Private Equity Financing Conditions

Including Reverse Break-Up Fees

Summary

Covers financing conditions for sponsor-led buyouts

Historically US buyouts have been conditioned on
private equity firm sponsors obtaining necessary financing
So that closing of deal is subject to a financing condition
Reflects market reality that providers of debt or bank financing will always re-assess the target company
and its prospects before closing on their financing
Reflects fiduciary concerns that sponsors have
when committing their investors' funds
Selling companies relied on sponsors reputation

Even though sponsor-led buyouts weren't certain to close
Witness the failed buyout of School Specialty 2005

Recent deals show change in practice

Some large deals haven't had a financing condition
Sponsors have agreed to express contractual liability
in the event deal doesn't close because of financing

E.g., Hertz, Neiman Marcus, SunGard Data Systems
See Limited or No Financing Condition below

Sometimes called a reverse break-up fee

As amount of sponsor liability is sometimes equated to
the amount of seller break-up fee in event it accepts
a competing superior proposal

This trend follows practice in hotel buyouts

See Hotel Buyouts below

Financing condition is often structural

As Buyer is a shell company organized by the sponsors
As sponsors have limited or no contractual liability for breach by the shell company
So that Seller has no recourse against the sponsors

In typical sponsor-led buyout, the shell company Buyer

Represents that it has received debt commitments or highly confident letters from financing sources
May represents that it has received equity commitments from sponsors
Covenants that it will act to close on debt and equity commitments

Commitments will have their own set of conditions

Compare acquisitions by strategic buyers

Where buyer typically has wherewithal to fund any cash portion of the purchase price through its own devices
So that buyer typically represents that it has (and will have) sufficient funds to fund the required cash payment

E.g., no financing condition

Examples

Instinet Group / Nasdaq
◊ Merger agreement §5.6 at page 31
◊ Deal page
Metris / HSBC
◊ Merger agreement §4.7 at page 35
◊ Deal page
AT&T Wireless / Cingular Wireless
◊ Merger agreement §5.2(g) at page A-22
◊ Largest ever US cash merger
◊ Deal page

Precedent - Limited or No Financing Condition

HCA 2006

Deal page

Burlington Coat Factory 2006

$70mm reverse break-up fee

Covers specified breaches by acquisition vehicle
but not failure to obtain financing
3.4% of a $2.06B deal
Company break-up fee is also $70mm

Deal page
Proxy statement disclosures

Hertz 2005

$125 mm reverse break-up fee

2.23% of a $5.6B deal
Expressly tied to failure to obtain financing
Liability for other breaches capped at $300 mm

Deal page

Financing summary
Stock purchase agreement

Financing representation §2.2(e) at page 18
Financing covenant §3.9 at page 30
Termination fees §7.1(d) at page 48
◊ Defined as a Debt Receipt Failure

Neiman Marcus Group 2005

$140.3 mm reverse break-up fee

2.75% of a $5.1B deal
Company break-up fee is also $140.3mm
Supported by equity commitment letters from sponsors
Triggered by failure to obtain financing

Target could also pursue damage claims up to $500 mm

Deal page
Proxy statement disclosures

Merger agreement

SunGard Data Systems 2005

$300mm reverse break-up fee

2.7% of an $11B deal
Pro rata guaranty from sponsors
Triggered by acquiror breach
Buyer closing condition uses both
Market MAC and Lender MAC
Company break-up fee is also $300mm

Deal page
Proxy statement disclosures

Merger agreement

Financing representation 4.08 at page 27
Guaranty representation §4.09 at page 28
Financing covenant §6.08 at page 40
Buyer closing conditions §7.02 at page 45
◊ No Market MAC Defined in §6.08(d) at page 42
◊ No Lender MAC Defined in §6.08(a) at page 40
Termination fees §8.02 at page 49

Precedent - Hotel Buyouts

Meristar Hospitality - Blackstone 2006

Guaranty by Blackstone Real Estate Partners

Terms not yet disclosed

Deal page
Merger agreement

Guarantee representation §4.10 at page 41
Financing covenant §5.17 at page 55
Buyer closing conditions §6.2 at page 57

La Quinta Hotels - Blackstone 2005

$275mm guarantee from Blackstone

11.8% of a $2.3B deal

Deal page
Proxy statement disclosures

Financing representation §4.4 at page 14
Financing covenant §7.10 at page 54
Buyer closing conditions §7.2 at page 57
Termination fee §9.2 at page 61

Wyndham - Blackstone 2005

$275mm guarantee from Blackstone

20% of a $1.4B deal

Deal page
Proxy statement disclosures

Financing
Guarantee
Merger agreement

Precedent - Subject to Financing Condition

Serena Software 2005

$52.3mm guarantee from Silver Lake fund

Covers specified breaches by acquisition vehicle
but not failure to obtain financing
$1.2B deal - 4.4%
Company break-up fee is $35mm

Deal page
Sponsor guarantee
Proxy statement disclosures

Sponsor guarantee
Financing
Closing conditions
Including financing condition
Merger agreement

Financing representation §4.6
Financing covenant §5.3
Buyer financing closing condition §7.2(e)

Linens N Things 2005

$70mm reverse break-up fee

Covers specified breaches by acquisition vehicle
but not failure to obtain financing
$2.06B deal - 3.4%
Company break-up fee is also $70mm

Deal page
Proxy statement disclosures

Financing representation §4.4 at page 27
Financing covenant §6.9
Buyer closing conditions §7.1 at page 44
Termination fee §8.3

Party City

$140.3 mm reverse break-up fee

$5.1B deal - 2.75%
Company break-up fee is also $140.3mm
Supported by equity commitment letters from sponsors
Triggered by failure to obtain financing

Target could also pursue damage claims up to $500 mm

Deal page
Proxy statement disclosures

Merger agreement

Financing representation §5.5 at page 32
Buyer closing conditions
Financing covenant §6.10
Termination fees §8.2 at page 53

UICI

$140.3 mm reverse break-up fee

$5.1B deal - 2.75%
Company break-up fee is also $140.3mm
Supported by equity commitment letters from sponsors
Triggered by failure to obtain financing

Target could also pursue damage claims up to $500 mm

Deal page
Proxy statement disclosures

Merger agreement

Financing representation §5.5 at page 32
Financing covenant §5.15 at page 53
Buyer closing conditions §6.2 at page 56
◊ Subject to Debt Financing condition §6.2(f)
Financing covenant §6.10
Termination fees §7.6 at page 60

SS&C Technologies 2005

$30mm guarantee from Carlyle Group (3.1%)

Covers specified breaches by acquisition vehicle
but not failure to obtain financing
$941mm deal - 3.2%
Company break-up fee is also $30mm

Deal page
Proxy statement disclosures

Merger agreement

Toys R Us 2005

$140.3 mm reverse break-up fee

$5.1B deal - 2.75%
Company break-up fee is also $140.3mm
Supported by equity commitment letters from sponsors
Triggered by failure to obtain financing

Target could also pursue damage claims up to $500 mm

Deal page
Proxy statement disclosures

Merger agreement

Financing representation §5.5 at page 32
Financing covenant §6.10 at page 46
Buyer closing conditions §7.2 at page 52
Termination fees §8.2 at page 53

Select Medical 2004

Reciprocal agreement to pay $10mm in event of breach

0.54% of $1.8B deal

Deal page
Proxy statement disclosures

Merger agreement

Financing representation §3.2(f) at page 22

Commentary

Law firm mailings

Simpson Thacher 2006

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