Q&A: Financial Readiness

New Flyer’s acquisition of MCI illustrates the importance of capital structure

In North America, New Flyer Industries is the biggest builder of city buses; Motor Coach International is the biggest builder of highway buses. The two seemed a perfect match, with separate businesses dovetailing without much of any overlap. Even the unions and competition watchdogs were on board. So what was the holdup? Financing. Before New Flyer could make its move, the company had to get its books in order.



LEXPERT:
The acquisition of MCI by New Flyer was a blockbuster in the industry. Anyone could see how the combination would benefit both companies. In fact, the deal seemed to be fairly long in the making. MCI’s owner, KPS Capital Partners, also owned New Flyer at one point in time. So, let me ask first off, had these companies been circling each other, or was it all due to the involvement of KPS?

Colin Pewarchuk (EVP, GC for New Flyer):
In 2002, an investor group led by KPS acquired New Flyer’s business from the Netherlands-based Den Oudsten group. In early 2004, the KPS group sold the business to another New York-based private-equity group, led by Harvest Partners. New Flyer subsequently undertook an IPO and became listed on the Toronto Stock Exchange in 2005. KPS acquired a controlling interest in MCI in 2010 and proceeded to strengthen and build the business.

LEXPERT:
Okay, that’s the backdrop. When did the merger talk start to gain traction?

Pewarchuk:
By the early 2000s, New Flyer had emerged as the leading North American transit bus manufacturer and MCI had emerged as the leading North American coach manufacturer. These are complementary businesses and the potential synergies in the overall manufacturing footprint and the aftermarket parts business were plain to see. Management of both companies knew each other and had considered the merits of combining their businesses on several occasions, including previously in 2010. However, it was not until 2015 that both businesses were fully positioned and ready to execute on a deal.

LEXPERT:
You mention positioning. New Flyer’s CEO, Paul Soubry, has said the timing never seemed right for a merger. Specifically, he mentioned the need to stabilize the business and fix the company’s capital structure. Can you elaborate?

Pewarchuk:
Financial and general organizational readiness is a key requirement for the successful execution and integration of any transformative acquisition. New Flyer achieved this state of readiness over a period of a few years as it needed to convert from an income deposit security capital structure to a conventional common share structure, digest its 2013 acquisitions of North American Bus Industries and the Orion bus and parts business and continue to streamline its overall operations.

LEXPERT:
The company also had to arrange an US$825-million credit facility in order to finance this transaction. Is this the sort of vehicle that requires the kind of stable capital structure that was created?
Michael Amm (Torys LLP for New Flyer): The US$455 million purchase price was fully financed by an upsizing of New Flyer’s senior credit facility up to US$825 million. This all-debt financing made the deal significantly more accretive to New Flyer’s shareholders without uncomfortably stretching leverage. New Flyer was fortunate to have strong relationships with its banking syndicate, led by The Bank of Nova Scotia and The Bank of Montreal. They quickly got comfortable with the deal and were very supportive through the execution phase.

LEXPERT:
All right, let’s go back to the beginning. The deal was announced in November, but New Flyer first approached MCI all the way back in January 2015. And needless to say, the deal had been contemplated for some time. When were the legal teams first brought in, and were you all well acquainted with each other?
Amm:
Torys acted for New Flyer with a cross-border team based in Toronto and New York, reflecting the Canadian and US presence of the parties and the fact that the purchase agreement would be governed by US law. Torys has acted for New Flyer since its IPO in 2005 and the same Torys cross-border team had previously advised New Flyer on its acquisition of NABI in 2013. Torys began conducting its legal due diligence review in March of 2015 and started engaging directly with the Paul Weiss team [counsel for MCI in the US] during the summer of 2015.
Howard Silverman (Borden Ladner Gervais LLP for BMO, Scotiabank):
On the financing side, I wasn’t brought into the deal until September 2015. By that time, the structure on the acquisition side had been set and much of the due diligence had been completed. The acquisition documents were already far along. We had to step in and get up to speed quickly, but the fact that we were amending and restating an existing credit facility and had worked on it with Torys on the borrower side and with Chapman and Cutler as US counsel on the lender side since 2009 certainly helped.

