Distressed M&A in the UK Hospitality Sector: Opportunities and Risks

What hidden opportunities might lie within the financial distress plaguing the UK hospitality sector?

The UK hospitality sector faces many difficulties today, worsened by COVID-19. These include a lack of workers, high interest rates, and inflation. These have made businesses financially vulnerable. However, this has created a chance for strategic acquisitions despite the slow start during the pandemic.

Sector troubles bring chances for knowledgeable investors, especially in consumer-facing fields like retail and hospitality. But, buying struggling companies is complicated. Issues like the value of the business and different laws become crucial. Directors must be careful as these deals might include debts, which can affect them personally.

In these acquisitions, time is of the essence. Companies in trouble need to sell quickly to avoid bankruptcy. This pushes buyers to research fast and thoroughly. They need to understand everything about the business and make sure their investments are secure.

Introduction

The UK’s hospitality sector is facing tough times after COVID-19 and economic issues. It’s a moment of both danger and chance. Recent data shows a major drop in the sector’s activity. In September 2022, this fell to its lowest since February 2021, says the Lloyds Bank UK Recovery Tracker.

Like-for-like sales in the industry dropped 3%. And 2,230 licensed places shut down in just one quarter. These are big issues the sector is dealing with.

Now, businesses are even more worried because things are getting more expensive. About 35% of companies are afraid they might not survive by the end of the year. Everyone is paying more for energy and losing staff, with an 11% job vacancy rate.

Restaurants and pubs are cutting their hours. Food prices in restaurants have gone up by 93% because of higher costs for ingredients. Things are really tough.

But there is a ray of hope for smart investors in a bit of distress. One in four businesses has run out of money. This means there are chances to buy these businesses for less. These companies are doing a lot to save money and reorganise, which makes them good picks for smart buyers.

This introduction shows the hard but hopeful reality in the UK’s vibrant hospitality world.

Current State of the UK Hospitality Sector

The UK’s hospitality sector faces hard times. It’s dealing with big problems right now. The Lloyds Bank UK Recovery Tracker noted a sharp decline in September 2022. This marked the fastest drop since February last year.

The marketplace for UK hospitality is also feeling the pinch. There was a 3% drop in sales compared to the previous year. This came from the Coffer CGA Business Tracker. These combined challenges hit the sector hard.

Many businesses in the sector are really worried. A report from UK Hospitality, BBPA, BII, and Hospitality Ulster says 35% might close by the end of the year. During the third quarter, a lot of places shut down. More than 2,200 places closed, showing how bad things are.

Job vacancies in hospitality are 11%, which is high. This makes the staffing problem much worse. Plus, the rising energy costs and supply chain issues are hurting the sector. This all means survival for hospitality is tough right now.

Understanding Distressed M&A

Distressed M&A happens when one business buys another struggling with money problems. This kind of deal is different from regular ones. They need special financial checks and talks with the people who own the money.

These deals also might include special ways to handle money troubles. This helps make sure the value of the business is saved.

In the UK, many businesses are facing big challenges right now. Things like not having enough goods to sell, not enough workers, and prices going up. Places where we shop and eat are feeling it the most.

If a business is having a hard time, the boss needs to think more about the people they owe money to. This change in focus is to keep out of trouble over how they manage the business finances.

When a struggling business is being sold, it’s done quickly and with a lot of care. The checks done are more about the main parts of the business. Sellers can’t promise everything will be perfect, so buyers don’t expect too much.

The seller needs money quickly, and the buyer must know they won’t get many guarantees. The deal moves fast, and everyone has to be ready for that.

How the deal is done can change, especially if the business being sold has big debts. There are different ways to make sure the sale still makes sense for the seller and the buyer. Doing it right is key, because the situation is already hard enough.

Opportunities for Buyers

In today’s shaky economy, the UK’s hospitality scene is a tempting target for buyers. Many hotels are family-owned, making up about 80% of the European market. This presents a good chance for those interested, especially in the unique and charming hotel categories. These places are mainly struggling due to the effects of the pandemic.

Buying means getting valuable assets for less currently. Especially in the luxury segment, there are chances not to be missed. Despite high spending on these properties, they might be undervalued now. It’s a good time for buyers to make their move.

The office space sector is also looking promising. London alone might see 10 million sq ft of space changing hands. This will both pose a challenge and offer opportunities, especially after a busy summer in popular spots.

For those on the lookout for new markets, the timing is just right. The current economic state offers unique chances for those willing to invest. As things get better and business picks up towards 2024, smart investments now could lead to big returns later.

Risks for Buyers

More and more, the UK’s hospitality sector is seeing lots of companies go into insolvency. This can be worrying for those wanting to buy a business. With things like CVAs getting common, buyers have to be extra careful when picking up a company that’s not having an easy time.

Cyber threats are also a big worry, especially for struggling businesses. They might not have strong systems to protect against data leaks or cyberattacks. It’s key to check on their cybersecurity before making any deals. This protects the buyer and the business they’re thinking of buying.

Then, there are unexpected costs that insurance can’t help with. These might come from problems in how the company runs, sudden legal issues, or not managing risks well. Doing solid research and setting up a good way to handle risks can lower this type of problem.

Lastly, there’s the issue of broken promises after the sale. Target companies might not be in a stable financial place. So, the assurances they give could be less reliable. This puts the buyer at a risk of facing problems later. To prevent this, it’s wise to carefully check and discuss what guarantees the seller is willing to make.

UK Hospitality Sector Distressed M&A

The UK’s hospitality sector is going through tough times due to financial stress. Many businesses are struggling with less money coming in and tough economic times. This has led some to go insolvent.

Despite these tough conditions, experts forecast more merger and acquisition deals in 2024. They see possibilities in troubled companies for those who want to invest.

