Private Equity Myth Busters: One Year After Del Monte, Is Stapled Financing Dead?

More than a year after the Delaware Court of Chancery handed down its decision in In Re Del Monte Foods Company Shareholders Litigation, 25 A.3d 813 (Del. Ch. Feb. 14, 2011), there remains an abundance of uncertainty in the financing market as to whether stapled financing is still a viable source of buy-side financing in merger and acquisition transactions. While this structure has received a fair amount of judicial attention in recent years, private equity firms can still take advantage of the benefits of stapled financing, especially when avoiding five specific pitfalls highlighted in Del Monte.

What is Stapled Financing?

"Stapled financing" colloquially refers to the commitment letter and term sheet provided by a target company's financial advisor containing the principal terms of a financing package that is "stapled" to the back of the offering materials prepared by such advisors and distributed to potential bidders. The financing is generally not required to be utilized by the buyer, and arises in connection with the sale of both public and private companies, including subsidiaries and divisions.

The Benefits

The potential benefits of stapled financing are numerous and well established. In addition to creating a pricing floor, it has the added benefits of strengthening deal certainty and speeding up the transaction, and increasing confidentiality by reducing the need for bidders to contact alternative financing sources. It may also encourage more aggressive bidding by strategic buyers (entities that typically finance an acquisition on their own balance sheets or through the capital markets) as the presence of a stapled financing package could cause a strategic buyer to regard competition from private equity sponsors as more likely.

In a tight credit market, as has been the case in recent years, stapled financing has the added benefit of guaranteeing that financing will be available. It may also provide a level of comfort to bidders that the lender offering the package is, after conducting its own due diligence or from having a prior working relationship with the target, confident in the future profitability of the company.

Conflicts of Interest

The primary drawback to a lender serving the dual role of the target company's financial advisor and the buyer's financier is the potential conflict of interest. Given that the lender may stand to make tens of millions in additional fees if a financing package is accepted (fees for advising on...