What Is Going Private?
Let me explain what going private really means. It's a transaction or a series of them that turn a publicly traded company into a private one. Once that happens, you as a shareholder can't trade those shares on the open market anymore.
You'll see different types of these transactions, like private equity buyouts, management buyouts, and tender offers.
Key Takeaways
- A going private transaction converts a public company into private ownership.
- Common examples include private equity buyouts, management buyouts, and tender offers.
- Many going private transactions involve significant amounts of debt.
- The assets and cashflows of the acquired company are used to pay for those debts.
How Going Private Works
A company usually goes private when its shareholders figure there aren't enough benefits left in being public. One common way this plays out is through a private equity buyout. Here, a private equity firm buys a controlling stake, often loading up on debt. They secure that debt against the company's assets, and then use the business's cash flows to cover interest and principal payments.
Another approach is the management buyout, where the company's own management team takes it private. It's structured much like a private equity buyout, with heavy debt reliance, but the key difference is that it's insiders who know the business inside out doing the deal.
Sometimes, these transactions include seller financing. That's when the current owners— the public shareholders— help finance the buy by letting the new buyers delay paying part of the price, say over five years.
Remember, many of these deals pile on a lot of debt. The acquired company's assets serve as collateral, and its cash flows handle the debt servicing.
Tender offers are another frequent method. This is when a company or individual publicly offers to buy most or all of a company's shares. If the target company's management doesn't want the sale, it's called a hostile takeover. These offers can come from public corporations too, financed with a mix of cash and shares—for instance, 80% cash and 20% in the acquirer's shares.
Real-World Example of a Going Private Transaction
Take the case from December 2015, when JAB Holding Company, a private-equity group, announced plans to acquire Keurig Green Mountain. This was an all-cash offer, unlike many buyouts that mix in debt or shares.
They offered $92 per share, which was almost an 80% premium over the pre-announcement market value. As you'd expect, shares jumped right after, and the company accepted soon enough.
The deal closed in March 2016, shares stopped trading on the stock market, and Keurig Green Mountain went private.
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