The Opportunity in Distress

BlackLeaf Insights & News
Oct 9
7 min read

How Business Rescue is Creating Private M&A Value

In volatile economic cycles, distress is often viewed solely as failure. However, for astute private equity funds, strategic corporate acquirers, and sophisticated family offices, the current climate of widespread financial strain—particularly in South Africa—presents a compelling and non-cyclical opportunity for significant value creation. This is the realm of Distressed M&A, where the legal framework of Business Rescue (BR) acts as the crucial catalyst for unlocking hidden potential.

I. Redefining Business Rescue as an M&A Mechanism

Business Rescue (BR), established under Chapter 6 of the Companies Act, is designed to rehabilitate financially troubled companies. While its primary goal is to save the entity, it has evolved into one of the most powerful and underutilized mechanisms for value-accretive private M&A.

Unlike standard acquisitions, a BR process offers several distinct advantages for the acquiring party:

Clean Asset Acquisition (The Liability Shield): An approved BR Plan can statutorily restructure debt, suspend onerous contracts, and effectively ring-fence liabilities. This allows the acquirer to purchase the core operational assets free from the burden of historical financial mistakes, preventing the investor from inheriting pre-existing debt or unsecured creditor claims.
Accelerated Due Diligence (The BRP Validation): The process mandates high levels of transparency and disclosure, often speeding up the due diligence phase compared to a hostile or traditional acquisition. Crucially, the Business Rescue Practitioner’s (BRP) independent assessment provides a court-appointed, third-party validation of the company's financial status, which significantly aids investor confidence and reduces information asymmetry risk.
Protected Process (The Moratorium Effect): The statutory moratorium on legal proceedings provides a necessary shield. It stops all creditor action and lawsuits against the company, allowing the acquirer and the BRP to focus intensely on restructuring and stabilization without the constant threat of operational collapse or seizure of assets. This protection is vital for securing the investment timeline and executing the turnaround strategy.

In essence, a successful Distressed M&A transaction via Business Rescue is not simply buying a cheap company; it is buying a future, clean operating platform at a significant discount.

II. The Architectural Insight: Structuring for Value

True value is not extracted from the distressed price; it is created through the Architectural Insight applied by the acquirer's advisory team. This requires a unique fusion of legal, financial, and operational expertise—the hallmark of specialized Corporate Services (CSAT & M&A Advisory).

1. Corporate Services and Turnaround (CSAT)

The value unlock begins with CSAT expertise and must be deployed during the company’s "Golden Hour"—the immediate period following the BR filing. Before M&A documents are signed, the advisory team must assess the viability of the distressed company's operating model. Key actions include:

Operational Triage and Cost Base Rightsizing: This involves rapid identification of non-core assets, the elimination of wasteful expenditure, and immediate optimization of working capital management. The focus here is rapid deployment of cash-flow improvement measures to ensure the company survives the crucial first 90 days.
Supply Chain Negotiation and Rationalisation: The BR process allows for the suspension of onerous contracts. CSAT teams leverage this power to renegotiate terms with key suppliers, reducing input costs or securing more favourable credit terms to alleviate cash pressure.
Stakeholder Management as Strategic Diplomacy: Navigating the complex relationships with creditors (secured vs. unsecured), employees, and suppliers is a delicate task where the BRP plays a pivotal, neutral role. Successful communication, transparency, and assurance of the best possible outcome for each class of creditor are often the difference between plan approval and catastrophic failure.

The CSAT function provides the operational runway necessary for the M&A transaction to take place, transforming a dying business into a viable target.

2. Strategic M&A Advisory and Structuring

The M&A advisory function then translates the operational roadmap into a bankable transaction structure. This is where deal-specific expertise is paramount:

Valuation in Stress (The Two Values): Standard discounted cash flow (DCF) models are insufficient. M&A advisors must apply bespoke valuation methodologies that consider both the Liquidation Value (the lower floor, used as the legal test of fairness to creditors) and the Post-Restructuring Going Concern Value (the upside potential). The investor’s offer must exceed the Liquidation Value to satisfy the courts and creditors, but remain low enough to ensure a sufficient margin for the acquirer.
Structuring the Plan (Cram-Down and Loan-to-Own): The BR Plan must be legally designed such that the acquisition is the central solution. This often involves:
- The Cram-Down: The use of the BR legislation to enforce the restructuring plan on dissenting creditors (or equity holders), provided the plan offers them a better result than immediate liquidation. This is the ultimate tool for achieving certainty of closure.
- The Loan-to-Own Strategy: Often, the incoming investor provides Post-Commencement Finance (PCF) to stabilize the business before officially acquiring it. This is a common strategy where the PCF becomes convertible debt, giving the investor significant control and a protected pathway to ownership upon plan approval.

3. Financing Expertise (Post-Commencement Finance - PCF)

Securing Post-Commencement Finance (PCF) is perhaps the single most critical element of a Distressed M&A transaction. PCF provides the liquidity to stabilize operations during the BR period and is crucial for signalling commitment from the incoming investor.

