The increase in distressed transactions is a growing trend in the field of mergers and acquisitions in Spain. Political and economic uncertainty is giving rise to an increasing number of distressed M&A transactions.
On the one hand, there is liquidity in the market and investors with an appetite for risk, such as the Special Opportunities divisions of funds and investment entities. On the other hand, there are plenty of opportunities for companies with proven reliability but which are in financial trouble due to the global economic situation of the last few years. These are companies that are not financially viable but are economically viable. In other words, their real problem is not operational but stems from excessive indebtedness.
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What are distressed operations
In distressed transactions, the selling company is experiencing financial difficulties and its shareholders are looking for corporate transactions that provide them with liquidity and/or viability alternatives to maintain part of the business and meet their financial liabilities. For this reason, these companies or some of their production units or business branches are now available at lower prices.
On the other hand, the buyer has sufficient financial capacity to afford the transaction and is looking for medium to long term profitability. In the case of Spain, these buyers tend to be local and international investment funds.
Distressed M&A transactions are usually bilateral, with no competitive sales process.
Fast procurement, earn-out and anti-embarrasment clauses
Distressed transactions are usually quick, mainly because the seller or the target company has a cash flow urgency that does not allow them to extend the deadlines. This speeds up the whole process, including due diligence, which entails a certain added risk for the buyer but also facilitates downward negotiation.
In terms of pricing, the price is usually linked in part to the company’s future performance. This is known as an earn-out clause. Anti-embarrassment or “anti-shame” clauses are also common, whereby the seller ensures a price increase if the company is restored to health in the short term and the buyer sells his stake at a higher price.
Payment is usually deferred at least partially.
When is it best to undertake a distressed transaction: before or during the insolvency proceedings?
In most of these types of transactions, the strategic decision of when is the best time to carry out the transaction: in a pre-insolvency or insolvency situation? There is no single answer either from the point of view of the target company or from the point of view of the acquirer.
- In a pre-insolvency scenario the acquiring party has to assume certain termination risks.
- In an insolvency scenario, it may seem that the seller has less room for negotiation, but the insolvency administrator and/or the commercial court will put pressure on the seller to obtain a reasonable exit for certain assets in order to provide liquidity to the insolvent company.
Advantages of acquiring a distressed company
Investment funds are attracted to distressed deals because the price is often much lower. But this is not the only reason. This type of M&A is also a way to gain risk-minimised access to an interesting sector or geographic area.
Difficulties of distressed M&A
The main difficulty to be faced when undertaking such a transaction is that it involves not only the buyer and the seller, but also the interests of the sold company’s creditors. This entails the need to negotiate and execute the sale and purchase and the debt restructuring in parallel.