Beaufort Nelson Loane has the potential to make a substantial gain from the privatisation of Adare Printing Company. By selling his 8 per cent stake in Adare for €12.9 million (£10.2 million), he will end up with an effective 18 per cent shareholding in the newly constituted Adare, at a cost of only £900,000 sterling (£1.15 million).
He will also be investing £3.5 million sterling by subscribing for junior loan notes in NAPG - the vehicle being used to acquire Adare. But the interest on those repayable notes is a comfortable 10 per cent per annum until maturity in 2010, or sooner, if Adare is sold, or seeks a public listing. The substantially lower equity price being paid for the restructured Adare, and multiple gearing in NAPG are, of course, reflections of buyouts. However, this one is different because it is not a real management buyout. Apart from Mr Loane and his co-director, Mr James Coll who will have a 2 per cent stake, none of the management is involved at this stage.
But the plan is to get substantial management involvement. The offer document says "the opportunity to invest in NAPG will be extended to certain other Adare managers and employees. These arrangements are described in more detail in appendix 11". And that appendix explains: "it is proposed that within 3 months of the offers becoming or being declared wholly unconditional, NAPG will make available up to 555,556 of the authorised but unissued ordinary shares in NAPG (representing 10 per cent of the enlarged equity) for subscription by employees of the Adare Group, under a performance based option scheme on terms to be agreed between Beaufort Nelson Loane and Allen, McGuire (the venture capitalist whose funds will have an 80 per cent stake in Adare)."
The managers' reaction to the incentive packages will be crucial to Adare's future success. Many of these managers had already been hyped up by the initial MBO proposal, headed by finance director, Mr Peter Lynch who resigned following the recommendation of the Loane deal by the independent directors. Under those proposals, 85 to 100 managers would have been part of the original package and, as such, they would have had a great urge to succeed. Now Mr Loane who also stands to make a capital profit of 1.9 million euros (u1.5 million) from his options will have to convince these same managers to stay. If, as the offer document suggests, the managers are just offered options, based on performance, that may not be a sufficient incentive, particularly as Mr Loane and Mr Coll are buying in at £1 sterling per share. If, however, they get in at the same terms as the two directors then all the people in the management team would be starting on a level playing field.
For MBOs to succeed, the participants need to go in at a low equity price to compensate for the risks associated with high borrowings. The €11.46 offer per share, valuing Adare at €161.1 million (£127 million), has already received backing from shareholders representing 54.9 per cent of the equity, and is being financed as follows (all in sterling): Equity £5 million, £20.5 million in loan notes underwritten by Allen, McGuire, £3.5 million in loan notes from Mr Loane, up to £80 million in senior secured banking facilities underwritten by the Bank of Scotland (that bank could end up with a 5 per cent stake in Adare if warrants are executed), and mezzanine finance of £15 million. So it will be well financed with sufficient funds to finance the ongoing requirements of Adare and its parent, NAPG.
If the takeover bid succeeds then the focus of the management team will be to pay off most of the debt as soon as possible. This could take up to ten years as evidenced by the maturity date in Mr Loan's loan note.
Under the deal, 20 per cent of the company is, in effect, being transferred to Mr Loane and Mr Coll for a mere £1 million sterling. The deal has valued Adare at £103.6 million sterling (£113 million sterling if options and warrants are taken into account) - that puts an effective value of almost £20 million being transferred to them, but they have given certain warrants to the Allen, McGuire funds, subject to certain limitations on liability. While the other management will not have to give similar warranties, their degree of co-operation, and participation in the unquantified management share scheme, will have a strong correlation with Adare's future as an unlisted company.
