What doomsday prepper and opportunist Boards should both know about distress

Unless you’ve been living under a rock, you’ll know that commodity prices are in the doldrums and that the outlook in the near term is not particularly positive. How should Boards prepare? Combine that with current inflation, interest rate and other cost of living pressures that continue to dominate public discourse and you can understand why many Boards and executives in the resources sector are having some sleepless nights. FY24 is also on track to have more insolvencies than FY23. By December FY24 insolvency activity was up 33.79% on the same time in FY23. But it is not necessarily bad news for everyone, with current market conditions creating the potential for consolidation in various markets through distressed M&A opportunities for those with the capacity to take advantage. This article looks at a couple of key issues to keep in mind if you think you might be a distressed M&A participant.

1. Opportunistic M&A: We expect to see a spate of opportunistic M&A deals during 2024 as corporates look for ways to grow their businesses through acquisitions at discounted prices and divest their non-core assets to help shore up balance sheets.  In particular, ASX listed corporates that have been struggling in the current market conditions and trading below market value may be ripe for the taking.  If this sounds like the situation you are currently in, now is the time to be engaging with takeover defence advisers so that you are on the front foot should your chairperson get approached by a bidder after market close on a Friday.
   
   
2. Insolvency opportunities: Increased insolvencies will also create unique opportunities to acquire desired assets or restructured businesses out of insolvency. Recent transactions (for example, the sale of the Probuild and Clough construction businesses as going concerns) demonstrate how those opportunities can be used to acquire a highly sought after workforce and a workbook of profitable renegotiated contracts.
   
   
3. Secondary capital market remains open for M&A: While the IPO market is still in hibernation waiting for a big bang to wake from its slumber, secondary capital raisings in the whole are still being well supported by the market, particularly when the funds are being raised to support attractive M&A activity. Since mid-2023 the largest raisings have generally been to fund acquisitions – APA, Orora, Treasury Wines and Metcash to name a few. We expect that trend to continue in the near term.
   
   Although capital raisings are never easy, those being undertaken for acquisition funding throw up some unique issues that boards and executive teams need to navigate, including how to structure your team internally so it has the bandwidth to deal with the both the acquisition and the raising (and their usual day jobs!), how to integrate the acquisition and capital raising due diligence processes, how much information on the target to disclose in the offer documents and what type of comfort you require over that information, how to co-ordinate any wall-crossing of investors with finalisation of the acquisition documentation and what you will do with the funds if the acquisition doesn’t proceed. The earlier you start thinking about these and other issues (for example, what type of structure you’ll use), the easier you will make it on yourself.
   
   
4. Secondary capital market can also be used to support balance sheets: With commodity prices down, debt expensive and the market focussed on leverage, the secondary capital market can also be used by companies as a defensive tool to support their balance sheet and ride out the cycle. These types of raisings give rise to different types of issues – the most important being cost and whether there might be other more attractive alternatives available (e.g. disposal of non-core assets or businesses).

Whether playing offence or defence, early planning and preparation is key, to ensure that you are positioned to act quickly when the opportunity or need arises. Like everything, the more detailed the planning, the better.