But the deal Naude is trying to put together is different from the private equity bids so far.
If either of those two equity investors had bought Billabong, they would have likely brought in their own, trusted management to take over. That deal is called a management buy-in.
If Naude’s deal is a typical management buyout, he will ask a private equity fund to buy the majority of Billabong, say 80-90%, partly with its own funds and partly with bank debt. Then he and a team of company’s existing management buys the remaining 10-20%.
Typically, the private equity investor will reduce the amount the directors pay to about 1%-2% of the company’s value, using a complicated structure of preferred shares and mezzanine debt.
But the effect is straightforward: the potential return to the company’s senior leadership will be directly tied to an increase in the share price of the newly private company.
Woodthorpe says: “Managers have a lot at stake; skin in the game. The manager in a listed company will have a token handful of shares. In an MBO, managers are very much rewarded on performance of company; in absolute terms, on how much it gets sold for.”
The advantage of using existing management – as almost every private company knows – is that they are very knowledgeable about the business and what its problems are.
There are risks, however.
Markets can go wrong (and Billabong is already struggling with its retail business), investment funds can run out before the project is completed, or managers and investors can fall out over the best strategy to solve a company’s problems.
However, private equity involvement solves two problems faced by private companies that are run by their owners.
Having a private equity investor on the board provides a sounding board for ideas from an owner who is not bogged down in day-to-day decision-making is one advantage; the other is that the project has a time limit – typically three to five years – after which the company is sold and the investment realised.
In other words, one of the major headaches for private companies – succession planning – is agreed upon from the get-go.
This article first appeared on LeadingCompany.
