Everyone loves a bargain

28 April 2020

The flow on consequences of COVID-19 to Australian businesses and recent sluggish economic growth may result in a greater volume of distressed acquisition opportunities in the coming months.

Injecting fresh capital where there has been a breach of lending covenants or for emergency working capital or acquiring businesses through a formal insolvency sale process, is often seen as an attractive investment opportunity. A high acquisition multiple may be avoided and value released via a turnaround process. Whilst this theory holds true for some acquisition opportunities investors should be careful and determine whether these opportunities represent bargains or simply the acquisition of damaged goods.

Harvey Norman’s acquisition of Clive Peeters in 2010 is an example of what appeared to be a bargain purchase of a distressed business. However, the lustre of the acquisition tarnished in a little over 12 months.

Harvey Norman acquired the majority of Clive Peeters for $55m after the franchise collapsed into voluntary administration in May 2010. At the time, Clive Peeters was one of Australia’s leading electrical appliances retailers with a peak turnover of more than $500 million and a network of 40 stores.

In August 2011, just over 12 months following the acquisition, Harvey Norman abandoned the Clive Peeters brand and closed several stores. Harvey Norman reported $41.07 million before tax start-up investment costs and trading losses incurred in the Clive Peeters operations since its acquisition.

The best approach when investing in distressed businesses is one which is risk based and underpinned by restructuring advice allowing investors to make informed decisions. This approach includes:

  • Assessment of key drivers of financial distress – including understanding if the opportunity represents a fundamentally sound business which is overleveraged, or one suffering from a flawed business model or highly challenged industry or market place.

  • Assessing insolvency impact where applicable and determining appropriate investment structures to minimise risk.

  • Acquiring debt with the view to implement a debt for equity swap in a restructuring.

  • Understanding insolvency sale processes including value drivers considered by insolvency practitioners and bid structures and due diligence considerations given the likely limited warranty regime.