Leveraged Buyouts

Abstract

This master thesis aims to address how the legislation of self-financing affects the optimal capital structure of the portfolio company (“Target”) in a leveraged buyout (“LBO”) transaction. Furthermore, the thesis intends to evaluate the current legislation to determine if it can be reformulated in a way that improves the value of Target’s capital structure beyond the current legislation. This, without aggravating the social considerations that required the legislation in the first place. In order to conclude on the above, the thesis performs a thorough analysis of the legal framework within the Danish Company Act and the Danish AIFM Act. in regard with legal selffinancing and debt push down (through dividend payments). It is concluded, that the procedure for legal self-financing – the so-called whitewash procedure – is filled with uncertainty and requirements that are not beneficial for an LBO. Thus, the LBO practice debt push down in order to optimize the capital structure of Target. Both procedures are limited to only use free reserves according to the annual report. This is not ideal for raising the optimal debt level in Target. The optimal capital structure, according to capital structure theory, is presented as the point where the value of the tax shield and the value of the disciplinary effect of debt are maximized and the value of the financial distress costs and capital costs (WACC) are minimized. Through empirical studies, it is concluded that LBOs use four tools in order to reach optimal capital structure in Target: 1) high financial leverage, 2) structured financing, 3) concentrated ownership, and 4) investor’s equity commitment. Furthermore, it’s emphasized how the four tools individually affect the variables of the optimal capital structure. A cost-benefit analysis shows that the LBO may have the incentives to use legal self-financing over debt push down because the financial structure reduces the financial distress costs if Target has minority stakeholders. The whitewash procedure limits the LBO from practicing legal self-financing. Thus, the thesis proposes to re-formulate this procedure to match the conditions for debt push down since the social considerations behind the law are the same. Thereby, the LBO can improve the value of Target’s capital structure