Delaware Vice Chancellor J. Travis Laster's opinion on Kohlberg Kravis Roberts & Co. LP's leveraged buyout of Del Monte Foods Co. is having an effect on deals.
In the recent acquisition by KKR of Capsugel, the capsule-making division of Pfizer Inc., both the buyer and seller decided to keep Pfizer's adviser, Morgan Stanley, off the financing. The decision was a direct result of Laster's scathing Del Monte opinion, sources say.
Morgan Stanley was hired as Pfizer's M&A adviser on the $2.38 billion buyout, which was announced April 4, and the bank had offered staple financing of around 6.75 times Ebitda on the deal, sources say. But KKR chose to go with UBS and Barclays Capital instead.
That Morgan Stanley lost a financing assignment suggests that Laster's decision could take away a source of fees for sell-side banks, at least in the short term. "The whole topic of staples is very complicated, especially after the Del Monte issue," says one source close to the Capsugel transaction. "People are being more careful."
Staple financing is debt offered to buyers by the sellers to make transactions easier. Such packages became a normal part of private equity auctions, particularly during the 2004-2007 buyout boom, because they eased concerns about the availability of financing in large deals.
They also had the beneficial side effect of setting price expectations on deals by giving the parties involved a sense of the amount of leverage the market was willing to offer on any particular deal.
The conflicts these staples created -- with banks working both sides of a deal -- were generally ignored until Laster's landmark opinion on KKR's acquisition of Del Monte Foods, the largest LBO since the financial crisis. The opinion was related to a shareholder suit seeking to halt the proposed buyout, which was announced on Nov. 25.
Laster, who delayed the closing of the merger for 20 days, lashed out at Barclays for its role in the $5.3 billion transaction. Barclays acted as Del Monte's financial adviser and provided staple financing to the buyers, which included KKR, Centerview Partners LLC and Vestar Capital Partners.
Laster singled out for condemnation Barclays' willingness to advise the seller and finance the buyers. "Barclays secretly and selfishly manipulated the sale process to engineer a transaction that would permit Barclays to obtain lucrative buy-side financing fees," Laster wrote.
Those fees can add up. In the Del Monte deal, Barclays was able to take a $23.5 million fee from Del Monte for M&A advice, and add between $21 million and $24 million more for providing financing.
Still, it's too early to say that the Capsugel deal marks the end of staples. One debt financing banker says the Del Monte case was an extreme example of a common phenomenon in financings. As Laster noted, the Barclays banker, Peter Moses, actively went behind the company's back to arrange the deal with KKR and land the financing assignment. Such behavior is rare, the banker argues, and banks will be more careful about how they handle such assignments.
That Laster also blasted KKR for colluding with Barclays to arrange the Del Monte deal also makes the private equity giant particularly careful in dealing with staples now, says one debt markets participant, and it's unclear whether other PE firms will be as strict with their financing bankers.
It's also true that companies are leery of anything that could derail or delay closing of any deal, and now have some motivation to avoid the appearance of conflict in financings. One M&A lawyer says that, in the past, advisory banks would be chosen to provide financing because it was most convenient to do so, but now the calculus has changed. "Before the convenience factor outweighed other things, but now the risk factor outweighs convenience," the lawyer says. "Companies will be asking if they really get any benefit from this."
He says that companies will still likely offer staples, but are more likely to choose other banks to do so. However, he also notes that nothing in the Del Monte opinion precludes mergers and acquisitions advisers from appearing as one of the lesser banks on the financing syndicates, as opposed to one of the bookrunners.