15/07/2024
Uk distressed m&a and corporate finance
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Exploring the Intersection of Distressed M&A and Corporate Finance in the UK

How can looking at corporate finance in many ways change distressed M&A in the UK? Angela Allen shines light on this within the UK’s mergers and acquisitions scene. She is a partner at Jenner & Block in Chicago and was the TMA Chicago Midwest Chapter’s past president.

Bankruptcy cases have jumped in the life sciences and pharmaceutical sectors. This is because venture capital funding has decreased. Angela often helps buy distressed assets in these areas. She points out the importance of having a team that knows health care, intellectual property, M&A, and commercial finance.

In the UK, there’s a big push for getting more market share, spurring consolidation. This happened as economic stability began to return. The first quarter of 2024 saw a huge increase in high yield issues in the US and Europe. This highlights how active the distressed M&A market is around the world.

Dealing with distressed M&A transactions requires a broad and thoughtful approach. Angela’s wide-ranging work and her role in professional groups show that bringing different skills together can truly reshape corporate finance in tough times. This is key for pushing the UK market to a place of stability and growth.

Introduction to Distressed M&A and Corporate Finance

This led to more distressed M&A transactions. Factors like the end of Covid-19 aid, growing debts, inflation, and higher interest rates made understanding these areas vital.

Knowing the basics of corporate finance is key in handling distressed M&A deals. These deals can bring both challenges and chances to those willing to take them. Forbes says, these deals need quick and focused checks on finances, laws, workers, and ESG matters. Angela Allen from Jenner & Block highlights the role of legal knowledge in these deals, showing how laws around financial troubles have changed.

Certain industries in the UK, like retail and hospitality, feel economic ups and downs more. Angela Allen talks about the need for gender equality and accepting family duties in the workplace. This makes for a better work environment, which aids in making sound financial decisions. Getting advice and strategically planning are crucial in these uncertain times to protect everyone involved in distressed M&A.

Negotiating in distressed M&A also means talking about warranties and guarantees. Sellers might give fewer promises, so having insurance for warranties and indemnities (W&I) helps manage risks. Also, how insolvency is handled in England is important. Companies can get time to restructure through administration, and Company Voluntary Arrangements (CVA) allow for debt repayment over time, needing approval from 75% of creditors who vote.

It’s important to grasp the details of distressed M&A and corporate finance for those navigating the UK’s economic scene. Angela Allen gives valuable insights into the big part legal experts play in successful distressed M&A deals. The changing nature of financial instability and the need for quick, well-informed choices underline the importance of specific industry knowledge and strategic thinking for positive results.

Impact of Financial Distress on M&A Activity

Economic pressures are growing in the UK, making financial distress more common for businesses. Issues like shortages in supply chain and labour, higher interest rates, and increasing inflation are causing troubles. Industries facing the customer directly, such as retail and hospitality, are feeling the most impact. They urgently need strategic plans to cope.

The coronavirus outbreak in 2020 did not lead to as many distressed M&A opportunities as expected. The resilience of the UK market is being tested as companies struggle with these financial issues. Energy sectors, which deal with much volatility, are greatly affected. Directors must act carefully when close to insolvency, focusing on creditor rights to avoid legal pitfalls.

Keeping detailed records of board decisions is very important in distressed M&A. It’s also crucial to focus on the value during these processes. Companies should confirm financing to stay solvent and competitive. We’re seeing more M&A activities, showing the need for quick, effective actions in challenging markets.

Financial investors, with plenty of capital, are likely to get more involved in M&A than strategic buyers. Strategic buyers may look to reorganise or sell assets they don’t need. This creates a varied market with chances in sectors like retail, making, transport, and healthcare. The UK’s laws, like the National Security and Investment Act 2021, highlight the need for compliance and thoroughness.

The UK market’s resilience is shown by a surge in M&A activity, expected to keep up as government aid lessens. A deep understanding of legal duties and risks is crucial. Directors must focus on the interests of shareholders or creditors in line with the company’s financial health. Balancing liabilities and asset values is key in the UK’s financial distress scene.

UK Distressed M&A and Corporate Finance

Corporate insolvencies in England and Wales hit their peak since 2009. This rise shows the tough economic conditions, worsened by supply chain woes, labour shortages, and increasing interest rates. Retail and hospitality sectors have suffered most, leading to more distressed asset sales in the UK.

