The general principles cited elsewhere on this site relating to recourse financing generally apply but some of the choices that will have to be made by the acquirer’s management are, if anything, even more critical than those made when negotiating debt facilities for normal equipment purchase or project development. We have assisted clients in a number of acquisitions and view such opportunities in a somewhat different way which has proven successful for our clients.

 

“Debt First”

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Acquisition activity in in the solid waste and recycling industries is not what is was some years ago when a great number of  “roll ups” of smaller companies by entrepreneurial national or soon to be national, publicly traded entities were made. 

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But, acquisitions are still being done and many don’t make the headlines. We can help for most sized acquisitions up to the hundreds of millions but there are also smaller opportunities. First, many leaders of family owned companies looking to acquire another entity assume that they will need additional equity to do so and often start the process by speaking with investment bankers, and ultimately, to venture capital or “family office” investors. While those financing partners can be very useful, they come with a price—and generally a large one—on issues like control, preferred return, exit strategy and other factors on which they base their investment decisions. And, they are not always necessary. 

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In looking at a potential acquisition, we start with debt. That is, we can assist you in determining how much debt would be available for the acquisition. One of our first such transactions in the 1990’s involved one of our clients buying another. For obvious reasons, we took no part in their price negotiations but we did help the acquirer actually complete the merger. Management of that company had assumed that they would need an equity investor but once we were retained, we showed them how to do the transaction with 100% debt and we solicited the lender and negotiated the debt. The company greatly increased its size and is now a premier company in California. 

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Most acquisitions, at least larger ones, will need additional equity but equity negotiations should not be finalized until one knows the amount of debt that is feasible, and the terms and pricing likely to be obtained. 

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Acquirers also need to be conscious of another potential issue that can arise in a transaction with a third party equity investor and that is that the investor may want to use a bank with whom they have a relationship to fund your company. While management may later refer to “its bank”, as a practical  matter, the bank is really your investor’s, not yours, because it is highly likely that the investor/bank relationship is much bigger than the amounts involved in your company. That can yield unfortunate results and we have seen more than one occasion where decisions were made by the investor and bank that were not consistent with the wishes of management. If we assist you with the debt, however, that risk can be mitigated. 

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Getting the Right Lender or Bank Group

 

As noted elsewhere on this site, there are only a few banks that truly understand the solid waste, recycling and renewable energy industries. In the context of an acquisition, having the right bank or banks is even more crucial than for day to day banking needs. Ideally, if the transaction is smaller, you want a bank with whom you can work successfully for years to come.

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But, if the size of the borrowing is in the hundreds of millions because at that point, your transaction would fall into the “syndicated” or “national shared credit” market. In a typical syndication transaction, you will hire a lead or “agent” bank whose syndication department will be paid a significant fee to find other banks to join the bank group since no single bank can hold the whole required amount once you start getting into hundreds of millions.

 

Typically, a bank syndication department will propose adding banks with whom they’ve worked before but that may have no significant experience in the industry and are happy to serve in the subordinate role. There are two problems with that. First, if the banks are participating based on the national syndication market and not on the specifics of your company, industry and the transaction, your pricing will be higher than it should be. And, second, the agent knows that there is not going to be a threat to their position unless they prove totally incapable of doing their job. 

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It is in your interests to have a bank group with experienced members that could step into the agent role should the lead bank become difficult. (Unusual, but it happens!). And, having competitive second, third or fourth banks keeps the agent bank “on its toes” because it knows that if it doesn’t continue to do a good job, it can be replaced. 

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Given that, in all the larger transactions in which we participate, while technically syndication departments are always involved, we actually put together the bank groups and we generally do a competitive solicitation for the agent. This has resulted in a number of bank groups for our clients with the various banks serving as agent for one client, and a participant for another. That too promotes the best possible experience for the borrower clients (and reduces or eliminates any syndication fee).