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

Transcription

1 Facing today, tomorrow and the day after* *connectedthinking

2 IPO readiness: Planning for exit Ashley Coups Private Equity Assurance Leader, Slide 2

3 Recent headlines Aviva to raise EURO 1.1Bn In Delta Lloyd IPO Private equity looks to float again in 2010 Ocado planning 350m share sale Pets at Home groomed for 2010 flotation Plans for IPOs to be aired by BC partners Slide 3

4 Introductions Mark Hughes Sophie Rooke Capital Markets Group Partner Capital Markets Group Director Marissa Thomas Julian Samsun M&A Private Equity and Tax Partner Human Resource Services Partner Slide 4

5 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 Slide 5

6 Your objectives Maximise value on exit Execution of strategy and development of compelling equity story Strong cash conversion Maintain flexibility of exit routes Initial Public Offering (IPO) Trade sale Sale or strategic deal with another private equity investor Refinancing Minimise disruption to the business and avoid delays and surprises Rigorous up front planning providing flexibility on timing of exit Minimise need for top up work Slide 6

7 Managing the exit key issues Maximising value Good track record Experienced management team IPO Value Robust management information Clear strategy and compelling equity story Trade sale Twin Track Recognisable sustainable brand Strong cash management Strategic deal / PE sale Acquisition Investment Exit Slide 7

8 Which market? 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 the business Expectation other stakeholders Listing location peers Where to list? Regulation Admission criteria Prospectus Rules Continuing obligations Indices Indices structure the stock markets and channel investor attention increasing liquidity of shares Certain indices are limited to domestic companies only Slide 8

9 Identify the issues up front Strong equity story and track record Need for a compelling equity story and evidence of successfully managing business through the downturn Be ready to access market quickly when IPO market reopens Selection of market Preparing for life as a public company Establish high quality corporate governance standards underpinned by robust management information and management reporting systems: - Building an experienced board of directors - Implementing systems and processes to enable timely reporting of information - Developing appropriate risk management, audit, compliance procedures Other deal related matters: tax structuring, distributable reserves, incentive arrangements Complexity of financial track record Accounting complexities including the conversion from local GAAP to IFRS, availability of consolidated financial information Complexity of financial track record - need for carve out financial information - impact of acquisitions/disposals buy & build - identification of issuer - impact of refinancing structures Benefits of rigorous planning Planning and good preparation are crucial for a successful flotation. Issues highlighted at this early stage can be tackled prior to the offering commencing, thereby minimising potential unpleasant surprises and making the most of unexpected advantageous situations Identify a strong project manager who understands the process Ensure shareholder and management objectives aligned Anticipate political obstacles including regulatory and competition clearances Slide 9

10 Overview of requirements Eligibility conditions in London (similar to other jurisdictions) Appointment of a sponsor/nominated adviser and broker Production of prospectus or admission document Clean three year track record Two years IFRS (or equivalent) US GAAP accepted At least 75% of business should be supported by revenue earning track record for 3 year period Audited numbers must not be more than 6 months old Interim financial information if document is dated more than 9 months after end of last audited financial year Adequate controls to meet continuing obligations Adequate financial reporting procedures Sufficient working capital for at least 12 months from the date of the prospectus At least 25% shares in public hands Main Market PwC s Which Market? publication Slide 10

11 A strong financial track record is key Financial track record in London (similar to other jurisdictions) 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 business across the track record) Other Will interim financial information (including comparatives) be needed? Slide 11

12 IPO windows IPO in 2010 using 3 years to December Jan Dec Dec Dec Jun Conversion to IFRS Dec audited accounts produced Early Mar At 30 June the 31 Dec 2010 financials go stale under UK Listing Rules (9 months under Prospectus Rules) Pre-IPO preparation complete. IPO preparation commences FSA review IPO window Slide 12

13 Common pitfalls: Prepare the business early for life as a public company it takes time Transaction structure Early determination of which entity will list Creation of distributable reserves for future dividends / elimination or reserves blocks Determination of appropriate capital structure, including debt level Slide 13

