(As originally published in FEI Canada F.A.R. member e-newsletter, May 2017)

Execute a divestment strategy that leads to a higher valuation

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By: Doug Jenkinson, EY Canada’s Divestiture Advisory Leader

Demanding capital markets, macroeconomic volatility and technological change are weighing on the minds of Canadian executives. In a world that seems to be increasingly complicated, Canadian companies are actively pruning their portfolio of businesses to keep up with disruption. As businesses become more streamlined, there are a few trends we’re seeing – as noted in EY’s Global Corporate Divestment Study 2017.

Firstly, when it comes to divestments, Canadian companies are digging deeper to identify non-core businesses. Almost two-thirds of our Canadian respondents’ last divestment involved a business that was 5% or less of their parent company. This is interesting because, often, the smaller the divestment, the more complicated it becomes. Yet, the majority of Canadian companies have done well to see these smaller transactions through to fruition.

We’re also seeing that these more complex divestments seem to be paying off. Once divested, 51% reported their divestment led to a valuation of the remaining business that exceeded their expectations. And arguably more important, 81% believe they have been effective in continuing to create value in their businesses.

From my experience, these strong results aren’t just luck. There are a number of things Canadian companies are doing to drive these better-than-expected valuations. Before, during and after a divesture, companies should be:

  1. Be thoughtful about buyers. Take the time to consider who and where buyers are, and how to deliver value.
  2. Conduct more aggressive and regular portfolio reviews. Apply pre-sale valuation creation initiatives, such as synergy opportunities to different buyer groups and develop revenue enhancement plans to compete globally.
  3. Use more vendor due diligence reports. These reports highlight the financial health of the company being sold, and in turn can lead to a quicker and more cost-effective sale. Although traditionally a European practice, almost half of Canadian companies have been applying this tool more frequently, compared to only 35% of their European peers.

According to EY’s report, while fewer Canadian companies are planning a divestment over the next two years compared to their global peers, they’re actually more open to opportunistic approaches. Meaning, while they aren’t necessarily proactively looking to sell assets, they aren’t going to turn a blind eye if the right offer approaches. 

As divestment opportunities pop up, Canadian companies should be exploring ways to highlight tax upsides to purchases, as well as make changes to enhance the revenue profile of the business prior to a sale. Leadership teams should continue to practice regular portfolio reviews and due diligence through the divesture process and beyond. Doing so will help to drive higher valuations, improve financial performance and create long-term value in the business after the transaction.