The first management buyout (MBO) of an Irish public company - the €385 million (£303 million) Candover-backed buyout of Clondalkin - seems assured of success after more than 35 per cent of Clondalkin's shareholders gave irrevocable acceptances to the €9.10 (£7.17) a share offer from Edgemead, the vehicle for the management bid.
The total cost of the buyout rises to €475 million when Clondalkin's debt at the end of June is taken into account.
Assuming the offer succeeds, a 44-strong management team will end up owning 19 per cent of Edgemead, with Candover putting up €122 million in equity finance for its 81 per cent stake.
Clondalkin chairman Mr Henry Lund said that each of the executives involved in the MBO group was investing the proceeds from their Clondalkin shares and share options. He added that the management group would be investing on a roughly pro rata basis as Candover, with an unspecified discount reflecting the expertise the management group is providing to the new private company.
Despite this discount, it looks as if the management group is investing in the order of €25 million for its 19 per cent stake. The two biggest individual shareholders within the management team are Mr Lund and chief executive Mr Norbert McDermott. Mr Lund's shares in Clondalkin are worth £4.35 million at the offer price while Mr McDermott's shares are worth £2.9 million.
About one quarter of the cost of the buyout and €90.6 million in assumed debt will be covered by the equity component, with a further 50 per cent in senior debt and 25 per cent in mezzanine finance coming from a group of banks including AIB, Warburg Dillon Read and Lehman Brothers.
Clondalkin management first began exploring the possibility of a buyout after the stock market slumped in August last year in the wake of the Asian crisis.
Unlike front-line industrial shares like CRH, which have rallied strongly since that slump, Clondalkin shares have suffered as sentiment to the small/mid-capitalisation companies turned negative.
The movement of institutional funds out of Irish stocks into European shares following the introduction of the single currency was another major factor which affected shares like Clondalkin.
Mr Lund was exasperated at the market's treatment of his company's shares, given the strength of the group's earnings growth over the past 15 years. "CRH shares have risen 148 per cent since last year's crash. We are up 48 per cent, even though our earnings growth was the same. If we had risen 148 per cent since August last year our shares would be at €19 now and we wouldn't be doing this."
But the management's offer to take Clondalkin private is not cheap, with the €9.10 offer to shareholders equivalent to 12 times historic earnings per share and 7.5 times earnings before interest, tax and depreciation.
"We couldn't cheapskate this deal. There's always some scepticism about management buyouts and Warburg and Candover told us that we had to offer a full price up front. This was a one-shot opportunity and, to be credible, we had to come in with our best offer straight away," said Mr Lund.
Mr McDermott said: "We decided to go with Candover because Candover has a great record in following their investments and they have done a lot of these sort of deals before. "We have sufficient facilities for bolt-on acquisitions and will be able to fund deals up to €100 million. We've told our acquisition contacts to keep talking and it's definitely business as usual. Half of our growth has come from acquisitions in the past 15 years and we want to maintain that pattern," added Mr McDermott.
He said the jobs of Clondalkin's 3,800 employees are safe under the new ownership. "They'll be doing the same jobs and reporting to the same managers as they did before. The staff shouldn't see any change," he added.
Candover director Mr Marek Cumienny said his group would support the Clondalkin management's growth ambitions "for as long as it takes".
"The difference between us and a stock market company is that we can take a long-term view and are not driven by six-month earnings per share growth and share prices.
"Our policy is to back managements for as long as it takes to grow the company and the Clondalkin management is one of the most outstanding teams we have met," said Mr Cumienny. Mr Cumienny said Candover traditionally looked at its venture capital investments in a five to seven-year timescale. "Our exit could be trade sale, a listing or receivership, but it's way too early to even think about an exit."
