that should be well understood by the market. LTIPs should be builtaround delivering this plan and growing the value to investors.

*Total Shareholder Return or TSR is the return an investor would receive through combination of share price increases anddividends. Dividends are reinvested into the shares.

• Choosing appropriate comparators

• Volatility of share prices

• External shocks

• Issue of cliffs at median and upper quartile

• Poor performance one year creates a low basethe next

• Little attempt to differentiate based on realbusiness prospects

Some issues with this

October 2009

Benchmarking the total package

Build up approach avoids gaming individual elements

Base Total cash (inc bonus) Total direct prospective on-target

earnings (inc LTIP)

Total prospective on-target

remuneration (inc pension)

Directors

October 2009

Taxation

• Listed company plans are generally subject to income tax + national insurance –effective rate 51.5% for highest earners

• Increasing focus on tax efficient plans since 2009 Budget

- Approved plans

- Joint Ownership Plans

- Special classes of shares

• Pensions no longer efficient for highest earners. Alternatives being consideredinclude:

- Employer Financed Retirement Benefit Schemes (EFRBS or ‘unapprovedpension’)

- Employee trusts

- Paying as cash

- Emigrating!

This is an area of rapid change in the listed world

October 2009

All employee plans

• Company Share Option Plan (‘approved options’)

- Market value options with face value limit of £30,000

- No income tax, CGT paid on sale unless covered by annual exemption

- Corporation tax relief on gains

• Save As You Earn

- Discounted option plan linked to savings vehicle, limited to £250 per month

- Achieves CGT & CT deduction

• Share Incentive Plan

- Partnership shares up to £1,500 pa

- Matching shares up to 2x or £3,000 pa

- Free shares up to £3,000 pa

- Achieves CGT & CT deduction

• All plans subject to holding shares / options for set period of time and otherrestrictions

These plans provide a tax efficient means to invest in the business

October 2009

Governance

• Remuneration Committee

- Establish committee, agree terms of reference and meeting cycle

- Committee reviews performance and ultimately determines awards

• Contracts

- 12 month max is normal

- Mitigation on leaving

- Bonuses, LTIPs typically pay pro-rata to time and performance for good leavers

• Investors

- A number of shareholder bodies will comment on remuneration every year

- Adverse comments take the form of ABI ‘Red Top’ and vote against recommendations

- May lead to a vote against a remuneration report

- This can lead to reputational issues for the Remuneration Committee and the business

• Establish transparent policies and procedures early

Governance is closely monitored by investors in listed companies

October 2009

IPO ReadinessAn approach that works

Post investment Pre-IPO preparation

Timetable

Maximising value post initialinvestment

Pre-IPO preparation IPO preparation Marketing / Pricing

Performanceimprovement

Financial trackrecord

Duediligence

Corporate and taxstructure

Transaction structuringand finance

considerations

Financial reportingprocedures andinternal controls

Corporate governance

12-24 months

6-9 months

4-5 months

1 months

• Strategy and equity story

• Identify and deliverperformance improvementinitiatives

• Consider strategicacquisition / divestment

• Appoint key managementteam

• Availability of threeyear IFRS trackrecord

• Complex financialhistory (materialacquisitions)

• Carve out financialstatements

• Conversion toIFRS

• Selection ofappropriate policies

• Availability ofinformation

• Early understandingof key issues andequity story

• Understanding ofunderlyingperformance /trends across trackrecord period

• Legal structure(transparency andownership)

• Related partytransactions

• Tax considerations:

– Pre IPOrestructuring

– Minimising tax onIPO proceeddistributions

– Managing futureeffective tax rate

– Holding companylocation

– Preservation oftax losses

• Need to restructurebusiness pre IPO

• Impact of dividendcapacity and policy

• Location of Hold co

• Index inclusionconsiderations

• Ability to meetcontinuingobligations (LP2)

