Case Study #2

The Challenge:

Winning and funding in a bidding war without overpaying

A major supermarket chain wanted to divest itself of several properties in order to raise cash to pay down debt.  Its investment bankers sent books to both strategic and financial buyers.

Food Processing, Inc. (FPI) was in the same business  as one of the manufacturing properties up for sale. FPI had been considering expanding its own facility, so a turnkey acquisition was very attractive. FPI would immediately gain both capacity  and market share.

The seller’s bankers put the properties up for auction to get the best price for the seller.  FPI was one of several interested strategic buyers, and there were a surprising number of strong financial buyers.  This was a highly desirable facility, and FPI wanted it, but didn’t want to pay a premium just because there were other interested buyers.

The Solution:

Creating wealth to fund the purchase

The Gordian Organization (TGO) first analyzed the seller’s reason for divesting.  The facility had been well run and was operating as a profitable subsidiary mainly serving its parent’s needs.  The seller wanted cash from the sale, but still needed the product the plant produced.  It was known that the seller had a second facility producing the same product, but that neither facility had been operating at full capacity.

The seller had offered to enter into a long term purchase agreement to continue  buying product from the divested facility.

The Gordian Organization structured a business/purchase plan that allowed FPI to place a bid for the facility that brought additional value to the supermarket chain without costing FPI additional dollars.  TGO modified the seller’s proposed 10 year purchase contract  by adding a “take or pay” provision.     Under the new contract the seller would be obligated to take the amount of product contracted for, OR pay FPI  3% of the value of any product not “taken” (3% is approximately FPI’s net profit margin).

The first advantage to the seller was in reducing its  liability for future purchases, both in fact and on their books, by 97%. If the seller’s business changed, as an example, it would not obligated to take 10 years’ worth of product.  The second advantage was the seller gaining great  purchasing flexibility by having FPI, its other facility, or the open market as a source.  In addition, the 3% cost would be nearly self liquidating if the seller shifted production to its other facility to bring up plant utilization and therefore bring down costs.

FPI gained by having either a long term customer or fees that would equal its net profits from that customer should the business go elsewhere. Should the seller reduce orders, FPI was still assured of its profits, and then also had open capacity available to serve other accounts.

This was a true “win-win” situation.

TGO was able to structure financing for FPI based on the value of the “take or pay” contract. TGO discounted the assured cash flows  over 10 years to its net present value.  This net present value was then used as the  collateral for the loan to finance the purchase.