Concerns over social distancing, the rising cost of debt financing and due-diligence difficulties were some of the topics panellists addressed on the Nordic M&A update webinar held by the Swedish Chamber of Commerce for the UK, hosted last Thursday (14 May).
The Nordic M&A market has suffered badly with the ongoing coronavirus crisis, along with most other markets. The amount and value of M&A deals in the region has dropped significantly during the spring, but some transactions have been able to materialise, such as Altor’s acquisition of Eleda Group and EQT-backed Ellab’s three add-ons.
The deals that have been done so far had likely been in preparation before the COVID-19 outbreak or had been driven by old relationships, the panellists said. The lack of visibility for future earnings and what impact COVID-19 will have in all sectors has created concern amongst potential sellers, who do not want valuations to drop, as well as buyers, who do not know how well the forecast will play out.
Since early March, most private equity houses and lenders have spent time on their portfolio companies to understand potential demands for cash or how to solve likely liquidity issues.
“We have mostly been in contact with our own companies. I think that in the recent months the activity has been very focused on how to solve the liquidity and financial position, and you will see that 3Q and 4Q will be challenging for some sectors,” said an asset manager CIO panellist.
“When we speak to our CEOs and CFOs it’s obviously clear that no one really knows what is going to happen. It is very difficult to predict. That is why it is difficult to focus on forward leading things like acquisitions. Large stable companies will be able to prepare right now, but I don’t think the transactions will be made until end of this year or early next year, since the visibility has gotten better then."
Gearing up to hunting mood
However, a private equity panellist said that the focus now has slightly shifted to new leads, as most PEs still have dry powder to spend.
“In the beginning of the spring, everybody was looking at their portfolios. Depending on which fund you are assessing, they have different dry powder. Now we are gearing up to hunting mood again, trying to find new opportunities. But that is difficult, since something may look cheap [but forecasting earnings is tough], and if you are not in a forced seller mood, why would you sell now?” said a private equity panellist.
The current crisis is more difficult for the market to handle compared to the financial crisis in 2007 and 2008, since forecasts change everyday as the pandemic continues, the private equity panellist argued.
“Then the CEO had a tested toolbox, they knew what would happen, knew how to handle capex and so on. But this time the visibility is so unclear, so you don’t know how to manage the pedals, with the breaks or the gas. You don’t know when the second wave is coming, and then you have the macro perspective, the increasing protectionism, some companies and some sectors will have a different business model when the pandemic is over,” he said.
“It is more challenging for the CEO to change something to post COVID-19, when the behaviours will be different.”
Back to the world of covenants
The lack of visibility has also pushed lenders to take precautions, as the outlook on cashflow for most companies has been less reliable. The days when lenders could compete on increased leverage and less covenants are gone, as most lenders now increase the pricing and tighten documentation in line to ensure they don’t lose control if things go wrong, said the panellists.
The private equity panellist said financing deals at the moment is difficult, since the volatility makes it impossible to price risk. Some liquidity can be found with unitranches, but they pricing is expensive, he argued.
“Until the market opens for higher syndicated loans, it will not be much deal making of larger sized companies. In the Nordics, if you have the right company that is less impacted by COVID 19, potentially you can get a club of Nordic bank between EUR 150m-EUR 200m. But the market hasn’t tried that yet. And we are back to the world of covenants, covenants-lite is not on the table anymore,” said the private equity panellist.
“Financing could be an issue now, but it is coming back and the US and their institutions will take the lead,” a banker panellist added.
The missing gut feeling
Due diligence has also been an issue hampering M&A activity. The panellists said that digital data rooms and virtual presentations worked relatively well, but since the private market is so relationship driven a virtual meeting with management cannot replace the confidence and perspectives from a physical meeting and site visit.
“A lot can be replaced, but if you for an example are buying a house, you can see the house on the web or via video, but in the end of the day it’s important to see the locations and so on. My experience from transactions normally is that it’s good to have a feeling for what you are buying,” the banker said.
The Nordic M&A landscape is likely to look significantly different post-pandemic compared to what it was before COVID-19. The analyst said key to M&A activity was the ability for buyers to understand how a target company will generate cash in the long-term, adding that the public markets are likely to be paramount in providing comparables to assess valuation – even though visibility remains the biggest problem.
“We will look at cashflow, but also look at comparable transactions and try to define what is a comparable company. And then look at how they trade on the market, NASDAQ or any other stock exchange. Valuations have jumped in all directions and NASDAQ is north of what it was in January again”, said the banker.