Insolvencies and distressed assets Down Under snaring fair share of M&A with more to come

News Analysis 21 April

Insolvencies and distressed assets Down Under snaring fair share of M&A with more to come

Insolvencies and distressed assets hitting the Australian market are snaring their fair share of M&A, and there’s more to come, according to industry experts polled by this news service.

Insolvency appointments for FY23 to date have already exceeded the total number for FY22, at 5,685 as of end March compared with 4,912 for the whole of FY22, said Scott Taylor, founding partner at Taylor David Lawyers, citing latest ASIC statistics.

There will be more buying opportunities coming out of restructuring situations where businesses are underperforming and debt is becoming unserviceable, said Preeti Inchody, senior managing director at Ankura, who is a transaction expert with experience in both turnaround and M&A.

Many companies that were already struggling prior to COVID-19 were propped up by government economic and regulatory pandemic incentives, but with the double whammy of the end of these safety nets and the current economic environment, have not been able to hold on, said Gilbert + Tobin Partner Peter Bowden, who is seeing an increase in both insolvencies and distressed assets.

BDO National Leader, Business Restructuring Andrew Sallway told this news service that his team is working with more and more clients on accelerated M&A transactions and turnaround plans, many having been impacted by cash flow issues from external factors like labour shortages, wage growth, and supply chain and business interruptions due to 2022 weather events. He also noted that he is seeing more distressed businesses rather than insolvencies, which are returning to pre-pandemic levels.

Opportunity in adversity

Businesses in distress or facing insolvency are not necessarily poor businesses and prospective buyers should not be afraid to explore deals as they can often facilitate and expedite transactions, said Gilbert + Tobin’s Bowden.

Taylor David’s Taylor agreed, noting that many insolvencies are due to lack of appropriate management or absence of risk mitigation strategies. They may have debt but there are ways for interested buyers to buy just portions of profitable parts of a business, Taylor said.

There are also ways to purchase entire existing businesses, free from legacy debt through the voluntary administration process, which may appear complex, but can present tremendous opportunities for those that understand it, Taylor added, noting that there are the added benefits of employee retention and continuity of operations.

Gilbert + Tobin’s Bowden agreed but urged buyers and companies alike not to hold on until formal insolvency is the only option as there are also good deals to be had in distressed situations, and value and goodwill may well be better preserved in circumstances where companies avoid going the administration route.

For Ankura’s Inchody, key factors in restructuring deals are healthy engagement with the administrator and receiver and then structuring a bid that shows value to prospective buyers.

Transactions pursued without major stakeholder support and professional advice tend to result in staff with value being poached or competitors obtaining access to customer databases, reducing the value of the business, which is not a desirable outcome, BDO’s Sallway noted.

Wide spread of buyers 

Buyers looking at assets in administration or receivership need to have strategic angles and confidence that the assets can be turned around, which usually happens when buyers are in the same industry and are buying to pick up market share, customer contracts, or supply relationships, Inchody said.

As an example, she pointed to transport group Lindsay Australia, advised by Ankura, acquiring a substantial portfolio of Scott’s Refrigerated Logistics' assets after it went into liquidation in March. Tribe Breweries, which went into voluntary administration in February, is another that could see a positive outcome if it attracts an offer from Young Henrys, as has been speculated in local media.

BDO’s Andrew Sallway is certainly seeing buyer appetite from stronger players in the same sectors which can demand a significant discount to fair value. That said, since the collapse of Silicon Valley Bank and the bail-out of Credit Suisse, he has seen two instances where funding sourced from the US has been withdrawn, and as a result those transactions have been delayed, he said.

In addition to strategic buyers, Gilbert + Tobin’s Peter Bowden is seeing private equity (PE) interest. Investments in turnaround opportunities often offer high returns, especially if companies’ debts have been wiped out, which is certainly the case when targets are acquired through formal insolvency processes, he noted. 

There’s a lot of PE activity around beauty company BWX [ASX:BWX], for example, which called in the liquidators earlier this month, with local media speculating that PE firms like Allegro Funds, Tanarra Capital, Bain Capital and Avenue Capital Group could be interested. 

Meanwhile, KPMG is looking to appoint advisors for the sale of BWX’s US business and a majority stake in its Go-To Skincare business, as reported by this news service earlier this week.

For its part, Taylor David is seeing no shortage of funds enquiring about distressed assets and business opportunities, with interest increasing in the past three months.

Sector spotlight

The construction sector is seeing the highest number of insolvency appointments since September 2022 with 1,601, followed by accommodation and food services with 805, and manufacturing with 373, according to ASIC statistics.

Construction companies are obvious candidates, especially those in residential construction as they are susceptible to interest rates hikes with many suffering from fixed priced contracts and increased materials costs, noted Gilbert + Tobin’s Bowden. Porter Davis, which managed to sell its multiple dwelling business to Nostra Property earlier this week, is the latest in a long spate. We are also seeing flow-on effects to supply-chain parties, Bowden said, with electrical and plumbing services provider PlumbFirst, for one, reportedly having called in the administrators last week.

Businesses that were able to easily raise capital and continue to rely on capital rather than revenue or profit to grow will also continue to feature highly in insolvencies, with Milkrun a case in point, according to Bowden. He believes there will also be more activity on the tech front, while lifestyle goods will be the next frontier as inflationary and interest rate pressures become more widespread.

Ankura’s Inchody pointed to industrials and other sectors where the cost of goods has gone up but companies have not been able to pass these on to customers. Not only some ASX-listed companies with visible debt levels, but also companies that have gone through a leveraged buyout (LBO), some owned by private equity, will potentially enter such situations, she added. 

Sponsor-backed companies, however, are slow to come as sponsors will usually try to support by injecting more capital, but it will become an issue when sponsors run out of patience, she noted.

Most restructuring opportunities come from larger assets as there tends to be more planning, making them more salvageable than smaller companies, which tend to lose value more quickly, she added.

For BDO’s Sallway, regardless of sector, the best opportunities will be those that provide buyers with new market share and revenue streams, protect supply chains, or give access to new IP or technology.

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