The private equity firm’s acquisition of a majority stake in the German hearing aid business used a new-style management participation vehicle and novel warrants
EQT's acquisition of a majority stake in Siemens' Audiology Solutions reveals European private equity (PE) firms' willingness to pursue well-established targets.
The circa €2.15 billion ($2.43 billion) deal, reportedly the Swedish firm's biggest equity investment to date, closed last month.
The deal is notable for its use of a new-style management participation vehicle and novel warrants to accommodate the German seller's rollover interest and minority shareholders' anonymity.
But its more immediate market impact is in showing that European funds can succeed in diversifying their investment strategies.
"It could be an indication for PE firms to set their sights a little higher, and also look at bigger and more-established targets," says Marcus Peter, partner at Bonn & Schmitt who advised EQT.
The region's PE firms have historically targeted small-to-medium sized companies with high-growth potential. But Siemens' hearing aid business – Audiology Solutions – was established nearly 15 years ago, and the seller is one of Germany's biggest companies whose shares have been listed since 1899.
MPP Luxco
The acquisition structure consisted of a chain of three entities, including a Luxembourg holding company in which the four shareholder groups hold their stakes. Of those entities, the most notable is the management participation programme (MPP) vehicle.
As with most PE investments or takeovers, the target's management have kept in place and granted ownership interests to incentivise their performance. What's different about the EQT/Siemens deal is that the managers hold their stake through Luxembourg's new special limited partnership vehicle (SLP).
"Since its creation in July 2013, Luxembourg has strongly promoted its SLP for use in investment funds established by banks and investment management firms but also by private equity players in their structuring," says Peter.
Investment funds and promoters have embraced SLPs, establishing more than 300 in the 18 months since the legislation took effect. But Peter understands this is one of the first times the structure has been used for a Luxembourg-based MPP.
Luxembourg is a common intermediary jurisdiction for European PE deals, and local market participants hope that EQT's use of the SLP for this MPP will gain traction. SLPs' flexibility certainly helps its cause.
Just one or two pages of legislation are dedicated to governing SLPs. They can be set up in one day, and without a notary. Governance rules must be created by the partners and outlined in the limited partnership agreement.
The structure should be adapted to the needs of the relevant managers, and can include, for example, non-voting and voting shares, a range of drag and tag along rights and different notice periods.
However the major benefit for limited partners (LP) is that they don't need to be named in Luxembourg's company register.
"One of the most important features is that the LPs of the SLP – the MPP members – can remain anonymous as they do not need to be made known to the public," says Peter.
Warrants and phantom shares
The German deal is the latest example of PE firms becoming co-owners rather than taking over 100% of targets.
As majority owner, EQT is responsible for Audiology Solution's strategy going forward. But the transaction structure needed to satisfy minority shareholders' desire for future returns.
This was achieved by granting them instruments linked to so-called phantom shares.
"The idea was to have the warrants in place but not necessarily to give the rights to later fully acquire real shares, but rather the rights that shares might provide," says Peter. "This was inter alia to ensure that the participation of the minority shareholders remain on the agreed level."
This novel type of warrant ensures they benefit from Audiology Solution's success, without diluting EQT's majority stake.
Financing
The deal was reportedly financed by around 50% debt and 50% equity. The complex debt package included a senior loan facility agreement, revolving credit facility, and a €1.1 billion high-yield issuance.
The bond proceeds were closed into escrow, and released on January 15. However, given the size and scale of the transaction, it involved a staggered completion.
Bonn & Schmitt counsel Andreas Heinzmann, who advised on the financing, says some of those closing steps must still occur. "If certain milestones are not achieved within the next few months, it is possible that bond can be redeemed."
If the conditions to the release of the escrowed proceeds have not been satisfied by April 27 2015 or upon the occurrence of certain other events, Heinzmann says the bonds will be subject to a special mandatory redemption.
Their redemption price will be equal to 100% of the bonds' aggregate initial issue price – plus accrued and unpaid interest from the issue date – and any relevant additional amounts.
Tear sheet |
EQT’s circa €2.15 billion acquisition of a majority stake in Audio Solutions from Siemens was signed on December 15 2014 and closed in mid-January 2015. Siemens, certain of the target’s managers and family-related owners – through Santo Holdings – have minority stakes. EQT was advised by Freshfields Bruckhaus Deringer (Germany) and Bonn & Schmitt on corporate aspects, Latham & Watkins on the notes issue, and Pollath + Partner on the MPP. Hengeler Mueller advised Siemens and Allen & Overy advised the financing banks. Shearman & Sterling advised on the banks on the notes issue. |