14 Common pitfalls: Prepare the business early for life as a public company it takes time Tax considerations Unwinding and simplification of the acquisition structure Impact required restructuring and proceeds distribution to investors Managing dividend withholding tax leakage Understanding the group future tax rate Understanding and disclosure of the inherent tax risks Slide 14

15 Common pitfalls: Prepare the business early for life as a public company it takes time Financial reporting and control environment Need to upgrade systems, procedures and controls pre IPO Difficulty in producing interim consolidated financial statements within required time frame Need for robust budgeting and forecasting processes and cash flow management Ensure clarity of what needs fixing pre IPO and what enhancements are to be made post IPO Slide 15

16 Common pitfalls: Be clear on the issues up front and establish a strong project team Project management Limited up front planning does not identify all issues up front Lack of dedicated project drivers with sufficient influence across business Clear ownership of project at board level Workstream owners have insufficient resources to deliver workstreams in addition to performing the day job Management and owner objectives not fully aligned Other considerations Will non-financial metrics be needed to market offer and enhance value and are they robust and verifiable Effective post IPO incentive plans not designed/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 compliance with transparency and disclosure rules Slide 16

17 Agenda for remuneration Areas to consider 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 Slide 17

18 Key pay differences between listed and PE backed companies Listed companies Fixed pay targeted around median, incentives geared to deliver upper quartile Have been big annual increases Annual bonuses based on mix of financial and personal performance Rolling annual awards made under LTIPs Very consistent performance conditions across companies (Relative TSR, EPS) Generally not tax efficient Portfolio companies Fixed pay may be lower due to lower increases Financially driven bonuses One LTIP targeted at exit Tax efficient But the typical listed model is flawed, careful consideration can provide a much better remuneration structure Slide 18

19 Annual bonuses can have a range of performance conditions FTSE 250, Source PwC Monks and IVIS Financial only Financial and individual Financial and nonfinancial Financial, Individual and non-financial % of companies Slide 19

20 Typical listed company LTIP is this right for you? 50% Relative TSR*, 50% EPS Half the payment is based on company s Total Shareholder Return* versus a comparator group over 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 for EPS of RPI+10% pa measured over a 3 year period Some issues with this TSR Choosing appropriate comparators Volatility of share prices External shocks Issue of cliffs at median and upper quartile EPS Poor performance one year creates a low base the next Little attempt to differentiate based on real business prospects On IPO, businesses have a natural anchor to performance the listing price and a business plan that should be well understood by the market. LTIPs should be built around 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 and dividends. Dividends are reinvested into the shares. Slide 20

21 Benchmarking the total package Build up approach avoids gaming individual elements Median remuneration ' CEOs CFOs Directors Base Total cash (inc bonus) Total direct prospective on-target earnings (inc LTIP) Total prospective on-target remuneration (inc pension) Slide 21

22 Taxation This is an area of rapid change in the listed world 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 considered include: - Employer Financed Retirement Benefit Schemes (EFRBS or unapproved pension ) - Employee trusts - Paying as cash - Emigrating! Slide 22

23 All employee plans These plans provide a tax efficient means to invest in the business 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 other restrictions Slide 23

24 Governance Governance is closely monitored by investors in listed companies 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 Slide 24

25 IPO Readiness An approach that works Maximising value post initial investment Pre-IPO preparation IPO preparation Marketing / Pricing months Timetable 6-9 months 4-5 months 1 months Post investment Pre-IPO preparation Performance improvement Financial track record Due diligence Corporate and tax structure Transaction structuring and finance considerations Financial reporting procedures and internal controls Corporate governance Strategy and equity story Identify and deliver performance improvement initiatives Consider strategic acquisition / divestment Appoint key management team Availability of three year IFRS track record Complex financial history (material acquisitions) Carve out financial statements Conversion to IFRS Selection of appropriate policies Availability of information Early understanding of key issues and equity story Understanding of underlying performance / trends across track record period Legal structure (transparency and ownership) Related party transactions Tax considerations: Pre IPO restructuring Minimising tax on IPO proceed distributions Managing future effectivetax rate Holding company location Preservation of tax losses Need to restructure business pre IPO Impact of dividend capacity and policy Location of Hold co Index inclusion considerations Ability tomeet continuing obligations (LP2) Budgeting and forecasting processes Management information Group tax and treasury IT systems Internal audit Compliance with Combined Code Composition/ structure of the board and committees Risk management Regulatory considerations Corporate and social responsibility Slide 25

