The theory and practice of management buyouts: Our experience with Rigidal

In the Middle East region, where a high percentage of businesses is owned by family groups or state-related entities, management buyouts (MBOs) are quite rare.

Although private equity firms are able and willing to support MBOs in principle, and have the ability to bring both equity and debt to the table, to date there have been few opportunities for motivated management teams to take ownership positions in the companies they manage. In 2004, Havenvest Private Equity backed the management team to acquire Rigidal Industries through an MBO. At the time of acquisition, Rigidal was a relatively small manufacturer of roofing systems that was primarily focused on the UAE market.

The author represented Havenvest on the Board of Rigidal during this period, during which the company grew substantially while navigating its way through the difficult times of the Dubai economic downturn to emerge as a market leader in the region. In August 2012 Havenvest sold the company to the leading international cladding and roofing manufacturer, Kingspan Group plc, a company listed on the Irish and London stock exchanges. The author shares some of his practical experiences from the Rigidal MBO.

In theory, according to the Canadian Association of Family Enterprise, MBOs have the highest success rate of any type of business sale: 80 per cent, compared to the success rate of inter-family succession, which is only 32 per cent (1). There have been a number of other studies of MBOs by academia (2) and industry bodies, most of which concluded that MBOs are indeed a highly successful model. This is not surprising, as two key success factors are normally inherent in the very nature of an MBO. One is the ability to run the company successfully, or 'strong management' and the other is a strong desire to succeed, both through upsides or 'alignment of goals', and downsides or 'skin in the game'.

In practice, the Managing Director of the company, who was the driver of the MBO, was a highly capable and motivated manager. However, it was recognised that there was insufficient depth to the management team at the outset. A key decision was therefore taken to bring an experienced industry professional from outside the company into the buyout team as sales director in order to drive the intended revenue growth and enhance the company’s ability to supply to major infrastructure projects. The deal was structured to ensure a strong alignment between the management and Havenvest, using preference shares and debt to ensure that management had a material equity stake in the company, with further incentives linked to performance.

"From the onset, Havenvest facilitied the management team to own a significant percentage of preferential shares, thus ensuring long-lived motivational drive." - Phil Ellerby, Managing Director - Rigidal

In theory, a key risk of MBOs is often management’s failure to make the transition from employees to owners. This risk can be especially relevant when there is a need to invest in the company, as managers often have different risk appetites than business owners or investors.

In practice, this risk was addressed in three ways. First the Managing Director strongly identified with the business, as he had been the first manager when it was initially established as a small division of Alcan, 30 years ago. He had the instincts of an owner from the start.  Second, we had agreed with management at the outset on an approach and plan for growth, with the intention of establishing a new plant on larger premises. Following the buyout, this plan was actually accelerated, and almost two years to the day afterwards, the company moved to new premises in Dubai Investments Park on which a custom designed factory and offices were built.  At this point it was clear that management felt it truly was their company. New production lines were steadily put in place, and the sales team was expanded. Third, and importantly, the company was managed in a way that ensured a high level of cash generation, which meant that the company's productive capacity could be expanded from its own cash flow, while also ensuring a healthy level of dividends. There was no requirement for external funding for continued growth.  

In theory, one of the main roles of a private equity firm is to establish corporate governance and organisational procedures to reduce risk and dependence on just a few key people.

In practice, one of the main pleasures in dealing with the Rigidal management team was its tight control over business risk. Management had a clear appreciation of its principal roles. In simple terms, the Sales Director and his sales team were responsible for driving revenues, while the Managing Director was responsible for the continual process of de-risking the business. Procedures and authority levels were refined, with levels of approval for banking exposure, contract terms, capex and budgeting cascading down from the Board to management. Ongoing delegation and monitoring systems were established, and clear goals were put in place at all levels of the company. This created a strongly aligned organisation with depth of management.

"Board of Directors from Havenvest provided continuous support and input through quarterly Board meetings to ensure the company was eventually ready to be taken to market." - Phil Ellerby, Managing Director - Rigidal

In theory, a private equity firm can add limited operating value to a management buyout when the management already knows the business well.

In practice, Havenvest’s experience is that companies in the region often require significant changes to their operating platforms as they migrate away from owner-operated businesses to wider corporate structures. Moreover, in times of turmoil like the 2008 Dubai economic downturn - when committed projects were cancelled overnight, strong corporates suddenly could not make payments, and the world was reeling from debt and tight cash flows - support from private equity shareholders is often critical. 

In Rigidal’s case, the basic business model had been established well before the 2008 crisis hit. The key elements of its business model – no net debt, secure customer payment terms, minimal performance risk and no exposure to variations in terms from suppliers – gave the company real resilience.  Havenvest’s value was in providing strong backing to banks and creditors, wider market knowledge such as project cancellations and high-risk debtors, assisting with risk management systems of credit insurance and hedging, and legal knowledge for disputes. Rigidal's key value addition was in developing a specific strategy, namely diversifying out of the UAE and expanding of its geographic footprint to the wider economies in the region that were still doing well, such as Saudi Arabia, Qatar and India. Rigidal’s management very effectively implemented this strategy and business model, and consequently its losses were minimal and it emerged as a much stronger regional industry leader.

In theory, since MBOs are often the result of an owner who wishes to retire or a parent company that wishes to sell a part of its business, there are often a number of issues that need to be addressed to ensure clean ownership structures, clear titles to intellectual properties, clear liabilities to employees and a clear demarcation of assets. 

In practice, the essential governance issues were addressed early on.  Nevertheless, we had not appreciated at the outset the importance of ensuring that the company’s intellectual property (IP), in the form of its trademarks and brand, was protected. Both Havenvest and management initially felt that what was important about the company’s products was the technical specifications, not its brands. However, in the initial stages of planning the company's sale it became clear that it was essential to deal with these IP issues. As a result, trademarks were registered in the main countries where the company operates and assets in all countries were secured. Registration of IP in the region is a relatively inexpensive process; however it is time consuming and can take over three years in some countries.

In theory, MBOs can be a very effective form of acquisition if there is empowered and effective management with a private equity partner that adds value and ensures there is clear alignment between the parties through a well-defined strategic plan, ongoing engagement and a shared exit strategy.

In practice, yes, yes, yes and yes.

"One could not ask for a more professional team or a greater amount of support leading to the final successful shared exit." - Phil Ellerby, Managing Director - Rigidal

- By Ajay Bhandoola, Senior Director, Havenvest

  1. From the Nov-Dec 2009 issue CGA Canada by Mark Wardell
  2. University of Exeter, January 2006 study of success rates of MBOs
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