M&A in the U.K. just got a major boost, with the mandate to sell major British airports issued by U.K. competition authorities. Sure to influence this transaction are global credit markets, which continue to leave a strong imprint on the shape of M&A in the U.K. and beyond. Look no further than several recent M&A transactions to see that access to cash is the key divide – the lucky ones have access to cash-providing credit lines and the even luckier few have cash in pocket already. Ferrovial, BAA's Spanish parent, and others also considering asset sales had best keep this in mind as they move forward.

The recent Competition Commission order requiring BAA, one of the worlds largest airport operators, to divest of three airports, Gatwick, which is already underway, Stansted, and either Edinburgh or Glasgow is one way of jump-starting the acquisition market.  Though done as an effort to improve competition within the U.K. airports the aggregate sale is expected to generate up to ₤4 billion. This is the largest divestiture to date ordered by the Competition Commission, the U.K. body responsible for investigating competition within industries and as part of mergers.

Credit markets and tough economic conditions have the dual effect of depressing equity prices and driving companies to sell assets and thus recapitalize. From the covetous buyer’s perspective, they are well-positioned to take advantage. Below we look at three transactions driven by credit conditions and access to funding.  As a further hat-tipping to increasing global integration, the U.K transactions reach the U.S., Canada and Australia.

Evidencing the impacts of credit markets on M&A is the acquisition of Canadian oil and gas exploration firm Bow Valley Energy by U.K.-based Dana Petroleum. In 2008, Bow Valley sought to replace existing credit facilities, but due to the deteriorating credit markets found it increasingly difficult and instead formed a special committee of the board to seek strategic alternatives for the company. The result was an approximate CDN$240 million acquisition by Dana through a plan of arrangement. Dana appears to have included some protections within the transaction including a condition that Bow Valley complete the U.S.$30 million sale of certain of its North Sea assets and a non-completion fee of U.S.$6 million that Bow Valley would owe to Dana.  As a side note, Canadian energy assets seem to be all the rage these days: a second transaction recently announced is the U.S. $16 billion acquisition by Suncor of flag-carrier Petro-Canada.

Constrained credit markets and a thirst for capital led U.K.private equity fund fund Lion Capital to its new role as both creditor and equity holder. On March 13, American Apparel, the Los Angeles-based clothing manufacturer and retailer popular among teens, announced an On March 13, American Apparel announced an $80 million private financing agreement with Lion Capital, the former owner of shoe maker Jimmy Choo. The agreement consists of secured second lien notes with detachable warrants giving Lion nearly 20% of American Apparel as well as the right to designate two board members. American Apparel needed the financing to avoid issuing warrants to purchase an additional two million shares of stock to an affiliate of Michael Dell’s investment company, MSD Capital, LP. In December 2008 American Apparel was forced to negotiate an extension of its existing credit agreement with the MSD Capital affiliate which included a requirement to raise $16 million by March 13, 2009 or issue the additional warrants. As part of the transaction Lion also entered into an investment voting agreement with American Apparel’s controversial CEO, Dov Charney.

Of course, not everyone needs to borrow cash to make M&A aspirations come to life. One of the lucky few with cash is BG Group, the U.K.-based natural gas company and one of the two firms that resulted from the 1997 demerger of British Gas. BG Group just acquired Pure Energy Resources, an Australian coal seam gas firm, as part of its quest to enter the fast-growing liquefied natural gas market. The U.S.$678 million transaction originally announced February 9 also required BG to outbid rival Arrow Energy, an Australian firm and 20% holder of Pure Energy, as well as Royal Dutch Shell, which held an 11% stake in Pure Energy. BG was able to fund the transaction through its existing cash giving it the flexibility to outbid the competition and promise the Pure Energy shareholders a quick cash payment.

As we can see, there are opportunities existing for those firms with the available credit or cash to make acquisitions, possibly with more favorable terms. While the economic climate continues to constrain many companies the idea of being acquired may no longer be so unappealing. It does generally appear to be a buyer's market.

Published: March 24, 2009