To say we are in an economic flux is definitely an understatement. The cost of living crisis coupled with the news of the UK entering technical recession all point towards a dwindling economy. With the highest interest rates in 15 years, many industries, including manufacturing, are grappling with constant uncertainty. 

The number of companies facing the risk of bankruptcy has thus increased across the entire nation. With insolvencies soaring and no signs of this easing yet, an estimated 35,000 businesses could go under this year. That’s a steeper climb than during the early Covid-19 recession or the 2008 financial crisis. 

In this situation, manufacturers with fixed assets like factories and equipment are more susceptible to becoming insolvent. What implications does this have for the manufacturing industry, a sector typically among the first and hardest hit by recessions and economic downturns? Let’s find out. 

Sector overview

Across all sectors, corporate insolvencies soared nearly 14% in 2023 compared to 2022, a trend which is likely to continue as we move into Q2 2024. This especially threatens consumer-driven industries like manufacturing, construction, and retail, which contribute a staggering £166 billion – a third of the UK economy.

Rising borrowing costs are weighing heavily on these struggling businesses, particularly in manufacturing and construction, as squeezed household budgets further add to the challenges. 

Instances of distress have primarily occurred at the micro-level of the market. This means that small and medium-sized businesses have proved to be more vulnerable to shifting economic uncertainty. Manufacturing insolvencies are surging in the North West, with administrations at a four-year high in January 2024. 

The manufacturing sector faces a storm of challenges, yet M&A activity remains strong. Manufacturers are using acquisitions to scale up, diversify, and pursue sustainability objectives despite current headwinds. This opens up opportunities for distressed business buyers. In a distressed manufacturing company, some assets hold more value than others for potential buyers. Here’s a breakdown of the most valuable assets to look for:

Tangible Assets

Underutilised Equipment: Eell-maintained, modern machinery that isn’t operating at full capacity can be integrated into existing operations or used to expand production 

Inventory of Raw Materials and Finished Goods: A manageable stock of raw materials can be valuable, especially if they are in high demand or have stable prices. However, excess or outdated finished goods can be a burden, requiring additional storage costs and potentially needing to be sold at a discount.

Real Estate: Depending on the acquisition potential, the distressed company’s manufacturing facility might be valuable. Consider its location, size, and functionality for specific business needs. In some cases, it might be more cost-effective to lease a facility or outsource manufacturing altogether.

Intangible Assets

Intellectual Property (IP): Patents, trademarks, copyrights, and trade secrets can be highly valuable assets. These provide a significant edge for both, products and processes

Skilled Workforce: Experienced and well-trained employees are crucial for any manufacturing operation. If the distressed company has a skilled workforce, it provides a foundation for future success. However, be mindful of employee morale and potential challenges related to retention during a company turnaround.

The value of such assets is subject to specific business needs. Acquiring assets that complement existing operations and fill gaps in the supply chain can generate profitability

Carton Edge Packaging Ltd. Files for Insolvency

A prominent Coventry based paper manufacturer, Carton Edge, has fallen into liquidation. The manufacturer had a 32-year legacy of specialising in paper and paperboard containers, particularly cling film and foil dispenser cartons. They ceased operations and trading last month.

This closure has resulted in the dundancy of all 31 staff members.  Carton Edge’s story serves as a stark reminder of the human cost associated with these economic challenges.  

The company openly acknowledged “challenging market conditions” as the key factor in their demise, including rising cost of raw materials and production due to high inflation. Further, disruptions within global supply chains created uncertainties and delays, impacting production efficiency and squeezing profit margins.  

The company’s financial statements for December 31st, 2022, showed a mix of assets and liabilities. While they owned £184,820 in fixed assets like property and equipment, and had £761,512 in current assets like cash and inventory, they also owed over £675,000 to creditors. This left their net assets at £219,160.

Interflex Limited to Enter Administration

Interflex Limited, a Nottinghamshire-based manufacturer of automotive parts filed a Notice of Intention (NOI) to appoint administrators on 1st March. This legal step protects them from creditor action while they seek a solution. 

Interflex, headquartered in Essex with operations in Langar, supplies various sealing solutions for cars: doors, boots, interior trims, and under-carpet components. They also treat and cut materials like armrest fabrics for enhanced durability and comfort.

In 2021, Interflex underwent a management buyout led by Jim Griffin, previously CEO of Autins Group. The following year, they made a bold move by venturing into a completely new sector – horticulture. Their Langar facility began producing biodegradable mulch mats for saplings and strawberries.

Despite diversification efforts, Interflex is facing a potential financial collapse. While specific details remain unknown, factors like skyrocketing energy and material costs, supply chain disruptions, and high inflation likely contributed to their struggles.

Financial records for December 2022 show Interflex owned over £342,000 in fixed assets and £3.4 million in current assets. However, with debts exceeding £3.1 million, their net assets stood at just over £561,748. Keeping all these in mind, this news could potentially lead to the business’s insolvency within the next two weeks. 

Read more about the struggles of similar businesses in distress here.

The Continued Collapse of Shipham Valves

Financial woes for historic valve manufacturer Shipham Valve continue. Just his week, administrators revealed that the company owes a staggering £24 million to creditors after it collapsed late last year. The Brough-based company, with a rich history of 225 years, filed for insolvency in December 2023. This resulted in significant job cuts, with 39 employees laid off from a workforce of 71. Currently, the company operates with a skeleton crew of 28 staff.

The administrators, Mazars, attributed the collapse to cash flow problems caused by global supply chain disruptions. Newly filed documents shed more light on the situation. These documents reveal claims totaling £24.5 million from a staggering 167 creditors.

A significant portion of the debt, roughly £12.9 million, is owed to Shipham Holdings, the company’s parent organisation. Additionally, private equity owner Evergreen Financial LLC is owed a hefty £7.4 million.

The collapse occurred just three years after Shipham separated from its former owner, the Finnish group Wärtsilä. The separation involved a deal with Evergreen, allowing Shipham to reclaim its historical name.

Despite its long history, Shipham wasn’t performing well financially. Company accounts show it was operating at a loss, with a reported £4.9 million operating loss on a turnover of £5.9 million in 2021. At the time, however, management expressed optimism about a healthy order book after restructuring to leave the Wärtsilä group.

As the UK navigates this period of uncertainty, strategic deal making may offer a lifeline to struggling manufacturers, ensuring the continued resilience of this vital sector.  To gain a deeper understanding of these trends, download our comprehensive report – compiled using data from our platform throughout 2023. This report provides key insights and predictions that can help distressed business owners identify potential acquisitions this year. Stay tuned to Administration List for more.