Mergers and acquisitions are often a hallmark of a thriving economy, but even when times are tough, there are opportunities to jump in and find dynamic businesses which could go a great distance – with the right management at the helm.
COVID-19 has shaken the global economy to its core, with lockdowns causing us to change our working habits in order to limit the spread of this new coronavirus. One unfortunate consequence of lockdown is that business on the high streets has virtually ground to a halt.
On the surface, the lockdown certainly seems like a hostile environment for business. A lack of consumer demand is putting healthy businesses on the line. But a consequence of this is that we’re seeing gaps in the market emerge over time. When growth resumes, the businesses left standing could become some of the greatest success stories of the century.
With many businesses unable to weather the storm, we’re seeing growing signs of distress, with winding-up petitions, liquidations and administrations on the up. COVID-19 is doing damage to our economy as much as to our health. But like any downturn, there are causes for optimism, and a great number of acquisition opportunities – if you know where to look.
How deep is the downturn?
UK economists typically define a recession as being two successive quarters of contracting GDP. In other words, a three-month shrinkage might be a blip; but a six-month contraction is a sign of a more entrenched downturn taking root.
The 2008-09 recession saw UK GDP fall by six per cent, declining over five successive quarters. Growth resumed, albeit at a weak pace, but GDP didn’t surpass its early-2008 peak until mid-2013. Living standards effectively stagnated for over five years.
The COVID-19 downturn is projected to result in significant drops in GDP. The Bank of England has predicted that UK GDP is expected to be close to 30 per cent lower in 2020 Q2 than it was at the end of 2019. All this would make 2020 one of the worst since records began in the early-1700s.
UK GDP is expected to be close to 30% lower in 2020 Q2 than it was at the end of 2019. Chart from Bank of England’s Monetary Policy Report May 2020.
(a) The illustrative scenario is conditioned on the assumptions set out in this section, including: Bank Rate following a path implied by market yields; the TFS and TFSME; the Recommendations of the Financial Policy Committee and the current regulatory plans of the Prudential Regulation Authority; the Government’s tax and spending plans as set out in Budget 2020, updated to reflect additional announcements made up to 29 April; commodity prices following market paths for two quarters, then held flat; the sterling exchange rate remaining broadly flat; and the prevailing prices of a broad range of assets, which embody market expectations of the future stocks of purchased gilts and corporate bonds. The main assumptions are set out in the ‘Download the chart slides and data’ link at www.bankofengland.co.uk/report/2020/monetary-policy-report-financial-stability-report-may-2020.
(b) The dotted line begins in 2020 Q1, as ONS data are currently only available to February.
However, it comes with a slight caveat – COVID-19 is expected to have an adverse economic impact in the short term, but it will be followed by a rebound, which could allow the UK to make up for any lost ground, and then some.
Of course the immediate consequence of the downturn is the expected spike in businesses entering administration or liquidation. But with every downturn comes opportunities to invest. A great number of these insolvent businesses with high intrinsic value will be ripe for acquisition, presenting unique opportunities to invest.
Where are the potential acquisition opportunities in the wake of COVID-19?
We’ve explored the impact of COVID-19 on the macroeconomy, but now it’s time to share some unique insights of our own, here at Administration List. We’ve been tracking the sectors worst-hit in the last few months, and found some interesting trends beginning to emerge.
- Retail is hardest hit, comprising 33 per cent of all administrations we observed in February 2020
- Construction is second-hardest hit, with 93 administrations or liquidations recorded in the same month
- There were over 4.5 times more liquidations than administrations in February 2020
- The trend for retail and construction to top the list has continued throughout February, March and April
- April saw 73 construction insolvencies and 81 retail insolvencies
- Financial sector insolvencies have slowly crept up with 15 financial companies listed in February, followed by 21 in March and 24 in April
The hit to retail is understandable, when you consider how businesses in this sector rely so heavily on high volumes of footfall to drive sales on a daily basis. Popular retailers such as Oasis and Warehouse are recent examples of large businesses who struggled to stay afloat, suggesting that the current downturn is every bit as damaging to large retailers as it is to small ones.
Debenhams was another large retailer which fell into administration (for the second time in a year), putting over 22,000 jobs on the line.
There are signs too of trouble within the construction sector, especially given that the OBR’s forecast claimed that output in the sector could fall as much as 70 per cent. David Price, a reporter for Construction News, revealed in April that the next two months will be make-or-break for many construction firms.
These businesses are being forced to live off reserves and final payments from billing for January and February. With some construction companies getting back to work in May, this could start to change, but it seems impossible that everyone will have made it through unscathed. New income is thin on the ground and when the old revenue stream dries up, it is expected that many of these businesses simply won’t be sustainable.
Opportunity here will not be limited by sector. Smart acquisition strategies will take the assets and value of a failing business and put them to hard work in a potentially entirely unrelated sector.
The IP and technology that has boomed around retail could prove useful to smaller logistics businesses, scaling up their operations following a thinning of the competition. Catering teams at a loss following the destruction that has hit airlines might find themselves acquired by businesses at another end of the supply chain, perhaps working on commercial retail as businesses adjust to a new ‘social distancing’ workings structure.
Even the assets of the airlines, their technology, booking systems, vehicles and more could well find new homes, put to work in booming businesses, such as online tutoring, supermarkets or couriers, as their original owners remain grounded.
What does this mean for buyers?
Unfortunately for many, a lot of good businesses will fall victim to COVID-19. But for buyers, this risk of lost potential could become something infinitely more positive, if they spot the right opportunity and act at the right time. According to some, that time is now.
Over the next few weeks a great sense of urgency will build, as fortunes could be lost or found, depending on how informed buyers and investors are. Ran Carmon, managing director of Chelsea Corporate, a leading buy-side business broker, spoke exclusively to Administration List, telling us that he believed the window of opportunity for acquisitions of distressed businesses is very much open, but only for a limited period of time.
Mr Carmon explained: “We’re actually witnessing the turning around of things, and feel like the time to do distressed business purchases is very short. We think that in the next few weeks, things are going to ease up, which will work very much for UK businesses, but against people looking for distressed deals.”
If you want to get on the inside, in times like these you need the right information to stay one step ahead of the competition. Making wise acquisition choices takes careful analysis and timing. With the right insights from Administration List, you could make it through the turmoil and emerge in 2021 as one of 2020’s success stories.
Many of our subscribers are using the information in our listings to find distressed businesses with deep inherent value. They might have faltered in the current climate, but our subscribers see the potential in their assets and teams. A well-timed intervention could be all these companies need to put them on the right track and help you build up your business ambitions.
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