The impact of the global COVID-19 pandemic is not yet fully known, but what is known is that a number of businesses, including those that were trading profitably before the pandemic, are now experiencing a level of distress.
We understand from our ongoing engagement with UK corporates that stakeholders are considering options available to either protect their financial involvement or implement a strategy that maximizes realizations. As a first step, stakeholders, including lenders, investors and management teams, who cannot see how they can continue with a financially troubled business often look to implement what has become known as a distressed accelerated merger and acquisition (AMA) strategy.
A Seller’s Perspective
The AMA strategy can offer shareholders an opportunity to realize value and can also provide management with an opportunity to preserve company value. The AMA strategy has become an integral part of our restructuring toolkit at Duff & Phelps. In a distressed situation, a seller’s overriding consideration needs to be... “How much time do we have from today to maximize value before it is too late?”
The value of a distressed business tends to diminish slowly at first, but more quickly the longer the process continues. Often, in distressed situations, the value breaks in the debt stack and an AMA strategy is encouraged by concerned stakeholders who may have a different view of value. Usually, with the approval of the concerned stakeholder, a restructuring professional will be retained by a company to handle a time-critical disposal. At the first meeting, the appointed advisor will seek to obtain as much information as possible to formulate the most appropriate AMA strategy. The key questions they will ask are:
- When will the business run out of money?
- How long do we have to preserve a going concern?
- Who are the potential buyers of this business?
The strategy will include these key milestones:
- Preparation of a teaser document outlining the opportunity highlights
- Preparation of a more detailed information memorandum for parties that choose to enter into a non-disclosure agreement and progress their initial interest
- Population of an online data room with pertinent financial information
- Deadline for indicative offers
- Request for proof of funding
- Progression of offers to completion including legal, valuation and tax advice
The initial process includes focus on a targeted list of interested parties that have experience in the specific sector, a track record of completing time critical transactions and who have the financial ability to fund a transaction. If this initial process does not return the level of interest required, a business sale process is developed and this includes advertising the opportunity more widely.
In parallel with the AMA, the appointed advisor monitors both trading and short-term cash performance to ensure the AMA strategy continues to be the most appropriate approach and provides an opportunity to vary the timeframe or process to clinch a deal. A key part of the advisor’s role is to liaise with the financial stakeholders and key creditors to ensure the company’s short-term cash position is maintained. All of this activity is in support of the AMA strategy.
It is common for the strategy to evolve as the AMA progresses. In a transaction where the shares in the vendor company are not acquired but only its underlying business and assets, an administration is usually required. This, in some circumstances, may have advantages for the buyer. When second chances are few and far between, the advisor’s confidence that a purchaser will complete a transaction in good time is probably one of the most important single influencing factors.
Eye for a Bargain
With any level of distress comes an equal level of opportunity. Distressed businesses can offer great value, but, as a buyer, if you make a mistake along the way, a distressed acquisition could cost you more than you bargained for.
Being on the buy-side of the transaction is slightly different. The decision and deal execution must be decisive and quick to match the time critical nature and demands of the business vendor.
Once you receive the teaser document from the appointed advisors, you must act quickly and complete the formalities of entering the process to gain access to the information you will require. In most instances, you will not be the only party in the process, but the trick is to be the party whose interest is prioritized. To do that you must demonstrate that you have funding immediately available and can move to the next phase without delay.
Often a disposal is so urgent that the information available may be incomplete. You may never receive complete information but asking the right questions and understanding how the seller is valuing the opportunity is the art.
To give the vendor confidence that you are a serious buyer, it is important that your offer is structured in a clear and concise manner. Make it easy to understand exactly what the offer includes and excludes, the value attributed to each asset class, any liabilities assumed and what is being paid and when. This will naturally help to put you ahead of the competition.
Your opportunity to undertake due diligence may be limited in the initial phase, but the areas where you are potentially exposed can be mitigated by a transaction structure which has been considered by a professional advisor. Making an indicative well-structured offer in short order will help provide you with time to conclude further due diligence. The key is to be in, not out of the process.
Even for the seasoned seller, it is best to choose and appoint advisors who are experienced and are well versed in making offers for distressed businesses. An advisor who understands the “deal language and the thought process” is invaluable.