In the middle of growing concern and disenchantment among investors that private-equity firms are buying public companies on relatively cheap prices in order to sell them off later at a heavy profit, two of the biggest buyout players have skilled out innovative deal that offers shareholders a piece of the attractive offer. Kohlberg Kravis Roberts and Goldman Sachs have announced on Thursday that they are agreed to acquire Harman International, the US maker of high-end sound systems, in an $8 billion exchange with a an inventive arrangement that will allow public shareholders to participate in the buy-out.
According to the arrangements of the deal, which would put the company in private ownership, Harman’s current shareholders could opt to accept either $120 a share in cash, representing a 17% premium to Wednesday’s closing price, or swap some of their shares for stock in the new, privately owned company. In addition to it, Harman shareholders will also have the prospect to buy up to 27 per cent of the equity in the latest privately-held company, for as much as $1 billion. What interesting is this kind of arrangements had never earlier surfaced in a large US leveraged buy-out, and it could emerge as a model for many future deals.
This leveraged buyout is starkly different from usual takeover deals in many senses that have marked a major departure from the typical buyout. Usually private-equity buyers buy a public company, renovate it outside the public spotlight and then sell it off within a few years, often for a big profit. In this deal investors who like the company can elect to keep a share of it. That might be a maneuver to discourage higher bids, which are allowed for 50 days. As the stock is trading above the original offer appears to suggest that investors either think a higher bid is in the offing or that they actually enjoy the option to continue part of their investments.
This strategy has another added advantage. It could take the edge off concerns that the huge hand-out executives collect when taking their companies private generate a conflict of interest that could put them in disagreement with their shareholders.
Even though many private equity deals in Europe have recommended shareholders the possibility to co-invest alongside private investors, the stub equity concept has rarely been present in the buyout activities in the US. Stub equity assets could become more prevalent as firms try to bargain better deals with cash-rich private equity buyers and investors become more persistent in their right to benefit from the future growth of their companies.
However, the concept of stub equity was measured during the recent buyout of Clear Channel Communications Inc., however, the radio-station operator eventually elected a higher amount of cash rather than a minority stake in the new private company.
