Busted Takeover

A busted takeover, or bust-up takeover, is a highly leveraged corporate buyout, in which some of the acquired company’s assets are sold in order to repay the loan that financed the takeover.

Busted takeovers are used in acquisitions when the acquiring company does not have much cash and the target company has a surplus of undervalued assets. These assets are usually used as collateral for the loan, in order to complete the deal.

Busted takeovers are often leveraged buyouts which are financed by a significant amount of debt — which are sometimes used to combat hostile takeover bids. The resulting corporate structure, with high levels of debt, may subsequently act as a deterrent to hostile bidders.

Once the target company is acquired, some of its assets are sold in order to pay back a portion of the funds that the acquiring company used to finance the initial buyout. This form of asset stripping can unlock shareholder value, if the assets are sufficiently undervalued.

An example of a bust-up takeover was Pantry Pride's bid to acquire Revlon in 1985. Pantry Pride, a large supermarket chain controlled by Ron Perelman, was smaller than Revlon, the beauty products and healthcare concern, 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. Pantry Pride was able to purchase Revlon after winning a court case in the Delaware Supreme Court. After acquiring Revlon, Perelman sold about $1.4 billion worth of Revlon’s non-cosmetics businesses.