In line with international trends, leveraged buy-out transactions (LBOs) are expected to continue to trend in South African M&A private transactions in 2024, marking a resurgence after declining post the 2008 financial crisis.
LBOs serve diverse purposes, including acquiring immovable property, competitors, or facilitating management buy-outs. Private equity firms frequently employ LBOs to acquire companies (the Target).
In an LBO, the acquiring private equity firm (the "Sponsor") (for example) gains control of the Target's shares, often characterized by low debt levels, stable cash flows, tangible assets, and growth potential.
The Sponsor typically invests a portion of its own capital while financing the majority (usually 50-80%) through debt, which is repaid using the Target's cash flows, with the Target’s assets serving as collateral.
LBO structures vary, such as downstream mergers where the acquiring company is merged into the Target, transferring both interest and capital repayment obligations to the Target. Alternatively, "debt pushdown" mechanisms result in a portion of the buyer's borrowing moving into the operational Target entity.
In structuring an LBO it is important to fully understand the financial and tax drivers that will have a bearing on the transaction.