Profitable investments in Spain:
The distressed deal trend
The increase in distressed deals is a growing trend in M&A in Spain in 2023. Political and economic uncertainty is generating more and more of these kinds of transactions, which focus on the restructuring of companies undergoing financial distress.
The market has liquidity and investors with an appetite for risk, such as the Special Opportunities divisions of funds and other investment firms, and this is matched by the available opportunities at solid companies which are nevertheless in financial trouble due to adverse market conditions. These companies are economically but not financially viable due to their excessive indebtedness.
In distressed deals, the seller is undergoing financial difficulties and shareholders are searching for alternatives which provide liquidity and/or make the company viable, in order to maintain part of the business and meet existing liabilities. This is why these companies, or some of their productive units, are available at reduced prices. Buyers tend to be local and international investment funds.
Fast acquisitions with earn-out and anti-embarrassment clauses
Distressed M&A deals are usually bilateral, without an open competitive bidding process. These transactions tend to be quick, mainly because the seller or target company require funds to meet financial obligations which cannot be extended. This speeds up the entire process, including the due diligence, which brings added risks for the buyer but also facilitates the negotiation of a favourable price.
The transaction amount is usually pegged to the company´s future results. This is known as “earn-out clause”. Anti-embarrassment clauses are also common. They make provision for an increase in price if the company does a quick turn-around and the buyers sell their shares for a higher amount. Payment is usually deferred, at least partially.
When is the best time to attempt a distressed deal? Before or after going into administration?
A key question in most distressed deals is timing: Is it better to sell before or after going into administration? There is not a single answer to this question, from a buyer or seller perspective. Distressed deals are attractive for investment funds because they can get bargain prices, but this is not the only reason. These types of transactions also provide a way to access attractive sectors or geographical areas while incurring fewer risks.
Challenges in distressed M&A
The main challenge in distressed deals is that they do not only involve the buyer and the seller, but also creditors of the target company. Aligning everyone´s interests requires the parallel negotiation of both the transaction and the debt restructuring.
According to a report by PwC, the number of M&A transactions in Spain reached 1,047 in 2022, with a 21% increase over the previous year. This upward trajectory is expected to remain during 2023, boosted by economic recovery and the interest of investors in the Spanish market.
In this context, distressed deals are forecast to play an increasingly bigger role in the Spanish M&A market in 2023, both for local and international investors. Speed and agility in the management of these transactions, together with the chance to acquire companies at reduced prices, make them an attractive option for those seeking to minimise risks when accessing an attractive geographical area or sector.