Exploring Strategic Opportunities Through Distressed M&A in the UK

Could high energy prices and inflation help some businesses thrive? Recent trends suggest this may be the case.

Distressed mergers and acquisitions (M&A) are becoming an attractive option in the UK. They come as a way to deal with increasing costs and the long-lasting effects of the pandemic. This strategy has led to more deals in retail, manufacturing, and other sectors. Areas like financial services, healthcare, and technology are also seeing a boost in interest.

Reports highlight a potential rise in these deals in the UK. Market downturns and rising prices are key factors. Experts believe buyers will focus on improving struggling companies or selling off parts. Yet, investors with a lot of money are ready to jump on the chance to buy struggling businesses. Sectors generating a lot of interest include insurance, healthcare, and technology.

But, working in the distressed M&A field can be complex. It involves following specific laws, like the Enterprise Act 2002 and the National Security and Investment Act 2021. There is also a growing demand for loans. This demand could lead to more companies restructuring or seeking new financing in 2023.

For buyers, the risks are high. Due diligence may be limited, and seller guarantees might not be reliable. Issues can also arise from liquidators if deals seem undervalued. However, there are still many opportunities for those who are sharp and well-informed.

Understanding the Landscape of Distressed M&A in the UK

The UK’s market is changing, showing more signs of distressed M&A. This change is due to high inflation and energy costs going up. These factors have led to fewer deals in 2023, falling by 18% from the year before. The total value of these deals dropped to £83bn. This is a big difference from the past years where the values were significantly higher. Despite these challenges, financial investors are still looking for good opportunities in the UK. They are careful in their choices even though they face limits on how much debt they can take.

In 2023, PE made up a large part of the deals both in volume (42%) and in value (55%). This shows their strong presence in the market. There are clear rules for these deals that everyone must follow. This includes laws like the UK Competition and Markets Authority, the Enterprise Act, the Takeover Panel, the FCA, the Companies Act, and the Insolvency Act.

UK public companies must share more information because they have many shareholders. Due diligence is very important, as it can find issues in 30 to 50% of deals. This might change the terms of the deal in 20 to 30% of cases. It’s crucial for avoiding risks.

The M&A market has found it hard to deal with high borrowing costs in the past year. Sectors like construction, retail, and hospitality are facing more challenges. This has created chances for investors who can see the potential in these difficult situations.

When joining the UK M&A market, everyone must follow the Takeover Code. This includes needing 70% of control for a deal to go through. Sellers and buyers use different ways to value the deals, like through future performance or vendor loans. The NSI Act 2021 also looks carefully at deals in 17 key sectors. It makes sure solid checks are done in areas like law, finance, and IT before a deal is agreed on.

There are a lot of risks in the M&A market. Buyers need to do deep due diligence and have good ways to handle risks. Understanding the UK’s rules is key to finding and seizing good investment chances.

Legal Framework Governing Distressed M&A Transactions

The UK’s rules for distressed M&A deals have many laws. The UK Competition and Markets Authority (CMA) looks at mergers under the Enterprise Act 2002. It aims to make sure the competition is fair, even when companies are struggling. The National Security and Investment Act 2021 checks investments for any security risks. They need approvals to go ahead.

Part 26 and Part 27 of the Companies Act 2006 guide how negotiations and mergers work. They offer a clear way to handle M&A in hard times. The Insolvency Act 1986 and the Corporate Insolvency and Governance Act 2020 are key if a company is failing. They tell leaders to think about the people they owe money to. This helps avoid breaking the law and risk of penalties.

The Financial Conduct Authority watches over how deals are done under the Financial Services and Markets Act 2000. This is important in distressed M&A movements. The UK Takeover Panel checks the Takeover Code. They make sure things are done openly with companies that are in trouble.

Leaders and firms in these deals must be careful. They could face big fines or even go to jail for not following the merger and security laws. So, it’s crucial to understand and follow all the rules for a safe and good deal.

Distressed M&A Strategic Opportunities UK

The UK’s economic challenges are leading to more distressed M&A deals. This trend is especially strong in retail, healthcare, and tech sectors. Many businesses are facing financial troubles, making it important to look at strategic options. This situation focuses attention on finding growth chances in the UK.

