In recent years, the European landscape of distressed mergers and acquisitions (“Distressed M&A”) has shifted dramatically, with a noticeable dip followed by a significant comeback. Recent data throw light on this evolving phenomenon.
Background
From a large number of deals in 2019, the Distressed M&A market in Europe fell sharply in 2020 through 2022. This shrinkage was mainly caused by the introduction of unique measures aimed to help companies facing the CoViD-19 pandemic. Debt moratoriums, subsidized financing, and other governmental interventions to support companies’ liquidity and business continuity, all played critical roles in stabilizing businesses during this turbulent time, thus drastically reducing (on a short-term basis) distressed situations.
The Italian Distressed M&A market followed the pattern seen throughout the continent. In fact, despite the 2019 peak, the country’s Distressed M&A activity decreased significantly in the 2020-2022 period.
The 2023 Resurgence
During 2023, the market showed a significant comeback of Distressed M&A deals. This growth trend seems to be confirmed by the 2024 outlook. In fact, during last year, our firm recorded a material increase in Distressed M&A activities: almost half of the M&A deals we have been involved in encompassed insolvency or pre-insolvency-related situations.
The recovery in Distressed M&A activity is driven by several factors. The post-pandemic economic scenario, where the pandemic-related governmental subsidies have ended, along with the increase in energy and raw material costs and geopolitical concerns, are deteriorating the businesses’ financial condition and – therefore – are expected to boost the Distressed M&A market.
Legal Peculiarities
Based on our experience, Distressed M&A deals do not always follow the same path. The transaction structure may significantly vary depending on several factors, first of all: the severity and composition of the target company’s debt exposure. Here some examples.
In some cases, the acquirer acts as a proper turnaround investor, who relies on the target’s inability to pay back its debts (mainly long-term debts, frequently refinanced, transferred, and parceled out in the context of wider securitization and debt-assignment transactions). Under this scenario, the acquirer usually takes on – at a discount rate – the target company’s debts and leverages on said debt to take over the business.
In case of asset deals or acquisition of companies affiliated to a larger group, some bankruptcy-related tools may get involved. For instance, the transaction may be performed under the umbrella of dedicated debt-restructuring instruments. These instruments may be of help to achieve a greater level of protection on the buy-side and avoid claw-back actions originated by a seller’s bankruptcy occurring afterwards.
The approach dramatically differs when dealing with acquisitions in the context of a proper bankruptcy scenario. In such a case, the acquisition needs to follow the rules of bankruptcy proceedings and – usually – the acquirer needs to place a bid in the context of an auction called by the bankruptcy receiver and to abide by the rules of auction set out by the same.
Conclusion
While Distressed M&A activity has declined in recent years due to exceptional hurdles, the convergence of economic, regulatory, and geopolitical variables is paving the way for its resurgence.
