10

The Allen & Overy M&A Index | H1 2012

Distressed M&A
From the ashes
In the four years since the financial crisis many good companies
have struggled to survive. Finding a buyer for distressed assets is
often the best way to save businesses and preserve jobs and the
transaction tools are becoming more sophisticated.

At times of deep downturn, newspapers

sometimes launch recession watch columns
to track, day by day, all the businesses forced
to go to the wall or struggling to fend off
bankruptcy. They make for bleak but
powerful reading.
In the wake of the worst financial crisis for
60 years and with many Western economies
still limping in and out of recession, the roll
call of troubled companies has been long.
But increasingly theres a developing culture
to rescue these businesses through distressed
M&A transactions, saving valuable assets and
jobs. And the tools available to carry out
deals are becoming more sophisticated in
leading jurisdictions.
In the last four years a number of sectors have
been particularly hard hit, threatening some
high-profile, heavily indebted businesses.
The UK retail sector has seen a number of
big high street names saddled with too
many expensive stores and struggling to
cope with plummeting consumer spending
brought back from the brink through
distressed transactions or restructurings,
including Blacks Leisure, Game, Peacocks,
La Senza and Clinton Cards. Sometimes these
businesses are rescued pre-insolvency, in
other cases pre-pack administration has been
used to parcel up and spin out the better
assets and businesses.
In the travel sector Thomas Cooks debt has
recently been restructured through a complex

Allen & Overy LLP 2012

deal in the public arena, while in the

health sector Four Seasons Health Care
Group, the UKs largest independent
healthcare operator, and USP Hospitales,
Spains third largest private hospital group,
have been acquired by private equity groups
in contrast to the fate of care home
provider, Southern Cross, whose business
was wound up.
Property remains a hot area for transactions
as banks try to clear their balance sheets of
bad loans, made in the boom years. Ireland
established a National Asset Management
Agency (NAMA) in 2009 to acquire
EUR74bn of bad property loans from its
struggling banks, many connected with hotels
and properties in the UK. NAMA has ten
years to try to achieve good returns from
these assets for the state.
Private equity funds are both big buyers
and big sellers of distressed assets, as houses
that bought at the top of the market now try
to rationalise their portfolios through
secondary sales.
Different tools are available in different
jurisdictions to carry out transactions and
companies will often shop for the best forum
for a restructuring of debt, based either on
their Centre of Main Interest (COMI) or
seeking to establish jurisdiction before the
English courts based on the governing law of
their financing arrangements. Creditor
schemes of arrangements and company
voluntary arrangements allowing companies

to bind dissenting creditors into a deal

are also becoming more common,
often acting as an incentive to creditors
for a deal to be done on a consensual basis.
La Seda de Barcelona, the Spanish packaging
group, is just one of a number of Spanish and
German companies that have come to
London to implement debt restructuring
under English law. Recognising this trend,
Germany has recently amended its own
insolvency laws to allow a cram down
of creditors resisting a restructuring plan.
Buyers of distressed assets are also
increasingly acquiring debt positions in
distressed corporates as a way to exert greater
control over the outcome of a restructuring
and to secure the assets they want, as
American Greetings have recently
demonstrated over Clinton Cards. The
success of these loan to own strategies
is dependent on being able to control a
sufficient amount of the debt and having
access to effective cram down procedures
to be able to execute that strategy.
With debt funds now proliferating to buy
distressed assets from banks and banks
becoming more willing to sell debt at
distressed prices, we expect this part of the
M&A market to remain busy in the next
24 months with retail, real estate and
construction remaining at the fore.
Investors seem already to have decided that
Europe, the Middle East and Africa are more
likely to provide opportunities to snap up

11

Owners now should recognise that with

increased debt trading, lenient extend and
amend relations that have become common
during the downturn between banks and
the companies they lend to are under threat
from the arrival of more aggressive funds.

assets at attractive prices than the U.S.,

partly because U.S. banks moved faster to rid
themselves of bad debts after the crash and
the continued pressure on European banks
to manage their balance sheets.
But what are the implications for business
owners? Owners now should recognise that,

with increased debt trading, lenient extend

and amend relations that have become
common during the downturn between
banks and the companies they lend to are
under threat from the arrival of more
aggressive funds eager to acquire distressed
debt from banks who might otherwise be
more supportive of their borrower.

With funds likely to take a more aggressive

stance in looking to fix, once and for all, the
over-leveraged balance sheets of
fundamentally good companies by
restructuring the financial and capital
structures of those companies via
debt-to-equity conversions, a new dynamic
will be at play.

www.allenovery.com/maindex

12

The Allen & Overy M&A Index | H1 2012

Turkey
Crisis? What crisis?
Turkey escaped the financial crisis almost unscathed and is now
Europes fastest-growing economy. Political and market reforms
including a major privatisation programme are now driving
M&A transactions at an accelerating pace.

