Sunday 22 March 2020 6:16 pm

Deal or no deal? How coronavirus is impacting M&A

Deal advisers say they fear the coronavirus crisis could stop M&A in its tracks in the UK, but predict a wave of distressed deals in the coming weeks as struggling businesses are picked up and companies band together to try and ride out the economic shutdown.

KPMG’s head of deal advisory in the UK Liz Claydon says: “We are seeing processes get slowed down, put on hold or even pulled at this stage.

“In the short term we will see a decline in M&A deals in the UK and globally as companies focus on the wellbeing of their employees and the resilience of their operations.”

The sudden economic dislocation that has swept across the world in recent weeks has shattered share prices, made the retention of cash a pressing priority and limited the availability of cheap debt that helped drive dealmaking.

Read more: Coronavirus: FCA urges companies to delay publication of preliminary results

However, Freshfields M&A partner Oliver Lazenby says the fast-changing world may offer opportunities.

“There will be winners and losers. There will be deals that fall over and there will be deals which come about that may not have otherwise have done so. If you can call the bottom correctly you can get into an M&A situation on very favourable terms,” he says.

Claydon says private equity firms sitting on big cash piles will be avidly scanning the market for deal opportunities.

“It’s well known private equity houses make their best returns on investments at the bottom of the cycle – they are likely to focus on their portfolios for a few months, but they will also be trying to call when is the right time to come back into the market,” she says,

Despite anecdotal evidence that transactions are being postponed or cancelled, deal-making is continuing.

Read more: Pennon sells waste business Viridor to private equity firm KKR in £4.2bn deal

On Wednesday private equity firm KKR announced that it had agreed a £4.2bn deal to buy UK waste and recycling business Viridor from Pennon.

It is understood KKR pushed ahead as it views Viridor as a long-term investment with its infrastructure fund typically investing with a view to making a return 15 years down the line.

Nick Davis, chief executive of law firm Memery Crystal, says his firm continued to receive instructions on deals last week.

“We had four new instructions yesterday…on deals that are ongoing people seem to be continuing, the question will be in two-to-three weeks’ time,” he says.

Roger Barron, an M&A partner at law firm Paul Hastings, says the collective experience of the crisis may help advisers and executives in building relationships with counterparties.

“People on conference calls are aware the people they are talking to have lots of things going on and are facing lots of difficulties, so each call will start with a check in on how everyone is which in a funny way engenders trust and and helps form relationships, which is key to continuing M&A deals in a challenging environment,” he says.

KPMG’s consumer markets deal advisory lead Nicola Longfield says she thinks companies will continue with preparations for disposals despite the current economic turmoil.

“On the sell-side, some of the activity may hold up,” she says. “Corporates can use the time to prepare for non-core disposals.”

Read more: Coronavirus: What does the chancellor’s support mean for businesses and employees?

Laydon says there may be a wave of distressed M&A in the coming weeks as companies go bust or seek white knights to keep them afloat.

“We would expect to see more distressed M&A as people take advantage of opportunities in the market where they can,” she says.

Lazenby says companies and their advisers will need to be on their toes to deal with the fresh set of challenges this crisis will throw up

“It has some similarities to 07-08 but many challenges that are different. But we will have to react; it is our job to be fleet of foot,” he says.

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