Staple financing becomes staple option

Staple financing is typically offered by the vendor’s M&A adviser to private equity firms bidding to acquire a target company. It constitutes a ready-made debt package that the winning bidder might use to finance the acquisition.

When staple financing was first introduced in European buyout deals, it was viewed by players as the “new secret weapon”, according to one banker. Another described it as akin to a baseball bat, which sponsors wielded among banks in search of better terms.

With too many banks chasing too few deals these days, houses with a strong M&A franchise are using staple financing as part of their arsenal to win new business. “Staple financing gives everyone something to beat. It has become a competitive dynamic of M&A,” said Malcolm Stewart, head of acquisition finance at Citigroup.

Offering staple financing does not translate automatically into a leveraged finance mandate, however. The sale of NTL’s tower assets at the end of last year illustrates the point. Goldman Sachs, advising on the NTL sale, offered bidders a staple financing package that valued the tower business at roughly 7x–7.5x Ebitda. Macquarie Communications Infrastructure Group, which eventually acquired the business for €1.4bn, decided to go with Barclays and Dresdner Kleinwort Wasserstein for the financing.

“Although sponsors will invariably talk to additional banks, the staple provides the advantage of offering a credit-approved package upfront, which, at the very least, is a useful point of reference,” said Richard Howell, head of leveraged capital markets at Lehman Brothers.

In some cases, the point of reference might encourage wider bids from competing banks. “If a buyer is being offered 6.5x leverage in the staple, this could be used as a tool [for sponsors] to get seven times in the market,” another banker said.

Others believe that rising leverage has more to do with the overheating market itself. “I’m not sure if staple financing is pushing up multiples,” said Stephen Gillespie, a partner in the banking department at law firm Allen & Overy. “There’s just too much money chasing too few deals.”

Gillespie cited the LBO of pan-European directories business Yellow Brick Road as an example of what loan bankers and credit committees were willing to approve these days. 3i and Veronis Suhler Stevenson backed the buyout a year ago, financed by a debt package levered at 6.5x. The subsequent recapitalisation of the company, which is now up for sale, was completed at 8x.

But is staple financing generally finding many takers? Consensus of opinion suggests that take-up is fairly low. “You obviously don’t get a 100% hit rate but enough staples convert into a financing role to make the structure a worthwhile part of the M&A process,” said Howell.

Paribas Affaires Industrielles (PAI) recently adopted a staple financing offered by UBS, which advised on the sale of FTE Automotive, Germany’s largest manufacturer of automotive clutch and brake systems. PAI paid €370m to buy the business from HgCapital, while CIBC also has a role in the debt package.

Generally speaking, private equity firms prefer to shop around and mix and match. While a highly levered staple might provide a slight edge in an auction, there is much to be said for combining ideas from several advisers.

Apax took such an approach when it came to financing the buyout of Travelex, the world’s biggest foreign exchange company. Deutsche Bank advised the seller and offered staple financing, while Citigroup advised Apax. Both banks are now arranging the financing, which is eagerly awaited in the market.

One source observed that a buyer might include the sell-side adviser in its financing arrangements in the hope of ingratiating itself into that adviser’s good books. There is never a shortage of alternatives if sponsors do not feel comfortable with the staple offer. Firms rarely enter auctions without at least some idea of what financing they might call upon from their relationship banks.

“Staple financing has less of an impact on bidders and the market as a whole now than six to nine months ago,” said Christopher Baines, head of European loan distribution at SG CIB. “The market is so aggressive that sponsors are likely to receive equally attractive offers from non staple financing banks that have sector knowledge or good distribution channels.”

Furthermore, commercial banks that lack an extensive M&A franchise have been known to offer a staple finance package even though they are not advising on the sale.