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The Buyside
Distressed M&A: Great Expectations

Strategic acquirers more likely to buy distressed assets than their PE counterparts

Bankers who specialize in restructurings report that strategic acquirers are succeeding in buying assets out of the distressed M&A pool, rather than their private equity counterparts. Corporate dealmakers are doing a better job matching the expectations of sellers these days. Strategics also have the upper hand, in that they can offer synergies, which may make the deal more attractive to the debtors involved.

With sales going to strategic buyers, corporate dealmakers are considered the acquirers who can pay the most and appease the sellers, which is the key problem today, according to bankers.

Take, for example, the Levelland-Hockley County ethanol plant, which filed a Chapter 11 reorganization petition in April 2011 seeking to operate the asset as debtor in possession. Houlihan Lokey started shopping the plant to buyers in late 2011, but market concerns slowed the auction.

The process reportedly took a long time, because buyers and sellers couldn't agree. Sellers' expectations don't always match the buyer's valuations, bankers say.

The plant, which went into production in 2008, has a production capacity of 40 million gallons of ethanol annually, and when it operated, sold wet and dry distillers' grain for cattle feed.

Two ethanol producers ultimately won the bidding process for the Levelland, Texas ethanol plant in May. The target received a $9.21 million bid from Palmer Energy Co. in Toledo, Ohio and an $8.9 million bid from Western Plains Energy LLC of Oakley, Kan.

What's more, these strategic buyers are remaining active in what appears to be a smaller playing field for distressed deals, in which assets are sold cheaply. This not only creates less of an opportunity for PE investors to be acquisitive, but also pushes valuations of the debt of troubled companies to levels that some say does not adequately compensate for the risk involved.

As a result, not a lot has happened in 2012, say bankers. There have been fewer deals.

In the U.S., restructuring activity totaled $31.3 billion in the first half of 2012, a decrease of 14.7 percent from the first half of 2011, according to a Thomson Reuters recent report.

The trend is not exclusive to the U.S. Worldwide, completed bankruptcy and out-of-court restructuring activity totaled $335.9 billion in the first half of the year.

That number gets cutto $72.8 billion when Greece's $263.1 billion debt exchange, the largest restructuring deal on record, is factored out.

In Europe, the Middle East and Africa (EMEA), first-half restructuring activity was down by 50 percent from 2011, once sovereign debt restructuring was taken out.

Government debt restructuring accounted for 89 percent, or roughly $267 billion of the $300 billion of EMEA distressed debt restructuring in the first half of 2012.

 

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