Special Situations Deals: Is 2021 their chance to shine?

What is a Special Situation Deal?

Special Situations is a term increasingly used to describe a transaction involving a target business that is experiencing one or more of the following issues:

• Detrimental commercial and financial impact by a one-off event;
• Short-term cash flow stress, coupled with an uncertain trading outlook and unfavourable sector or economic forecast;
• Poorly structured balance sheet, burdened with too much debt;
• Lacking the ability to adapt to both rapid and longer terms shifts in a core market;
• Operational underperformance or inefficiencies;
• No clear strategy or scenario planning, coupled with poor financial information and a lack of strong controls;
• An unloved subsidiary or division that is either loss making or no longer aligned to a wider group strategy;
• An under or unfunded need for investment and recapitalisation;
• Increasingly unsettled and agitated stakeholder groups, with business value breaking within the debt stack rather than equity.

At its core, however, there is likely to be a viable business with solid foundations – perhaps with strong demand for its product or service coupled with untapped markets, a loyal, experienced work force, opportunities for cost savings or consolidation with a competitor and, importantly, a good underlying brand and reputation.
With the support of new investors, additional hands on “situation experienced” management resource and a robust turnaround plan, these attributes will drive the potential for a reshaping of the business into a viable and profitable operation.

The Outlook

The full economic impact of the pandemic is yet to be truly measured or seen, and Special Situations deal flows have not yet fully manifested themselves. In part, Government-backed funding support, grants, tax payment holidays and the furlough scheme, have provided a much-needed sticking plaster to help businesses navigate what has been an unprecedented period. Whilst the news of the vaccines is hugely positive for everyone, with rolling lockdowns being implemented, it is not yet clear if we are yet at the bottom of the Covid-19 impacted trading cycle. Insolvencies continue to run at low levels, which is perhaps one surprising statistic and measure.

However, as the support packages begin to eventually be withdrawn, the wounds of significant increased long-term debt, unpaid short-term HMRC liabilities and permanently lost revenues may be a step too far for some battle-weary businesses.

The recent re-introduction of crown preferential status is also not helpful to companies in need of further affordable commercial debt, as lenders have seen the floating charge security against which some of their lending has been based, diluted down.

The market outlook in 2021 could therefore present a significant opportunity for well-funded corporates or specialist turnaround funds to acquire, invest in and support those businesses running short of liquidity, options and time.

Perhaps, therefore, this points to the need for equity-based risk and solutions.

Established turnaround funds are already well versed at assessing and investing in these situations. The pack of credible investors seeking improved returns and opportunistic well-priced deals is growing and becoming more diverse. This also includes successful corporates keen to deploy their hard-earned cash reserves to bolt on new products, services and grow much needed revenues.

Special Situation deals are not for the faint hearted though. They may involve investing in a business as part of a restructuring process, such as a Company Voluntary Arrangement, or acquiring through a formal insolvency procedure and pre-packaged sale. Bold decisions on existing management and staff are needed, due diligence will be light touch, time frames to transact will be weeks rather than months, cash bidders are preferred, warranties and indemnities are rarely available and post-acquisition working capital needs will be higher. Buyers will need to be innovative and structure deals to help minimise these risks.

Mazars Special Situations Team

Advisors have a key role to play in supporting their clients as either buyer or seller. Teams need to be rapidly deployed, providing deal experience, diverse transaction skillsets and sector insights.

The Mazars Special Situations team is a multi-disciplinary team which brings together the specialisms of M&A, Restructuring, Transaction Support, Tax, Debt Advisory and Valuations. The team is committed to helping our clients transact (either as buyer or seller), raise new funding, improve financial performance or to protect the value of businesses in instances of business underperformance or financial crisis.

As stability, revenue certainty and re-growth begin to return in 2021, stakeholders in these underperforming and under pressure businesses will begin to consider their options and strategies. Coupled with a notable recent trend in accelerated shareholder exit planning and transactions, driven by expectations of upward pressure on UK taxation, the Special Situations deals market could perhaps see record activity levels. Deal hungry investors with funds and dry powder to deploy will certainly gather around the flickering flames of these burning platforms, ready and able to assist.

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