Banks more cautious on M&A financing
Although the crisis has made access to acquisition financing much more difficult, banks are still open to participating in such deals, but are more demanding in setting their conditions.
The M&A financing market is segmented by deal size. The biggest transactions, structured with the involvement of international banks, usually go smoothly, according to Falkenburg Corporate Finance partner Ferenc Zákány. He cited the examples of the acquisition of triple-play provider Fibernet by alternative telco Invitel and UPC Hungary, and the purchase of Provimi Pet Food by Advent International.
Smaller deals are trickier, Zákány noted. Bank resources to provide acquisition financing are there, although it is extremely difficult to get these funds. Banks are more cautious, and risk assessment and due diligence are done at the parent company rather than at the Hungarian unit. A side effect of this is a significantly lengthier transaction process.
The conditions of M&A financing became stricter after the crisis at UniCredit Bank. Equity financing required by the bank rose to 35-45% from its pre-crisis level of 15-25%. “Thus, the bank and the buyer are sitting in the same boat, so if loan repayment becomes difficult later, the owner will do his best to sort out the situation,” UniCredit said.
The terms of the loans have become shorter. While a financial investor could easily get six- or seven-year loans before the crisis, maturities now strictly follow the investment horizon, which is typically less than four or five years.
In a typical transaction, the bank provides a loan package and the buyer gives capital to the company, acquiring a majority share in the target. The loan is repaid from the target’s cash flow, thus the analysis of the business plan is the main focus of the risk assessment process. Experienced investors are well aware of the fact that the loan approval procedure can be sped up if they approach the bank with a financial consultant, a business plan and an information memorandum.
UniCredit has observed increased M&A activity in shipping and automotive parts production as well as in the wholesale and energy sectors. The market is dominated by relatively small transactions in the value of €5-15 million, with only a handful of larger deals, the bank noted.
OTP Bank says it is willing to finance M&A transactions if the stable financial position of the buyer and the favorable business prospects of the target ensure repayment of the loan. As the risks of M&A transactions are above average, the bank demands a higher equity proportion, while its margins are higher too. Besides the usual concerns, such as industry, market and operational risks, the bank has to deal with complex financing structures and long maturities, as well as the uncertainties of the restructuring process, which is unavoidable in most M&A transactions.
M&A deals require a comprehensive and detailed analysis by both the buyer and the financer, thus the process could last for four-five months, from getting the loan application to closing the deal. The bank carries out a legal and financial audit of both the buyer and the target company and prepares a financial model to analyze the parties’ ability to pay, based on its own macroeconomic and industry forecasts.
K&H Bank has been actively involved in financing M&A deals in Hungary for the past ten years. It participated in most major leveraged buy-outs in Hungary, as well as in financing several regional cross-border transactions. The bank, which has its own M&A specialist team, continues to be open to financing such transactions.
K&H has closed its second successful deal this year and has been approached to finance several new potential M&A transactions. According to the bank, the most attractive targets are in the agricultural, transport and IT sectors, the food industry, as well as automotive parts suppliers and smaller financial service providers. Strategic investors have shown more interest lately and are also involved in smaller transactions, in the €5-10 million range. Private equity investors continue to play an important role in the region, but seek bigger targets.
The financing structure of each deal reflects the risks and the volatility of free cash flow at the target company. The major risk factors are the cyclical nature of the industry and client orders, the changes in raw material prices, the concentration of buyers, the rate of leverage and the quality of the technology applied. In addition, the transaction itself carries high operational, legal and taxation-related risks.
Banks usually enter the deal process after the indicative offers were made, typically in the second phase of the transaction. In certain cases, financing is already in place, which enables banks to start talks with the parties before the actual transaction process is launched. A special case of this is called staple financing – a pre-arranged financing package offered to potential bidders in an acquisition. Staple financing is arranged by the investment bank advising the selling company and includes all the details of the lending package, including the principal, fees and loan covenants.
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