The Corporate Unloved: Disposal of non-core assets
With the strong current M&A market UK corporates are seeing a golden opportunity to sell non-core assets, including many hidden gems. Tom Reece discusses the dynamics of the carve-out.
The family trees of many UK corporates include numerous businesses which, as a result of lack of scale or strategic alignment with the direction of the parent company, can suffer from a lack of management time and investment. When the M&A market is strong corporates often seek to divest these assets in order to realise cash to re-invest in the core business and allow senior management to focus on a tighter scope of activities. Such action is generally seen as a sign of leadership with a clear vision and, for public companies, is typically viewed favourably by investors.
Many non-core assets operate in attractive markets and have sound fundamentals and, with the benefit of the focus and resources the current owner is unable to provide, the inherent potential within them can be realised to deliver profitable growth.
Strategic Acquirers
The right strategic acquirer will be in a position to pay a premium valuation for a non-core asset should the business add technical capability, allow vertical expansion, have the scope to realise material operational or distribution synergies or simply capture market scale or new market opportunity.
Despite the potential to achieve a high valuation it is important for public companies in particular when selling, to protect the business and customer information being sold from competitors embarking on an information gathering exercise. A staged release of the most commercially sensitive information throughout a sale process is critical, to allow non-serious counterparties to be appropriately screened and customer sensitivity and anti-trust considerations to be met.
Private Equity Specialists
There are an increasing number of specialist private equity investors, not only comfortable with, but seeking the additional complexity of undertaking corporate carve-outs. These funds frequently see significant value potential where others may not. Funds like OpenGate Capital, for example, have executed multiple international carve-outs from public companies. The surfeit of capital available to deploy and prevailing favourable conditions in debt markets means that financial investors can be highly competitive in a managed auction process.
The ideal characteristics for a buy-out to be a viable option remain the same as always - a credible and motivated management team (or a suitable buy-in candidate), robust financial data and a clear, executable strategy that can deliver the growth required to make the private equity model work. The ability to tick these boxes if choosing to market a business to the private equity community requires consideration and careful preparation in the form of internal planning and vendor diligence is usually advisable. If the vendor is able is able to effectively meet these requirements there is scope to execute a timely deal at a competitive valuation.
Bundling
The other factor that can determine the ultimate buyer in a carve-out process is the strategic alignment of the units to be sold with each other. It is quite common for corporates to seek to sell several units in a single deal rather than have the distraction of multiple processes. Where they are clearly aligned this can favour trade or traditional private equity who will recognise either an easy add-on or a potential platform investment respectively. It is in cases where the units do not fully align where the advantage can swing significantly to the specialist carve-out funds or to operational funds such as H.I.G. or Sun Capital who are well-placed to make further acquisition or disposals after the deal.
Separation Considerations
Non-core assets can often be highly integrated into group operations and an appropriately planned separation will ensure that a divestment is value accretive for vendor and purchaser. Sold businesses can be weaned off shared services, such as central finance, HR and IT support, through a well thought through transitional services agreement however there are inevitably many less evident points requiring consideration. Interaction with third party stakeholders, reliance on the brand name or other intellectual property of the parent and commercial and operational dependencies on the wider group can all have a material impact on execution risk and the value ultimately realised on both sides of the transaction. The key is thorough analysis of the units to be sold on a stand-alone-basis, the early identification and involvement of the relevant supporting functional heads and development of a roadmap of steps to be taken pre- and post- transaction.
Outlook
Despite the complexities involved in transacting, the drivers to dispose and the incentives to acquire are compelling and 2017 looks set to be another busy year where the right homes can be found for more of the UK corporates hidden gems.