• Budgeting andforecastingprocesses

• Managementinformation

• Group tax andtreasury

• IT systems

• Internal audit

• Compliance withCombined Code

• Composition/structure of theboard andcommittees

• Risk management

• Regulatoryconsiderations

• Corporate andsocial responsibility

October 2009

IPO ReadinessAn approach that works

Phase 1 Phase 2 Phase 3

Pre-IPO IPO Post-IPO

IPOHealth-check

ReadinessAssessmentandImplementation Plan

ProjectSet Up

Deliveringthe IPO

Embedding change

Phase 1.1 Phase 1.2 Phase 1.3

Agreed IPO implementationplan

Detailed IPO readinessassessment workshops

IPO health-check identifyingkey issues

October 2009

Panel Discussion

October 2009

Appendices

October 2009

Twin track approach

Tradesale

Historicalfinancials /

business plan

Informationmemorandum

Vendor duediligence

DataroomShare

purchaseagreement

Auctionprocess

Historicalfinancials /

business planProspectus

Financialinformation,

comfort letterAudits

Regulatoryfilings

Marketing,roadshowsand pricing

Regulatory / investor protection driven

Subject to regulated timeline

More commercially / diligence focused

Ability to compress timetable

October 2009

Delivering a successful IPO

• Equity story and strategy

• IFRS track record andconversion

• Legal and tax considerations

• Financial reporting procedures

• Corporate governance

• Due diligence

• Prospectus

• Verification

• Investor education

• Roadshow

• Regulatory approvals

Pre-IPO preparation IPO preparation Marketing / Pricing

4 – 5 months

1 month

October 2009

Illustrative timelineA lot to do in a short period of time

Regulation anddocumentation

Marketing

Companyunderwritersadvisors

Auditors/reporting accountants

General

Month 6Month 5Month 4Month 3Month 2Month 1Flotation timeline

Transaction, shareholder and debt structure finalised Appointment of underwriters (beauty contest) Appointment of advisers (financial, legal, IR) Preparation of investor story General planning, timetable and preparation Discussions with UKLA

Historical financial statements and interim financial statements Conversion to IFRS Financial reporting proceduresWorking Capital report Profit forecast (if applicable) and pro forma report, if any Comfort letters plus review of prospectus

Business and financial due diligence Legal due diligence Draft legal documents Prospectus preparation and verification

Announcement ofpossible listing

Pre-marketing Broker research Prepare investor

relations function Preparation for road

Confirmation ofeligibility

Prospectus verification Drafting prospectus plus comment letter regulator Prospectus vetting and approval

October 2009

IPO windows

31 Dec

2010 timeline

30 Jun1 Jan

List using 31 December2009 audited financial

statements

List using 30 June 2010audited interim financial

statements

144A 135 day rule - 31 Decfinancials go stale

Audited accountsproduced

At 30 June the 31 Decfinancials go stale under

UK Listing Rules (9months for Prospectus

Rules)

30 June Auditedaccounts produced

with unauditedcomparatives

31 Dec30 Jun1 Jan

IPO window

144A 135 day rule -30 June financials go

IPO window

FSA review

October 2009

Exchange requirements

The following table provides a high level analysis of the significantrequirements and differences of six international exchanges

Profit forecast

Pro forma financial information

Compliance with exchange's local GAAP4

Working capital

Capitalisation and indebtedness

Retailed party transaction disclosure

Major transaction disclosure5

Major transaction pre-approval

Quarterly reporing5

Half year reporting5

Annual reporting

Ongoing requirements – financial information

Difference between domestic and overseas listed companies

Trading support structure

Internal control certification

Corporate governance

€1 million£700 thousand€5 million$750 million$8 million• Market capitalization3

25%25% of class of shareslisted to be held in

public hands

Minimum 25% of issuedshare capital or 5% if this

represents €5 million

1,100 thousand750 thousand• Minimum shares traded on market

500500400 round lotshareholders

• Minimum number3

Investors

Applicant must be able todocument a profitable trackrecord OR document that ithas sufficient funding for at

least 12 months

Sum of last threeyears: $10 million

Minimum in each of thetwo most recent years:

$2 million

Sum of last three fiscalyears: $2.2 million

No losses in prior threeyears

• Profits3

$75 million$90 million• Revenues2

NASDAQ OMXLondon Stock ExchangeNYSE Euronext

• Audited track record1

Financial information

Initial listing criteria

Stockholm ExchangeAIMMain marketEuronext AmsterdamNYSENASDAQ Global Select2

Significant requirements

Some requirements

Minimal requirements

Notes:

1 AIM requires an audited track record, if oneexists

2 NASDAQ Global Select (NASDAQ) is themarket with the most stringent initial listingrequirements among the three marketscomprising The NASDAQ Stock Market

3 When initially listing on NASDAQ, companiesmust meet the criteria for revenues or profits.When listing on the AMEX, companies mustmeet any one of the criteria for revenues,profits, minimum number of investors or marketcapitalisation.