LEXPERT:
How would you describe the tone of the deal? Were the parties friendly? Tentative? Or even perhaps dismissive at first, given the fact that MCI was healthy and there seemed to be no really urgent reason to sell the company?

Silverman:
The three principal firms for the financing, BLG, Torys, and Chapman and Cutler, had a good working relationship. When I heard that the parties intended to close the deal before the end of the year, we weren’t dismissive of course, but I was surprised given the amount of work that was required to close and that regulatory approvals would be unlikely by the end of the year. The tone of the negotiations was amicable, but everyone was under pressure because we had a lot to do in a short period of time.
Stefan Stauder (Torys LLP for New Flyer):
The dynamics were typical of most transactions that involve a strategic buyer and a private-equity seller. New Flyer was looking to acquire a quality and synergistic business at an acceptable cost while MCI was looking for a value-maximizing liquidity event and a clean exit. Neither party was compelled to do a deal, but rather both worked diligently over time to put together the right transaction.

LEXPERT:
Sounds like a lot of work. Did any of you manage to take a break?

Amm:
Well, there was the Blue Jays game. Following a daylong negotiation session in Toronto with the KPS team, New Flyer’s CEO and Chairman and advisors attended the Blue Jays’ playoff game with the Kansas City Royals [on Oct. 14]. The Blue Jays’ victory in that game topped off with Jose Bautista’s famous bat flip was a good omen for a successful deal!

LEXPERT:
The representatives speaking for the machinist unions didn’t seem to be perturbed at all by this deal, since New Flyer and MCI don’t compete directly. So if traditional layoffs and redundancies and “synergies” weren’t driving this deal, what were the key drivers? I remember reading about logistical benefits, process improvements and even increased purchasing power.
Stauder:
There is little overlap between the New Flyer and MCI businesses with New Flyer’s focus on transit buses and MCI’s focus on motor coaches. The key drivers for the deal were business and product growth and diversification in both the bus and aftermarket segments, with further opportunities for implementation of best practices, lean operating techniques and engineering expertise and technology sharing across the businesses. Cost synergies were also an objective, but not the only one.

LEXPERT:
I imagine there was a lot of work convincing the competition agencies that the merger would not create an anti-competitive force in the bus manufacturing industry. Still, the deal managed to close quickly — it took a little over a month from the point of announcement. Were the competition agencies less concerned than originally feared?

Stauder:
The relatively quick competition clearance in Canada and the US was attributable to the fact that there was little overlap between the businesses, which focused on different products and customers. The closing timing was also facilitated by the fact that the key terms of New Flyer’s credit facility had been agreed by the time the transaction was first announced and that the facility was fully underwritten by the lead banks without the need for an extended marketing period.
Silverman:
The fact that the principal firms involved in the financing had worked together on the credit facility for a number of years helped. Also, most of the acquired companies were in the US, and Cynthia Baker and her team at Chapman and Cutler did an amazing job organizing that aspect of the deal and more. On the credit agreement side, BLG worked hard with The Bank of Nova Scotia and BMO Capital Markets, as co-lead arrangers, to get the document into good shape before we sent the first draft to Torys. That helped to smooth the negotiations and allowed the parties to focus on the key points.

LEXPERT:
Overall, what would you say was the most interesting or memorable aspect of this transaction? Were there any unique challenges that you’re proud to have helped to overcome?

Stauder:
One of the key components of the transaction was the use of representation and warranty insurance, leaving the seller with significantly reduced post-closing exposure and allowing the parties to accommodate one of KPS’s key deal objectives. While this involved a separate work stream and negotiation of the policy terms, overall the representation and warranty process dove-tailed well with the rest of the transaction. Representation and warranty insurance is becoming more common, particularly in mid-market transactions.
Silverman:
I would say really just being part of a large team effort and that we were able to achieve the clients’ objectives in such a short period of time.

(For a summary and full list of legal advisors, click here.)