Set out your stall - ReSolve Group UK

Set out your stall

ReSolve Group UK

Set out your stall

In an article published in HealthInvestor, our Managing Partner Mark Supperstone, discusses how restructuring, compromising and simplifying play their part in M&A activity.

If viewed through an optimistic lens, the ebullient M&A market within the healthcare sector could be seen as part of the overall post-Covid bounce back. However, looking at it from a more realistic perspective this activity may have a lot to do with the sector’s weaknesses – including lower valuations, falling local authority funding, regulatory pressures, rising inflation, and poor staff retention and availability – which have allowed opportunistic and well-capitalised organisations, competitors, venture capitalist funds, and private equity firms, to advance and consolidate their positions.

In Q1 2021 the UK had by far the largest flurry of M&A activity in Europe, with almost 10 times more value transfer and was home to approximately 26% of all of the M&A transactions. I expect the second half of the year to continue the momentum as firms seek to maximise exposure to companies that have been successful, by adapting and responding to the pandemic and consumers’ changing patterns, as well as picking up ailing businesses that may be currently distressed but deemed to have potential.

Directors may think that the only factors that truly matter to acquirers are their company’s fundamentals, market share and growth prospects. These are certainly important, but they are not the only aspects that appeal to a suitor. A struggling company can be very attractive  to distinct investor types that target distressed entities and utilise their skills and experiences to adapt and improve the business accordingly. Additionally, complex group structures may be off-putting and in need of a clean-up.

Restructuring

Restructuring an insolvent company using a business rescue process such as pre-packaged administration, where the directors engage with an insolvency practitioner to assist with the marketing of the company and/or its business and assets early, can attract a new variety of investors or purchasers. The new company may not have the same shareholders (unless a share sale occurs), but is shorn of its legacy debt, which may well have acted as a deterrent to its ongoing development. Medium to high-risk investors find such acquisitions attractive and will suffer the loss of warranty provision in business sales in return for an opportunity to turn around, refinance and drive revenue generation to seek returns.

Multiple shareholders can hold differing perspectives and agendas, all of which can be commercially problematic, especially in distressed times. A new, leaner company, perhaps with a new and smaller set of investors, can be more flexible, dynamic, clean and mobile.

Alternatively, and avoiding the administration route, restructuring the balance sheet of a company with the input and guidance of restructuring professionals can lead to enhanced value in the long term. There are lots of benefits to negotiation and discussion with stakeholders, such as retaining goodwill and creating refinancing opportunities. Consider as a case in point a debt-for-equity swap mechanism that deleverages a balance sheet, improves cash flow and ensures a continuation of stakeholder value, aligned with the directors’ long-term objectives.

Debt compromise

In certain cases, potential acquirers may wish to see a company enter into debt compromise arrangements with its creditors in an effort to cleanse the balance sheet prior to investing funds. A Company Voluntary Arrangement (CVA) is a great way to recalibrate operations when there’s too much historic creditor debt on the balance sheet.

Working with restructuring professionals, directors construct a set of proposals to put to their creditors that will allow the respective companies to compromise on some or all of their accumulated debts, give the company time to repay the element of debt that is not being written off, and provide for the rescue of the company.

The proposals need at least 75% of the creditors in value of claim to vote in favour, but if some of the votes in favour are from connected parties, such as shareholders or intercompany claims, then a second test is applied which effectively requires at least 50% of the unconnected creditors’ vote to be in favour. This means that the senior management teams of companies proposing CVAs may need to spend some time lobbying creditors to support the proposals and that is why it’s crucial that they are realistic and not overly optimistic
or, in the alternative, appear to favour heavily the company proposing the CVA. The end result is a company that has more manageable debts and has creditors that are aligned with its priorities.

Group restructuring

It is often said that chronic M&A is the result of poor integration. I would agree and in the case of group restructuring, effective integration is key to delivering long-term investor value. This can be achieved through the reduction of overheads, decreased regulatory obligations and an alignment of the various business units, creating optimal synergies. While this can be extremely difficult and consuming of time and resources, its obvious benefits such as higher margins, no cannibalisation or wastage, and creating more tax-efficient operations can make it worthwhile.

If companies in a group cannot be integrated, perhaps they can be simplified. Corporate simplification processes create sleeker and more streamlined corporate forms that are better positioned for sale. Simplification starts with combing through a company’s various legal entities to see which can be closed down through solvent liquidation or strike off. This is very relevant for groups operating in high-margin sectors, like medtech or education, because they are often built by bolt-on acquisition. This behaviour often results in lots of dormant entities, which the owners have neither the expertise nor inclination to sort out.

Simplification can take a number of forms, such as the elimination of legacy entities that serve no further economic purpose, or through the reduction of cost, risk and the number of jurisdictions in which a company operates. In all cases, corporate simplification results in a cleaner, more cost-effective way of doing business.

Often, group corporate simplification processes are actioned post acquisition. This has been popular with pharmafunds and private equity houses to release value through solvent liquidation processes, initiated at the end of a fund’s life or in order to repurpose the investment monies.

I expect to see an uptick in corporate simplification as M&A activity develops, particularly in light of the potential for changes to the UK’s fiscal environment.

Buoyant market

If Covid-19 had silver linings, one was how turbo-charged the healthcare sector became. We have witnessed an unprecedented level of developments and discoveries, bringing the sector into a new era.

Yet with many companies losing long-term investors because of the economic repercussions of the pandemic,there have been a lot of organisations that have found themselves financially distressed and having to wind down operations due to a cash crunch, or too cumbersome to remain profitable.

The buoyant market for M&A in the healthcare sector provides companies and groups with an opportunity to restructure, rescue or simplify good businesses. Good businesses, after all, will always be highly sought after.

Regardless of whether a business is on a strong or weak financial footing, my advice to those who are considering selling up is to recognise the various processes available to help you achieve your objectives, and to take professional advice from restructuring professionals qualified to guide you through them.

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