The COVID-19 crisis is already showing signs of pushing the UK economy into recession, has undoubtedly impacted the M&A market in the UK and increased the likelihood of businesses entering into insolvency proceedings. However, history tells us that shocks to the market do give rise to opportunities it's a question of knowing where they are and being prepared.
It is anticipated that much of that activity in the short term will be centred in the world of insolvency and restructuring. To assist potential buyers from the UK and aboard, we have set out below an overview of relevant insolvency sale processes and provided our thoughts on considerations for buyers when operating in this space.
To understand more about other opportunities in the M&A market over the coming 12 months and the steps which buyers can usefully take now to be best placed to capitalise when the market does inevitably return, see UK M&A Partner Ragi Singh's latest Insight: COVID-19: Where (and for whom) are the UK M&A opportunities and what can you usefully be doing now?.
UK insolvency processes
The insolvency of a UK corporate is administered by an insolvency practitioner appointed to that corporate through either a liquidation or administration process.
A liquidation is designed as a terminal process for the company and its business and therefore the vast majority of insolvent business sales (executed as asset sales) are completed under the blanket of the moratorium from creditor action afforded by an administration.
An administrator appointed either by the Court or, out of court, by a company's directors, shareholders or secured creditor becomes the agent of the Company with the power, amongst other things, to trade the business and sell its assets either piecemeal or as a going concern.
Sale processes
A sale of assets (as a going concern or otherwise) by an administrator can either be:
- negotiated by the Company's directors (with the assistance and oversight of a proposed administrator) prior to the administrator's appointment and executed immediately after that appointment (a so called "pre-packaged" administration sale); or
- negotiated and executed by the administrator following appointment.
In both cases described above, either the directors (with the proposed administrator's assistance) or the administrator will run a sales process. Given that the company in question will be facing financial distress, that process will often be significantly accelerated when compared to a process run for the purchase of share equity in or assets from a solvent company. These accelerated sales processes can, for example, be completed over the course of weeks rather than months.
Tactical considerations
In view of the above, it is important that potential buyers position themselves to take advantage of the opportunities which arise. In that context, our key considerations for potential buyers of assets from distressed or insolvent UK corporates are:
1. Early Warning Signs
Given the speed with which deals in this space are marketed and executed, the earlier buyers can become aware of opportunities and organise themselves with the right legal and financial support early on, the better placed they are to properly structure offers, participate meaningfully in aggressive bid processes run by the Administrators' teams and complete a transaction. The following can be useful tools for that purpose:
- The press - often the first sign of corporate distress to the outside world comes from reporting in local or national newspapers or online press resources. It is therefore very important to keep an eye on that reporting especially in sector specific publications. However, to maintain value in business assets, directors and funders alike will be motivated to keep signs of business distress out of the press as much as possible. Other avenues must also be explored;
- Winding up petitions - the UK courts operate a central register of winding up petitions. A winding up petition can be presented at Court by disgruntled creditors petitioning the Court for a company to be placed into liquidation. The presentation of such a petition is a clear sign of corporate distress and can precipitate action by the company's directors or its funders. A potential buyer would need to have a specific target in mind and then monitor the register through its lawyers or otherwise; and
- Registering interest with insolvency practitioners - as we have mentioned above, sales processes for the assets of distressed or insolvent companies will be run by insolvency practitioners working for accountancy firms across the UK. Buyers that are clear as to the opportunities on which they want to be kept informed (whether that be based on specific sectors, deal size or otherwise) should look to register their interest with those national accountancy firms.
2. Offer Structure
The deliverability and structure of any offer to purchase assets from a distressed or insolvency company will be key to its success. The following points should be considered before making any offer:
- Consideration - the primary focus for any administrator (or liquidator for that matter) is to realise best price for the benefit of the insolvent company's creditors. However, the risk of payments being missed will also be a consideration. Therefore, although an offer based on deferred consideration may be acceptable, an offer of full or majority payment of the purchase price on completion of the transaction will always be looked on more favourably;
- Assistance to the administrator - it may be possible to offer an administrator assistance with matters related to the insolvent company following the sale. Any such assistance would give additional weight to an offer made. An example would be assistance (for a fee) with the collection of the company's book debts owed to the insolvent company at completion; and
- Understanding the transaction fundamentals - although the terms of the sale will generally be negotiable, there are a number key concepts within the sale contract which will not. For example, the administrator will sell the assets on an "as seen" basis without any warranties as to title to sell the assets in question. The risk will be placed solely at the buyer's door and any offer for those assets should reflect that additional risk.
3. Advisers with expertise and ability to move quickly
As we have highlighted above, transactions within the distressed and insolvency space must be completed quickly and on specific terms. It is therefore key for any buyer to have both financial and legal support that has extensive experience in this area to ensure risks are understood as early as possible and to put a buyer in a position to move to completion in the necessary timescales. Administrators need confidence in the integrity of the bid and the buyer purchasing team - they want to see you on top of the due diligence (often offered through a data room) and they want to see buyers organised early on with the right specialist legal and financial teams supporting that bid.
Pre-insolvency
In the current economic circumstances many businesses will be struggling to find ways of shoring up their liquidity and avoiding formal insolvency. Some of these businesses may well welcome a direct approach from a buyer, even where in other circumstances they would not have been thinking of selling. So strategic buyers would be well advised to consider direct approaches to target companies where the owners or sponsors may well be, or are on the verge of being, distressed sellers. Although a buyer may have to pay more in such cases than might be the case on an insolvency sale, there may be advantages in acquiring a business early, when it might otherwise be damaged in the period before it finally collapses into insolvency.