Sun Capital partners could make up to £400m from incentive scheme

Hugh Osmond and his partners at Sun Capital, the investment vehicle that he heads, could make as much as £400m over the next couple of years thanks to a complex incentive scheme revealed yesterday.

The scheme, concocted by Capital Management & Investment to reward Sun Capital, is based on the bonus deals used by venture capitalists – usually well away from the public glare. It kicks in on top of £107m, which will be paid in three parcels to Sun Capital in CMI shares by way of payment for the investment vehicle's help and input into the bid for Six Continents.

The incentive structure has several elements, most of which involve Sun Capital.

Upon completion, Sun Capital's five directors, who own 20 per cent of CMI, will immediately receive an advisory fee of £22m in shares. This is to compensate Sun Capital for investing a total of £22m in CMI.

The directors of Sun Capital (see panel) will receive a further £38m in shares. Broadly, this payment will see them receive 1 per cent of any value returned to Six Continents' shareholders over £700m (the amount the leisure group has already promised to hand back), provided the new group's adjusted value is more than 692p per share after results for the years to 2004, 2005 and 2006 are produced. To get the full amount, they must return more than £2.6bn of value, a hurdle rate set by CMI's advisers.

A bonus scrip dividend of 244 million new CMI shares – worth about £47m – will be paid to Sun Capital once the deal is completed. This payment is worth roughly the same as CMI's existing market capitalisation.

All that is just for starters and does not include fees payable to outside advisers, such as banks, lawyers and spindoctors. So far, CMI has agreed to pay £5m to its banking advisers, CSFB and Lehman Brothers, by way of a commitment fee.

Provided the equivalent Six Continents' share price, which includes any cash handed back to shareholders such as dividends, reaches 692p, 38 per cent above the price when the company announced its demerger, then Sun Capital starts to make real money.

Working on the assumption that Sun Capital would take 20 per cent of any gains generated above the equivalent 692p level, at an equivalent share price of 750p, the team, who are not drawing any salaries for two years, would reap £101m. If the equivalent share price rises to 850p, they would receive £274m – or £381m, including other deal fees, bonuses and incentives.