Stapled Financing Juices M&A Competition
S tapled financing, once used predominantly by the bulge bracket firms in billion-dollar deals, is becoming more prevalent in mid-market publishing deal circles, thanks to favorable lending terms. BMO Capital Markets, for one, has leveraged its ability to offer stapled financing packages along with M&A advisory services in an attempt lure private equity firms away from competing “boutique” banks, such as Jordan, Edmiston, DeSilva & Phillips or AdMedia Partners, to name a few. However, stapled financing might just be a gimme that lets private equity go back to their own lending community with better negotiating leverage, rather than a disruptive tool that has any impact on who wins a deal.
A stapled financing package, so named, from its origins as a fully financed deal “stapled” to the offering memorandum, and commonly also referred to as “staple” financing, essentially sums up the debt capacity of the seller and outlines what buyers can borrow and how much they’ll have to come up with in equity. Investment banks can offer one when representing the seller. The boutiques, without a balance sheet, can’t create their own staples. However, they can go to a third party lender and build a stapled package, too.
Todd Freeland, managing director and head of the Media Communications & Technology group at BMO Capital Markets, says, “Particularly for private equity buyers who are going to be using leverage as a key component of their acquisition capital structure, knowing the debt capacity of the target is very important to them.”
For example, if a business is worth $100 million, a private equity buyer will want to know if it can put $30 million or $70 million of debt on that business, which impacts their equity contribution. “The staple is where the sell-side advisor would also provide committed financing to buyers,” says Freeland. “So when we take a company to market we can tell buyers here’s the company, here’s why it’s a good investment opportunity, and, we’re prepared to finance a significant percentage of the purchase price on this business if you buy it.”
He adds that BMO targets billion-dollar deals, though wouldn’t rule out deals in the $100 million to $500 million range, and has a leg up on competing brokers due to its ability to offer turnkey services, from advising to lending.
“I think that’s a function of the debt market becoming more competitive and so more providers are willing to, up front, provide this staple financing as part of a potential transaction, especially when it’s an investment bank that has that capability,” says one source at a private equity firm who declined to be named. “That said, does it differentiate a sale? I would say probably not. What happens is guys like us take that and use it as a benchmark and we go to our resources and we see if that’s a good one, a bad one, or somewhere in between. A majority of the time a private equity firm will go to its preferred providers and get leverage.”
Thomas Kemp, managing director at Veronis Suhler Stevenson, says, “I think as much as anything else it’s more of a marketing device than a practical financing mechanism. I think the percentage of conversion is relatively small.”
Nevertheless, Kemp notes that Kelly Conlin, former CEO of Primedia Business, hired CSFB specifically for their stapled financing services. VSS itself sold both Canon and Hanley Wood with stapled financing provided through third-party lenders.
New Competition for Boutiques?
While staple packages may be more common in the billion-dollar deals, they’ll easily dip into the sub-$100 million range. And the deals BMO is seeking out, especially now with the addition of former VSS bankers Andrew Buchholtz and Seth Rosenfield, are likely to compete with the boutique brokers. But Roland DeSilva, managing partner at DeSilva & Phillips, doesn’t see staples as any particular threat. “It’s always a competitive issue. We have the ability to put staple financing on mid-market and larger deals because there are a number of financing institutions that we have strong relationships with who are lending or want to lend into this market.”
And stapled financing, as the private equity firms can attest, is far from a take it or leave it proposition. “What some investment banks do is they use their own money or go to syndication for staple and may use it as a loss leader to get the banking relationship,” says DeSilva. “This is sometimes a good tactic, but the buyers are still going to shop the staple. However, in the vast majority of cases we can match or better the staple from other sources.”