In the first 11 months of 2023, deals in the UK hospitality sector dropped to £9.5 billion from £13.7 billion, the year before. 156 deals were done in 2023, smaller than 179 in 2022.

Big buys included Apollo Global Management spending £506 million for The Restaurant Group. Young’s also took over City Pub Group for £162 million. These deals show a trend; the market is struggling, yet it offers good chances for smart investors.

Despite challenges like loans being hard to get and the high cost of debt, M&A activity continues. Investors are more hopeful now. They see the chance to buy low and later make a profit.

With UK market looking for new growth after the effects of Covid-19 and the Ukraine war, there is hope. Especially when compared to the US, UK companies are seen as good buys. This attracts not just local but foreign investors too.

Lockdowns helped some types of businesses, like those that sell directly to people or through supermarkets, to grow. Combine this with investors feeling good about their chances, and the scene is set for more deals in the sector.

Key Considerations for Sellers

When facing distressed M&A as a seller, many things need careful handling. This is to keep the value as high as possible. These deals move fast, and sellers must use special strategies. With more companies failing, sales face bigger risks. So, it’s vital to keep up the competition among buyers.

It’s vital to manage separation costs well. This includes ending contracts and dealing with money issues. Sellers have to remember that they might still be responsible for problems after the sale. The end of some financial help has caused more companies to seek arrangements in October 2023.

Due to the situation, sellers can’t give the usual promises to buyers. This means buyers might face more risks. Sellers need to make plans that give some guarantees but also set the right expectations. The deal-making must be quick, yet careful, to fit the financial rush.

Dealing with these issues means finding a good balance. Sellers have to be quick but also smart in their decisions. Understanding the deal’s terms and deadlines well is crucial. This helps ensure a fair deal is made for both sides.

Strategic Investments in the Hospitality Sector

Investments in the hospitality sector can lead to long-term stability. In 2023, UK hospitality market activities halved. Still, it made up 40% of Europe’s transactions. This shows the UK’s key role.

In the upcoming year, many loans will expire. This creates chances for investors. Despite higher interest rates, the UK’s hospitality sector stays strong. This shows it’s a good time for careful investment.

The US is facing high inflation, leading to a greater demand for hotels. Despite this, hospitality assets have been doing well. More hotel transactions are expected, thanks to strong customer demand.

The luxury hotel sector is bouncing back quickly. But, it faces challenges like finding enough workers and fixing old buildings, especially in Asia. There might be more distressed situations in the future.

Private credit markets are now crucial for the sector, stepping in when banks pull back. Lockdowns and travel limits have hurt the industry. Without government help, some hotels, especially near cities and airports, face difficulties.

M&A activities across borders are increasing. For those looking at these opportunities, acting quickly is key. With distressed deals, fast and thorough due diligence is necessary. This means being ready to move swiftly to make the most of these situations.

Regulatory Environment and Legal Considerations

The regulatory environment plays a crucial role in handling difficult M&A deals in the UK’s hospitality sector. Directors must know their duties under the Companies Act 2006. This is vital when a company is near insolvency.

Once insolvency is close, directors should focus on protecting creditors. They must be sure to follow all laws. Not doing so can bring big legal and personal problems.

The economy’s current state, worsened by several factors, requires careful steps regarding laws and regulations. Distressed M&A deals demand special transactional designs to meet rules. These efforts aim to lower risks and increase deal value.

Given the ongoing economic struggles, carefully planned strategies are key. They must fit within the law. This ensures that M&A changes happen smoothly and legally.

Market Recovery and Future Outlook

The UK’s hospitality sector is working hard to bounce back. It’s clear that keeping the economy stable and inflation low is essential. In September 2022, the sector’s activity dropped to its lowest at 36.3, the biggest fall since early 2021. This drop matches a 3% reduction in sales compared to the previous year, as seen in the Coffer CGA Business Tracker.

Things like higher running costs, not enough staff, and people struggling with the cost of living are hurting the sector. A big 35% of hospitality businesses are worried they might go out of business by the end of the year. Also, from July to September, the UK lost 2,230 places that sell food and drink, meaning more than one spot closed every hour, according to CGA and AlixPartners.

There is a big problem with finding enough people to work, leading to 11% of jobs in the sector being empty. This is much higher than the average for other jobs and is costing the industry about £22 billion every year. To add to this, 77% of the businesses say they have fewer customers. This, along with 8.3% of the workforce leaving, is making things harder during the busy holiday season.

More than 95% of these companies are seeing their energy bills go up. Because of this, many are changing when they open for business. While places to stay have been filling up a bit more, with some types seeing more visitors, London’s hotels are only about half as full as those outside London. Profits from each room people stayed in went down in London but up outside by quite a bit.

The UK’s hospitality industry needs to get ready for better days. Experts think things might pick up in 2024 if problems like these get better. To do this, smart investments and new ideas are key. By planning ahead and being ready to change, the sector can get back on its feet and do well after the pandemic.

Conclusion

The distressed M&A scene in the UK’s hospitality area is complex yet full of promise. The UK leads in deals within Europe, showing it’s a good place for acquisitions despite economic challenges. The strong demand for rooms and steady prices show a market that can overcome obstacles.

Loans ending soon bring both risk and chances for growth. Even though the sector has faced tough times, like shown by the Lloyds Bank UK Recovery Tracker, there are opportunities for smart investments. The luxury hotels are bouncing back fast, catching the eye of many investors.

The UK’s hospitality field faces a high 11% vacancy rate and hiring issues. This makes acting quickly and wisely in distressed buys very important. Those involved must carefully check through any risky buys and know the rules well to lower any dangers. By doing so, they can help in the market’s recovery after the pandemic and set new paths for M&A in hospitality.