Pre-packaged financing made available to all bidders
in an auction

• Provided by sell-side financial advisor

Can benefit the process

• By attracting more bidders
• By expediting the process and removing some uncertainty

• As one potential financing source will have already completed its due diligence

But potential conflicts can raise concerns

• Advisor can have an incentive to favor bidders
  who want the financing over those that don't

• As financing fees typically exceed advisory fees

• Stapled financing may not be on the best terms

• Potentially lowering seller's equity valuation

• Conflicts can develop over adverse developments
  prior to closing

• Such as a material adverse change
• Lender-advisor may resist closing on financing
• Could complicate efforts to renegotiate the deal

Terms of financing can signal seller's expected valuation

• As bidders can reverse engineer the financing terms to determine seller's expected equity valuation

In re Toys R Us decision Del Ch 2005

• Criticized sell-side advisor providing buy-side financing

• See In re Toys R Us This page

• Has led many legal advisors to discourage use of stapled financing or to advise investment banks not to give a fairness opinion (or to have a second firm also give an opinion) if they provide stapled financing
• Opinion's author (VC Strine) has said that it has been misconstrued and should be read more narrowly

• See Subsequent Strine Commentary This page

Precedent practice

• Use of stapled financing is reported to have declined in US

• Because of Toys R Us decision
• Because of strong market for buyout financing
• Many winning bidders use their own financing sources

• Some deals have continued to use stapled financing

• Despite critical remarks in Toys R Us decision
• E.g, Merrill Lynch for Education Management buyout
• See Precedent Deals This page

V C  Strine opinion

• Lawsuit over Toys R Us LBO (Deal summary)

• Deal process was challenged on several grounds

• See In re Toys R Us Litigation (Litigation summary)

• Includes hyperlinked and PDF versions of opinion

Criticized sell-side advisor providing buy-side financing

• CSFB had raised possibility of its providing stapled financing

• Initially rejected by target's board
• Board agreed after merger agreement was signed
• CSFB then provided financing to the winning bidder,
  the KKR Group
• Technically, this wasn't a stapled financing as it wasn't made available to all bidders during the auction

• "That decision [to provide financing] was unfortunate, in that it tends to raise eyebrows by creating the appearance of impropriety."

• But Strine found that CSFB's advice wasn't compromised
• 877 A2d 975, 1005-1006 (Direct link to text of opinion)

Opinion has been read broadly by many as a general criticism of stapled financing

• See footnote 46 (Direct link to text of opinion):
  "By stating this, I do not want to be perceived as making a bright-line statement. One can imagine a process when a board decides to sell an entire division or the whole company, and when the board obtains a commitment from its financial advisor to provide a certain amount of financing to any bidder, in order to induce more bidders to take the risk of an acquisition. These and other scenarios might exist when roles on both sides for the investment banker would be wholly consistent with the best interests of the primary client company. In general, however, it is advisable that investment banks representing sellers not create the appearance that they desire buy-side work, especially when it might be that they are more likely to be selected by some buyers for that lucrative role than by others."

• Led many legal advisors to discourage use of stapled financing or to advise investment banks not to give a fairness opinion (or to have a second firm also give an opinion) if they provided stapled financing
• VC Strine has said this misconstrues his opinion

• See Strine Commentary (immediately below)

Tulane Corporate Law Institute 3.24.06

• V C Strine speaks at an M&A lawyers conference

Says that his Toys R Us opinion has been misconstrued

• Should be read narrowly
• In Toys R Us, Board initially refused stapled financing and then changed its mind "for absolutely no purpose. This was not adroit. I could see situations where it would be really good for a seller to offer financing."

• Note ambiguity in footnote 46 (Direct link to text of opinion)
• Note that financing in Toys R Us wasn't a stapled financing as it was only offered to the winning bidder after the auction had ended
• Opinion can be read as only being critical of a buy-side advisor chasing more fees

Criticizes use of second fairness opinions

• Only serve as "banker protection" and are of little benefit to target shareholders
• The advisor that runs the process should "back it up by giving a fairness opinion" regardless of whether it provides stapled financing"'

• "Whats going to impress us about whether you got a good deal is the quality of the market check."

Bally Total Fitness  2006

• Has announced that it's seeking a buyer

• Has engaged JP Morgan and Blackstone to run process

• Reported to have engaged Deutsche Bank to provide stapled financing

• Presumably using an independent bank to avoid any issues over conflicts

Education Management LBO  2006

• Sell-side advisor provides buy-side financing
• Proxy statement disclosure

• "In addition, at the request of the board of directors, Merrill Lynch and one of its affiliates have delivered a commitment letter to EM Acquisition Corporation relating to the financing necessary to complete the merger and plan to further provide, or otherwise assist EM Acquisition Corporation in, financing the merger, for which services Merrill Lynch and its affiliate would expect to receive compensation from EM Acquisition Corporation or its affiliates."
• At page 25

• Lazard Freres gave a second opinion

UICI LBO  2006

• Sell-side advisor provides buy-side financing

• Deal page

• Proxy statement disclosure

• "In addition, pursuant to a letter dated August 24, 2005, we consented to the participation by Morgan Stanley or any of its affiliates, effective as of September 2004, in providing or arranging, or seeking to provide or arrange, financing, including, among other things, bank or bridge loans or debt or equity financing for one or more potential bidders, which would be available to all qualified bidders, in connection with a strategic transaction of the type contemplated by Morgan Stanleys engagement letter."
• At page 51
• Note: letter of consent followed Toys R Us opinion

• New Vernon Capital gave a second opinion

Toys R Us  2005

• Sell-side advisor provides buy-side financing

• Deal page
• Criticized by Delaware court (In re Toys R Us)

• Proxy statement disclosure 5.23.05

• "In addition, with the approval of the executive committee of the board of directors, Credit Suisse First Boston or one or more of its affiliates has agreed to provide, or otherwise assist the Sponsors in obtaining, a portion of the financing necessary to complete the merger, for which Credit Suisse First Boston would receive additional compensation."
• At page 30

• Duff & Phelps gave a second opinion

Law firm

• "In Defense of Stapled Finance", The M&A Lawyer
  by Alston & Bird Kevin Miller, January 2006
• Alston & Bird (Kevin Miller) 2005
• Cravath (Richard Hall) 2006

Other

• MacFarlanes survey

Re: Toys R Us decision generally

• See In re Toys R Us

Private Equity Deals