A quick presentation of the Restructuring job…

November 1, 2022 by Louis DETALLE

A quick presentation of the Restructuring job…

In this article, Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023) explains the job of an analyst in Restructuring.

What does Restructuring consist in?

Restructuring is a term that encompasses all professionals working to assist companies in difficulty. In this market, various categories of actors are involved: debtors (often the company in difficulty), creditors (which may be banks), shareholders (of the company in difficulty) and managers.

Restructuring is an activity that comes to the aid of companies facing economic and financial difficulties in the course of their lives that could threaten their survival in the short or medium term. The particularity of this sector is that it requires both a real financial technicality and a legal technicality, which are invaluable during complex collective procedures.

This activity is particularly fashionable in the current context, marked by the post-covid period, and it should be noted that the restructuring profession generally does well in periods of crisis or post-crisis since the number of companies in difficulty increases.

What does an analyst in Restructuring work on?

There are several situations in which a company in difficulty may call on the services of a restructuring consultancy.

However, if a general methodology is to be given, the missions of a restructuring analyst are generally as follow:

Analysis of the company’s history and the choices that led it to find itself in this situation (collective procedure in France for example). The first step is therefore to determine how the company got into such difficulties. The objective is simply to understand the choices and events that led to this situation.

A strategic due diligence is then required: In order to understand the prospects for improving the company and its activity, the business plan submitted by the company must be carefully examined in order to gauge the company’s future ability to repay its creditors.

To do this, a comparative analysis of the business plans of the last 10 years compared to the results actually achieved may be judicious in order to gauge the realistic nature of the company’s management. A forecast analysis of the evolution of the company’s market is also essential to assess whether the company will evolve in a favorable context or not. A strategic analysis must complete this due diligence work to see if the business strategy implemented is consistent with the developments anticipated by the restructuring firm.

Definition of the sustainable debt level and production of a debt repayment plan: Next comes a turnaround plan to suggest ways to improve the company’s management and profitability. This may involve reducing the cost structure, requesting longer payment terms to relieve pressure on operating cash flow.

Finally, the company will have to define its sustainable debt level. The company will propose a new sustainable debt according to the estimates made by the Restructuring firm. This will allow the company to continue its activity under new conditions that will enable it to repay the old debts that have not been honored as well as the new debt intended for the continuation of the activity.

In doing so, the restructuring firm will enable the creditors to assess the company’s future capacity to honor its debts in the event of a continuation of its activity under the terms proposed in the turnaround plan.

What is interesting & demanding in Restructuring?

First of all, a restructuring analyst can work on extremely complex cases, both because of the number and nature of the players involved and because of the situations of the companies in difficulty.

Indeed, if all economic crises are different, it is also because all the events that cause them have a different impact on companies. This is why each restructuring assignment is different from another, and this is an aspect that many professionals in this sector stress.

However, this diversity of subjects obviously suggests complexity since each subject is not like any other. On the other hand, the topics encountered are related to both legal and financial considerations, which requires skills in Law as well as in Financial Modelling. Profiles with these two facets are therefore highly appreciated.

Useful resources

KPMG’s definition of Restructuring

An article about how Restructuring creates value for companies…

About the author

The article was written in October 2022 by Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023).

Understand the mechanism of inflation in a few minutes?

November 1, 2022 by Louis DETALLE

Understand the mechanism of inflation in a few minutes?

In this article, Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023) explains everything you have to know about inflation.

What is inflation and how can it make us poorer?

In a liberal economy, the prices of goods and services consumed vary over time. In France, for example, when the price of wheat rises, the price of wheat flour rises and so the price of a loaf of bread may also rises as a consequence of the rise in the price of the raw materials used for its production… This small example is only designed to make the evolution of prices concrete for one good only. It helps us understand what happens when the increase in price happens not only for a loaf of bread, but for all the goods of an economy.

Inflation is when prices rise overall, not just the prices of a few goods and services. When this is the case, over time, each unit of money buys fewer and fewer products. In other words, inflation gradually erodes the value of money (purchasing power).

If we take the example of a loaf of bread which costs €1 in year X, while the price of the 20g of wheat flour contained in a loaf is 20 cents. In year X+1, if the 20g of wheat flour now costs 22 cents, i.e., a 10% increase over one year, the price of the loaf of bread will have to reflect this increase, otherwise the baker will be the only one to suffer the increase in the price of his raw material. The price of a loaf of bread will then be €1.02.

We can see that here, with one euro, i.e., the same amount of the same currency, from one year to the next, it is not possible for us to buy a loaf of bread because it costs €1.02 and not €1 anymore.

This is a very schematic way of understanding the mechanism of inflation and how it destroys the purchasing power of consumers in an economy.

How is the inflation computed and what does a x% inflation mean?

In France, Insee (Institut national de la statistique et des études économiques in French) is responsible for calculating inflation. It obtains it by comparing the price of a basket of goods and services each month. The content of this basket is updated once a year to reflect household consumption patterns as closely as possible. In detail, the statistics office uses the distribution of consumer expenditure by item as assessed in the national accounts, and then weights each product in proportion to its weight in household consumption expenditure.

What is important to understand is that Insee calculates the price of an overall household expenditure basket and evaluates the variation of its price over time.

When inflation is announced at X%, this means that the overall value spent in the year by a household will increase by X%.

However, if the price of goods increases but wages remain the same, then purchasing power deteriorates, and this is why low-income households are the most affected by the rise in the price of everyday goods. Indeed, low-income households can’t easily cope with a 10% increase in price of their daily products, whereas the middle & upper classes can better deal with such a situation.

What can we do to reduce inflation?