Super-Priority Status: An experienced advisor will structure PCF to gain super-priority status over almost all other unsecured debt. In the event the business rescue fails and the company is liquidated, PCF providers are paid out before pre-commencement creditors. This high-priority security makes PCF a highly protected and attractive investment vehicle for the incoming party.
Control Mechanism: By providing PCF, the potential acquirer gains significant leverage and oversight during the Business Rescue period, often influencing the BRP's decisions and operational improvements before the final acquisition is executed. It’s an investment that secures influence and reduces execution risk.

III. Navigating the Pitfalls: Execution Risk and Legal Dynamics

While the legal protections of Business Rescue are powerful, the process is far from a simple closing. Acquirers must be acutely aware of inherent risks:

1. The Creditor Voting Block Dynamics

The successful completion of a Distressed M&A transaction relies entirely on the final approval of the Business Rescue Plan by creditors, requiring 75% voting interest (comprising 50% independent creditor value and 50% non-related creditor value).

Secured Creditor Leverage: Secured creditors (like banks holding bonds over property) often wield the most power. Pre-engagement and tailored proposals for this class of creditor are mandatory. A failure to secure their support is frequently fatal to the plan.
Mitigation Strategy: The advisory team must engage in thorough, proactive pre-engagement with major creditors, presenting detailed viability assessments and meticulously designing the plan to ensure perceived fairness and to clearly demonstrate that the M&A solution yields a superior return compared to immediate liquidation.

2. Litigation and Regulatory Challenges

Distressed transactions attract scrutiny and often dissent, leading to legal challenges:

Litigation and Challenge: The BR process, particularly the cram-down of existing equity or debt, can be challenged in court by dissenting creditors or affected parties who argue the plan is not fair or equitable. While the statutory moratorium shields the company during the process, legal challenges post-plan approval can create significant delays and uncertainty.
Competition Commission Review: If the proposed acquisition results in a change in control that exceeds established thresholds, the transaction must be filed with the South African Competition Commission (CompCom). CompCom’s approval, especially in distressed cases involving job losses or sector concentration, adds a necessary regulatory layer that must be factored into the timeline. Robust legal counsel and a transparent process led by an experienced BRP are the only effective defenses against these delays.

IV. The Distressed M&A Execution Framework

Successful Distressed M&A is executed in three distinct phases, each requiring specialized Corporate Services (CSAT & M&A Advisory) expertise:

Phase 1: Assessment and Filing (0-30 Days)	Phase 2: Stabilization and M&A Plan Development (30-90 Days)	Phase 3: Creditor Approval and Implementation (90-180 Days)
Action: Conduct rapid viability assessment (forensic audit, operational triage). The decision to file for BR must be made strategically, often pre-emptively. CSAT Role: Select and appoint the BRP. Prepare and manage the initial engagement with lenders and major creditors to secure preliminary buy-in. Output: Successful BR filing and approval of immediate Post-Commencement Finance (PCF) to achieve survival.	Action: BRP assumes control. The CSAT team executes the operational restructuring plan (cost reduction, working capital optimization). The M&A team begins valuation and structuring. M&A Advisory Role: Structure the acquisition proposal, negotiate terms with the BRP, and draft the BR Plan, ensuring the proposed transaction is the central mechanism for rescue. Output: A fully developed, legally sound Business Rescue Plan ready for creditor consideration.	Action: Present the BR Plan to creditors for voting. Manage voting dynamics and respond to queries or objections. Upon approval, apply to court for final sanction, if required. Legal & M&A Role: Manage the creditor voting process (securing the 75% threshold). Execute the legal steps of the M&A transaction—transferring assets, settling claims according to the Plan, and officially closing the deal. Output: Successful closure of the distressed M&A transaction and the establishment of the newly acquired, clean operating entity.

The confluence of economic volatility and the formal Business Rescue mechanism provides a continuous, high-return stream of M&A opportunities for those prepared to act decisively. Distressed M&A is not for the faint of heart, demanding high tolerance for complexity and risk. However, for those with the robust advisory capability (CSAT and M&A Advisory) to navigate the legal, operational, and financial dimensions, it represents a strategic shortcut to market consolidation, rapid scaling, and superior private returns. It is the ultimate test of an advisor's ability to see opportunity where others see only chaos.

Disclaimer

This material is for informational purposes only and does not constitute financial, legal, tax, or investment advice, or a recommendation to buy or sell any security or financial instrument. The information contained herein is general in nature and does not take into account the specific investment objectives, financial situation, or particular needs of any specific person.

BlackLeaf Wealth is a provider of strategic capital solutions and bespoke advisory services. We do not act as a commercial bank. Investment in private credit involves significant risks, including loss of principal, limited liquidity, and speculative strategy. Prospective investors should consult their own professional advisors before making any investment decisions. BlackLeaf Wealth makes no representations or warranties regarding the accuracy, completeness, or suitability of any information provided herein. Past performance is not indicative of future results.