26 IPO Readiness An approach that works Phase 1 Phase 2 Phase 3 IPO Health-check Readiness Assessment and Implementatio n Plan Project Set Up Delivering the IPO Embedding change Pre-IPO IPO Post-IPO Phase 1.1 Phase 1.2 Phase 1.3 IPO health-check identifying key issues Detailed IPO readiness assessment workshops Agreed IPO implementation plan Slide 26

27 Panel Discussion Slide 27

28 Appendices Slide 28

29 Twin track approach More commercially / diligence focused Ability to compress timetable Trade sale Historical financials / business plan Information memorandum Vendor due diligence Dataroom Share purchase agreement Auction process IPO Historical financials / business plan Prospectus Financial information, comfort letter Audits Regulatory filings Marketing, roadshows and pricing Regulatory / investor protection driven Subject to regulated timeline Slide 29

30 Delivering a successful IPO Pre-IPO preparation IPO preparation Marketing / Pricing 4 5 months 1 month Equity story and strategy IFRS track record and conversion Legal and tax considerations Financial reporting procedures Corporate governance Due diligence Prospectus Verification Investor education Roadshow Regulatory approvals Slide 30

31 Illustrative timeline A lot to do in a short period of time Flotation timeline Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 General 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 Auditors/reportin g accountants Company underwriters advisors Historical financial statements and interim financial statements Conversion to IFRS Financial reporting procedures Working 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 Pathfinder day Impact day Regulation and documentation Confirmation of eligibility Prospectus verification Drafting prospectus plus comment letter regulator Prospectus vetting and approval Marketing Announcement of possible listing Pre-marketing Broker research Prepare investor relations function Preparation for road show Slide 31

32 IPO windows 1 Jan 2010 timeline 30 Jun 31 Dec List using 31 December 2009 audited financial statements Audited accounts produced Early Mar 15 May 144A 135 day rule - 31 Dec financials go stale At 30 June the 31 Dec financials go stale under UK Listing Rules (9 months for Prospectus Rules) FSA review IPO window 1 Jan 30 Jun 31 Dec List using 30 June 2010 audited interim financial statements 30 June Audited accounts produced with unaudited comparatives Early Sep FSA review 12 Nov 144A 135 day rule - 30 June financials go stale IPO window IPO window closes last 2 weeks Slide 32

33 Exchange requirements The following table provides a high level analysis of the significant requirements and differences of six international exchanges NYSE Euronext London Stock Exchange NASDAQ OMX Key: NASDAQ Global Select 2 NYSE Euronext Amsterdam Main market AIM Stockholm Exchange Significant requirements Initial listing criteria Some requirements Financial information Minimal requirements Audited track record 1 Revenues 2 $90 million $75 million Profits 3 Sum of last three fiscal Sum of last three years: $2.2 million years: $10 million No losses in prior three Minimum in eachof the years two most recent years: Compliance with exchange's local GAAP 4 $2 million Profit forecast Pro forma financial information Working capital Capitalisation and indebtedness Investors Minimum number round lot 500 shareholders Minimum shares traded on market 750 thousand 1,100 thousand Minimum 25% of issued 25% of class of shares share capital or 5% if this listed to be held in represents 5 million public hands Market capitalization 3 $8 million $750 million 5 million 700 thousand Corporate governance Internal control certification Trading support structure Difference between domestic and overseas listed companies Ongoing requirements financial information Annual reporting Half year reporting 5 Quarterly reporing 5 Major transaction pre-approval Major transaction disclosure 5 Retailed party transaction disclosure Applicant must be able to document a profitable track record OR document that it has sufficient funding for at least 12 months % 1 million Notes: 1 AIM requires an audited track record, if one exists 2 NASDAQ Global Select (NASDAQ) is the market with the most stringent initial listing requirements among the three markets comprising The NASDAQ Stock Market 3 When initially listing on NASDAQ, companies must meet the criteria for revenues or profits. When listing on the AMEX, companies must meet any one of the criteria for revenues, profits, minimum number of investors or market capitalisation. 4 In the US, the SEC eliminated the requirement for Foreign Private Issuers ( FPIs) to reconcile their financial statements to US GAAP where they have been prepared under IFRS as published by the IASB In the UK, non-eu issuers are permitted to use accounting standards other IFRS, provided that the country issuing those standards has, by 30 June publicly committed to either adopt IFRS or to converge with IFRS by 31 December Additionally, the EU has specifically permitted non-eu issuers to use US GAAP and Canadian GAAP 5 FPS in the US only need to follow their home country s rules 6 If particular criteria are not met, consultation with the exchange is recommended Slide 33

