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Arjowiggins— anatomy of an MBO

One of Aberdeen’s highest profile deals of 2019, the Arjowiggins management buy-out, completed in September, attracting a great deal of attention.

Rightly so, the transaction protected over 500 jobs, safeguarded two historic paper mills and brought control of the iconic Conqueror brand to Scotland.

Arjowiggins has enjoyed a special place in the heart, and the commercial life, of the Granity City: the Stoneywood Mill has made premium paper since 1770, a product recognised nationally and internationally.

The transaction was financed with support from Scottish Enterprise, Shawbrook Bank and SQN Asset Finance. As lead advisers to the management team, Ledingham Chalmers co-ordinated the efforts of no less than nine law firms to make the deal happen.

Project Score, as it was known, marked a highlight in Ledingham Chalmers’ long-term relationship with the Arjowiggins business. For this transaction, our team comprised 18 lawyers drawn from our offices in Aberdeen, Edinburgh, Inverness and Stirling. For projects of this kind we call on our specialists in mergers and acquisitions, real estate, banking and employment, amongst others.

Here we take a look back at the Arjowiggins deal; what an owner has to consider when selling a business, and what makes a successful MBO.

The MBO option

When looking to sell a business, an owner has a number of options.

One of which is to sell to the existing management team. This may be a preferred route for a number of reasons: trade buyers may be limited, or may not exist, there may be a concern about approaching competitors and disclosing sensitive information, or there simply may be a desire for the business and staff to carry on in safe hands.

In MBOs there is a convergence of much of the most technical work lawyers do: from intellectual property and employment law to property titles and security: all project managed in parallel to come together at the same time.

Benefits of an MBO

Overall an MBO can be a relatively smooth ownership transition — of all potential buyers, the existing management team invariably knows the business best. Employees’ reporting lines are preserved and existing customers and suppliers are reassured. It’s business as usual.

Plus, due diligence for funders can be handled efficiently, with the commercial interests of all the key players being aligned.

A management team rarely has sufficient funds on its own, so external support is invariably required. This can take a variety of forms including from the public sector, asset finance, private equity as well as funding from traditional and challenger banks.

Funders pay close attention to the skills, experience and knowledge of those they back; however, incumbent management has an inherent advantage when it comes to establishing credibility.

What makes a successful transaction?

It helps to have a great product, an appreciative marketplace, a dedicated workforce and a little bit of luck!

Overcoming challenges is the very nature of doing business, and management owned businesses are no exception; however, owning shares helps drive many to be amongst the hardest workers in their organisations.

It is generally accepted that businesses that have been bought by their management often have a better success rate than those that have been sold to another business or to a new management team.

Notwithstanding exhaustive (or at least exhausting) due diligence, few trade buyers readily understand a business as well as its long-term management. Also following many trade sales a new and remote HQ can lead to slow decision making, with entrepreneurial management leaving to join more agile businesses.

An MBO can “lock in” key knowledge and experience. This is often combined with the potential of new resources to develop the business in the medium term.

How does it work?

The management buy-out process customarily takes some months.

The exact period often depends on how well prepared the business is in advance of the transaction — and preparation is key.

Here’s a topline overview of how it breaks down:

  • Buyer and seller agree on a sale price — most likely after an independent valuation
  • Detailed financial analysis that seeks to project, amongst other things, the cashflow requirement and return on investment
  • Funding sought and secured — usually a combination of private and external finance

Then, after months of answering questions and negotiations, everything can seem to come together very quickly.

With the Arjowiggins MBO, alongside two UK transactions, we were supporting three smaller transactions to consolidate the group’s interests in continental Europe and East Asia. Across time zones, we co-ordinated the key moment in all the deals to occur in a single, and exhilarating, five-minute window.

And the finishing touch? The deal documentation was signed on beautiful Conqueror paper…. manufactured right here at Stoneywood Mill on the banks of the River Don.

This article appeared in the Press and Journal's The Business supplement on Monday, 17 February 2020.

Peter Murray

Peter is head of corporate, and an experienced commercial lawyer who regularly advises clients on contract law, corporate governance, compliance issues, mergers and acquisitions.

Posted, 18 February 2020 by Peter Murray
Categories: Commercial property | Corporate | Employment | Insights