The use of Company Voluntary Arrangements (CVAs) has grown in the UK’s financial restructuring scene. In October 2023, we saw a 14% increase in CVAs from the previous year. These CVAs allow companies to reorganise with 75% creditor approval, under licensed insolvency practitioner’s supervision.

Administration plays a key role in corporate finance in the UK, enabling the handing over of assets to new owners. This helps businesses to keep running. During distressed M&A deals, due diligence is often sped up. The focus is on key areas to address the buyer’s main worries quickly.

In specialised fields like pharmaceuticals, specific expertise is crucial for distressed asset sales. Legal knowledge tailored to the sector is key in such complex deals. Angela Allen’s work in this area shows how important it is to have industry experts. Companies also use restructuring plans and schemes of arrangement to manage financial issues, aiming for continuity and stability.

Common Drivers Behind Distressed M&A

Distressed M&A transactions are expected to increase in 2023. This is due to various economic and logistical issues in the UK. Companies face time constraints, limited information, and few protections in these deals. Thus, buyers ready to move fast are more appealing to sellers.

Often, these deals are structured as asset sales. This lets buyers select the assets they want and avoid unwanted liabilities. Due diligence might not be thorough because of limited access to key details. Yet, Warranty & Indemnity insurance can lower some risks, especially when buying from administrators.

Business recovery strategies

There’s often a clash over price between sellers wanting sure payment and buyers cautious about valuing a target’s worth. A deal being undervalued can lead to a challenge or reversal after the fact. Also, high inflation and interest rates by central banks are driving distressed M&A today.

Issues like unemployment, staff shortages, and supply chain problems add to business distress. For instance, a strong US dollar raises prices for American goods overseas. This hurts sales and worsens existing problems. Higher interest rates and rising energy costs in Europe also play a role, affecting various sectors.

Investors in distressed assets are seeing more activity now than in past years. This shows significant disruptions in areas like cryptocurrency and specific legal cases. Therefore, business recovery strategies need to be strong and flexible. Sectors like healthcare and real estate face higher risks during downturns due to several pressures.

High initial valuations and the growing cost of debt financing add to the distress. This is true especially in consumer goods and real estate sectors. Strategic financial planning is crucial for those wanting to invest in distressed opportunities. It offers a chance for discounted buys and great returns post-restructuring.

Legal and Regulatory Considerations

The UK’s M&A legal scene is complex, especially with distressed mergers and acquisitions. Corporate insolvencies in England and Wales are at a high not seen since 2009. The spike in Company Voluntary Arrangements (CVA) by 14% from September 2022 to October 2023 shows how crucial they are. CVAs need a 75% yes vote from voting creditors, showing their trust in the company’s future.

Compliance in distressed M&A is crucial because due diligence is often rushed. Buyers may do less checking and accept fewer guarantees, knowing sellers can’t offer much. Thus, the UK M&A laws give buyers little to fall back on, making it important to understand compliance very well.

It’s important to understand England’s insolvency rules. They aim to either help a company trade again or end it by selling assets and paying off debts. New laws mean companies can agree deals with creditors, affecting corporate finance hugely.

Directors of companies must be very careful when their company is close to failing. Their main responsibility shifts towards the creditors in such times. If they don’t act right, they could face serious personal and criminal charges.

More distressed M&A activity is expected in 2023 due to economic and geopolitical challenges. The UK’s rules and regulations will play a big role in corporate finance then. It’s about finding a balance between speed and careful checking to minimise risks in distressed M&A.

Financial Restructuring Strategies

UK businesses face many issues, such as supply chain and labour shortages. Rising interest rates and high inflation are big problems too. These issues hit companies in retail, hospitality, and energy hard. To solve these problems, UK companies use several key restructuring methods.

One method that helps is debt-for-equity swaps, like with Vue cinemas. Companies cut debt by trading it for company shares. This helps improve their financial situation and attracts new investors. Amend-and-extend deals are also used, which change debt terms to give companies more time to pay back, helping them manage in shaky markets.

Getting new funds is crucial, shown by Barings and Farallon Capital Management helping companies in trouble. This money helps companies right away, letting them plan for the future. These strategies show how various methods are important for fixing debt issues and keeping businesses running smoothly.

Directors of struggling companies must know their legal duties. When insolvency is close, they must focus on creditors’ needs. If they make bad decisions, they might face legal trouble. This highlights the need for careful choices during mergers and acquisitions to protect everyone involved.

Business reviews and managing relationships with stakeholders are key for success. Independent reviews give a fair view of the company’s financial health. Skilled people negotiate deals that work well for shareholders, banks, and others.

