Distressed deal flow predicted to rise in these industries globally

Our new global series of M&A predictions reports have revealed aligning expectations that distressed activity will rise in a handful of industries.

By AnsaradaSat Dec 04 2021Mergers and acquisitions, Due diligence and dealmaking, Advisors, Industry news and trends

distressed deal flow
Distressed M&A has been front of mind since the earliest days of the COVID-19 pandemic. Governments around the world have committed stimulus and made amendments to insolvency laws to help companies ride out the ongoing impact and survive as best they can. Today, many of these temporary measures are coming to an end.

The pandemic has already left a number of distressed companies who need buyers or investors in its wake, and according to our recent global predictions surveys, there’s more ahead. The majority of global participants tend to agree on the industries that will be most impacted. 

Industrials and chemicals, real estate and construction, transport, and energy, mining and utilities sectors are poised to see the most distressed activity into 2022. All of them are cyclical industries that tend to underperform during times of recession.

In the UK

Nearly three quarters (70%) of respondents in our Top UK Dealmakers’ M&A Predictions Report 2022 believe that distressed M&A activity in the UK in the coming months is expected to occur primarily across the industrials and chemicals (26%), real estate and construction (22%) and energy, mining and utilities (22%) sectors. 

Transportation is not far behind, with 16% of UK dealmakers anticipating an uptick in distressed deals. According to figures from accountancy firm Mazars, 31 UK haulage firms became insolvent in June 2021, the highest in a single month since January 2019, as the loss of cross-border trade and a lack of drivers took their toll on the industry. Haulers have been hit by fewer shipments across borders due to the additional red tape and costs of doing business with the EU. Driver shortages have also been a problem. Inevitably these supply chain disruptions are stalling sales for swathes of businesses. Until the effect of Brexit normalises, the UK may see distressed deal flow increase to a degree, especially as government support to businesses affected by COVID-19 comes to an end.

The UK has rebounded from the effect of lockdowns, but momentum is not guaranteed. In July, for example, GDP flatlined at 0.1% due to a fall in retail sales and Brits being advised to self-isolate by the NHS track and trace system. In this context it is surprising that no respondents believed that the consumer and leisure sectors would see the greatest amount of distressed deal activity in the coming year.

There is a notable divergence in sentiment over the prospects of distressed activity in the UK and Europe, however. More than half (54%) of respondents see the number of distressed deals in the UK rising in the next 12 months, which falls to 26% across Europe as a whole. This coincides with a difficult period for UK businesses, which have faced the double challenges of the pandemic and the first year since Brexit took effect. Both of these pressures have been disrupting supply chains. 

Until the effect of Brexit normalises, the UK may see distressed deal flow increase to a degree, especially as government support to businesses affected by COVID-19 comes to an end.

Download the Top UK Dealmakers’ Predictions Report 2022

In Germany

Expectations of distressed deal flow are lower in Germany than the rest of Europe, likely reflecting the country’s assured fiscal response to the pandemic. Just over half (56%) of respondents in our Top German Dealmakers’ M&A Predictions Report 2022 think that the number of distressed M&A deals will increase in the next 12 months compared with the previous year, while 70% believe distressed deal flow will increase in Europe overall.

The country made the most of its fiscal headroom after years of prudent management of its public budget, implementing sizable pandemic mitigation measures. These included expanding the short-time work benefit known as Kurzarbeit, extending the duration of unemployment benefits, and providing liquidity to firms and expanding loan guarantees. Banks have been focused on providing state-backed loans but as central bank and government support for the economy comes to an end and borrowers need to refinance, this should lead to more opportunities for distressed debt funds.
Real estate and construction lead the way in anticipation of distressed M&A activity, with 26% of the total vote and as much as 36% of Frankfurt-headquartered respondents seeing the industry providing the most of these deals. Transportation (20%) and energy, mining and utilities (20%) are also widely expected to see elevated distressed M&A activity in Germany in the next 12 months.

It is worth noting that Germany is the most populous country in Europe and, combined with its commercial assets, is the largest real estate investment market in Europe and one of the largest in the world. A round of cost cutting as businesses look to improve their margins amid the ongoing pandemic is likely to see some companies scale back their office properties and could result in landlord defaults, in turn delivering opportunities for distressed investors. 

Download the Top UK Dealmakers’ Predictions Report 2022

In California

According to our Top Californian Dealmakers’ Predictions Report 2022, 24% of survey respondents say industrials and chemicals (including automotive) will see the greatest level of distressed M&A activity in Silicon Valley in the next 12 months, followed by transportation (20%) and energy, mining and utilities (18%). Real estate and construction are tied with defense at 16%. 

All sectors are expected to face headwinds from rising geopolitical tension, which is highlighted by 30% of respondents as the most prominent headline in the M&A investment market in the US in the next 12 months. The impact of geopolitical tensions between the US and China, for example, has been cited as a major contributor to computer chip shortages – a growing issue for the TMT sector. 

Download the Top Californian Dealmakers’ Predictions Report 2022

Maximize outcomes with Ansarada Deals

In such a climate, it is critical for buyers to adopt a standardized process across acquisitions in order to seize on the opportunities while mitigating the risks.

Despite the predicted distressed activity, dealmakers globally are optimistic. For those who are prepared, the rewards significantly outweigh the risks. Accelerated deal timelines along with discounted prices will continue to make distressed assets and companies highly attractive options for buyers.

Ansarada Deals is a total transaction management solution that enables advisors and their clients to standardize and scale their deal processes in one centralized platform. Get a quote and a free Data Room today.

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