Transaction news: March 2014

Selling Assets is an important way for companies to raise capital

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Eighty percent of global executives that based divestment decisions on a strategic portfolio review saw an increase in value of the remaining business following the divestment, according to a new report from EY.

The 2014 annual Global Corporate Divestment Survey which surveyed more than 700 corporate executives globally, also reveals that 88% of companies felt they left money on the table when divesting, at a time when no company can afford to lose deal value.

“We’re seeing more interest in divestment activity both globally and in Australasia,” says Stephen Lomas, EY Asia-Pacific Divestiture Advisory Services Leader Transaction Advisory Services.

“After a period of divestment activity driven by a need to repair balance sheets and pay down debt, we are now seeing companies becoming much more strategic with their divestment decisions aligning them more closely to focus on what is core to the future strategic direction of the business,” Lomas says.

Survey reveals three leading practices

EY’s 2014 Global Divestment Survey results revealed three best practices to consider when undertaking a divestiture:

  • Companies must know their core business

    Gaining an accurate and complete picture of what the core business looks like is key for reaping the full value of divestment programs. Senior leadership need to recognise core competencies and what differentiates them from their competitors. They need to be clear about the future direction of the business and what is critical to the ability to deliver this vision.

    As part of this, regular and up-to-date portfolio reviews are a vital part of the divestment process.

    Companies using a recently developed model of their core business consider portfolio reviews as more effective and conduct divestments that are better received by their investors because the decision to divest can be clearly aligned to the future direction of the business. 

    In the Global Divestment Study, 85% of respondents saw an increased valuation multiple in the remaining business by basing the divestment as a fresh definition of core operations.

    A portfolio review process can also help remove some of the emotion from the decision to divest an entity, helping executives to be very clear on their corporate aims and how best to meet them. 

  • Make better-informed decisions

    Companies need to be able to make informed decisions when divesting and this requires access to quality financial data and skilled staff that can ask the right questions, bring all the information together and interpret that data efficiently.

    This happens when senior management leads portfolio reviews and diversely skilled teams analyse robust business unit performance and industry benchmarks.

    Executives believe that improved industry benchmarks (45%) and better business unit data (39%) would increase portfolio review efficacy.

  • Act strategically

    Divestments are strategic tools. In the Global Divestment study, respondents acknowledged that an opportunistic divestment was much less likely to result in a positive share price reaction. 

    When companies think strategically and act on portfolio-review findings, it increases valuation multiples post-sale. Fifty three percent of executives believe portfolio reviews would be more valuable if companies dedicated resources to act on review results.

    “These leading practices might seem obvious, however, it is surprising how many companies do not consider all of these when making divestment decisions - causing them to leave money on the table and miss out on full value of the deal,” says Lomas.

Why divest now?

Divesting business units that are no longer strategically aligned with companies’ core offering allows management to reallocate capital to higher-growth areas, and helps them create a more focused, better defined organisation that investors would value.

“We live with continuous change. Whether it is technological innovation, shifting consumer demands or increased investor scrutiny, companies need to be proactive in actively managing their business portfolios, reassessing what is ‘core’, effectively allocating capital, meeting market needs and driving long-term growth,” says Lomas.

Planned divestments and the M&A story for 2014

The divestment plans of global executives will be a vital part of a developing M&A story for 2014. January could see the highest value recorded in the first month of the year in some time with three US$10b+ megadeals already announced in US, we are seeing a very robust start to 2014.

38% of Australasian executives are planning a divestment in the next two years ranging from full sale, carve-out, demerger and IPO according to our survey. This suggests that appetite for divestment continues to increase.

“Companies are realising that divestments are a growth tool, similar to acquisitions,” concludes Stephen Lomas.

“Those that adopt leading practices and are clear on their core business, are completing divestments that achieve higher sales prices and are rewarded by investors through stronger valuation multiples on the remaining business.”

Download the full Global Corporate Divestment Survey.