'Business as unusual' - the benefits of accelerated M&A
We are seeing an increasing focus on the economic impacts of the COVID-19 lockdown. While much traditional M&A activity may have been quiet, some businesses are looking actively at new opportunities and more unusual types of deal, for both defensive and strategic reasons.
We expect to see more activity like the recent fundraising by online fashion retailer Boohoo, which launched a surprise £200 million share placing to fund the acquisition of struggling high street rivals. For both buyers and sellers there will be a new 'need for speed' requiring a different approach and buyers with cash will see a wave of new opportunities.
What might accelerated M&A look like?
Accelerated transactions may be initiated either by buyers who are able to use their cash resources to make approaches that would previously have been unwelcome, or by a company which is itself suffering the dramatic economic consequences of being unable to survive in its normal state or market.
Buying a weaker competitor
Companies under financial pressure may be willing to entertain a deal with a competitor or its owners when they would not before. Doing so may preserve value, jobs and market share compared to trying to survive in a weakened state. Buying a known entity from your sector brings the advantage of your own knowledge and knowledge about where your competitor sits in the market, so you can focus due diligence on very specific information requests.
Rescuing a business which is crucial to your supply chain
There may be opportunities for you effectively to 'rescue' companies that are small and vulnerable to the COVID-19 pandemic's economic effects, but nevertheless form a business-critical part of your supply chain.
We have seen this happen in the food & drink and electronics sectors, where essential, but low-volume ingredients or electronic components are supplied by niche producers who may be in difficulties themselves.
An accelerated acquisition could be worth exploring as a way of safeguarding the interests of both parties. It may also be possible to introduce a mechanism whereby the owners of the supply chain company are able subsequently to buy back some or all of their equity in certain circumstances.
Temporary joint ventures
Other deals may involve temporary joint ventures. These could include, for example, competitors or adjacent brands which have shared logistics in order to access new direct-to-consumer markets becoming cemented into a more formal and strategic relationship for both parties.
Buying the dip in a particular sector
In the same way as investors on the stock market seek to time their entry in and out of sectors according to valuation cycles, the next few weeks and months may prove to have been a great time to invest in business areas which are currently out of fashion, but have a long-term intrinsic value.
Examples may include the domestic hotel and leisure sector, where this year will be badly hit, but you may feel next year and beyond will benefit from even stronger growth as foreign holidays are taken less. We have also seen student letting businesses and accommodation come to the market quickly.
What are the benefits of accelerated M&A?
As the name implies, accelerated M&A is designed to be faster than a normal M&A transaction, but it may also bring much wider benefits.
Accelerated M&A should be deployed for transactions which are only effective and worth doing if they complete quickly: For example, to preserve the business, to retain the skilled workforce, client base and supply chain etc.
While the circumstances will be different in each case, many of these transactions might be deliverable without entering into an insolvency process. The benefits of the speed of execution, must balance the risks of doing a deal at a time when financial forecasts are bound to be much less reliable, and the due diligence and warranty cover is less than normal.
Some warranty and indemnity insurance providers are offering new products designed to cover the risk associated with accelerated M&A: There may be less (or no) time to carry out normal due diligence. In the insolvency/restructuring sphere this is compounded by the fact that administrators will not give any warranties or indemnities in respect of the sale assets.
There are policies which are designed to give basic cover on key buyer risks beyond the level any administrator would provide. Risk can also be mitigated by carrying out particularly focused due diligence quickly and, of course, reflecting in the price the unknown risks that are being taken on.
Post-completion price adjustments are also possible, but we would always bear in mind the ability of any selling entity to meet the financial obligations arising from the transaction if they are already in a fragile state.
Debt-for-equity swaps – preserving vital relationships and ensuring continuity
This approach may appeal to a company that is finding it impossible to obtain payment for its goods from a customer or from another company further down the supply chain. There is real scope for novel deals in this area at present.
For example, as an alternative to issuing potentially costly and time-consuming legal proceedings for the pursuit of the debt, if you can afford to, you may choose to suggest a deal to swap the debt for equity, and therefore become a shareholder in the relevant company.
As a precursor to these transactions, a creditor could make emergency funds available to the business in question on a 'loan-to-own' basis. This is where the funding which is advanced comes with the safeguard of triggers and events of default which can lead ultimately to the creditor owning most of the debtor's share capital.
A lighter alternative might be for the creditor to take a minority interest in the debtor's share capital with the benefit of some significant minority protections and other shareholder rights in the investment agreement. This could deliver a strategic investment in a vital supplier which would otherwise be simply a bad debt risk.
Light touch administration – breathing space for deeper restructuring
If your business is subject to creditor pressure, you may be able to benefit from using a 'light touch' administration in order to mothball the company and/or to provide breathing space to implement a deeper restructuring or workout. We see these being an option at the moment, as there are plenty of businesses who could benefit from being mothballed.
'Light touch' administration is one where your company enters administration, thereby benefiting from the protection of a general moratorium against creditor claims/actions.
In an 'ordinary' administration the directors are effectively divested of their powers; in a light touch administration day-to-day responsibilities are delegated to the directors, so that they can continue to operate the business.
The typical intention of a 'light touch' administration is that your company can exit administration on a solvent basis when trading conditions have improved and/or your company has restructured its affairs. These could be restructured on a consensual basis, or by deploying a compromise of claims under a Company Voluntary Arrangement (CVA).
For further information on light touch administration, please see our recent article.
How we can help you
We have an Accelerated Deal team ready to assist with these new deals. Our approach draws on the combined strengths and skillsets of Michelmores' Banking, Restructuring & Insolvency, Corporate Finance, Commercial and Employment teams.
We would be delighted to speak to you and your accountants or corporate finance advisers with a view to exploring how you may benefit from accelerated M&A deals or advice in relation to more distressed situations.
To start this conversation, please contact: Richard Cobb.