34 IPO readiness a tried and tested approach Two stage approach 1 2 High level IPO health check workshop with key management/houses to identify key issues Detailed readiness assessment workshops to understand the issues and develop a detailed remediation plan Readiness assessment typically covers: Corporate and tax structure Transaction structure Financing and tax considerations Financial track record Financial reporting procedures and internal controls Corporate governance Slide 34

35 Scope of IPO readiness Corporate and tax structure Due diligence Transaction structuring and finance considerations Financial reporting procedures and internal controls Financial track record Corporate governance Legal structure (transparency and ownership) Related party transactions Tax considerations: - Pre-IPO restructuring - Minimising tax on IPO proceed distributions - Managing future effective tax rate - Holding company location - Preservation of tax losses Availability of information Early understanding of key issues Understanding of underlying performance Need to restructure business pre IPO Impact of dividend capacity and policy Location of Hold co Index inclusion considerations Ability to meet continuing obligations (LP2) Budgeting and forecasting processes Management information Group tax and treasury IT systems Internal audit Availability of three year IFRS track record Complex financial history (material acquisitions) Carve out financial statements Conversion to IFRS Selection of appropriate policies Compliance with Combined Code Composition/ structure of the board and committees Risk management Regulatory considerations Corporate and social responsibility Slide 35

36 Base pay increases FTSE 250, Source PwC Monks and IVIS % Base pay increase 5 4 CEO Other Directors ZERO Slide 36

37 Annual bonuses FTSE 250, Source PwC Monks and IVIS Bonus as % base salary Maximum bonus opportunity Actual bonus payments Slide 37

38 Performance metrics annual bonuses FTSE 250, Source PwC Monks and IVIS Financial only Financial and individual Financial and nonfinancial Financial, Individual and non-financial % of companies Slide 38

39 Non financial metrics FTSE 250, Source PwC Monks and IVIS Personal targets Health & safety Strategy Corporate responsibility Customer Operation Production Project Shareholder measures Risk Management People % of companies Slide 39

40 Deferred annual bonuses (DABS) FTSE 250, Source PwC Monks and IVIS None Compulsory Voluntary Combination (compulsary and voluntary elements) Slide 40

41 LTIP expected value FTSE 250, Source PwC Monks and IVIS Value (% of base pay) Lower quartile Median Upper quartile Slide 41

42 Form of long term incentive FTSE 250, Source PwC Monks and IVIS % of companies ESOS LTIP Slide 42

43 LTIP performance conditions FTSE 250, Source PwC Monks and IVIS % of performance conditions EPS and other measures Other measures EPS only TSR and other measures TSR and EPS TSR only 20 0 Deferred bonus match ESOS LTIP Slide 43

44 Total remuneration FTSE 250, Source PwC Monks and IVIS Median remuneration ' CEOs CFOs Directors Base Total cash (inc bonus) Total direct prospective on-target earnings (inc LTIP) Total prospective on-target remuneration (inc pension) Slide 44

45 Non-Executive Director fees FTSE 250, Source PwC Monks and IVIS ' Non-executive chairman 60 Non-executive director Slide 45

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