There is something to be learned from successful M&A acquisitions. In contrast to an earn-out strategy, Let’s look at the timeline of Disney’s acquisition of BamTech, which began in 2016:
Here, we look to Disney’s 2016 10-K
In fiscal 2016, [Disney] acquired a 15% interest in BAMTech, LLC (BAMTech), an entity which holds Major League Baseball’s streaming technology and content delivery businesses, for $450 million. BAMTech is a content management and distribution business and also has a direct-to-consumer business in which it acquires rights and distributes sports programming.
The Company is committed to acquire an additional 18% interest for $557 million in January 2017. In addition, the Company has an option to increase its ownership to 66% by acquiring additional shares at fair market value from Major League Baseball between August 2020 and August 2023.
Here, we see an alternative strategy to earn-outs.
First, the buyer took on a $1 Billion minority stake of 33% over 2 years (15% in 2016 and 18% in 2017). During this time, a partnership was formed with the selling company (BamTech).
Second, the buyer has an option for an additional 33% in ownership to acquire a majority stake.
In 2017, we learn the following:
On September 25, 2017, [Disney] acquired an additional 42% interest in BAMTech, a streaming technology and content delivery business, from an affiliate of Major League Baseball (MLB) for $1.6 billion due in January 2018. The acquisition increased our interest from 33% to 75%, and as a result, we began consolidating BAMTech. The Company paid $1.0 billion for its original 33% interest in BAMTech.
Here, we see that now the total stake is 75% with an additional $1.6 Billion investment. The total invested is now $2.6 Billion for 75% of the company. The buyer here has spread risk over several years and had an opportunity to develop a partnership, monitor results, and then seize upon the opportunity to place a larger bet when the time is right. You can compare this with Disney’s earn-out strategy regarding its acquisition of Maker Studios.
How does the buyer deal with the remaining minority shareholders? The 10-Q for 2018 Q2 says the following:
BAMTech’s noncontrolling interest holders, MLB and the National Hockey League (NHL), have the right to sell their interest to [Disney] in the future. MLB can generally sell their interest to the Company starting five years from and ending ten years after the September 25, 2017 acquisition date at the greater of fair value or a guaranteed floor value ($563 million accreting at 8% annually for eight years).
The NHL can sell its interest to the Company in fiscal 2020 for $300 million or in fiscal 2021 for $350 million. Accordingly, these interests are recorded as “Redeemable noncontrolling interests” in the Company’s Condensed Consolidated Balance Sheet. In addition, ESPN’s noncontrolling interest holder has a 20% interest in BAMTech’s direct-to-consumer sports business.
The Company has the right to purchase MLB’s interest in BAMTech starting five years from and ending ten years after the acquisition date at the greater of fair value or the guaranteed floor value. The Company has the right to acquire the NHL interest in fiscal years 2020 or 2021 for $500 million.
Thus, the buyer deals with the remaining minority shareholders in several ways:
First, the minority stakeholders are noncontrolling interest holders. The buyer has the controlling interest of the company.
Second, the noncontrolling interest holders have redeemable interests. These holders cut different deals with Disney. MLB can sell at a predetermined floor value, or fair value, whichever is greater between 2022 through 2027. NHL can sell its interest for $300 million in 2020 or $350 million in 2021.
Third, the buyer has the right to acquire the shares based on the fair value or guaranteed value (whichever is greater) for MLB, or based on a fixed amount for NHL ($500 Million).
This will be a win-win scenario, where the seller received $2.6 Billion over 2 years for a 75% stake. The minority shareholders will receive a profit based on their investments. Finally, the buyer has used an option to spread risk, and now has a path to 100% ownership over the next 5-10 years, staying connected to valuable partners who have a minority stake and provide synergy. Risk is spread out over years for the Buyer in this scenario.
Fogel & Potamianos LLP‘s General Counsel Group serves as outsourced general counsel to small and middle market companies, as well as high net worth individuals. Our Corporate Practice Group provides expertise in M&A dealmaking.
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