UK distressed acquisitions can offer strategic gains to acquirers

Since the last material peak of insolvencies during the 2008-09 recession, insolvency filings dipped only to rise again from 2022 onwards. More recent trends show some fluctuation in volumes, but high levels of insolvency generally remain elevated versus historical standards.

Read more on distressed acquisitions

• Buying a company out of UK insolvency: an introduction
• Buying a company out of UK insolvency: included and excluded assets
• Buying a company out of a UK insolvency: operational considerations

There is therefore ample opportunity for enterprising businesses to acquire companies in financial distress. Most recently, Frasers Group plc’s acquisition of the renowned department store Harvey Nichols through a pre-pack administration sale demonstrates the scale and profile of opportunities available to those prepared to act decisively.

Like consumers who “bargain-hunt”, companies can look for deals that might turn challenge into lucrative opportunity, simply by identifying a stressed business which might, with a few adjustments, be an excellent fit with its existing strategy. These businesses may even offer a successful complimentary business unit for swift expansion.

A cut-price distressed acquisition could therefore offer more than just a value buy: they offer existing businesses the opportunity to grow in an accelerated fashion.

Distressed acquisitions

Distressed acquisitions present an established business with a prime opportunity to take any remaining goodwill and know-how in a legacy business, internalise the business offering, and transition it into a new or improved service line.

This type of agile growth allows a business to rapidly expand its operations, to flexibly adapt to changes in the market and consumer sentiment, and to move quickly to exploit market opportunities. The same pace of expansion into new markets may not be accessible via traditional merger and acquisition (M&A) or internal growth strategies.

Distressed acquisitions offer a buyer something more than ‘taking a chance’. Take, for example, a struggling business that has secured a valuable long-term contract, or is holding a wealth of valuable customer data. Incorporating that asset into an existing business brings the opportunity for revitalising that contract or exploiting that data, and all it may need is a small injection of working capital to do so. Add in the potential synergies and the benefits of engaging the existing knowledgeable and skilled workforce, and the journey to accelerated growth becomes clear.

Levels of distress across the UK market

Many sectors in the UK market are currently experiencing distress, be that milder issues with cash provisioning or more severe distress leading to unstainable insolvent positions where neither existing lenders nor investors are willing to provide further support.

Construction, retail and hospitality sectors have been battling persistent market challenges for a number of years, with well-known names affected. However, those sectors are not alone, and we have seen insolvencies across both powerhouse and niche industries – from logistics and motor trade, to recycling, alternative energy providers and pharmaceuticals. Very few sectors are immune.

Well advised investors can take advantage of the distressed sale environment and demand that their speed of deliverability warrants a reflectively appropriate price. However, investors need to approach distressed targets with a clear understanding that they will have limited knowledge of the intricacies of the businesses operations and there will always be the risk of uncovering problems upon completing the transition.