In a world with so few deals, dealmakers have been forced to get very creative. And those that want to pursue deals are having to show they have the firepower to do so without much help from the banks.
Whether it’s companies increasingly trying to shore up liquidity through divestitures or private equity firms ramping up participation in the PIPEs market, it’s become clear to corporate development teams and their advisers that it is a brave new world.
To top it all off, they’re having to do all this while learning how to work in an entirely new way, as coffee meetings and handshakes have been replaced by Zoom meetings and the occasional on-screen greeting from pets or teenagers.
This new world of dealmaking was the focus of discussion Wednesday, May 13, for panelists participating in a webcast hosted by The Deal in partnership with Edelman, Corporate Dealmaking Amid Covid-19: Restructurings, Carve-Outs and Divestitures.
“From a dealmaking standpoint, there has definitely been a significant impact on how the working group functions in a transaction,” said Arielle Patrick, a senior vice president and transaction director within Edelman’s financial communications and capital markets group. “Typically, there are war rooms where the lawyers and bankers and company, everyone including the PR firm, sits together, right up to announcement to get things done.”
“Also, very, very important relationship-building happens between the buy and sell side that is critical to build up trust for successful dealmaking. The remote environment has made it a tiny bit more challenging to get all parties aligned, but I also think people are adapting very quickly,” Patrick added.
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One of the ways parties have been forced to adapt is to become less reliant on deal financing that was once very easy to obtain.
“What really is the driver behind the [dealmaking] that we expect is whether [companies] actually have capital because in this environment capital, or cash, really is king,” Hamilton Lane Inc. managing director Andrea Kramer said on the panel. “Who has the money to make the play, who has positioned themselves effectively to make that play, and who’s going to control the long-term competitive market? Ultimately, that’s what’s going to be driving this in a lot of ways.”
These factors may prove more important than whether a company is in a sector that is doing well during the current crisis, Kramer added, pointing to the reported talks between Uber Technologies Inc. (UBER) and Grubhub Inc. (GRUB), which, if true, provide an example of a company in a traditionally money-losing industry looking to consolidation as a means of capturing market share and driving synergies.
Other deals that have come up this week also demonstrate companies’ willingness to try new things to get deals done.
Consumer products supplier Coty Inc. (COTY), for instance, said on Monday it had agreed to sell a stake in its Wella hair products unit to KKR & Co. (KKR) at an enterprise value of $4.3 billion. KKR will pay up to $3 billion cash for a 60% stake in Wella, and the firm will also buy about $1 billion worth of convertible preferred shares in Coty as part of the partnership. Coty reportedly struggled for months to sell its portfolio of beauty brands to bidders including Germany’s Henkel AG and KKR.
But while certain companies may find creative ways to stay afloat, many others will ultimately fail to do so. Even being part of so-called essential industries that are permitted to keep facilities open during the Covid-19 pandemic may not save them, the panelists admitted Wednesday.
Kristy Waterman, former senior vice president and general counsel for Dean Foods Co., which filed for Chapter 11 in November and has completed asset sales through the pandemic, said that while certain businesses may be marked as essential, it may not actually translate to their business doing well given the major disruptions to global supply chains.
“Our business was pretty much spread between not only retail but also restaurant food service and school business,” she said. “And there has just been such a dramatic shift in where the demand is coming from that it’s been hard to address that in an efficient manner at the same time when you’re trying to manage a workforce that is also dealing with a pandemic.”
Waterman said these factors are playing a role in the meatpacking industry’s woes even as grocery stores sell out quickly of these products, with millions of consumers opting to cook over ordering out during the crisis.
All is not lost, however. Hamilton Lane’s Kramer pointed to some interesting carve-out deals that have taken place in recent weeks as opportunistic buyers emerge in an environment that has created distress but not yet fully paralyzed financial firms in the same manner as the 2008-2009 financial crisis.
Kramer also discussed a recent wave of PIPE deals among some of her firm’s peers, as obstacles preventing the proper valuation of businesses, accurate financial forecasts and comprehensive due diligence processes have made full-control deals challenging.
“PIPEs have been viewed as an interesting option or alternative because it allows firms to take advantage of recovery and growth and, at the same time, provides liquidity and price support to the issuers,” she explained. “There is a market perception that, ‘We can kind of project where that stock price is likely to be, and therefore we can inherently value these investments today.’
“It’s control in a world where control is tough to do.”