4 In the US, the SEC eliminated the requirementfor Foreign Private Issuers (“FPIs) to reconciletheir financial statements to US GAAP wherethey have been prepared under IFRS aspublished by the IASB

In the UK, non-EU issuers are permitted to useaccounting standards other IFRS, provided thatthe country issuing those standards has, by 30June 2008. publicly committed to either adoptIFRS or to converge with IFRS by 31 December2011. Additionally, the EU has specificallypermitted non-EU issuers to use US GAAP andCanadian GAAP

5 FPS in the US only need to follow their homecountry’s rules

6 If particular criteria are not met, consultationwith the exchange is recommended

October 2009

IPO readiness – a tried and tested approach

Two stage approach

High level IPO healthcheck workshop with keymanagement/houses toidentify key issues

Detailed readinessassessment workshopsto understand the issuesand develop a detailedremediation plan

Readiness assessment typically covers:

• Corporate and tax structure

• Transaction structure

• Financing and tax considerations

• Financial track record

• Financial reporting procedures andinternal controls

• Corporate governance

October 2009

Scope of IPO readiness

• Legal structure(transparency andownership)

• Related partytransactions

• Tax considerations:

- Pre-IPOrestructuring

- Minimising taxon IPO proceeddistributions

- Managing futureeffective tax rate

- Holding companylocation

- Preservation oftax losses

• Availability ofinformation

• Early understandingof key issues

• Understanding ofunderlyingperformance

• Need to restructurebusiness pre IPO

• Impact of dividendcapacity and policy

• Location of Hold co

• Index inclusionconsiderations

Corporate andtax structure Due diligence

Transactionstructuring andfinanceconsiderations

• Ability to meetcontinuingobligations (LP2)

• Budgeting andforecastingprocesses

• Managementinformation

• Group tax andtreasury

• IT systems

• Internal audit

• Availability of threeyear IFRS trackrecord

• Complex financialhistory (materialacquisitions)

• Carve out financialstatements

• Conversion to IFRS

• Selection ofappropriate policies

Financialreportingprocedures andinternal controls

Financial trackrecord

• Compliance withCombined Code

• Composition/structure of theboard andcommittees

• Risk management

• Regulatoryconsiderations

• Corporate and socialresponsibility

Corporategovernance

October 2009

Base pay increases

2004 2005 2006 2007 2008 2009

Other Directors

October 2009

Annual bonuses

2004 2005 2006 2007 2008 2009

Maximum bonusopportunity

Actual bonus payments

October 2009

Performance metrics – annual bonuses

0 10 20 30 40 50

Financial, Individual

and non-financial

Financial and non-

financial

Financial and

individual

Financial only

% of companies

October 2009

Non financial metrics

0 10 20 30 40 50 60

People

Risk Management

Shareholder measures

Project

Production

Operation

Customer

Corporate responsibility

Strategy

Health & safety

Personal targets

% of companies

October 2009

Deferred annual bonuses (DABS)

Compulsory

Voluntary

Combination (compulsary and voluntaryelements)

October 2009

LTIP expected value

2004 2005 2006 2007 2008 2009

Lower quartile

Median

Upper quartile

October 2009

Form of long term incentive

2003 2009

October 2009

LTIP performance conditions

Deferred bonus match ESOS LTIP

EPS and other measures

Other measures

EPS only

TSR and other measures

TSR and EPS

TSR only

October 2009

Total remuneration

Base Total cash (inc bonus) Total direct prospective on-target

earnings (inc LTIP)

Total prospective on-target

remuneration (inc pension)

Directors

October 2009

Non-Executive Director fees

2005 2006 2007 2008 2009

00 Non-executive chairman

Non-executive director

This publication has been prepared for general guidance on matters of interest only, and does not constituteprofessional advice. You should not act upon the information contained in this publication without obtaining specificprofessional advice. No representation or warranty (express or implied) is given as to the accuracy or completenessof the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP,its members, employees and agents do not accept or assume any liability, responsibility or duty of care for anyconsequences of you or anyone else acting, or refraining to act, in reliance on the information contained in thispublication or for any decision based on it.

© 2009 PricewaterhouseCoopers LLP. All rights reserved. ‘PricewaterhouseCoopers’ refers toPricewaterhouseCoopers LLP (a limited liability partnership in the United Kingdom) or, as the context requires, thePricewaterhouseCoopers global network or other member firms of the network, each of which is a separate andindependent legal entity.

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