Where are M&A’s, what are the sectors most affected, is there still a market? In this interview Lluís Lluch, M&A partner, reflects on this issue and defines what the post-COVID-19 scenario will be.
Many questions have been raised about the implications of COVID-19 in the area of M&A in the short term with respect to existing transactions and the functioning of operations in the future, but where do we stand now?
In general, in ongoing transactions what we have detected is that buyers have insisted on their interest in completing transactions that have not yet been closed. On the other hand, sellers want to make sure that the deal is closed. This crisis will also have a long-term impact in terms of how transactions are negotiated and we anticipate more difficulties in reaching agreements on transaction structure, payments at signing and deferred payments linked to future results (earn-out).
Depending on the industry, it is still early to see how strategic buyers will act, do you have any indications?
Very probably in sectors seriously affected by the crisis, investors will be more concerned with ensuring the survival of their businesses than with expanding. We do not rule out that companies with high liquidity will take advantage of the moment to close acquisitions of companies in critical situations or opportunities of their interest that previously resisted being acquired. We have also detected during these two months that companies in unaffected sectors, with a certain amount of prudence, are showing interest in maintaining the analysis of potential investments and advancing in operations.
In our experience, investment funds (PE) have been moderately active over the past two months. The EPs with highly affected portfolios have been much more conservative and focused on managing their investments but the rest continue to show a high interest in analysing new investments before the end of the year.
Which sectors will be most affected in our country?
The sectors that are expected to be most affected in Spain not only in the short term but also in the medium term are leisure, tourism, restaurant/hotel, trade/distribution (non-food), automotive, textiles, culture and transport. In these sectors we do not expect to see activity in strategic acquisitions beyond opportunistic operations. The uncertainty as to how long it will take to return to the new reality affects any investor. If the process of establishing the value of a company is already often complex, the current situation complicates it even more.
What can happen, for example, in the textile and fashion industry?
In this sector, brands with low positioning and liquidity difficulties may be the focus of investors’ attention, and undoubtedly valuations may plummet. Likewise, opportunistic operations can also be seen in the luxury sector due to the fall in consumption in the main client markets, China and the USA.
On the contrary, the COVID-19 crisis will arouse the interest of investors in some other sectors..
Yes, there will be sectors that are little affected or even favored. Healthcare, online sales, online education, grocery shopping, business services or new technologies related to connectivity will be the focus of investors.
We believe that it will be some time before bargain hunters seek opportunities in the industry with complex international supply chains. As we have mentioned, one of the difficulties at the moment is valuing companies and structuring operations to minimize buyer and seller risk. We will have to be resourceful in this process.
AddVANTE continues to be active in M&A processes in sectors such as industrial electronics, food, distribution of equipment for the agricultural industry or online education.
What changes are planned for the company’s valuations?
The sectors affected by the COVID-19 with a complex recovery will move through the low band of the multiples or even lower (EBITDA multiples from 4 to 5), while the less affected companies will probably move through the high band from now on, especially SMEs that are in sheltered sectors (EBITDA multiples from 6.5 to 10, depending on the sector and characteristics of the company).
As I said before, what we are seeing is that the structure of the agreements is complicated. Buyers especially want to reduce risk by, among other things, increasing the percentages of the deferred price subject to the result of the total operation.
With ten years of experience in M&A, he was founder and CEO of Barcelona Business Landing, a company specialized in M&A processes and landing strategies for companies with commercial and investment interests in Spain.