Finance ; Management buyouts ; Strategy

Piet Malan, CEO of Metermatic, received a phone call from the private equity company he had approached to help him with a potential management buyout (MBO) of Metermatic from its parent, SAFREN. Equis Private Investment needed a commitment from Malan and wanted to firm up on the deal price and its share of the equity. Malan's management team, particularly the sales manager, were very keen to take management control of Metermatic, but Malan was more cautious. He was worried about the risk of the high levels of debt that Metermatic would have to sustain and the fact that Equis wanted him and the management team to put up some of the equity. He knew this would call for each of them to increase the size of their mortgage bonds and that it would put a great strain on Metermatic's cash flow over the next few years. Yet this was a rare opportunity. Metermatic did not fit into SAFREN's strategic vision. At least this was the impression that Malan and his management team were given whenever they met with the rest of the group. It was too small to warrant much attention within the SAFREN group. Malan was concerned that Metermatic was not able to take advantage of investment opportunities. Capital expenditure was rarely allocated to the division, a source of frustration to Metermatic executives, and Malan felt that he might be better able to retain his senior management team if they felt they 'owned' a significant share of their own company and raised additional capital for growth. Consequently, a private equity-financed MBO looked attractive. Of course, he still needed to discuss the proposal with SAFREN. He was not sure how they would respond.