DEM Asia represents investors, fund providers and management in taking strategic advantage of changing economic environment’s to ensure that they have the ability to maximise or minimise the impact of uncertain change on their businesses.
As Deed Advocates we work with management and investors to present Deed Proposals, manage creditor support, execution and post Deed accounting and planning.
The advantages of acquiring businesses through a Deed of Company Arrangement are considerable:
- lower transaction costs i.e. stamp duty;
- speedier transaction period for leased assets; and
- utilisation of carry forward tax losses.
DEM Asia’s private client base and executive management also combine to provide a unique equity and operational solution to complex stress situations when the optimal solution is not always clear.
By reducing uncertainty, hedging risk and creating a buffer which distinguishes your business from that of your competitors, all contributes to putting you in the best position to take advantage of opportunities when others cannot.
Distressed acquisitions are by their very nature opportunistic purchases, and as such buyers often don’t have the time, or ignore the reasons for the businesses failure in the first place, and in doing so fail to realise the full benefits of the acquisition.
Broadly business failures fall into three categories:
- The Single Issue – these are the one off transactions that can be quarantined into a specific set of circumstances i.e. a lost litigation, too much debt, an unprofitable location or division, a failed diversification or investment.
- The Scalability Failures – surprisingly, as many businesses fail during a boom as a bust. These are the businesses that cannot fund their own growth, where revenue grows at a greater rate, depleting working capital, or the opposite, where revenue falls at a faster rate than a business can reduce costs.
- Management Failure – into this category falls both the visionaries and the incompetents, where the core issue is the failure of current management.
Too often purchasers only see the financial distress as an opportunity to discount the purchase price of a ‘good asset’ rather than an acknowledgement that the good asset is no longer good.
In a 2013 PwC survey of US Fortune 1000 companies who had been involved in merger and acquisition transactions between 2010 and 2013, 65% of respondents characterized recent deals as a success from a strategic point, while only 49% achieved financial goals and only 35% achieved operational goals.
Achieving a strategic goal is simply “completing the sale”, while financial goals and operational goals require significantly more work. What is clear is that with nearly 44% of all deals being transformational the success of these deals is being considerably over estimated at their outset.
There are usually two ways to acquire a distressed business, the traditional way through an asset sale or through a Deed of Company Arrangement. Acquiring a business through a Deed of Company Arrangement provides additional value and at lower costs than an asset sale and purchase. It is however more often used by incumbent owners rather than external purchasers.
The benefits of acquiring a business through a Deed of Company Arrangement are fourfold:
- A deed of company arrangement does not attract stamp duty on asset values.
- The Deed of Company Arrangement is a compromise of liabilities and does not consider the value of assets, such that the assets can continue to be carried at the book value.
- As there is no transfer of contracts from the company, the time costs and risks around achieving an assignment of customer, supplier and landlord contracts is eliminated or limited.
- To the extent the acquirer continues the same business, accrued tax losses less any debt forgiveness will be available to the purchaser.
In 2014 the Queensland University of Technology (QUT) produced a report based on a sampling of 72 out of a total 350 deeds of arrangement effected in Australia between August 2012 and July 2013 only 28% of cases were found to be genuine reconstructions. If you extrapolate these figures over an average of 1,633 voluntary administrations a year this equates to only 8.6% genuine reconstructions in Australia.
The same QUT study indicated that the level of dividends in the sample of deeds was 3.7 cents for large companies and 9.7 cents for small companies, a median of 5.4 cents. With the dividend distribution at this level, it is clear that dividends, are not the predetermining factor for creditors supporting Deed proposals. Creditors are looking for certainty in supporting a sustainable business going forward.
DEM Asia Group manages the process for you:
- Negotiating the selection and or funding for the Administration process;
- Preparation of the Deed proposal;
- Preparation of business strategy and supplier presentations;
- Communication planning with stakeholders;
- Voting and proxy management;
- Finalisation and Execution of Deed terms; and
- Post Deed accounting and management statements.
The Deed once its terms are satisfied affectively creates a statutory bar to company claims which arose before the commencement of the voluntary administration.
Setting aside a resolution or terminating a Deed
Section 600A of the Act provides that the Court has powers to set aside the resolution approving the DOCA in the event that the DOCA has yet to be executed.
