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Coronavirus - Accelerated M&A transactions; a guide for sellers and buyers - Global

  • Global
  • Coronavirus - M and A issues
  • Mergers and acquisitions
  • Restructuring and insolvency

07-04-2020

For companies that are financially stressed or distressed, a sale of the company or its business and assets might be the best exit route for its stakeholders. The desire to exit through a sale is often the preferred method for financial creditors who can see little prospect of being repaid in line with the terms of the facilities. The decision to sell may be driven, at least in part, by creditor pressure.

An accelerated sale process, often referred to as an “AMA process” or “distressed M&A process”, is almost identical to a more traditional sale process. The most significant difference is, of course, the compression of timelines. Whereas a healthy business whose owners wish to sell may run a marketing and sale process over a number of months, in an AMA process the time from start (the issue of a ‘teaser’ or IM) to finish (sale) is likely to be measured in weeks, or in the case of severe distress, days.

The other point to keep in mind is that a significant proportion of AMA processes result in a sale of the business and assets, rather than the company, and of those sales very many are effected through an insolvency process (in the UK the so-called “pre-pack” administration). Buyers and sellers should keep this in mind at the outset of any AMA process.

As the UK and wider world economies work their way through the COVD-19 lockdown and restrictions, and governments start to loosen those restrictions, many companies will find that the damage done to their finances is too great to recover from. Many of those companies will have viable underlying businesses, but the creditor stretch and pressure from the COVID-19 restrictions will mean restructuring is required. For many owners, a sale may be the only way to repay creditors and perhaps even recover some value for themselves.

It is our expectation that, as the COVID-19 restrictions are loosened there will be an upturn in AMA processes as businesses struggle to recover. Whilst this will be devastating to business owners, a well-run AMA process may preserve some value for owners, but at the very least will enable the best return possible for creditors of the business.

We expect that potential buyers in any AMA process will come from two points of view. There will be the opportunistic buyers, who remain relatively cash-rich and see the opportunity to acquire a competitor to increase their own capacity and market share. Equally important, and possibly greater in number, will be the defensive buyers – those who see liquidity and solvency issues in their supply chains and conclude that the best way to maintain supply to their ultimate customers is to take their suppliers in-house to ensure continuity of supply.

As AMA processes are likely to come to the fore in the post-COVID-19 world, and in view of the subtle differences from a more traditional M&A process, we set out below a few points for buyers and sellers to consider before embarking on the AMA process;

AMA considerations for sellers

• preparation is key

• appoint corporate finance advisers experienced in running AMA processes – given that many AMA processes end in an insolvency, a firm with restructuring expertise would be recommended

• the same applies to lawyers - it is uneconomic in time and cost to instruct corporate finance lawyers if you then need to switch firms to find a restructuring team

• start building the virtual data room early – full and easily accessible information for potential buyers will be key to maximising value

• be available to supplement information and answer questions from potential buyers

• keep key stakeholders (particularly financial creditors) informed of progress – their buy in to any sale (if it doesn’t represent full repayment) will be needed

• keep deadlines short and stick to them (and make sure potential buyers do too) – time to complete a transaction will be short (possibly very short) and delay will make management of the business difficult

• don’t lose sight of your duties as directors – if there is potentially an insolvency at the end of the process, directors conduct will be examined. Take advice on duties regularly and keep a record

• be flexible – the outcome of the AMA process is uncertain and may not be known until the very end

AMA considerations for buyers

• preparation is key

• appoint advisers (financial and legal) who understand how an AMA process will be run and the expectations of potential buyers – you might not have been involved in an AMA process before but your advisers should have been

• due diligence is the most important part of the process for the buyer. If there is a sale through an administration process, the buyer will receive no warranties and indemnities from the seller. Even with a solvent sale, warranties and indemnities may be of limited value in the longer term

• any issues regarding the business and assets need to be identified early. Without warranty cover these issues become price considerations – if there is an impact on value this must be reflected in the price as no refunds will be offered

• however we are starting to see an emerging market for warranty & indemnity insurance on purchases from administrators, where non-recourse warranties are given by administrators or former management, which might be helpful

• employee costs and TUPE liabilities are unavoidable – once you are into negotiations the seller cannot reduce its workforce at the buyers instigation (without the dismissals being automatically unfair) so factor into the price any future redundancy costs

• be careful of group situations and ensure all asset owning companies are party to the sale agreement (pay close attention to Intellectual Property)

• have the resources to move quickly – time will be of the essence in negotiating and executing any transaction

• be flexible on outcome – a solvent sale might appear preferable, but an insolvent sale might get you a bargain with little additional risk (if you do your due diligence right)

Whilst the general concepts in an AMA process will be familiar to both sellers and buyers, the compressed timescales and the urgency to find a solution for the buyer and its stakeholders will bring new pressures in to play. Our team of Restructuring experts can work with your teams to deliver a smooth transaction and to help you navigate the unfamiliar terrain of an accelerated sale process.