Private equity: Fat Face sale

Fat Face recently underwent a tertiary buyout. Weil Gotshal & Manges’ Samantha McGonigle explains how such private equity deals work

Fat Face started selling sweatshirts and T-shirts on the ski slopes in 1987. The first store opened in London in 1993 and there are now more than 120 outlets in addition to the catalogue business. The lifestyle-orientated outdoor clothing and accessories epitomise the Fat Face philosophy: Life is out there.

Fat Face was bought by Advent International and a management team in April 2005. Advent International sold Fat Face to Bridgepoint in April 2007, with the management team reinvesting in the business. Both Advent International and Bridgepoint are international private equity houses which invest in businesses across a number of sectors, including the retail sector.

One of the most dramatic developments in the European mergers and acquisitions (M&A) market over recent years has been the emergence of private equity funds as acquirers of businesses. For instance, in the last few months high street chemist Alliance Boots and supermarket J Sainsbury have both been private equity targets.

Private equity houses have the financial ability and the experience to match, and in many cases outbid, trade buyers. This has helped fuel the growth in private equity deals, both in terms of value and number.

A private equity buyout rather than a venture capital transaction, which focuses on start-ups or developing businesses is the acquisition of an established target company or business. The deal is driven by the private equity investors, and managers are offered a small percentage interest in the company as an incentive to drive the business forward. Private equity investors choose companies with the potential for growth and increase in value, and with a strong cashflow. They use the cash generated by the business to pay down the debt borrowed to finance the acquisition. Their aim is to sell the target or list it on a stock exchange, within two to five years, realising profit both for themselves and the managers who held shares. On a successful deal, a private equity house will hope to make a return of at least 25 per cent and to get back double the money it originally invested, which compares very favourably with average returns on the stock market. The challenge is, of course, that not every deal is successful.

There are various types of buyout (see Jargon Buster), but the majority of issues and structures discussed below apply equally to each type.

Fat Face was a relatively standard management buyout, distinguished by being a secondary buyout for Advent, and a tertiary buyout for Bridgepoint. A secondary buyout means that a buyout has already taken place before and the private equity house involved at that time is now the major selling shareholder. On a secondary buyout, the management team will usually be selling to the new private equity house as well as participating in the new deal. A tertiary buyout is essentially the same thing, but to a third private equity house.

A leveraged buyout can be seen as three separate transactions that have to happen simultaneously: there is the acquisition of the target; the equity financing and arrangements with the managers; and the bank financing. The special purpose vehicle set up by the private equity investor, and ultimately owned by the private equity investor and management, is always known as newco.

The equity documents govern the relationship between the private equity house and the management team. They will set out the mechanics of the investment and the rules for the ongoing governance of the group. The main document is a shareholders agreement, which will grant certain control rights to the private equity investor and set out the framework on which the managers will run the business on a day-to-day basis.

The shareholders agreement will be supported by the articles of association of newco. The articles will set out the share rights for the shares held by management and the private equity investor in detail. Additionally, the private equity investor is likely to impose further restrictions on the management team through their employment agreements. The private equity house and the management team will have separate legal advisers.

The main acquisition document is the sale and purchase agreement (SPA), which sets out the terms upon which newco will purchase the shares of the target. An SPA in a buyout is likely to be similar to one in any other acquisition. But there are certain features that are common to secondary buyouts, for example the reluctance of private equity sellers to give warranties other than relating to ownership of the shares. This means that on secondary buyouts only the managers usually give warranties about the business, so the buyer needs to pay particular attention to its due diligence as there will be less cover available to pay out if there is a successful warranty claim. In addition to the SPA there will be numerous ancillary sale and purchase documents.

The terms of the debt finance provided by the senior and mezzanine banks are set out in a facilities agreement, or potentially in two separate agreements one for the senior debt and one for the mezzanine debt. Additionally, there will be security documentation under which the banks take security for the loans, for example over the shares of the target. An intercreditor agreement will govern the order of priority for payment of any money by the newco group and control of any insolvency process. The parties to the intercreditor agreement will include the newco group, the banks, the private equity investors as they are likely to have provided shareholder debt to the newco group and often management.

Lawyers advising private equity houses on buyouts typically get involved in four to six deals a year that complete, and many more that fall by the wayside. For the corporate lawyers, each completed deal is hopefully the start of a relationship with the target company, which may well see one or more bolt-on acquisitions take place, followed by work on a disposal or a float. It is no wonder then that so many law firms and lawyers want to be private equity specialists.


Buy-in management buyout. A transaction where both incoming and existing management are involved in acquiring the target.

An acquisition by newco of an additional business to add to the target.

Initial public offering. The process by which a company obtains a first listing for its securities on an investment exchange and offers securities to the public for the first time.

Leveraged buyout. Any buyout where the equity investment is leveraged up by debt.

The ratio of debt to the amount of equity investment in the company. A highly leveraged transaction will involve a proportionately large amount of debt.

Loan notes
A form of debt, usually where the shareholder is the lender and the company is the borrower. The lender is issued loan note certificates that are effectively an ‘IOU’.

Management buyout. A transaction where the existing management team of a business joins up with a private equity investor to acquire the business or company they already manage.

Management buy-in. This is a transaction where a new management team, usually selected by the private equity investor, is involved in acquiring the group.

Mezzanine debt
The mezzanine bank provides debt that is subordinated to senior debt and is therefore more risky. Mezzanine debt is likely to have a higher rate of interest.

Senior debt
The senior bank provides debt to the newco group that is not subordinated to any debt and is intended to rank ahead of other debt on the insolvency of the borrower.

Sweet equity
Equity that is taken by a management team where they have not had to take loan notes at the same time.

Trade buyer
A buyer that is a business rather than a financial institution and usually a buyer that is involved in the same or similar business as the target.