The re-launch of Virgin Australia through a voluntary administration process (‘Virgin 2.0’) is the latest high profile Australian turnaround story to have attracted significant interest from potential bidders around the globe. Bidders were given a short timeframe to remotely evaluate management’s turnaround plan, determine a valuation and quantify the funding requirement, all whilst balancing the continued risk and uncertainty caused by the COVID-19 pandemic and the precarious insolvency situation.
Participating in these processes requires a risk-adjusted and nimble approach to deal execution and due diligence. Consider:
Management’s proposed turnaround plan may provide a useful starting point for anchoring valuations. However, buyers need to proceed with caution where the turnaround hinges on unproven strategies, a failed management team or focuses too much on the ‘end state’ rather than the road to get there.
Astute buyers need to quickly assess management capability, critique the turnaround plan and ascertain achievable earnings and the related funding requirement. Developing an implementation plan to execute management’s strategy (and in the case of a bolt-on, integrate the target business within the wider group) is critical to capturing acquisition value.
Accelerating the turnaround
Through an insolvency driven process buyers can efficiently carve out specific assets and/or collaborate with the administrator to restructure the business prior to completion. An administrator can help fast track a turnaround plan by:
- Disclaiming onerous contracts including property leases (i.e. to reset a footprint);
- Renegotiating supplier and customer agreements;
- Restructuring the company’s workforce;
- Divesting non-core assets/operations;
- Borrowing on preferred terms; and
- Raising or redistributing equity/delisting.
These initiatives, coupled with a newly cleansed capital structure can deliver immediate profit improvement and/or alleviate working capital funding requirements.
While large companies like Virgin Australia will require longer timeframes in voluntary administration, the process is extremely flexible and can be truncated in cases of less complex business sales.
Acquisition funding is not limited solely to the purchase price. Depending on the level of underperformance or financial distress, a bidder may need to consider:
- Funding the business to allow it to continue trading prior to completion of the sale transaction, usually through a Deed of Company Arrangement;
- Funding losses that may continue in the short term as the turnaround plan is implemented and ramp up commences; and
- Investing in working capital to transition the business to its new operating capacity.
Sharpen your focus
In these situations, due diligence is often limited by imperfect financial information and restricted access to management. These issues are further compounded during an insolvency process by truncated time frames and ‘warranty-lite’ sale contracts.
Successful bidders need to minimise or ‘price’ risk by focusing on the most critical aspects of the transaction. Non-negotiables (e.g. key customer and supplier support, ipso facto termination waivers where applicable, access to licences and intellectual property) need to be quickly identified and locked down. Creditor exposures and voting dynamics need to be taken into account and trade-offs may need to be made to deliver transactional certainty and/or ensure business continuity.
In the next blog in the series we will discuss transaction structuring considerations when buying a business via an insolvency process and interacting with the administrator.
This blog is part two of the ‘Rescuing and recapitalising a business’ series. Read part one here.