Although European M&A is still in the doldrums, experts said that a tidal wave of restructuring activity could in time lead to a recovery in deal volumes.
Rising unemployment across the continent and a sharp reduction in consumer spending are creating the perfect conditions for a wave of restructuring activity. As an example of the extent of the problem, BDO Stoy Hayward said that almost one hundred businesses will go to the wall every day in the UK.
Although restructuring-led M&A will be a major theme in the months and years ahead, it can be harder to get mandates than during the boom years, largely because companies often delay making tough decisions until the last moment.
“Companies had reserves to survive for a while and those reserves are gone now, so they have to restructure drastically,” said Frédéric de Boer, senior partner at Zurich-based Zetra International. The boutique firm’s restructuring business has increased 50% in the last several months. “More than half our company is working on restructuring cases, which has not been the case for years.”
Meanwhile, a turnaround expert in Spain said that its corporate restructuring activity will typically lead to M&A in the form of asset sales and spin-offs.
One of the largest cases so far in Spain has been media group Prisa, which has extended its debt payment schedule to give it time to restructure. The company had previously called off the sale of pay-TV channel Digital+ after failing to agree a price.
Possible solutions in the months ahead include a recapitalisation of Prisa and the entry of minority investors into various business lines, as reported. Digital+ might also be put on the block again following a solution to a football rights dispute. A spokesperson for Prisa declined to comment on market speculation.
Though restructuring is expected to play an increasingly important role in M&A deal flow, the timing of restructuring mandates is harder to pin down.
Companies have a great capacity for denial when times are tough, a second Spanish turnaround expert explained. They want to see how far they can go by themselves before giving a mandate to turn the business around. One legal expert in restructuring said it can be difficult to face ugly truths about the state of the industry, acts to save companies should not be seen as worrying ones.
“We have been pitching restructuring deals to companies for a year now, when the first signs appeared,” a London-based media advisor said. “However, companies seem to only act on those needs at the last minute, when they are about to breach or have already breached their covenant.”
The delays in giving mandates means that advisers have to think outside the box in obtaining them. Zetra’s Boer said that many mandates now come from lenders or directors. Once mandated, the work starts almost immediately. “Within a couple of days we have to get people in there,” he said.
In the new environment, buyers and sellers also are realising that it is no longer enough to simply buy or sell a company. Instead, restructuring must be done; ideally before the sale in order to make it more attractive and invariably afterwards by the buyer, said Marko Gucijan, a partner at Mrezaznanja. "We are therefore working with an increasing number of companies in this respect, and plan do more still on the restructuring advice side."
In the Balkans and Central and Eastern Europe, a number of private companies are dominated by families or self-styled entrepreneurs whose business models revolves around them. "They need to implement systems and practices within the company so that it can stand alone without them - otherwise in many cases without them it would collapse," Gucijan said. There are increasing opportunities in this field, though companies are sometimes reluctant and lack the sophistication to truly face the restructuring issues. “But restructuring can often free-up more cash than pumping in new investment or taking on more debt," he added.
Despite initial preparation work done prior to sale, in Serbia many state-owned companies also need restructuring, said another source working in the space. Serbia Telekom, for example, will probably need a headcount reduction, though no one would admit it publicly due to political pressures, the source said.
While in Europe restructuring activity has only recently been picking up, in the US it has been a recurring theme for some time, Boer noted. Brown Gibbons Lang & Company (BGL), a US boutique, recently estimated that restructuring deal flow now accounts for 90% of its business, according to Allison Dent, CEO of Global M&A, an international boutique advisory that counts both Zetra and BGL as partner members.
The US mid-market is experiencing an uptick in both restructuring and M&A, said Bryant Riley, founder of Riley Investment Management LLC, an advisory firm that services companies in the USD 200m market cap range. The activity is driven by investors looking to take a more proactive role in their positions and the lack of liquidity in the market. “Illiquidity is going to drive M&A. In terms of restructuring, the view is similar,” Riley said.
by Rupert Cocke, Abigail Roberts, Mariana Valle and Elaine Green
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