It is the regulators who control inflation through major macroeconomic levers. It is therefore central banks and governments that can act and they do so in various ways (as an example, we use the context of the War in Ukraine in 2022):

They raise interest rates: when inflation is too high, central banks raise interest rates to slow down the economy and bring inflation down. This is what the European Central Bank (ECB) has just done because of the economic consequences of the War in Ukraine. The economic sanctions have seen the price of energy commodities soar, which has pushed up inflation.

Blocking certain prices: This is what the French government is still doing on energy prices. Thus, in France, the increase in gas and electricity tariffs will be limited to 15% for households, compared to a freeze on gas prices and an increase limited to 4% for electricity in 2022. Without this “tariff shield”, the French would have had to endure an increase of 120%.

Distribute one-off aid: These measures are often considered too costly and can involve an increase in salaries.

Bear in mind that “miracle” methods do not exist, otherwise inflation would never be a subject discussed in the media. However, these three methods are the most used by governments and central banks but only time will tell us whether they succeed.

Figure 1. Inflation in France.

Source: Insee / Les Echos.

Useful resources

Inflation rates across the World

Insee’s forecast of the French inflation rate

About the author

The article was written in October 2022 by Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023).

The abandonment of the TF1-M6 merger: what happened?

November 1, 2022 by Louis DETALLE

The abandonment of the TF1-M6 merger: what happened?

In this article, Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023) explains how the fusion of the 2 biggest French TV companies has failed…

What was planned & why?

It was in May 2021 that the project to bring together the two French television channels was announced. On the one hand, TF1, whose 2020 turnover exceeds 2 billion euros; on the other hand, M6 with a turnover of 1.2 billion euros.

In the context of the loss of speed of French television channels in the face of fierce competition from the multiplying streaming platforms such as Netflix, Disney+ and Prime Video, the two television groups had deemed it strategic to come together in a giant merger.

Indeed, if we look at TF1’s revenues in 2020, they may reach more than €2 billion, but this means a notable drop of €256 million compared to 2020, i.e., a drop of 11% in its turnover.

It is therefore in a context of loss of market share that the two French television giants announced their desire to merge. A merger would have enabled these two players to combine a total of 40% of the television audience and 70% of the television advertising market.

This risk of an ultra-dominant position in France was also the source of complications for the two groups, which estimated that they could achieve economies of scale of nearly €300 million.

What happened after the announcement?

Well, after the announcement, the French Competition Authority (l’Autorité de la concurrence in French) announced that it had started a report on the consequences of a potential merger between the two groups.

The result of this report was made known on July 27, 2022: the TV channel groups were asked to divest themselves of some of their larger channels to satisfy the market monopoly issues.

According to this report, it was suggested that the M6 group should, for example, have divested itself of the M6 channel as well as TFX, 6Ter and Paris Première, which was not possible. The Directorate-General for Competition, Consumer Affairs and Fraud Control suggested to the competition authority that the new entity should sell W9 or TMC.

Why haven’t M6 & TF1 accepted to sell some TV channels?

First of all, at the beginning of the announcement of the merger project, the management of the two groups argued that their so-called hegemony on the television advertising market was non-existent.

One of their strong arguments was to point out that the market to be considered was not only that of television advertising, but rather the market for advertising on broadcasting platforms. This market would then effectively include television but also advertising on streaming sites or on-demand content platforms.

This argument was rejected by the competition authority, which considered that the market to be considered remained that of French television advertising and that an entity with 75% of the market share was therefore unthinkable, which is why TV channels had to be sold.

Useful resources

Autorité de la concurrence

Group M6’s website

Group TF1’s website

About the author

The article was written in October 2022 by Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023).

What are LBOs and how do they work?

November 1, 2022 by Louis DETALLE

What are LBOs and how do they work?

In this article, Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023) explains why LBOs are so trendy and what they consist in.

What does a LBO consist in & how is it built?

LBO stands for a Leverage Buy-Out. It means a company acquisition which is funded with a lot of debt. Often, when an LBO is performed, 70% of the funds used for the acquisition come from debt, the 30% left being equity.

Figure 1. Schematic plan of the organization of an LBO.

Source: the author.

To perform an LBO, the company wishing to buy the company called Target in this example will have to create a Holding company specially for this purpose. The holding will then take on some debt with specific lenders (banks, debt funds) under the form of loan or bonds. After that, the holding will have both some initial equity from the company wishing to acquire Target and some debt to buy Target.

What happens after the target has been bought?

Well, after the target has been bought, since the target company has an operating activity which motivated the acquiring company to buy it, this means that the target company had great financial performance. And it better to be the case! Otherwise, the large amount of debt taken for the operation will never be reimbursed to the lenders.

The principle is that target’s financial cash flows will be redistributed to the holding in the form of dividends, and the holding will use these dividends to pay back the debt to the lenders until all debt is reimbursed.

What makes a company a good LBO target?

A good LBO target should respect a few conditions related to the target company: important operating cashflows, a mature market, A company whose development cycle is over.

Important operating cashflows

First & foremost, without great cashflows, the holding will never be able to reimburse the debt taken with the dividend if they are insufficient. For that matter, the company targeted for the LBO should have both regular & important cashflows.

A mature market

When looking at the bigger picture, the company willing to acquire a target with a LBO must make sure that the market in which the potential target evolves is stabilized. Because LBO means major financial risk due to the amount of debt involved, a company cannot also add operational risk.

A company whose development cycle is over

Once again, the target company will ensure the reimbursement of a high debt. This is why all capital expenditures (CAPEX) and major investments such as machines, fleets of vehicles should have been already done.

Useful resources

Vernimmen’s book chapters on LBOs

Youtube video on a LBO Case Study

About the author

The article was written in October 2022 by Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023).