Zero-Money Leveraged Takeovers

"*If a deal’s any good, you should be able to do it with no money.*"

"Gibbs handed over his A4 sheet of analysis, saying, ‘Look, James this is a good deal, we need funding, here are the facts.’ He then had to wait three months while Wardley’s analysts went to work on the figures to confirm Gibbs’ calculations. With that hurdle crossed, Gibbs hired Yonge as his investment banker for the takeover bid with a large success fee. The generous fee encouraged Yonge to pull all the strings necessary with his parent, the Hong Kong Bank, to lend the New Zealanders 100 per cent of the money required for the bid. Since Gibbs and Farmer were using a fresh company to make the bid, Tappenden Nominees, which had only $100 capital of its own, this wasn’t straightforward. Gibbs says:"

"Gibbs’ scheme was good enough for the Hong Kong Bank (now HSBC), but since it didn’t operate in New Zealand special arrangements were required. In the end, Gibbs arranged that the Hong Kong Bank send a letter of credit to BNZ for $115 million which then endorsed Gibbs Securities’ bills of exchange. The BNZ endorsement turned the bills into first-rate paper. Gibbs then used Jarden and Co. (New Zealand’s largest broking firm) to sell the paper in the money markets. In a roundabout way, then, Gibbs and Farmer were effectively funding it themselves, putting no money in, but having gained the confidence of Wardley, the Hong Kong Bank and BNZ. The whole process had been made much easier by the financial deregulation that the government had passed over the previous months; Gibbs had been amongst the first to take advantage of the new freedoms."

"Then a few days before the bid was due, Gibbs ‘had a brainwave’. He now offered to commit to buying 10 per cent of the shares at the purchase price. They’d put down $20 million on settlement day and the rest, $380 million assuming a bid of $4 billion, would be due three years later. The Americans would fund them for those three years, while the New Zealanders would pay them interest on the outstanding money until they paid for the shares. Gibbs recalls: *That got the Americans’ attention. ‘Oh that’s a different deal,’ they said, ‘you’re committed to buy.’ And there it was: the greatest coup of my business career, the chance to make serious money. We’d own the shares but didn’t have to pay for three years; we’d put down $20 million, but that would represent only part of our merchant banking fee; we’d have to pay interest, but dividends would probably cover that, and unless something went badly wrong, in three years’ time the shares would be worth a hell of a lot more than the original purchase price.* But what if something did go badly wrong and Telecom shares went down over the following three years; what if Gibbs and his friends had to stump up another $380 million in 1993 for shares that were worth only $200 million? Gibbs hadn’t been prepared to take that risk. Under the deal that he prepared, Freightways and Midavia would buy the shares through a company, Carla Nominees, which only had $100,000 capital and they would give no personal guarantees. Furthermore, Gibbs took the precaution of securing their $20 million down payment against the shares. Bell Atlantic and Ameritech, for all their lawyers and checkers, overlooked doing the same for their $380 million, so if for any reason the New Zealanders didn’t pay they’d get their $20 million back before the Americans received any of their $380 million. And they were risking only $100,000. Carla Nominees had entered a binding contract to purchase the shares, but the New Zealanders had no risk. It was effectively still an option."