Merger may mean different things to different organisations, but there are some clear advantages when it comes to treasury.
2016 was very much the year of the "mega mergers" as L&Q and Affinity Sutton merged with East Thames and Circle respectively to form FTSE 100-sized behemoths.
These newly-formed organisations have set the bar that bit higher in terms of scale and influence and like their corporate peers, size matters when it comes to the amount of leverage a borrower can exert over its lenders and investors.
But what of the rest of the sector?
After a relatively quiet start to the year, we are seeing a noticeable uptick in merger activity across the market and whether or not you buy in to the supposed benefits of merger, we believe that the process of consolidation among housing associations has real momentum and will continue to play out over a number of years.
In turn, this process is leading a number of our clients to consider whether their existing financing arrangements are fit for purpose if they see merger and/or acquisition as a key part of their strategy in the short-to-medium-term.
So, what does it mean to be “merger ready”?
In truth, it probably means different things to different organisations.
Most fundamental perhaps is the mind-set of the board and executive of the business in question.
It is often highlighted that the shareholder driver is lacking in the housing association sector – although the evidence of the success that this discipline supposedly brings in the private sector is less than convincing.
It is the board who will determine how open or not they are to either receiving approaches positively or pro-actively making approaches to other organisations.
There are many organisations which have determined that merger isn’t really for them, either because they don’t believe that scale helps in delivering their social purpose or perhaps because their model or culture is unique and would be lost or damaged, and in a small number of cases, maybe the adage about turkeys and Christmas does indeed hold true.
But if we start with the premise of a housing association which is open to mergers (in any form) , are there meaningful steps that they can take to either smooth the process or to make themselves a more attractive merger partner or rescuer of a troubled organisation?
We highlight some of the key issues below based upon our considerable experience in housing sector M&A:
Mergers and acquisitions in the housing sector are complex transactions to deliver and the list of issues at play is a lot wider than the relatively narrow treasury lens we have used here.
Nonetheless, we are noticing an increasing realisation on the part of some housing associations with a clear appetite for M&A activity that their existing treasury arrangements may present a material stumbling block in pursuit of such a strategy.
Addressing these issues is easier said than done but many clients are taking an increasingly pragmatic approach in recognising the need for corporate flexibility versus preservation of value in legacy lending arrangements, much of which can be embedded in long term loans where it is debatable that the value will ultimately be extracted.
Rather than seeking re-negotiation of existing terms in a “must have” situation (i.e. at the point of trying to undertake a transaction), some businesses are seeing value in addressing these issues ahead of need.
The rewards here of a stronger negotiating position with lenders and a better state of “merger readiness” need to be considered against the risk of giving up value and the hoped for opportunities not transpiring.
These considerations as well as different strategies and treasury portfolios will drive a case by case approach, but as the merger bandwagon continues, housing sector treasurers should certainly be kept busy.
*Phil Jenkins is managing director and a partner at Centrus Advisors.