We think that both the conditions and the expectations for M&A will be substantially different in 2024 than they were beforeâand even duringâthe pandemic, particularly as they relate to navigating uncertainty, financing and restructuring.
Navigating uncertainty
Many uncertainties continue to cloud the outlook for 2024, including economic volatility, geopolitical tensions, increased regulatory scrutiny, supply chain disruptions and upcoming elections in several countries. However, CEOs have learned a lot over the past few years, including how to navigate amid uncertainty, and are showing greater willingness to take calculated risks and to find solutions to equip their businesses for the future. We believe this will extend to developing an M&A strategy which will support their growth and business transformation objectives.
Financing
Credit conditions in early 2024 are markedly improved compared to during 2023, when institutional lenders were struggling to syndicate debt and the debt markets were effectively shut. In the past decade, private credit funds have emerged as key players in the credit marketsâproviding capital to support leveraged buyouts, recapitalisations and other types of private equity transactions, and offering more flexible and customised financing solutions. Private credit is playing an ever-increasing role in the provision of financing for deals and with global dry powder of US$450bn at the end of December 2023, they are in a strong position to support an increased level of dealmaking activity in 2024.
With the recent stock market performance and overall heightened public company valuations, the use of stock as a currency to finance deals is expected to increase and thus avoid the need for debt financing entirely. The two oil and gas megadeals announced in late 2023 are recent examples of mergers for which the consideration was 100% stock.
Distressed opportunities
There are approximately US$300bn of leveraged loans maturing between 2024 and 2026. In a higher interest rate environment, this will inevitably translate into a steady rise in dislocated capital structures. Where value breaks in the equity, but a vanilla refinancing is unachievable, shareholders may either explore a refinancing with an alternative credit provider, an amend-and-extend (A&E) arrangement with existing creditors, or may opt for an M&A exit. However, where value breaks in the debt, there may also be potential for more innovative M&A solutionsâfor example, partial disposals to service debt. In situations where credit fund lenders take over businesses in a restructuring, they will likely be open to right-sizing balance sheets and using M&A and refinancing tools to drive a turnaround, and accelerate their internal rates of return. This will likely translate into more M&A opportunities.
In late 2023, the fall in US Treasury yields prompted some companies to refinance debt maturing in the next few years rather than wait for expected interest rate cuts in 2024 to lower borrowing costs. Companies unable to refinance may find themselves burdened with higher debt servicing costs. This may create a need to restructure to reposition themselves for the future. In these situations, restructuring to improve the ability to refinance is not just financial, and it may come in different formsâfor example, portfolio assessments to improve the balance sheet by selling parts of the businessâor operational restructuring to improve profitability and reduce risk. Distressed businesses are also seeking to strengthen their balance sheets and cash positions through M&A solutions, whereby they are being acquired by a stronger new parent. When this occurs, it may be necessary to be executed through a legal process such as a UK scheme or similar arrangement, depending on the jurisdiction. Furthermore, we are seeing examples in sectors such as retail and hospitality where companies are taking action to reduce debt by removing some of the more capital-intensive assets, such as real estate, from balance sheets.