Covid-19 and the Foodservice Suppliers - Two Financing Waves and the prospects for M&A activity
We have received the following news item from Oghma Partners - Corporate Finance Advisors:

From the outside, the landscape of the food industry looks like a war zone with business casualties mounting but in some measure some victors as well. We see therefore the Food Manufacturing industry split in to two clearly defined camps. The suppliers to the retail trade are (generally) doing well, buoyed up initially by panic buying and more sustainably by greater consumption at home. Foodservice suppliers however have seen orders drop to near zero after customer after customer closed their doors. The above is an oversimplification, particularly in the area of retail supply, but the generality holds true. Furthermore to the above landscape we would add that we see the current challenges for the foodservice suppliers split into two distinct ‘financial waves’.

In the first financial wave we are faced with the shuttering or near shuttering of factories. The first objective is to cut costs. Over the last two weeks we have seen companies furlough their workforce, cease or renegotiate rental payments, plan to defer VAT payments and probably apply for government-backed loan schemes and the like. On top of the above, firms may seek out new customers and markets (selling in bulk from a van for example) and also look to raise cash from disposal of stock.

Whilst the government-guaranteed loan scheme was a bold and brave announcement, rather like the testing issue, when the execution leaves the hands of ministers and devolves to parties outside of government, delivery becomes a different matter. Ignoring for the moment whether 80% guarantee is sufficient to get the banks to lend, dealing with the sheer volume of applications is a challenge to the banks which have shrunk their headcount dramatically over the last few years. So we predict that some businesses will fall over in the coming weeks simply due to the inability of the system to get cash to them quickly enough. The only way this could be avoided, and it is probably already too late for some, is for the government to provide 100% loan guarantees and for the banks to simply deposit loans funds, on asking, into the requestors’ bank account.

The UK is blessed however with the second biggest Private Equity industry after the US. This UK competitive advantage could, it might be thought, assist those businesses supplying the foodservice area to survive. Unfortunately in the first financial wave of this crisis this is unlikely. Despite their reputation as risk takers, the reality can be viewed somewhat differently. Private Equity likes certainty; its leveraged model depends on certainty to provide it with the bank support and financial leverage to generate the returns needed for their investors. It is unlikely in this first wave of the financial crisis that PE will therefore step in to assist troubled businesses there are too many unknowns. In addition, many funds are already occupied with supporting their current investments and don’t have the bandwidth to do more.

The second financial wave will come when we have left the lockdown and the economy is returning to the new normal. For those businesses that survive they are likely to be burdened with much higher debt levels than pre-crisis and, for some, these debt levels will be impacting the ability to operate and pursue their strategic plans. At this juncture we see Private Equity likely to play a role – greater certainty will have returned, lending on leverage deals will be easier, risk reduced.

Having made it through the first financial wave it is worth preparing for the second. For those businesses that envisage they will be hamstrung with debt and unable to take advantage of the

business dislocation and, sadly, business casualties of the Covid-19 recession, it is best to work out a strategic plan now. This plan could, for example, involve re-scheduling debt, or introducing new equity into the business through corporate involvement or that of private equity/family offices. Working with corporate advisors on debt refinancing or the best way of finding a strategic corporate or private equity investor may be time well spent so relationships can be built and when markets open again liquidity can be improved as quickly as possible.

A key issue with any new equity will be price. Sellers will want to sell on the back of their pre-Covid 19 estimates and buyers will want to invest on the post Covid 19 numbers. This value gap will be a challenge to overcome. As ever some give or take should get a deal done. Sellers will need to realise that the world has changed and that risk has risen and any post Covid 19 recovery is likely to take time. Thus a readjustment in thinking will be need but this doesn’t mean ambitions should be lowered. In the case of a minority stake, for example, one proposal to breach a value gap would be to base a valuation on current run-rate and then scale up or down the equity granted dependent upon the actual full year outcome on say 2021 when, hopefully, the new normal will have been established.
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