Structuring and Managing Distressed M&A

• Consider all options & alternatives from the Distressed Seller’s perspective – distressed M&A disposals frequently occur during a crisis and may be conducted on an accelerated mergers and acquisitions basis so sellers often fail to receive full value. If the main driver is the need for liquidity or the need (pressure) to de-gear it is essential that the seller considers all options. This course provides guidance on the various alternatives open to the group which can either avoid a distressed sale altogether (by accessing other sources of liquidity) or enable them to postpone the sale to enable them to run an orderly process.
• Strategies for maximising value – retaining confidentiality regarding the sale process and that the seller is distressed (not always possible) will provide sellers with more time to prepare the target to ensure the information/data room is relevant, accurate and current. This will facilitate an accelerated mergers and acquisitions sale process with greater control. The programme will cover the tactics the seller can use to achieve these objectives.
• Valuation is tricky – the valuation range in distress is more complex particularly if the overall economic environment and/or the cash flows from the target are uncertain. Directors need to be mindful of their fiduciary duties and buyers need to ensure they are not at risk of clawback if the seller goes into liquidation
• Structuring the deal to enhance value – sellers may have to reorganise the group structure to facilitate the sale and minimise or ringfence liabilities via a hive-down or pre-packaged sale. Tactics for retaining value include anti-embarrassment clauses and retaining stub-equity (e.g. RBS/Worldpay).
• Manging the distressed seller’s liability – it is essential to engage with lenders at the earliest opportunity to keep them supported. The loan agreements need careful review to ensure that the seller achieves its objectives. Is the sale ‘permitted’ and will the assets be sold free of claims and collateral or are their lenders who might object? How much of the proceeds can the seller keep and will the repayment of debt trigger prepayment penalties?
• Traps for Buyers – buyers need to consider the various risks involved in acquiring from a distressed seller. Clawback risk (if the seller is declared insolvent within the lookback period) is a key risk. The course provides guidance on how buyers (and sellers) can mitigate these risks

The Rationale for a distressed disposal

• Financial / Business issues (liquidity)

• The Seller needs cash/ liquidity to support the group through a crisis
• The Seller needs to de-gear to meet financial covenant compliance
• Weak management

• Agency issues

• Seller refocusing on core activities exiting a sector (e.g. retail) or region
• Loss-making (non-core) asset-consuming resources / distracting management 

Initial considerations – review all options (if liquidity is the main issue)

• Has the firm taken steps to improve its financial position?

• Accessed govt support – delayed VAT, Corporation tax payments
• Sought rent holidays and reductions
• Furloughed staff

• Additional sources of liquidity

• Equity or quasi-equity – is this available
• Drawn down on committed facilities e.g. RCF
• Incremental debt from existing or new lenders – do they have basket capacity and what about pricing
• Amend existing loans to include additional facilities
• Refinance debt with alternative lenders? (it won’t be cheap)

• How ABL may be the best solution

• What assets does the seller have?
• Can they get more debt?
• How ABL can boost cash flow and finance a turnaround

• Case – review the various options open to sellers and the pros and cons of each

Lender issues – voting, security issues & cash sweeps

• Is the sale a ‘permitted M&A disposal’ by the loan agreements?
• If not, who needs to give permission (waiver)

• Pre-distress (junior secured lenders’ consent required)
• Post a distressed mergers and acquisitions event
• Intercreditor issues – release of collateral

• Mandatory Prepayments

• Will the cash proceeds be subject to cash sweeps?

• Prepayment penalties – do they apply?

Valuation issues and risks for Directors

• Importance of the valuation

• Establishing the value of the Target (the fulcrum capital vis-à-vis other stakeholders)
• Due diligence issues

• Issues for the (Sellers’) Directors

• Fiduciary duties
• Summary of position in key European jurisdictions (Sweden, Norway, France, Germany, Lux, Spain)

• Key risks in distressed M&A disposals (antecedent transactions)

• Vulnerable transactions
• Transactions at an Undervalue
• (voidable) Preferences
• Review of position in key European jurisdictions

• Steps to mitigate risk & subsequent challenges by Liquidators post Formal Insolvency

Other impediments/considerations in regarding Stake-holder issues

• Tactics for managing

• Landlords
• Aggressive creditors

• Employee Rights / Issues

• EU Acquired Rights Directive & TUPE
• Pension matters

• Regulatory / Competition Authority issues
• Key contracts – mitigating termination risk

Strategies for maximising value in distressed disposals

• Time is of the essence an accelerated mergers and acquisitions timetable preserves value and provides the distressed seller with more control)
• Due diligence issues

• Focus on the key issues
• Consider using Vendor Due Diligence to expedite the DD process
• Use Vendor Assist to ‘polish’ the data and data room
• Are valuations of assets / real estate up to date (real estate)

• Stapled finance can boost value and ensure that the buyers financing provides better terms (re leverage, covenants, collateral)
• Stapled warranty insurance can boost value by enhancing warranty coverage
• Avoiding landmines

• Managing confidentiality - leaks in the press can sabotage the sale (e.g. nervous suppliers tighten credit terms or customers head for the hills)

• Manage all key stakeholder conflicts (they may have competing agendas)

