Vol 3 (2006) - Issue 2

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Restructuring … the New M&A!

Crisis, what crisis? There has been so much liquidity flowing through the world’s capital markets in the last few years that predictions of a downturn happening ‘sometime soon’ become increasingly hard to ignore. The fact remains, however, that the market remains depressingly (for restructuring lawyers!) resilient to the laws of economics with no definite sign yet of any general downturn.
What has marked the market in recent years (and is still noticeable today) is the sector-driven factors which influence the insolvencies that we see. In the 1990s we had the dotcom bubble and then the telecoms market which generated enormous ‘localised’ downturns. In these sectors, huge amounts of other people’s capital were used to develop very expensive businesses which were then acquired by other people for relatively small amounts. Given the size of the numbers involved, it could perhaps better be described as ‘distressed M&A’ rather than insolvency or bankruptcy work! I think this analogy holds good today.
Take the ‘downturn’ we have seen in the retail sector over the last 12-18 months. Lots of high street names have disappeared from the market. We have seen names like Courts and Allders go through quite ‘traditional’ administrations in the UK. These are old-fashioned furnishing retail businesses with potentially large and attractive retail footprints. Just before Christmas there was a mini-downturn with businesses such as Unwins collapsing (and a number of stores being bought by Threshers). We also saw the collapse of the former Woolworths-owned music chain MVC, which was the subject of a pre-pack transaction for a number of its core stores. The Golden Wonder crisp name also disappeared– but the factory that made them was snapped up by a competitor.
The common feature running through a number of these transactions is the presence of a business in a sector,or with a particular brand name, that has become out moded or outdated. However, such businesses have valuable retail footprints which have been snapped up by competitors resulting in a relatively simple recycling of the retail estate with, in some cases, attractive recoveries to creditors.
In many ways this is no more than a localised version of what used to happen in the ‘good old days’ when we had recessions! The difference is that recessions reached across the whole of the economy. What we see as localised ‘downturns’ are driven by sector-specific issues. In the case of the last 12 months, the sector involved was ‘old fashioned’ retail. The real trick is to look ahead to what is to come. Given the incredible volatility in power prices, it is surprising to think that this was a sector that was in great difficulty during the 1990s when deregulation and a competitive market put great pressure on prices. Businesses such as the Drax coal-fired power station ended up in the hands of its creditors. This now looks like a safe bet given the pressure on gas prices!
So the power sector looks safe, but what about the automotive industry? This has become an industry of almost secondary importance in the UK given the loss of most indigenous capacity. The collapse of MG Rover was obviously the final nail in the coffin in the UK. However, it is easy in the UK to forget just how huge an industry sector this is in Europe – France and Germany especially. Even in the UK, a large sector of small/medium-
sized industry exists to support the increasingly ‘just in time’ supply systems used in this sector. That in itself creates its own risks. If every car has 10,000 parts and every part is subject to a sole supplier/just in time/minimum profit supply agreement then the risks of something going wrong increase dramatically.