Introduction
The recent measures introduced across Europe to deal with the COVID-19 pandemic have led to volatility in the public equity markets which exceed even that of the global financial crisis in 2008/9. As companies start to understand the implications of the crisis for their businesses, and the extent of government support becomes clear, we are talking to clients about the challenges and opportunities they are likely to face in the coming months.
Outlook for UK and European businesses
- There is no doubt that many UK and European businesses will suffer in the coming months. It is inevitable that their gearing will increase as they look to use available bank finance, and to government support through lending and deferral of tax payments.
- We expect equity prices to be depressed for some time to come, particularly in those industries most affected by the COVID measures.
- Sectors likely to come under particular strain are retail/hospitality, luxury brands and consumer, natural resources, infrastructure and FinTech.
- By contrast, certain industries such as food and logistics, are experiencing excessive demand.
Difficulties in raising cash
- Listed companies whose gearing increases will look to raise equity to correct the balance later in the year. Some may need to come to the market earlier if they are in need of a rescue.
- However at present, there is concern in the market around the appetite or capacity of traditional UK/European investors to support capital raisings. Rights issues may not get the requisite level of take up which leads issuers to look to alternative sources of capital.
- The sense is that many traditional lenders will restrict their new lending and that whilst there is apparently plenty of “dry powder” in private equity funds, many of them are focused on supporting their existing portfolio investments or are concerned about their own investors seeking redemptions.
- Unlike in Asia, most UK and European listed companies are widely held and do not have controlling shareholders, so when they are under distress they need to look to raise capital from the market rather than from their controlling shareholder.
Opportunities for Asian investors
- If the traditional sources of capital are not available, there could be opportunities for Asian corporates with deeper pockets to move quickly to support such companies. (Sovereign wealth is an alternative source of capital but may not be able to move as quickly.)
- Where Asian companies have supply chains which are reliant on some of these European businesses, it may also be sensible for companies with more resources to invest in companies under distress, to maintain their own supply chain integrity.
- The relative weakness of sterling and euro creates additional opportunities for Asian investors.
- Asian bidders or investors may be well received by European companies at present, particularly those who know they will struggle in cash flow terms or are facing a refinancing.
- We also expect that, for a time, the regulatory and competition authorities may be more sympathetic to overseas investors who are clearly supporting European businesses in distress.
What structures might we expect?
- Companies in severe distress will look to offload assets and/or put themselves up for sale to a buyer who is prepared to make an investment in them.
- Listed companies will look to the equity markets in rescue situations or to reduce their gearing. If there is a lack of demand among equity investors generally, and investment banks are cautious about underwriting rights issues, we may see Asian investors underwriting rights issues and potentially taking a controlling stake in this way at a deep discount.
- We also expect to see strategic investments through “PIPE” deals, and an increase in the use of convertible loans where investors manage their downside whilst seeking to capture the upside returns of the expected recovery.
Emerging trends
- In the UK, we are already seeing more listed companies make use of the new “formal sales process” structure to seek bidders pro-actively.
- However, all listed companies who suffer a share price erosion are potential targets.
- Potential bidders interested in M&A of listed targets should bear in mind:
- Target companies are increasingly prepared to open their books for due diligence to reduce acquisition risks.
- Bidders must be able to demonstrate cash funding at the outset and may be required to make a decision to bid quickly if there is a leak.
- We are starting to see increasing acceptance of shares from overseas bidders as consideration, even if not listed in UK.
Norton Rose Fulbright has a first rate corporate practice across Europe and can assist with any questions you may have around support that your existing partners may need or other investment opportunities that may arise during the coming months. In the UK, we have acted on some of the most high profile public takeovers and, through our Asian offices, we are well placed to assist Asian buyers operating in markets which may be less familiar to them.