Section 600A provides that the DOCA resolution can be set aside if, among other things not relevant, the votes of related creditors are disregarded then the resolution that was in fact passed would not have passed (Section 600A(1)(b)(ii)).
Section 445D of the Act provides that the Court may make an order terminating a deed of company arrangement if satisfied that:
(a) information about the company’s business, property, affairs or financial circumstances that:
(i) was false or misleading; and
(ii) can reasonably be expected to have been material to creditors of the company in deciding whether to vote in favour of the resolution that the company execute the deed;
was given to the administrator of the company or to such creditors; or
(b) such information was contained in a report or statement under subsection 439A(4) that accompanied a notice of the meeting at which the resolution was passed; or
(c) there was an omission from such a report or statement and the omission can reasonably be expected to have been material to such creditors in so deciding; or
(d) there has been a material contravention of the deed by a person bound by the deed; or
(e) effect cannot be given to the deed without injustice or undue delay; or
(f) the deed or a provision of it is, an act or omission done or made under the deed was, or an act or omission proposed to be so done or made would be:
(i) oppressive or unfairly prejudicial to, or unfairly discriminatory against, one or more such creditors; or
(ii) contrary to the interests of the creditors of the company as a whole; or
(g) the deed should be terminated for some other reason.
Accordingly, an application may be brought under subsection 445B (a), (b), (c), (e) and/or (f) of the Act seeking to terminate the DOCA returning the Company to liquidation.
That application can be brought by an interested party or creditor of the Company (Section 445B(2)).
All these issues can be addressed through careful planning, negotiation and clear disclosure in the Administrators Report and Deed Proposal.
A key indicator of a successful business is its ability to maintain a strong balance sheet and forward outlook, despite day-to-day fluctuations in short-term profits – we call this "underlying value".
A turnaround that can focuses on increasing underlying value over the long-term enables the true health and value of a company to be sustained and reinforced.
Operational and financial transformation improves the underlying value of the business involving a company-wide reorganisation aimed at re-evaluating the nature and focus of core operations, by simultaneously restructuring and realigning the organisation’s capital structure, assets and liabilities.
DEM Asia’s team of leading consultants work with management and boards to plan, implement, and communicate restructuring solutions under our “SICS” planning.
This process is able to transform the company and create a more financially beneficial environment that increases the organisation’s value and supports sustainable operational change.
The idea of underlying value and taking a long-term approach to viewing a company’s sustainability lends its self to how DEM Asia approaches operational and financial transformations. All too often advisers make changes to the capital structure of an organisation, focusing on a short-term solution to operational distress (the “get in, get paid, get out” approach) without paying due consideration towards ongoing liquidity needs and other long-term financial stresses. This short-term view ultimately leads to more severe capital distress, and potentially the ultimate failure of the enterprise.
DEM Asia participates with executive management and stakeholders at a Board level. We focus on putting together the right team with aligned operational experience to match a client’s specific situaiton and needs.
Our involvement can take the form of:
Even in times of low interest rates, cash is still king, especially in situations where external funding is unavailable or cash on balance sheet is an important issue for lending and covenant management.
Our short-term and middle to long-term approaches towards cash flow review and analysis represent one of the most effective techniques for establishing effective working capital controls and improving cash visibility.
Recognising the fundamental role of cash culture within a business results in a more effective application of free cash, lower administrative costs, reduced borrowing needs and improved investment performance overall.
DEM Asia works closely with Board, Management and Treasury teams to ensure cash forecasting and management methodologies are tailored to each individual business situation.
- covenant testing and short term cash campaigns
- cash forecasting and visibility testing
- medium – long term financial forecasts for going concern support
- cash culture workshop and management programmes
- aligning cash KPI’s and management
- crisis cash management
The 2016 Working Capital Report prepared by McGrath Nicol, profited the working capital performance of 147 ASX listed companies by sector and provides an excellent insight into working capital movements over the last four years. Their 2016 report indicated that while there was an improvement in overall working capital, this was offset in part by a tightening across the board of creditor terms. However, the ASX sample is not an appropriate indicator of working capital movements in the SME markets, which often underperform the ASX by a considerable spread. So, in a market where ASX is reporting lower recoveries across a number if sectors, the conversion of earnings to cash for the entire market is doubling important.
In 2017 with even still greater pressure on earnings, company’s who focus on cash conversion will be better placed to take advantage of opportunities.