Bust-Up Takeover

A bust-up takeover is a corporate buyout in which the acquirer sells off a piece of the company in order to pay down some of the debt used to finance the initial buyout. The acquirer buys the company by taking on debt and then repays it with the target's assets once it has control. This strategy is used in cases where the target company has undervalued assets that the acquirer seeks to exploit.

This style of buyout is a type of leveraged buyout, an acquisition of a company using a significant amount of borrowed money to meet the cost of acquisition. These acquisitions require the acquirers to conduct an in-depth analysis to adequately value the target company's assets and to ensure that the return on those assets pays for the added cost of debt.

If the target company has significantly undervalued assets and the acquirer has little cash (and so needs debt to fund the purchase), this strategy could be implemented to successfully unlock value.

An example of a bust-up takeover was Pantry Pride's bid to acquire Revlon in 1985. Pantry Pride, controlled by Ron Perelman, was smaller than Revlon and planned to use debt for the purchase. At the time of the bid, M. C. Bergerac, Revlon's Chairman, stated "Revlon is not for sale. We are not seeking acquisition proposals. Our board of directors believes that the Revlon shareholders should be protected against a junk-bond, bust-up takeover." In other words, Pantry Pride planned to use junk bonds for financing and would also sell off parts of Revlon once the acquisition was final. Ultimately Pantry Pride Inc. was able to purchase Revlon Inc. after winning a court case in the Delaware Supreme Court. After acquiring Revlon, Perelman sold about $1.4 billion worth of the beauty products and healthcare concern's non-cosmetics businesses.