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| Barclays Plc., headquarters in Canary Wharf financial district in London. |
Barclays Plc (BARC) is leading investment
banks in a retreat from a form of leveraged buyout financing
that has made the firms and their clients vulnerable to
allegations of a conflict of interest.
Barclays changed its policy following a February opinion
from a Delaware judge, who said the bank deceived Del Monte
Foods Co. (DLM) when it advised the company on a sale and failed to
disclose its plans to also arrange funding for the buyer until
late in the process. That funding, also known as sell-side
financing, allowed Barclays to collect about twice as much in
fees than it would have gotten from just offering M&A advice.
Since the Del Monte opinion, no firm has offered sell-side
financing for a U.S. public company buyout valued at more than
$1 billion, according to data compiled by Bloomberg. In the
previous 2 1/2 years, it was offered about 40 percent of the
time for deals of that size. At least nine major investment
banks, including Barclays, have reviewed their lending
practices, said people familiar with the matter, who declined to
be identified because the discussions are internal.
“This was a big hit to a bank’s reputation and got the
attention of every bank across Wall Street,” said Larry Hamermesh, professor of corporate law at Widener University in
Wilmington, Delaware. “It does seem like the banks are
exercising across-the-board caution after Del Monte.”
Financing Fees
Barclays says it disagrees with the judge’s statements on
Del Monte and has safeguards in place when it is advising
sellers on transactions.
In the Del Monte takeover, Barclays was paid $23.5 million
as an adviser for Del Monte and $21 million to $24 million for
financing provided to a buyer group led by New York-based KKR &
Co., according to the Delaware lawsuit.
Chancery Court Judge James Travis Laster said in his Feb.
14 opinion that Del Monte would probably have hired another bank
if it knew Barclays planned to “double-dip” for fees. The bank
was added as defendant in the shareholder lawsuit along with Del
Monte and the buyer group after the judge’s comments. All the
defendants deny the claims against them.
‘Established Safeguards’
Barclays will decide whether to keep its new rule on sell-
side financing in place after the court reaches a final
decision, said the people familiar with the matter, who declined
to be identified because the policy isn’t public. Regardless,
the bank will continue to provide buyout financing to acquirers
when it is advising closely held targets, since there is no risk
of litigation from public shareholders, the people said.
“Barclays has always had multiple established safeguards
with respect to financing in sell-side transactions, including
prior internal transaction review by senior executives, written
client authorization and the addition of a second independent
adviser,” said Kerrie-Ann Cohen, a spokeswoman for Barclays
Capital, the investment banking unit of London-based Barclays.
She declined to comment on the bank’s willingness to provide
financing in the wake of the opinion.
“As industry standards and legal guidelines evolve,
Barclays will continue to ensure its policies meet Delaware
Court requirements, industry best practices and its own high
standards in this regard,” Cohen said.
Banks React
After the judge’s opinion, Credit Suisse Group AG (CSGN), Bank of
America Corp. (BAC), JPMorgan Chase, UBS AG (UBSN), Goldman Sachs Group Inc. (GS),
Deutsche Bank AG (DBK), Morgan Stanley (MS) and Citigroup Inc. (C) have
reviewed their own policies on financing buyouts when they also
have a role advising sellers, said people with knowledge of the
situation. Lawyers at competing banks talked with each other and
came to a consensus to be more careful about providing sell-side
financing on public-to-private deals, the people said.
Credit Suisse has added a new layer of review when
providing sell-side financing that requires senior bankers to
sign off on any such funding, said one person. Bank of America,
JPMorgan and Morgan Stanley met with outside lawyers and told
bankers that sell-side financing should only be pursued if the
client insists on it or the financing is difficult to find in
the market, other people said. The firms are also asking clients
to hire a second adviser, usually a smaller boutique investment
bank, early in the sale process, the people said.
Potential Conflicts
Spokesmen for the banks declined to comment on their
internal reviews of the policies.
“The bar has been set extremely high for a sell-side bank
to provide financing,” said Peter D. Lyons, a partner at
Shearman & Sterling LLP in New York, which has advised banks on
the matter since the Del Monte decision. “If a client asks them
to do it, then they will think long and hard about it and
explain to the client all of the conflicts.”
Clients and their boards also want to avoid sell-side
financing, though they may ask their bankers to revisit the
practice if deteriorating capital markets make funding more
difficult to obtain, Lyons said.
Sellers often choose to have their adviser offer financing
to prospective buyers because it can help ensure a deal’s
completion. Sell-side financing can be justified if it benefits
the seller, especially if the company wants to keep the process
confidential, according to bankers.
The last major public transaction that used this type of
financing was the sale of Emergency Medical Services, announced
in February, to Clayton Dubilier & Rice LLC for $3.2 billion.
Bank of America advised EMS and arranged financing for Clayton
Dubilier.
‘Client’s Best Interest’
“Our role is to get the best price and terms for our
client, the seller,” said Stefan Selig, executive vice chairman
of global corporate and investment banking at Bank of America.
“If everything a banker does is always consistent with that
goal, then potentially providing financing to a buyer can, in
fact, be in the client’s best interest.”
On EMS, Bank of America provided staple financing, a type
of sell-side financing in which bidders are offered a pre-
arranged funding package. Total industry fees from staple
financing accounted for almost a quarter of the $2.2 billion
banks made globally from debt underwriting for leveraged buyouts
last year, according to researcher Freeman & Co.
Since then, a group including Apax Partners LLP agreed to
buy Kinetic Concepts Inc. (KCI) for $4.98 billion. JPMorgan advised
Kinetic on the sale, and didn’t offer or provide sell-side
financing, according to company filings. In six other deals,
sell-side financing wasn’t offered, the filings show.
Past Use
By comparison, in the 30-month period between Lehman
Brothers Holdings Inc. (LEHMQ)’s 2008 bankruptcy and the Del Monte
decision, sell-side financing was used five times in 20 deals
with an enterprise value of more than $1 billion, according to
company filings. Three other times the financing was offered and
not used.
“People do want more information and more comfort and are
asking more questions,” said Victor Lewkow, an M&A partner at
Cleary Gottlieb Steen & Hamilton LLP.
In the Del Monte lawsuit, shareholders originally accused
Del Monte directors of breaching their duties in handling the
sale effort and accused the buyers of aiding them.
Plaintiffs in the case intend to take testimony from
Barclays’ top investment-banking executives in depositions in
September and October. The group includes Hugh “Skip” McGee,
head of investment banking; Ros Stephenson, co-head of corporate
finance; and Joseph McGrath, head of leveraged finance.
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