Deals are back and that may be due to a new found pragmatism between dealmakers.
In days gone by, private equity firms saw asset-based lending as a tool to free-up cash flow for portfolio companies. Peadar O’Reilly, Venture Structure Finance’s regional director for the North West, sees evidence of that view changing.
‘Up to the front end of 2007, firms tended to prefer to use senior debt to finance and structure a deal, given the levels of leverage available. Now we are seeing an increased appetite among PE firms to use ABL at the front end of the transaction.’
There is a paradigm shift in M&A at the moment as attitudes evolve and compromises are made between dealmakers in order to get transactions completed. The result appears to be to everyone’s benefit as the ever present “deal pipeline” talked about by advisers is becoming jammed with deals, finally.
‘In the past two weeks I have received seven information memorandums for proper acquisitions,’ says O’Reilly. The market is stirring to life and the deals range from straightforward buy-outs to corporates seeking to achieve greater efficiency.
‘There are definitely more Plc divestments,’ comments O’Reilly, noticeably among companies in the FTSE 250 which are seeking to improve efficiency and focus. ‘I think they might have divested ten or 12 months ago but they realised they wouldn’t have received the right price, so they have spent the past year grooming these divisions of the business for sale.’
Cryogenic freeze
As for the market stasis, O’Reilly suggests that the banks, much like the listed corporates, have preferred to sustain entities that may essentially be on borrowed time. ‘The low interest rate environment has allowed businesses to continue that perhaps were traditionally driven into distressed or accelerated M&A. They have been able to service their debt and banks have had to crystallize their position.’
O’Reilly distinguished between the stressed and distressed. ‘In days gone by, the banks would look to exit stressed business. But they haven’t really been doing that for the last 24 months and that’s because they’ve been focusing on companies which are extremely challenged.’
The implication is that now might be the right time for banks to exit stressed businesses, leading to a surge in accelerated M&A.
Sound foundations
As far as the North-West is concerned, O’Reilly is certainly encouraged by the number of companies interested in Ventured Structured Finances range of asset-based lending facilities.
Targeting companies with sales of up to £150 million, the firm provides up to £25 million through its ABL facilities, such lending against debtors, plant and machinery, property and inventory.
For the region generally, he observes that the environment has been ‘quite strained’. But the influx of deals, which range from a recently completed £5 million management buy-out, where finance was raised against inventory, invoice finance and property, to a £10 million bolt-on acquisition, demonstrates that things are finally picking up.
As for sector activity, he highlights the continued importance of pharmaceuticals and aerospace companies, but notes that food and leisure are also ‘particularly strong at the moment’.
Although deals may be picking up, that’s not to imply that circumstances are set to improve for companies. The gloomy fact is that deals will occur because companies may have no choice but to sell as cash flow becomes squeezed ever tighter, or executives realise it’s simply wishful thinking to hang on for a higher valuation.
‘The upturn in deals may come from companies in difficulty,’ confirms O’Reilly. ‘There are a lot of businesses which have limped along which would probably not have survived in previous recessions.’