• Management
• Customers and (especially) Suppliers
• (Aggressive) Creditors can torpedo the sale if they initiate recovery action
• Lenders – are they supportive and willing to allow the distressed seller time for an orderly M&A disposal process 

Structuring the Deal

• Buyer profiles – pros and cons

• Strategic buyers (Competitors)
• Private Equity firms
• Funds – special situations (looking for a bargain)

• Sale process - methods

• Traditional auction
• Mini-auction
• Accelerated/ fast-track auction

• Special considerations for distressed mergers and acquisitions sales

• Managing the bidders
• Dealing with competitors – the key role of confidentiality

• Structuring the deal

• Shares vs Assets
• Hive-downs
• Schemes of Arrangement (apply to non-UK companies with UK connection)

• Tactics for enhancing the value

• Anti-embarrassment clauses
• Stub-equity
• Earn-outs

• Case – Pros and cons of the tactics for enhancing the value
• Structuring the Consideration – pros & cons

• Cash
• Deferred consideration
• Other methods of closing the value gap (vendor loans)

  Pre-packaged sales in the UK & some European Jurisdictions

• Anatomy of a Pre-packaged sales
• Pros and cons of using pre-packs
• Role of Statement of Insolvency Practice 16
• The Pensions Regulator’s guidance on its approach to pre-packs
• Review of Johnson press prepack
• Pre-packaged sales in Europe (Lux, Holland, Germany)
• Case – Structuring the consideration (how to close the value gap)

  Special considerations for Insolvent/distressed sales

• Warranties & Indemnities – the value gap
• Warranty Insurance, Escrow Accounts
• Transitional Service Agreements

• Key features
• How they can help – pros & cons
• Distressed Seller issues
• Buyer issues

• Asset sales

• Identification of assets
• Delivery of assets

• Third-Party Agreements

• Customers & supplier issues
• Leased Plant & Equipment
• Leased premises
• Licences
• Inventory – retention of title
• Book debts
• Real property

The trainer is a consultant, public speaker and author with expertise in private equity, debt advisory, distressed M&A advisory, M&A restructuring and infrastructure. He is a Senior Advisor to KPMG Finland, a Senior Advisor to Reorg EMEA Covenants, the leading provider of information to the European High Yield community, and a Senior Consultant to Grant Thornton UK.

Training programmes are provided to a wide range of blue-chip clients in Europe, Africa, the Middle and Far East, North America and Australasia. In-house clients include banks (BNP Paribas, Société Générale, ING, Barclays Capital, Bank of China, RBS, SEB); lawyers (Baker & McKenzie, Skadden Arps, Sullivan & Cromwell, Cadwalader, Latham & Watkins, Weil, White & Case); advisory firms (Lazard, PWC, M&A International, KPMG, EY, Deloitte); PE firms (Cinven, Advent, Barings Asia, Waterland); corporates (Siemens, Airbus, Turkcell, Candy Crush, Gunvor, Statkraft) and governmental bodies (the UKLA, the EBRD, the ECGD, Omani Oil Corp.)

He qualified in South Africa both as a Chartered Accountant, with Deloitte, and as a lawyer with Hofmeyr where he was involved in structuring several high-profile project financings including BMW 3 Series, Ford Sierra, GM, Sappi and Mondi.

When he moved to London and joined Lazard Brothers as a corporate finance executive he was involved in a wide range of public and private transactions. Subsequently, he joined Hoare Govett as an assistant director where he acted as an advisor to smaller listed companies and was involved in several syndicated Euro-Equity Initial Public Offerings.

In 1991 he joined ABN Amro’s cross-border M&A team before being transferred to MeesPierson Corporate Finance as a Director in Cross-Border M&A where he was also involved in multiple deals in Central Europe. During this time he was a member of the EU-PHARE programme and advised the Estonian government on its privatisation programme.

He is the Programme Director at the City Business School, London, for Infrastructure Finance for the M. Sc. programme in Business Administration and Finance.

Covid-19 has and will continue to have major ramifications for firms that have seen an unprecedented collapse in their revenues.   Companies facing financial difficulties face three options: flog, fix or fail (close). Often an M&A restructuring will involve a mixture of both debt restructuring accompanied by a sale of part or, occasionally, all of the business. Distressed M&A is a challenging process in normal conditions; however, selling a business in a distressed mergers & acquisitions scenario is fraught with difficulty and presents a raft of challenges over and above a sale in the ordinary course. In an ideal world, the distressed sellers will seek to execute a sale outside and before any formal insolvency process (Administration) however, in some cases, this may not be possible. The programme focuses on the challenges of selling a business both before the imposition of a formal insolvency process and also after Administration via a pre-packaged sale. Interestingly pre-packs have been used in jurisdictions other than the UK; namely Holland, Luxembourg and Germany.

This programme aims to identify the typical issues which parties are likely to encounter in the distressed M&A process and provides a route map on how these might be resolved. The programme adopts a generic approach that is relevant to stakeholders who may have an interest in these types of transactions including; lawyers, financial advisers, senior and junior lenders, accountants and owners.

The problems typically include the nature of the sale process, the structure of the deal and how the consideration is to be paid (deferred methods are unattractive at best). For the buyer, problems arise through the absence of warranties coupled with the limited due diligence which is conducted owing to timing pressures.