Smart buys: funding M&A in the post-credit crunch environment
By Ian Fraser
Published: The Times
Date: March 15th, 2010
The £955m sale of Pets at Home was a turning point for dealmaking; image from The Drum
Corporate treasurers are on the look out for imaginative but prudent ways of financing tactical and strategic acquisitions, writes Ian Fraser
During the credit crunch that commenced in July 2007 cash was king. Largely due to the lack of availability and expense of alternatives such as bank debt and equity, together with the cloudiness of the outlook for future corporate earnings, most companies just battened down the hatches and focused on self preservation. The hoarding of cash became the corporate treasurers’ number one priority.
As credit markets have thawed, with banks rediscovering some of their appetite for lending and dealmaking returning to the corporate agenda, the hatches are gradually being lifted again.
Deals flowing again
Corporate treasurers are on the look out for imaginative but prudent ways of financing tactical and strategic acquisitions. At the same time they must ensure their companies are sufficiently well-endowed with cash and cash equivalents to make hostile takeover attempts resistible.
Dealmakers cite Bridgepoint’s £955 million sale of the retailer Pets at Home to US buyout group Kohlberg Kravis Roberts after a highly competitive auction on January 27th as a major turning point.
Richard Madden, chief executive of Close Brothers Corporate Finance UK, said companies are finding it much easier to raise additional equity than even a few months ago. He said that CBCF’s client Sportech, a pools business, recently raised £17m through an equity placing and open offer to fund its acquisition of US-based specialist technology business SGR. “Six months ago that would have been very challenging.”
Private equity buyouts are making a comeback and Close Brothers has recently advised on several in which debt funding was provided by “clubs” of banks. There are even early signs that syndication, securitization and even covenant-lite deals are making a comeback.
Cash less regal
In this context, is cash likely to be deposed? As alternatives such as share issues and bond issuance become more feasible again, isn’t the hoarding of cash less critical to corporate wellbeing?
“Cash is still king, but it’s looking less regal than it was a year ago,” said Madden. “It has in recent months become easier to borrow it from a bank and to raise money from shareholders.”
According to James Douglas, head of debt advisory at Deloitte, one large FTSE 100 company was struggling to raise finance from either the bank or the bond markets a year ago, but today it has access to a plentiful supply from both these markets.
One source claimed banks are today “falling over themselves” to lend to larger companies with strong track records and respected management teams. Jan Skarbek, deputy head of UK investment banking at Citigroup said: “Bank debt is available for the right deals and there have been a number of mid-sized private equity transactions in the UK in 2010.”
“There’s been a massive shift in 12 months,” said Douglas. “Cash is not king as much as it was a year ago and liquidity has improved significantly. Central banks around the world have pumped an awful lot of money into the system and banks are under a lot of pressure to lend it. That said, conditions remain challenging.”
Madden believes corporate buyers are today more careful about not over-stretching themselves than during the boom. “From an M&A risk management perspective, people are not going for the most aggressive debt package they can. They want to go for something they are entirely comfortable with, that they can pay down and that won’t jeopardise their business’s operating flexibility going forward.”
“The priority for corporate treasurers is no longer to maximise the last pound of return. There’s no doubt that real and lasting lessons have been learnt from the crisis.”
Preparation is everything
Madden said preparation ahead of disposals has become more critical than in the pre-credit crisis days. “It’s about understanding the asset you’re selling and the markets in which it’s operating. It’s anticipating questions from potential bidders and knowing the bidders.”
During the credit boom, Madden said selling a company was too easy. “You could hire a helicopter and shower information memorandums over London, wait for someone to pick one up and then two weeks later they’d come back with a fully financed bid. Now an M&A adviser needs to work harder, establish which bidders are serious, which of them knows the asset, which have done their homework, which can credibly finance the deal.”
What’s the best thing a corporate treasurer do to ensure their company can resist unwelcome suitors? Douglas said: “A good first step is to ensure the company has adequate liquidity at all times whether that is through undrawn bank commitments or bond market access.” Such actions are invariably positive for the share price.
Madden said corporate treasurers’ top priority remains ensuring their companies have adequate financing and that their cash resources are properly husbanded, but also that they are able to dip into their cash resources as and when required to take advantage of opportunities as they arise.
Currency hedging and cash management are important. In recent years plenty of companies thought they had cash on their balance sheets but found to their cost it was trapped in illiquid places. Douglas said: “Having a vice-like grip on cash flows has helped some companies to massively outperform their peer group.”
Justin Meadows, chief executive of ICAP subsidiary MyTreasury suggests practical this might be achieved. He said, “In the world of M&A, cash is a powerful weapon and being able to deliver it can be a critical factor in determining the success or failure of any particular deal.”
He suggests corporate treasurers use ICAP’s My Treasury platform, to give themselves “a consolidated view of their cash positions and credit exposures across all eligible counterparties in all regions and all currencies.”
This article was published in the corporate treasury supplement produced by Ranconteur Media and published in The Times on Monday, March 15th, 2010.
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