Burges Salmon, supported by experienced lawyers, helps with these complex deals. They pay close attention to issues like pensions and laws. With little information available, careful planning is key for buyers. They must look closely at the big issues and risks affecting a company’s worth.

Different forms of distressed M&A deals exist, often as share or asset sales. These may involve an insolvency process like administration. Buying assets can help avoid former debts or problems, reducing the risk of inadequate research. Thorough planning and analysis are vital for a successful transaction.

The pandemic has made the economic situation more challenging, creating more distressed companies. Lenders need to scrutinize deals even more. This has led to a stronger focus on the quality of agreements and covenants. The UK’s changing insolvency laws and tougher competition rules are also influencing strategies to drive growth and stability.

Risks in Distressed M&A Transactions

Distressed M&A deals are happening more often in the UK. This is due to the impact of higher energy prices and inflation. Sectors like retail, manufacturing, and finance are facing recessions. This situation pushes buyers and investors to sell off non-essential parts of their businesses or restructure.

In these deals, buyers face big risks. Due diligence processes are often cut short. The rush and limited information can make it hard for buyers to see clearly. Sellers might also give less solid promises, increasing the chance of facing unexpected problems once the deal is done.

Buying something below its real value is a big risk too. In these cases, the deal might be seen as fraudulent. Then, the people at the head of buying could be held personally responsible. So, it’s very important to be careful and thoroughly check every deal to avoid such issues.

Sellers aim to make deals as certain as possible. They try to avoid terms that allow buyers to pull out or to pay later. This helps transactions to go more smoothly. But, buyers need to be extra careful and have good risk plans in place. In the UK, if a company is near bankruptcy, its leaders must put their creditors first, which further complicates matters.

With more distress sales happening, it’s key to plan well and act fast. Diving deep into the details, arranging the deal just right, and making proactive plans to dodge risks are crucial. These steps can lead to success in a highly unpredictable market.

Effective Due Diligence for Distressed M&A

Doing thorough due diligence in distressed M&A is key, given the tight schedules and high risks. It’s vital for buyers to check everything carefully. They need to find business chances and lower risks.

Key due diligence areas include hidden risks in contracts, finance deals, and technology laws. Buyers should also look into the duties of directors. They must make sure all parties involved are considered. This step is crucial to preventing future troubles.

Buyers must verify everything, from who deals with insolvency issues to who owns assets. This is to catch any problems early, like keeping people’s data safe and understanding pension commitments.

Contract protections in these deals are often few. Sellers can’t or won’t offer guarantees. So, buyers should focus on plans to protect themselves. Having a skilled team helps deal with the fast pace and tricky nature of distressed M&A. It ensures they can handle risks and grab opportunities well.

In the UK, with costs and inflation going up, we expect more distressed M&A deals. Buyers need to act quickly and wisely. This is to do good due diligence and gain from these chances while staying safe.

Financing Distressed M&A Deals

Financing troubled M&A deals needs careful planning. Due to inflation and high energy costs, markets face downturns. This causes more troubled M&A deals to happen. Getting funds before closing makes deals go faster and makes them more attractive to sellers.

For big investors, this is a chance to buy into various industries. These include retail, manufacturing, and healthcare. They need to check deals well. They must make sure prices are right and look out for any dishonest activity. This protects their money.

Planning how to fund these deals is tricky. But, getting money in early can be a huge help. It gives buyers a chance to get in before others. A smart financial plan is key. It helps make deals happen and deal with the many risks involved.

Choosing Between Asset Sale and Share Sale

In the UK, picking between an asset sale and a share sale is a big decision. This is especially true in troubled M&A situations. The choice has a big effect on how future debts are handled. Buyers often like asset sales because they can pick and choose which parts of the business to buy. This way, they avoid taking on the business’s full history of debts and responsibilities.

When deciding to buy, people must look closely at many things. This is crucial for assessing the true risks involved. For instance, in an asset sale, buyers need to check things like any deals that might change if ownership does, along with the business’s debts and security agreements. They also need to consider if any personal data the business holds follows data protection rules. Knowing the pension obligations and any national security rules is also vital. All this helps in making a careful choice.

