Friday, 12 May 2017

Understanding a Business Deal: The Encapsulating Company


What actually happens during the process of a corporate deal, and what role does the adviser play? This example explains by charting the process of a transaction on which KBS advised – the sale of London-based The Encapsulating Company (trading as Ultimate Promotional Paper Products) to SPS (EU) Ltd, a deal which completed at the end of 2015.
Understanding the business
The Encapsulating Company makes paper and stationery products, and is the sole distributor of Moleskine products in the UK and Ireland, including its iconic notebooks, while SPS is a Blackpool-based promotional gifts manufacturer.
The background to the sale was that the Encapsulating Company was owned by a single 100% shareholder who was looking to retire.
Presenting the business
The business did not require much ‘grooming’ to get it ready for sale as the owner had been preparing to sell for some time so the company was already relatively clean and efficient. There were no oddities on the balance sheet, and he had not been investing in the business so as to allow cash and profits to build up. KBS’s first job was to conduct an information-gathering exercise, looking at the company’s sales, its key staff, clients and relationships with suppliers to create an information memorandum.
Buyer targeting
KBS has a team of researchers who look across the market to identify potential buyers in different sectors, and in this case they drew up a list of 100 to 150 possibilities, making contact with them once the client had given approval.
A shortlist of interested parties were made to sign a non-disclosure agreement before commercially sensitive information could be shared with them. This is a very important part of the process, as news of a deal leaking out could prove damaging to the seller’s business.
KBS’s goal was to have more than one buyer in place, putting the company in a strong position and helping the deal executive negotiate the best price. Following a number of meetings, there were finally two offers on the table. One would have been a simpler deal overall, but did not seem to KBS’s deal advisors to be suitable and may have jeopardised the company’s most valuable contract, Moleskine, which made up 80% of its business.
Managing the process
A major priority KBS’s advisors was to protect the Moleskine contract as it was so fundamental to the value of the company. So they brokered a meeting between the seller, the potential buyer, and executives from Moleskine to negotiate a new supplier contract before the heads of terms were drawn up. This required careful handling to ensure there was no risk to the client if the deal fell through. Although the strategy was a bit of a risk, it paid off as it secured the future of this key supplier relationship.
Overcoming challenges
The structure of the deal was a significant payment upfront and some deferred payments, one of which was subject to the Moleskine contract being renewed. A challenge emerged towards the end of the deal when SPS’s private equity backer (which had previously funded an MBO of the business) demanded KBS’s client agree that any deferred payment ranked behind any payments due to them following the MBO. This could have put the client at great risk because the deferred payments depended on the performance of SPS’s business.
The solution was to secure some last-minute concessions from the buyer. KBS negotiated a larger upfront payment and was able to dramatically reduce the client’s risk exposure. The buyer helped this process by providing information in a transparent way, giving the seller comfort it was trading well and the backer’s demands would not be enforced.
KBS’s joined-up approach and skillful negotiation helped ensure the transaction closed within a week of its scheduled completion date, allowing the company founder a swift and easy exit from the business.


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