Virgin Australia, Harris Scarfe, PAS Group and McWilliam’s Wines are just a few of the high profile distressed businesses that appeared on the market in FY20. With the gradual tapering of COVID-19 government support programs and a protracted economic slump on the horizon, a greater number of distressed M&A opportunities seems inevitable for FY21.
Opportunity vs risk
To capitalise on opportunities to acquire assets below long term valuations, buyers will need to quickly develop a thorough understanding of valuation drivers, restructuring optionality and transaction risks.
Navigating distressed M&A processes can be challenging as deals of this nature are typically characterised by:
- truncated timeframes dictated by liquidity pressures;
- target companies with patchwork books and records;
- management gaps, deficiencies and conflicts;
- outdated forecasts and turnaround plans; and
- limited access to Management and the Vendors (a Voluntary Administrator or Receiver) may have only had their feet under the table for a few weeks.
The need for speed
Successful bidders will be those who can meet the Vendor’s need for speed, identifying risks including ongoing funding requirements and assessing materiality on the run. These activities need to take place while bidders consider their own ability to secure funding and execute the transaction before the deadline.
Despite the challenges, pragmatic and astute bidders can leverage these circumstances to their advantage, paying an attractive price for the business as a whole or for certain assets, whilst also undertaking value accretive restructuring activities facilitated by the insolvency process.
In this distress-driven deals blog series, we will work through what should be front-of-mind when rescuing a business from distress, including:
- what transaction structures are available, and the comparative merits of each from the perspective of both the buyer and the seller;
- ways to construct your offer, including valuation and conditions;
- the due diligence and restructuring activities you will want to prioritise, and the others which you may need to let go (“price the risk”); and
- understanding the likely cash requirements of the business pre and post completion.
These scenarios represent a great chance to generate a superior return and make a positive impact by preserving some or all of the business.