Buying the whole business in a share sale might seem simpler, but it does come with big risks. The buyer takes on everything the business owes or is liable for. This includes anything the seller might not have shared upfront. Sellers in tough financial spots might push for a share sale because it’s easier for them. But this can mean unknown risks for the buyer. It is smart for the buyer to ask for documents about how the business is being dealt with financially and check for any special rights over the assets.

Getting few promises and protections in a troubled sale means making smart choices from the start. This includes seeing if a pre-packaged sale – where the plan is made before the sale happens – makes things clearer and easier. Weighing up the chances with the risks ensures the best choice is made. This works for the company’s future goals and follows all the rules.

Mitigating Risks with Insurance Solutions

Insurance is key in tough M&A deals, with W&I insurance playing a big role in lowering risks. HWF’s study with 17 insurers found factors like what causes the stress, the deal’s workings, and how well the business can be seen.

The COVID-19 pandemic showed the need for really looking into a target’s operations. This means a deep look by legal and financial experts at the business’s records and commitments. Situations that are troubled but not yet in formal trouble are easier to insure. When a business is in administration, it’s also easier to get insurance.

W&I insurance is becoming more popular in M&A deals, helping protect both sides. For non-tax issues, it can cover for up to two years. For tax matters, it can go up to seven years. Sellers like it because they can sell without keeping money back for possible future problems. Buyers find it helpful to ensure the promises made are kept, worry less about the seller’s finances, and with loans for the purchase.

There are also synthetic policies, a new way of doing W&I insurance. These are useful when sellers might not be financially sound. But, buyers need to check really carefully if these are right for their situation. They need to make sure they protect against after-purchase problems well enough.

The future of challenging M&A work looks positive. Deals that stopped because of COVID-19 are starting up again. New deals are also happening, often involving sales of parts of the business that aren’t central. This trend shows how important it is to use the right insurance well and be careful in these kinds of deals.

The Role of Auctions in Distressed M&A

In the world of distressed M&A, auctions play a big part. They’re often required in formal insolvency processes. This helps to fairly value assets that are struggling, making sure everyone is treated fairly.

But it’s not just about meeting rules. Auctions can also be chosen to show deals are clear and to cut down on possible problems later. By choosing auctions, buyers can feel more confident their deals are solid. This also helps keep things open and fair in the market.

Dive a bit deeper, and you see how using auctions can be smart. In tough times, like we might see soon, they help buyers and investors fine-tune their game plans. Those who strategize focus on improving and selling off parts that aren’t central to their business.

On the other hand, those with a lot of cash are expected to shop more. In this changing market, auctions are key. They help manage the twists and turns that come with buying in difficult times. This isn’t just about selling or buying; it’s about doing it right, using every tool available to stay ahead.

Recent Trends and Developments

In the UK, M&A activity has slowed down, with 18% fewer deals than in 2022. However, private equity firms are very active. In 2022, there was a 20% increase in the number of distressed assets in the UK. This shows a big change in the industry. Private equity firms are paying more attention to ESG factors. This focus is set to grow in 2024.

The healthcare sector is doing well, with more deals in 2023 than the year before. Blockchain technology will make UK deals more transparent and secure. This opens up new opportunities for investors.

Green bonds are becoming more popular. They help fund green projects and show signs of economic recovery. Private equity firms are keen on specialisation and growth capital. This highlights the importance of strategic investments in today’s market.

In a wider context, Europe saw deals worth $412bn in the first half of 2021, topping the average from previous years. Global M&A activity hit a record $2.6 trillion in the same period. This jump from the previous year’s $926bn stresses the need for careful planning during the recovery.

Conclusion

The pandemic’s economic impact lingers, leading to more distress in UK industries. This trend is stronger after Autumn, with less government help. For investors looking at buying distressed companies, there’s a lot of opportunity. But, they must be ready for quick decisions and to tackle many issues like pensions, rules, and jobs.

Buyers in tough times often choose to buy just the assets to avoid too many problems. This means less assurance from the seller. However, they might also use special types of insurance or rewards for the managers. Laws about mergers are very important too. They guide how companies can increase in size without breaking the rules. So, buyers must always look out for these.

The companies being bought must react fast and wisely, understanding their finances well. The UK has made new ways for companies to fix their problems and stay afloat. Those who can work through these tough times carefully have a chance to turn things around. They could move from seeing problems to finding good investments, even in a tough economy.