It has been three months since the UK government enacted lockdown measures. The country is now transitioning to stage three of the alert level and the lockdown is gradually being eased. The focus has shifted from safeguarding lives to livelihoods, and from liquidity support to solvency support in an effort to kickstart the economy. The reality for SMEs will be brutal. Up to 600,000 British businesses are at risk of insolvency according to the Centre for Economic and Business Research. One in ten businesses in the UK said there is a “high risk” they will enter into insolvency.
In April, GDP in the UK fell by over 20% and recovery will depend on the speed by which demand recovers. Both Personal finances and company cash reserves have been squeezed and there is a real question of whether demand will ever reach pre-pandemic levels. The impacts of this will differ by sector.
For SMEs, convincing creditors and shareholders to part with capital will not be easy. This will be especially relevant for those companies who are currently fighting for survival and in need of capital to restart their commercial activities. Many will not succeed.
We believe these drivers will result in a wave of restructurings and M&A deals towards the end of 2020 and into 2021. Restructurings for those SMEs who have successfully weathered the storm will comprise the usual mix of debt forgiveness, debt-for-equity swaps, and fresh capital either in the form of debt or equity. However, the SMEs who are struggling must consider their strategic ownership options and re-appraise their business models.
A number of different M&A opportunities are likely to arise. Resilient SMEs will opportunistically look to acquire companies which have fallen into distress. Struggling companies will also look to offload operations or sites as they need to rationalise and consolidate their activities.
This will present acquisition opportunities for successful SMEs to increase market share. In addition, there will be sectors that experience increased demand as a direct result of the Covid-19 pandemic. Domestic manufacturing, telemedicine, online delivery services and, workplace digitalisation technology are examples of areas which are likely to expand. Successful companies in these sectors will be able to attract investment from a range of sources as well as support from creditors.
To benefit from this trend, SMEs will need a deep understanding of the opportunities, robust strategies and, realistic business cases in order to gain any traction with creditors and investors.
