Divestitures: What? How? Who?
Monday, 14th November 2016
Divestitures and disposals can be very complex. Ashfords LLP's Giles Hawkins outlines the whys and hows.
Barclays is selling its operations in Egypt to Attijariwafa Bank, a leading Moroccan bank, in a $500 million deal. The sale is part of Barclays’ strategy to focus on its UK and US markets. This article looks at the considerations companies need to think about when looking to dispose parts of their business in order to consolidate their business focus.
The vast majority of disposals are reactionary and are usually driven by the group’s debt burden, or the fact that the business unit is not performing well. Reactionary disposals tend to be done at lower values.
Other companies (think General Electric or Siemens) have historically looked at divestments more strategically. This more proactive approach not only focuses a company’s strategy, but has over time been shown to increase shareholder value.
What to divest?
Identifying potential divestment candidates involves a number of strategic and practical considerations. Companies should be wary of focussing on the practical issues first, as this can get in the way of the choosing the correct strategic path.
Using divestment as a means of focusing your strategy will likely require a change in mind-set. Disposing of companies is often seen as a sign of weakness or failure. You may be looking at disposing of profitable cash generative businesses or businesses/geographies in which the company has operated in for a number of years. Any programme of divestiture will need to be carefully communicated – both to the company as a whole and the wider market.
In identifying potential candidates to divest in order to consolidate its business focus, a company will need to consider the following:
The potential candidate’s impact (both positive and negative) on the company. What is the growth potential of the candidate? What are the capital requirements? How much management time does the candidate require? How much risk to the company does the candidate bring?
The company’s impact on the business unit – what value does parent add to unit? Can another company provide more value? This will inform what premium an acquirer may apply to the candidate.
Can the candidate provide further value to the company? Does the market over or under price such businesses?
The company’s overall portfolio – its business units, the geographies in which they each operate, the size of the company’s portfolio relative to its resources.
Divestitures can be very complex. Divestiture candidates are rarely neat packages and often involve a number of employees, assets and capabilities spread throughout the company. The Company needs to have a very clear idea of what is being sold, what is not being sold and what assets or capabilities will be required by both the company and the buyer following the disposal.
Once a company has identified what is actually being sold, it will need to consider:
- How to structure the deal (auction? spin-off? share sale? asset deal?)?
- What are the tax and regulatory implications? Can the divestment be made in a tax efficient way?
- What are the transaction costs?
- How will shared assets be dealt with?
- Is there a market?
- What will the market reaction be?
- How to divest?
Companies are often set up to acquire businesses, but very few are set up to dispose. Divestments need to be treated with the same care and attention as any M&A deal.
As well as strategic considerations, with any divestment a company will be aiming to:
- Maximise the price of any business being sold;
- Not give any advantage to any competitor; and
- Hand over an asset which can be operated by buyer from day one (including minimising any disruption to the company).
In order to deliver this, it is suggested that a company should have (i) a dedicated team to work through the de-integration process, and (ii) a full time to divest the business (just as you would in an M&A transaction).
The company will also need to ensure that employees are not distracted during the process, which may involve establishing some form of incentive package.
Who to sell to?
Part of identifying potential candidates for divestiture is also identifying potential acquirers. A company will typically focus on who will pay the highest price and whether one buyer is better than another from a strategic perspective.
It is important to remember when marketing to acquirers that a company is not just selling an asset, but it is also providing them with the capabilities for them to derive further value from it.
The most important aspect of any divestment is communication. The company needs to be able to carefully articulate the deal to its employees, the business unit employees, the potential buyers and the market. Any failure to properly articulate the deal can severely impact the business and/or the value it can realise from any disposal.