Coronavirus did stir up trouble for practically entire economies in Czech Republic and Poland. In general, companies have returned to work, but the outcomes are still to be seen for many businesses due to the initial market shrinkage, followed by broken supply chains, lack of financial liquidity of some clients and further investors’ hesitation.
The role of banks in the long-term financing is expected to temporarily decrease in Poland, which are now less ready to provide crediting. This will decrease the valuation of enterprises and projects and, in consequence, cause further activation of entities specialized in distressed assets. Foreign funds that specialize in buying out companies going through hardships are expected to activate in Poland where they might invest up to several hundred millions of Euros in distressed companies, yet the governamental act on granting public aid to rescue entrepreneurs under restructuring is still unfinished, which puts decision making at a halt.
From our perspective as a Virtual Data Room provider, we are still observing a large number of transactions being postponed or stopped to make new financial valuations, validation of market conditions and current investors’ interest. The situation is very complex – and it is still not certain for business what the final range of public help will be, how bigger consolidations will influence the industry, whether a new wave of pandemic will happen in autumn, forcing another lockdown, among other issues. Tools such as VDR are currently being implemented to a larger extent in audits and remote process organization to prepare companies in case Due Diligence is about to take place
COVID-19 developments took many surprising turns, as well as related implications on Czech M&A business over the last couple of weeks. Still, they are overly positive compared to the doomed perspective (such us closing borders for 1-2 years, etc.) just a few weeks back.
We are noticing that the current shape of the local M&A market is showing tendencies toward distressed M&A. At Cabernet Finance, we have estimated that the overall number of M&A transactions will drop by 50% in the next 12-18 months, compared with the ‘usual’ levels in the Czech Republic. Valuations are estimated to drop down by up to 30% compared with pre-corona times. As a result, owners of the companies who did not sell prior to the pandemic, and will not be under pressure to sell, will wait out up to 3-4 years for the valuation multiples to pick up.
The instability of smaller companies and the stagnation of the entire Czech and Slovak economy, including logistics or the manufacturing sector, is expected to bring in more oligarchic companies to take advantage of the situation through their relationship with the government and various possibilities to influence state interventions, with the SME sector to suffer more as a result – the elements so far known to occur in Chinese/Russian types of economies. The proposals of the Minister of Health to limit cross-border movement for people for a year or two have fortunately been dropped completely by now.
A sharp increase in distressed M&A opportunities to show up in the autumn of 2020 is expected, when the government assistance and protection against bankruptcy will have eased-out and the companies will be fully hit by the lower consumption and a drop of their respective order books.
The remote models of working, co-operating and sharing information proved to be highly viable during restrictions and will get a further boost in the future. From his perspective, investors will be more prudent and detail-oriented in the Due Diligence processes (terms and conditions of commercial contracts, i.e. cancellation, insurance, logistics contracts), while many of these aspects may be efficiently covered by VDR tools.
Moreover, we expect acquisition contracts/transactions documents to be more complex and structured, i.e. distribution of the agreed price over time and documentation related to achieving some thresholds as opposing the cash-at-closing type of transactions. The role of lawyers / legal advisors in M&A (and financing) transactions will further increase. One can see prospects of VDR not only for M&A transactions, but also in commercial reviews by business partners, procurement tenders, etc.
The co-author of this articlce wants to thank Jan Krizansky for his insightful input.