In distressed mergers and acquisitions, acting quickly and decisively is critical. Sellers may accept lower offers to avoid bankruptcy. Buyers should quickly understand the company and avoid agreements that depend on many conditions. Sellers value deals that are likely to go through without problems.

Choosing the right transaction structure can be better in tough times. Selling businesses or assets can help control losses and manage debts. Using new technologies and good advice can make restructuring in the UK more effective. This helps companies get through debt problems and keep their doors open.

Sector-Specific Challenges and Opportunities

The landscape of distressed M&A is uniquely shaped by the conditions of each sector. This requires understanding specific investment trends. Life sciences and pharmaceuticals are facing challenges, highlighting the need for a multi-skilled approach. Healthcare, intellectual property, and M&A knowledge are essential to overcome these challenges.

Financial troubles have spiked insolvencies in England and Wales to their highest since 2009. This is due to debts from the pandemic and rising interest rates. The healthcare sector, in particular, is experiencing many bankruptcies. This calls for a detailed approach to analyzing distressed sectors.

Directors of struggling companies must focus on their duties to sellers and creditors. The use of Company Voluntary Arrangements (CVAs) grew by 14% in October 2023, showing they’re becoming a popular solution. This reflects important trends in sector investments.

Selling distressed assets needs to be done quickly. This is because of ending contracts and staff leaving. Such sales come with high risks due to few guarantees for buyers. Understanding the specific M&A conditions of each sector is crucial to reduce losses.

Options for insolvency include reorganization or liquidation. Administration provides relief, allowing for restructuring. This, along with Schemes of Arrangement and plans under the Companies Act 2006, helps distressed sectors. These actions are aimed at minimizing financial damage.

Sometimes liquidation is the only choice left. Increased bond sales in the US and more Section 363 sales offer some recovery paths. In commercial real estate, defaults create unique chances. These trends are key to understanding distressed M&A activities.

Role of Private Equity in Distressed M&A

Private equity now plays a crucial part in distressed M&A, more so due to economic swings caused by COVID-19. These investors bring needed funds to help companies through tough times. Their capital is vital for businesses in financial trouble to survive.

Distressed M&A involves many parties like lenders, investors, and management. Each has different views which can make pricing deals hard. UK private equity must skillfully handle these differences for success.

Private equity involvement

Distressed deals need to be done fast, which can lead to not having all the info. This hurry can lower the quality of what buyers learn about the deal. Yet, PE experts use tools like W&I insurance to manage these risks.

Extra costs, like paying suppliers more, add to the challenge of these deals. But, private equity helps by setting terms that encourage growth. These terms help companies recover post-COVID-19.

Getting regulatory OKs is crucial and takes time, even in distressed M&A. Top private equity firms show their skill by rearranging debts and making special agreements. Examples include work done with Stada and NewDay.

To deal with these hurdles, PE firms do thorough checks and use smart strategies. They focus on improving business operations and financial health. This way, they ensure that the companies they invest in grow and become profitable again.

The Role of Financial Advisors in Distressed M&A

In today’s changing world of distressed M&A, financial advisors are key. They help tackle the tough parts of these deals. Since 2020’s COVID-19 start, the UK’s expected rise in distressed M&A hasn’t fully happened yet. But areas like retail, dining, and energy still face big risks. They’re hit hard by supply problems, not enough workers, and rising costs.

Companies close to failing must protect their creditors and stay away from illegal trading. In distressed M&A deals, selling firms and their advisors aim to get the best value. This means they need to create competition and lower risks. So, strong financial advice is essential for success.

Speed and deal certainty are crucial in distressed M&A, considering future costs and cash needs. Buyers must move quickly and may need to rush their checks on the business. Sellers want buyers who can handle risks and come up with funding solutions.

Kroll has been a big name here since 2022, when it brought its services under one brand. They are experts in handling difficult financial situations, offering advice and practical solutions. Kroll and similar firms are vital in giving support in these tough settings.

Financial advisors play a vital role in distressed M&A. They don’t just help with deals but also connect people with reliable experts. Their help is crucial in managing the challenges of distressed transactions.

Post-Pandemic Trends in Financial Distress and M&A

The pandemic has really changed M&A, bringing new ways to structure deals. Now, we’re seeing more activity in distressed M&A than in the last two years. This is because the economic impact of COVID-19 has been huge.

