Coronavirus grounds dealmakers seeking to brave market turmoil

By Arno Schuetze, Rebecca Spalding and Scott Murdoch

(Reuters) - Even as the market rout fuelled by the coronavirus brings most corporate dealmaking to a halt, buyout firms are competing fiercely to acquire Air Liquide SA's (PA:AIRP) disinfectant making unit Schuelke, as demand for hand sanitizers and medical cleaning supplies surges due to the fast-spreading disease.

There is just one problem. Travel restrictions are preventing dealmakers from flying over to visit Schuelke's factories in Germany and carry out the due diligence needed for the deal.

EQT AB (ST:EQTAB), Clayton, Dubilier & Rice LLC, PAI Partners and Ardian Holding are among the private equity firms asked by Air Liquide to submit second-round offers for Schuelke by the end of March, according to people familiar with the matter.

Ecolab Inc (N:ECL), a St. Paul, Minnesota-based U.S. cleaning and pest-control services company, was also asked to bid, according to the sources, who requested not to be identified discussing the confidential details of the process.

As governments and companies curtailed travel around the world, however, some bidders and their advisers have been unable to conduct due diligence in person, the sources said. This affects the ability of investment banks to provide financing for the bids, because they need the due diligence to sign off on their funding, the sources added.

Air Liquide and the private equity firms declined to comment, while Ecolab did not respond to a request for comment.

To be sure, Air Liquide said this month it did not envision any delays in the sale of Schuelke. It is hoping to fetch 1 billion euros ($1.1 billion) for the unit, according to the sources.

But the hurdles that at least some bidders need to overcome to acquire Schuelke underscore the challenges dealmakers face as the coronavirus pandemic roils global markets. They illustrate how acquirers are grappling not just with the financial impact of the coronavirus on the businesses they are looking to buy, but also with the travel restrictions weighing on their ability to clinch a deal.

Walking the floors of the factories, grilling finance chiefs at corporate headquarters, and hosting splashy dinners for the executives of companies being courted are all key rituals of dealmaking that can only take place face-to-face, dealmakers say.

"Getting into a lab, doing quality control testing, and even seeing whether employees are following safety procedures -- some of those factors are needed to see if a strategic acquisition makes sense," said Michael Patrone, a mergers and acquisitions (M&A) partner at law firm Goodwin Procter LLP.

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NO WINING AND DINING

The fallout from the coronavirus outbreak has rained on the parade of many dealmakers, who had been looking to 2020 to beat 2019 as the fourth strongest year for M&A on record, even with the uncertainty of the presidential election in November.

While M&A volumes have not yet fully registered the effect of this month's market volatility and some acquisitions are still getting announced, M&A advisers say many clients are stepping back from signing deals after the S&P 500 Index dropped 25% from its all-time high in the last three weeks.

Canada's Brookfield Asset Management Inc (TO:BAMa) put the $2 billion sale or potential listing of its coal export terminal in Australia on hold after buyers couldn't travel to the site and inspect it, sources told Reuters this week.

The inability to meet in person does not just slow down or thwart deal negotiations. It can prevent them from starting altogether.

A lot of acquisition approaches start with a personal outreach from one chief executive to another. But wining and dining cannot take place via teleconference, limiting the ability of dealmakers to break the ice with their acquisition targets before sending them a formal offer.

"A critical element of doing deals is building trust between the two sides. It is significantly more difficult for that to happen without face-to-face interaction," said Paul Schnell, an M&A partner at law firm Skadden, Arps, Slate, Meagher, & Flom LLP.