At a time when so many of the worlds M&A

markets are suffering a crippling crisis of
confidence thanks largely to problems in
Europe, its surprising that one European
economy is bucking the trend in such
spectacular fashion.
Turkey had its own financial crisis seven years
before the Lehman collapse in 2008 sent
the rest of the world into a devastating
downward spiral.
In 2001, backed by the IMF, the country
brought in a series of far-reaching economic
reforms that have left its banking sector
strong, resilient and free of exposure to bad
corporate and sovereign debts.
So Turkey was able to come through the
banking and the ongoing Eurozone crises
relatively unscathed. While much of the rest of
the West plummeted into the worst post-war
recession, it began a spurt of extraordinary
growth that has continued ever since.
Growth potential
Annual real GDP growth has averaged 5.2%
over the last nine years. In 2010 it reached
9.2%, and stood at 8.5% last year, making
Turkey not only Europes fastest-growing
economy but also the 18th largest economy
in the world, according to IMF figures.

Allen & Overy LLP 2012

Although expectations are that growth will

slow to between 2% and 3.5% this year, that
is still robust compared to most other
economies and represents, by anybodys
standards, a very comfortable soft landing.
The slowdown is also expected to be
relatively short-lived. Long term, GDP
growth is projected to return to nearer to 5%.
It is also expected to be lifted to investment
grade in the short to medium term, opening
the market to a much larger pool of investors.
The process of reform that began this growth
story is continuing. Turkey is in the middle of
an extensive privatisation programme
covering power projects, infrastructure
projects, such as motorways, bridges and
tunnels and even the national lottery.
This year the government introduced a new
Turkish Commercial Code which is expected
to change the dynamics of M&A in Turkey
the Commercial Code is due to come into
effect on 13 July 2012. Efforts to encourage
the IPO market have been less successful,
however, and equity capital market deals
remain sporadic.

One other area of concern remains a

significant balance of trade deficit. Increased
access to credit within Turkey is propelling a
consumer boom and fuelling demand for
imported goods. In the current climate,
Turkey is unlikely to be able to correct that
imbalance, not least because its most
important export market remains Europe,
where demand has shrunk radically.
Deals grow strongly
So how has Turkeys M&A market fared in
recent years?
In 2009, at the height of the financial crisis,
the number of USD100m-plus deals dipped
to just nine, worth an aggregate USD2.2bn.
But the market has since recovered strongly.
In 2010 there were 21 deals valued at just over
USD20bn in total and that growth is ongoing.
Take big inbound deals, for example. There
were just four major deals in 2009 with a
value of USD660m. In the first half of 2012,
there have already been five with an aggregate
value of USD5.5bn.
Recent significant inbound transactions include
the acquisition of Dexias Turkish banking
business, DenizBank, by Russias Sberbank for
USD3.5bn, underlining the fact that financial
services remains a key area for deals.

13

Charles Lindsay
Partner
Istanbul

Turkeys economy is growing at a healthy rate, spurred on

by financial reforms, a significant privatisation
programme, and the need for huge investment in
infrastructure and energy. Were convinced this will lead to
a big increase in M&A activity in the next few years.
Charles Lindsay, Managing Partner, Istanbul

Healthcare too is a growing area of interest.

Turkey is growing its capacity in this sector
rapidly with many new build projects planned,
many of them likely to be done as
public/private partnerships. An efficient
procurement process has been put in place
to support this expansion.
That explains why healthcare remains a key
area for deals, as we saw with the recent
acquisition of part of Acibadem by
Integrated Healthcare Holdings and
Khazanah Nasional Berhad.
The largest number of significant inbound
investments in the last five years have
emanated from Europe particularly the UK,
the Netherlands, France and Germany. But
U.S. investors have taken a good share too,
closely followed by Russia.
Gulf investment is growing fast and Korean
companies are very active in the market,
particularly in big construction projects. One
refinery project, currently out to tender, has
attracted four competing consortia, each one
involving a Korean company. Otherwise,
Asian investors remain relatively scarce.

Ambitious privatisation plans

The scale of Turkeys privatisation project is
of necessity ambitious, not least in the energy
sector. A dire shortage of electricity
generating capacity means the country has no
safety margin at times of peak demand,
resulting in frequent blackouts or brownouts.
A projected 84 gigawatts of new installed
capacity is needed to support the countrys
growing economy. Hydroelectric power will
play an important role and there is likely to be
some investment in nuclear. But the vast
majority of demand will be met by coal and
natural gas, one reason why Gulf investment
from both financial and industrial players is
likely to grow sharply.

One outstanding question is whether we will

see private equity play a bigger role in the
market. PE investment peaked at USD2.8bn
in 2008, but fell back to just USD39.8m in
2011 although we have seen some major
divestments by PE houses, including TPGs
sale of Mey Iki, the drinks business, to
Diageo for USD2.1bn in 2011.
Concerns about taxation are thought to be
acting as a major deterrent for PE investors.

Other key privatisation schemes include a

third bridge over the Bosphorus and a new
tunnel beneath it, plus plans to bring in
investors to build, upgrade and manage major
highways. The programme should continue
to drive an increase in M&A activity over the
next 12 months, with an estimated USD50bn
of private financing said to be required by
2015. An abundance of attractive targets will
also continue to support deal activity.

Allen & Overy means Allen & Overy LLP and/or its affiliated undertakings.

www.allenovery.com/maindex