M&A in Sweden and the impact of COVID-19

We started to see signs of a decrease in M&A activity during Q4 2019 and following a relatively sluggish start to 2020, Covid-19 has had a significant impact on M&A activity in Sweden. In this note we address some of the key observations.

Valuations of businesses have become more difficult, resulting in pending deal discussions slowing down or transactions being postponed or aborted. There is also a difficulty in securing debt financing of the purchase price dampens activity.

However, the current expectation is that M&A activity will not come to a complete standstill:

Businesses in certain industries, e.g. part of the healthcare sector, food and gaming, will presumably benefit from the crisis. Reduced stock prices could also create new M&A opportunities for well capitalised buyers. We have also seen an increased interest for public to private transactions / public takeover during recent weeks. We can also expect to see an increased number of distressed transactions.

Set forth below are some initial observations on how the crisis has affected and is likely to affect M&A processes:

W&I Insurance

Market for W&I insurance remains open and insurers are still willing to underwrite policies.
Pricing has so far been relatively unaffected. However, price increases may be coming due to insurers suffering increased losses.
COVID-19 exclusions are being introduced. Exclusions can come in many forms: blanket COVID-19 exclusions for high-risk industries (e.g. hospitality) as well as deal specific exclusions. There are also examples of insurers trying to carve-out COVID-19 from the definition of covered “Losses”.
Insurers are requiring robust diligence into the impact of COVID-19 and many insurers are seeking to water-down warranties or insert exclusions if the diligence does not provide sufficient comfort.
Some insurers may consider providing synthetic warranties in distressed deals. However, such warranties are likely to be conditional upon detailed due diligence, an ability to influence the Q&A process to elicit quasi-disclosure and the target operating in a favourable industry sector.

Regulatory approvals

Delays in securing regulatory approvals should be anticipated due to a variety of practical challenges and we are already seeing signs of national competition authorities in certain jurisdictions needing more time than usual to grant merger clearance. Parties should consider appropriate mechanisms in transaction agreements to allocate risks of delays.

Conditions precedent

We expect an increase in buyers requesting financing-out conditions, MAC conditions or other similar conditions which, if accepted, may increase the use of break fees in case transactions are not completed.
Sellers are likely to insist that the consequences of pandemics, epidemics or similar health emergencies are explicitly excluded from MAC clauses.

Financing

Some Private Equity buyers will do all equity or over-equitized capital structures and potentially place debt later.
We expect an increase in the amount of vendor notes to provide a bridge for future debt financing.

Valuation

Earn-outs are becoming more common and we expect more transactions where a substantial part of the consideration is paid in the form of an earn-out.
We also expect to see an increase in the number of transactions where the purchase price is paid in kind.

Due diligence

Management presentations, site visits and physical data room arrangements (e.g. in relation to sensitive information) will become more difficult or not possible at all due to strict travel restrictions or strict internal policies of companies.
Parties should be mindful of the implications of COVID-19 on, e.g. supply chain management, potential material contract disputes and employment matters. This is, as stated above, particularly important in case W&I insurance is considered.

Other matters

Sellers should specifically consider warranties regarding shut-downs, lay-offs, availability of capital, loss of customers and other areas that could be severely affected by COVID-19.
Parties should consider the potential impact of COVID-19 on the target’s ability to comply with its interim operating covenants, e.g. what does it mean to operate in the ordinary course of business in the current COVID-19 environment?