As economic conditions change, distessed merger and acquisition activity is set to increase. Neil Meredith, partner within KPMG Corporate Finance in Birmingham, looks at how it can help a business.
Homeform Group, Little Chef and Edinburgh Crystal are all examples of once successful businesses which have recently been sold in distressed sale processes. As credit conditions continue to deteriorate and the economic environment becomes more challenging, there will be more situations where corporate shareholders decide to take action rather than hope in vain that things will get better.
Sources of such deals will range from over-leveraged private equity investee companies through to profitable subsidiaries of distressed corporates and loss making businesses in numerous sectors such as construction and retail.
Distressed M&A is not all doom and gloom. Exiting non-core operations can free up much needed cash and free up management time and resource to focus on core activities. It can also provide banks with a better opportunity to recover their debt. The sale of Country Artists, a Midlands based giftware supplier, by KPMG resulted in Lloyds bank recovering all of its debt as a result of a sale to a strategic trade buyer.
The logic is compelling. Selling a business well ahead of any potential insolvency process by corporate finance professionals generates value for the following reasons:
? The business can be adequately prepared for sale, ensuring that time is taken to fully understand the business and its prospects;
? corporate finance advisers are often sector focused with professionals who have a detailed knowledge of individual sectors and the key potential buyers for a distressed business.
They will also have an understanding of a buyer’s acquisition rationale and be able to drive value through selling the investment opportunity to each potential buyer; the corporate finance sale process is proven to generate competitive tension as buyers will bid against each other to secure the acquisition opportunity.
The restructuring element is key to the proposition as many of these businesses may reside within the banks’ distressed leverage portfolio and be under close scrutiny. Keeping a watchful eye on trading and cash flows and liaising closely with the banks is a core part of the restructuring role in such deals.
Additionally, time is important for over-leveraged or distressed companies. Keeping track of trading and cash flows is critical throughout the sale process. If the position deteriorates there may be the need to rapidly accelerate the sale process to realise cash or even precipitate an insolvency event such as a receivership or administration.
In addition to corporate acquirers there is a growing number of turnaround focused financial investors, ranging from the more traditional private equity players to hedge funds and specialist distressed funds. Indeed, distressed debt funds were the fastest growing segment of the private equity industry globally during 2007.
Organisations such as Sun Capital, recent acquirer of the Homeform Group, and Endless who have recently bought The Works bookshop chain, have oversubscribed funds looking to invest in distressed and overleveraged businesses.
These buyers can often move quickly and will require differing levels of due diligence, however in many cases the trade off for speed of execution is value. These investors often employ turnaround specialists who will look to generate value from executing a restructuring post acquisition and then sell the business on for a profit when it (and often the market) recovers.
These players will often be successful in situations where a sector is generally struggling. As a result, trade buyer appetite may be low as corporates are often reluctant to buy businesses where significant restructuring is required as it presents additional integration risk.
As the credit and general economic environment continue to be difficult it is likely that more and more distressed disposals will occur. The high prices and excessive leverage that has been a feature of the recent few years will come home to roost as profit and cash flow is put under pressure.
Businesses in sectors which are seeking significant cost increases, perhaps as a result of increasing energy costs, and at the same time weak demand for their products or services, may consider a sale as the best option to realise value.
If executed properly an accelerated or distressed sale process can deliver real value to stakeholders, whether they be investor shareholders or debt providers.
In many cases such a sale will protect the future of many of our local businesses safeguarding long term jobs and prosperity in our region. Stakeholders in distressed businesses cannot afford to delay or their options could become limited.”