Who holds the keys?
Understanding the interests and motivations of the broad range of stakeholders is essential. Senior and junior lenders, equity investors, management, pension scheme trustees, landlords, trade creditors, unions and regulators can all play important roles in facilitating (or frustrating) a transaction.
It is important to get a handle on valuation, where the value breaks in the target’s structure and, as a result, which stakeholders have a seat at the table early.
Bridging the gap
Whilst the likely medium/long term impact of COVID-19 and the resulting economic uncertainty remain unclear, negotiations around valuation will often reveal a mis-match between exiting stakeholders’ expectations and what prospective bidders are willing to pay.
Sellers and administrators will tend to favour maximum value upfront, but, by way of example, the circumstances of senior lenders can give rise to a departure from that general rule. It may be possible for incoming equity investors to desire a structure where lenders can help bridge the value gap by ‘rolling over’ value into the new structure (at a better notional rate of recovery than would be the case on an upfront cash deal).
Making use of the tools at your disposal
Deal structure is likely to require careful thought early in the process. A share acquisition will often offer the sell side the best chance to preserve value (e.g. by avoiding the need to move key contracts), whereas a business and assets sale may allow the buyer to cherry pick the assets it wants and leave certain liabilities behind.
The ability to leave liabilities behind can help to minimise the risk of the unknown and can narrow the scope of the buyer’s due diligence exercise. It is important to remember that some liabilities (e.g. employment liabilities) cannot be left behind and will need to be priced in. Formal insolvency procedures can also be used to facilitate a transaction by allowing the target’s liabilities to be right-sized whilst limiting some negative impacts of insolvency on a viable business. Key examples in the UK include:
It is worth remembering that ‘solvent’ sale processes or exercises designed to attract new investment which are embarked upon in good faith at the outset can quickly erode and give way to accelerated M&A exercises and ultimately to pre-pack administration sales.