Anatomy of a Deal Seller: BP Buyer: Ineos Business: Innovene (petrochemicals) Sales: ~$25 billion EBITDA: $2 billion (2005F) Valuation: $9 billion Multiple of EBITDA: 4.5x Multiple of Sales: .36x Source: Chemical Market Reporter

.....neither seller nor buyer can afford to focus only on price. There is a lot at stake on other matters to be negotiated.

Secondary Negotiations

Agreement on price is but one of many hurdles to overcome in order to get a closing

An agreement on price is certainly the most important issue to be agreed upon in the negotiation of a transaction in the chemical industry. However, there are always many other matters to be negotiated that, while of lesser importance, nevertheless involve significant amounts of money or are otherwise material.

In the article that follows, we will discuss a number of these “secondary” negotiations
that so often take place.

• structure: Close on the heels of a negotiation over price is a negotiation over the structure of a deal....i.e. is it a sale of stock or a sale of assets? Is the buyer buying certain assets of the business and
  maybe assuming certain liabilities? Or is the buyer buying the stock of a company, which would normally include all of its assets and liabilities. These can be very important, big money issues to resolve for both the buyer and the seller. Usually the buyer will want to buy assets and the seller will want to sell stock. Two reasons are usually behind this: taxes and environmental. An asset deal is normally better tax-wise for a buyer and also may be better for the buyer because certain contingent liabilities, like environmental ones, may be avoided. Conversely for the seller, the opposite is often true. So a simple agreement on price without a simultaneous agreement on structure is really no agreement at all.
  
  
• environmental: Environmental matters in the chemical industry are frequently very important, probably taking up more negotiating time than any other matter. Environmental issues can range from how to handle on-site contamination from past activities that are no longer being conducted, to off-site superfund liabilities, to existing compliance issues, among others.
  
  
• working capital: The threshold issue with respect to working capital (if it is included in a deal) is: how is it to be valued? If a deal is for a certain price that includes working capital, typically an adjustment is made based on the actual level of working capital existing on the closing date. The mechanics of such an adjustment can involve a significant amount of money. If a deal is an asset deal, the issue of what assets and liabilities are included can be the subject of negotiation as well. Does the buyer take on the accounts receivable? If so, who has the credit risk? Does the buyer assume accounts payable? What about inventory -- is it included in the deal? and if so, how is it valued?
  
  
• bank financing: When a buyer is borrowing part of the purchase price, a whole separate negotiation has to take place with the lender, outside, in most cases, of the earshot of the seller.
  
  
• seller financing: In cases where the seller is taking on some of the debt in a transaction, the terms of that debt are often an important and contentious matter of negotiation.  Issues involving collateral, payment terms, interest rate, covenants, etc. need to be hashed out.  And when there is a senior lender involved in the deal ahead of the seller, then a another whole series of negotiations is undertaken between that lender and the seller with regard to subordination and their relationship to each other vis-à-vis the buyer and the collateral.
  
  
• earnouts/contingent payments: In addition to situations where a seller is a creditor taking on some of the debt in a deal, a deal will sometimes have part of the purchase price payable based on some type of earnout or other contingency post closing.  These negotiations as well can be very significant, making the difference between a good deal and a bad deal.
  
  
• reps and warranties/conditions/covenants and indemnification:  Sometimes referred to as the 4 horsemen of the legal documents, these provisions in an agreement between the seller and the buyer can be the subject of protracted negotiations.  While many of these provisions are more-or-less standard, there are always a number that can be very critical to a deal.  Other important issues to be resolved………..How long do reps survive closing? What is the “basket” or deductible on any claims made by the buyer?  Will there be an escrow to give the buyer some comfort?
  
  
• people issues:  How employees of a business are dealt with can also be an important matter in a negotiation.  Will the buyer hire everyone? At what salary and what kind of fringe benefits?  Will the buyer have the flexibility to relocate people or will there be some kind of commitment not to move anyone.  As in any business, the employees are critical and therefore matters affecting their future employment may also be a critical aspect of the negotiation.  Pension issues can also be very important.  With the move away from defined-benefit pension plans however, negotiations over pensions are becoming less and less frequent.
  
  
• transition issues:  In family-owned companies, there is usually an important negotiation over the terms of the continued employment of the selling shareholder.  In cases where a plant is not part of the deal, the terms of a transitional supply agreement under which the seller produces for the buyer for a short period of time can be very important.  In cases where there is a sharing of staff and/or facilities after a closing until the buyer can effect a complete separation, important issues in this context may be the subject of a critical negotiation.
  
  
• shareholder agreement:  In cases where the buyer is comprised of a group of shareholders, a whole separate negotiation among themselves is important (although the seller is not involved and usually doesn’t care).  In these situations, the shareholders of the buyer can be simultaneously negotiating a number of deals on a number of fronts:  i.e. with the seller, with a bank, and amongst themselves.  All of these negotiations must be successfully concluded in order for a deal to get completed.  While the seller is not involved in the negotiations that the shareholders of the buyer are having with the bank and in the negotiations among the shareholders themselves, the seller must be aware that these are necessary ingredients to a successful closing.
  
  

BOTTOM LINE: While price is the most important element in any deal, there are many other issues that can be very important.  Neither seller nor buyer can afford to focus only on price. There is a lot at stake on other matters to be negotiated.