Competition heats up for distressed sale opportunities

Access to distressed businesses and their assets has been one of the few things helping those who were smart enough to not just maintain but grow a business in the turbulent economic climate that has persisted since the 2008 recession.

However, the opportunities to grow a business through distressed acquisitions have lessened somewhat as investment and regeneration plans finally start to kick in and insolvencies tail off. This is proving to be a particular issue in the construction sector.

While the industry took one of the biggest hits in the recession, it is now experiencing one of the strongest upturns in business, with a major decrease in the number of failing businesses as demand picks up.

The latest figures from Experian's Business Insolvency Index showed that the rate of insolvencies seen in the building and construction sector fell from 0.14 per cent in September 2012 to 0.11 per cent in the same month this year.

This drop marked the eleventh month of year-on-year decline in insolvencies in the sector, a trend driven largely by the increase in demand for both commercial and residential property as business confidence returns and lending conditions ease. Government infrastructure plans, global economic growth and urbanisation have also contributed to improvements in the industry, according to 53 per cent of businesses questioned in a recent report from KPMG, Global Construction 2013: Ready for the Next Big Wave?. For those businesses looking to grow through acquisition, this upturn in the sector is a mixed blessing. As demand increases, so competition grows.

Richard Threlfall, the UK head of infrastructure, building and construction at KPMG Construction, commented on the growth pattern within the sector: “Companies now need to invest in growth. What is holding back the industry now is not lack of demand, but the ability of businesses to resource for it and recruit sufficient experienced staff.”

He added that construction firms must respond quickly to the increase in demand if they want to remain competitive: "Companies need to act now, because the industry's resurgence is already underway."

Acquisitions have often proved one of the most effective forms of quick growth, providing access to new facilities and staff bases within a matter of months, rather than the years that organic growth can take. But now that distressed opportunities are becoming increasingly scarce, competition for the spoils of failed competitors is growing ever more ruthless, forcing buyers to be on the ball if they want to stand a chance of success when it comes to bidding.

Monitoring winding-up petitions is a shrewd strategy when it comes to being first to know about an impending insolvency and many successful buyers have used this approach to get a foot in the door with administrators before an official disposal of distressed assets is announced.

And, while competition is indeed fierce, there are still opportunities to be found. Last month, Murphy Ltd, a construction company based in London entered administration, pushed into insolvency by a long period of difficult trading. Joint administrator, Nick Edwards of Deloitte, noted that it would take an unfeasible amount of investment to keep the company trading, prompting the administrators to begin the sale process and hunt down suitable buyers for Murphy's business and assets.

Murphy's is far from an isolated case. Other firms are still stumbling, pushed just that bit too far by the protracted downturn and a lack of investment. The assets they leave behind are being snapped up by eagle-eyed competitors, feeding back into a cycle of growth as the construction sector climbs its way out of recession. But as distressed opportunities become rarer and the economy picks up, rivalry is growing and only the most alert buyers will have a chance of obtaining spoils.

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