Page 17 - SONEPAR 2021 - AcquisitionBook

PHASE 1:
STRATEGIC ANALYSIS
PHASE 2:
EXPLORATORY PHASE
PHASE 3:
LETTER OF INTENT
PHASE 4:
DUE DILIGENCE
PHASE 5:
SALE & PURCHASE AGREEMENT
PHASE 6:
CLOSING
PHASE 7:
INTEGRATION & FOLLOW-UP
ROCE AFTER 3 YEARS
Prepare a BUSINESS CASE and an ACQUISITION SHEET
PAYBACK
The payback will indicate in how many years SONEPAR will recover the ENTERPRISE VALUE invested in the acquisition through the generation of free cash flows after the transaction.
% VALUE RETAINED 2
This ratio indicates the difference between the value of the acquisition through a DCF considering all the potential synergies and the ENTERPRISE VALUE that we propose to offer. The smaller this ratio gets, the closer we get to a potential impairment in the short-term.
• Time period:
Between 3 to 5 years after acquisition CLOSING, depending on each case;
• Profitability condition:
It is preferable to use as a calculation base for the EARN OUT a cumulated period longer than 1 year (3 or 5 years, for example) and to pay only one EARN OUT based on the whole time period than to pay several EARN OUTS (e.g. one instalment per year). The reason is that in the first case negative performance of one year can be used to offset the positive performance of the rest of the period;
• Contractual definition:
It is important to draft a detailed and accurate definition of the calculation base for the EARN OUT (for example, the EBIT, EBITDA or NET DEBTS and with/without IFRS-16). Management fees and other intercompany costs are key points to be discussed with the seller and addressed in the SPA. Future acquisitions that may be made by the target company must also be anticipated;
• EARN OUTS vs integration:
As results of the target company should be measurable and comparable to calculate the EARN OUT, the use of EARN OUTS may delay the target’s integration and the realization of potential synergies (e.g. impossibility to merge the companies).
The ROCE of an acquisition will be computed in the following way:
For target companies with sales over €50 million where a PPA test will be applied, EBIT will be reduced by the depreciation of the customer relationship.
The synergies of the transaction will be reflected in the EBIT as well as in the optimization of WORKING CAPITAL. Capital employed could consider further investment needed to complete these synergies.
2.3.6 EARNOUT
An EARN OUT is a complement of price to be paid to the seller based on the target’s future results.
➜ When are EARN OUTS useful?
• To retain the senior managers when they are also the sellers: An EARN OUT will typically incentivize the managers to keep working for the target after the sale with a view to sustaining the target’s growth and profitability and thus maximizing the cash out in a short-term future. Also, replacing the management in place may be difficult in the short-term;
• To link part of the price to the target’s future performance: An EARN OUT can offer the purchaser some protection against the risk of overpaying for the target by conditioning the payment of part of the purchase price upon the achievement of specified results;
• To take account of sellers’ ambitious growth plans: Sellers often prepare business plans showing ambitious growth compared to historical figures as they intend to maximize the target’s ENTERPRISE VALUE. In such cases, part of the price could be completed with an EARN OUT.
➜ Guidelines when using EARN OUTS:
• Presence in the Company:
The first condition to pay an EARN OUT is that sellers continue to work in the Company by the time of its payment due date;
EBIT/(Capital employed + acquisition GOODWILL)
2.3.7 FINANCIAL VALUATION FOR ASSET DEALS
M&A transactions may include two types of deals:
➜ Asset acquisitions (“asset deals”): In this type of transaction, SONEPAR is buying only the business of a legal entity, i.e. typically its customers/contracts portfolio, rights over certain employees and tangible and intangible assets. Outstanding debts, liabilities as well as cash and shares are typically excluded from this kind of transactions;
➜ Share acquisitions (“share deals”): In this type of transaction, SONEPAR is buying the shares (capital stock) of a legal entity. Subject to the terms of the contractual documentation, all existing assets (including outstanding debts), actual and potential liabilities attached to previously performed work, as well as the acquired legal entity’s cash, are automatically transferred together with the shares of that legal entity.
The type of deal chosen will depend on strategic, legal, regulatory, operational and tax factors to be assessed by the project team in charge.
The financial valuation of a business should not be much different in a share vs an asset deal. Usually the main difference in the ENTERPRISE VALUE will be the financial debt and the tax debt.
When calculating the valuation of an asset deal, the balance sheet of the target company must be adjusted so that the ENTERPRISE VALUE will reflect the normalized level of WORKING CAPITAL of the target company.
SONEPAR - ACQUISITION MANUAL - 2021 - FOR INTERNAL USE ONLY 15