Kooltex buyout: Valuing the management team incentive package (A)

It was March 2007 and Kooltex CEO Samuel Ashley was excited – he had a sense of déjà vu as he listened to the deal proposed by New Horizons Capital Management, a leading private equity firm based in London. Ashley was thrilled to be at the bargaining table again, despite a recent stream of negative press regarding private equity firms, focused mainly on the industry’s opaque governance and operating procedures and the conspicuously favorable tax treatment received by the funds’ General Partners (GP) on their carried interests. He was negotiating the next round of financing for the firm that he, and a team of fellow managers, had acquired through a management buyout in the fall of 2001. At that time, RIFE Capital, a leading European buyout group, acquired control and majority ownership in Kooltex. Since that original buyout, the company’s sales had doubled and its EBITDA had been multiplied by three to approximately CHF 22.9 million, or about €14 million. Originally, the entire management team had acquired some 15% of the equity in the initial transaction and negotiated a significant exit-based incentive plan; they stood to benefit handsomely from the secondary buyout which was priced at a level that would trigger most of the ratchets in the performance incentive. The freedom to operate, as well as the additional financial resources obtained through the buyout financing, had allowed them to unleash an ambitious growth and profitability strategy, leading the company to impressive market share increases against larger rivals in North America and Europe.