Many sectors are struggling with big challenges. These include rising inflation and interest rates, lower consumer confidence, not enough staff, and supply chain problems. Experts in restructuring predict a surge in restructuring projects soon.

Certain sectors like healthcare, commercial real estate, automotive, and retail could face tough times ahead. However, this situation creates opportunities for investors. They are keen on the possibilities that come with distressed businesses. Home goods and senior living are especially affected within real estate.

The UK’s road to recovery after the pandemic also shapes financial distress trends. Investors are navigating through uncertain times, with higher costs and tough financing conditions. A careful look at the fundamentals and structure of a business is essential now. There’s a chance to buy businesses at lower prices and help them bounce back.

Global M&A deals have dropped significantly, from over US$5tn in 2021 to US$2.5tn in 2023. The number of deals has also gone down by 17%. Yet, the energy, tech, and pharma sectors are making a comeback. Banking and healthcare are taking a bit longer to recover.

Valuations could still rise, as forward multiples have gone up by 15-20% in 2023. They’re still not as high as they were. The biggest tech deal in 2023, Cisco’s US$28bn bid for Splunk, shows the tech sector is still full of life.

Case Studies: Successful Distressed M&A in the UK

In the UK, the last decade has been rich in distressed M&A success stories. These span 25 reports from 2015 to 2023. They cover successful dealmaking, CEO succession, and strategies for successful divestment. Vue Cinemas is a standout, showing investment success in the UK. A strategic £75 million was put into Vue by Barings and Farallon. This was through a super-senior term loan, highlighting a remarkable recovery.

Another area explored is the effect of cross-border M&A on emerging markets’ ESG ratings. These deals look attractive and focus on various sectors. The rise of fintech and digital tech takeovers provides great examples. It is clear that adhering to ESG best practices is key for lasting success. The environmental aspect of these deals is also closely looked at.

Recent studies highlight an increase in insurer involvement in distressed deals. A variety of cover types are seen, like warranty and indemnity (W&I) insurance. The reasons behind this, like deal dynamics and business visibility, are influencing insurers. This detailed analysis shows the resilience and adaptability of the UK’s market.

Conclusion

The future of UK distressed M&A is complex, blending financial stresses with strategic choices. Corporate insolvencies in England and Wales have hit a peak unseen since 2009. This shows the big challenges businesses meet. The increase in Company Voluntary Arrangements (CVAs) by 14 per cent from September 2022 to October 2023 reflects a growing need for this rescue path.

Companies struggling can find hope through a restructuring plan under the Companies Act 2006. This plan lets them make binding agreements with their creditors. It’s a key support. They face two major hurdles: balance sheet and cash flow insolvency. Private equity plays a vital role by injecting needed funds and helping with structural changes, even though buying and selling distressed businesses can be tricky.

Quick action is essential in distressed M&A deals, with some needing to close in days. This rush cuts short the time for careful checks, raising risks for buyers. Directors of struggling companies have to carefully weigh their legal and fiduciary duties. At the same time, sellers look to sell businesses or assets to lessen warranty and indemnity risks, which complicates things.

Insolvency typically involves reorganisation or selling assets, with administration offering a pause for companies to plan or sell without creditor pressure. However, companies in retail, hospitality, and energy face serious issues like supply chain problems, staff shortages, and rising interest rates. Directors need to watch for shifts in their duties towards creditors, as legal missteps can result in big problems.

In conclusion, the arena of distressed M&A and corporate finance in the UK demands sharp legal insight, strategic planning, and financial strength. Despite the challenges ahead, there are opportunities for creative restructuring and smart buying. Understanding this complex environment is key to succeeding in the UK’s distressed M&A landscape.

Written by
Scott Dylan
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Scott Dylan

Scott Dylan

Scott Dylan

Scott Dylan is the Co-founder of Inc & Co, a seasoned entrepreneur, investor, and business strategist renowned for his adeptness in turning around struggling companies and driving sustainable growth.

As the Co-Founder of Inc & Co, Scott has been instrumental in the acquisition and revitalization of various businesses across multiple industries, from digital marketing to logistics and retail. With a robust background that includes a mix of creative pursuits and legal studies, Scott brings a unique blend of creativity and strategic rigor to his ventures. Beyond his professional endeavors, he is deeply committed to philanthropy, with a special focus on mental health initiatives and community welfare.

Scott's insights and experiences inform his writings, which aim to inspire and guide other entrepreneurs and business leaders. His blog serves as a platform for sharing his expert strategies, lessons learned, and the latest trends affecting the business world.

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