Risk management of mergers and acquisitions with borrowed capital in the energy sector

Abstract

Under the conditions of macroeconomic instability and the difficulty of forecasting trends in the market development, a competitive recovery of the electric power business is possible only by attracting large capital investment. Mergers and acquisitions deals that make it possible to concentrate assets and to amalgamate the industry business are done through the leveraged buy-out (LBO) scheme. However, LBO deals are associated not only with the investor's risks, but also with the risks of the acquirers and vendors. The article presents the authors' model of risks formalization of LBO deals. It allows for consolidating the blocks of key project and financial indicators, parameters of a specific risk, and macroeconomic and sectoral factors. The developed model yields an indicative assessment of the degree of risk of LBO deals taking into account the industry specifics. A mechanism for determining the position of the creditor in the framework of LBO is proposed as a practical application of this model. The results of the study can be used by the management of energy companies, investors and analysts in making financial decisions. © 2018 WIT Press.