3 minute read 4 Apr 2019
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Divestment intent remains near record levels as Southeast Asian companies streamline to compete

By

Vikram Chakravarty

EY ASEAN Transaction Advisory Services Leader

Experienced strategy advisor. Thought leader in Asia business. Wine connoisseur, avid squash player, ardent cricket fan and doting father.

3 minute read 4 Apr 2019

Companies in Southeast Asia are gearing up to divest business units to gain competitive advantage in the face of changing technology, and sector convergence.

A
growing desire to be more agile as companies in Southeast Asia (SEA) face new and existing competition is driving divestment intent. The EY Global Corporate Divestment Study, which surveyed more than 900 global executives, of which over 70 are from SEA, highlights that the elevated environment for divestment activity is poised to continue, with 85% of SEA companies planning to divest within the next two years. This continues to reflect a significant increase since 2018 from low previous averages – SEA divestment intentions were just at 26% in 2017.

Divestment intentions

85%

of SEA companies are planning to divest within the next two years.

Why so many companies are divesting

More than four in five SEA companies (85%) say streamlining their operating model will impact their divestment plans this year, demonstrating a growing desire for companies to be more agile as they face new and existing competition.

As corporates in SEA are starting to go through or have been through a paradigm shift, they are looking to streamline their operating model into key geographies or core products. Many are looking at technology investments to enhance and improve existing capabilities. Divesting non-core geographical assets or products is a way to fund future investments into capital market.

Management teams are realizing that business units that are underperforming or deemed to have a weak competitive advantage are not necessarily bad assets. Instead, these may have been not afforded the right focus. With the right investor, these assets could be strategically grown or utilized better.

The major geopolitical shifts that will impact divestment plans are the increased cost of operations (73%), cross-border trade agreements (60%) and tax policy changes (60%).

Divestment decision factors

85%

of SEA companies say streamlining their operating model will impact their divestment plans this year.

In this year’s study, SEA’s view on the market has changed noticeably in comparison with 2018. Seventy-one percent of SEA companies see the number of divestments increasing from technology-driven changes, such as in consumer habits and supply chain. This view has increased from last year, where 68% of respondents saw the number of technology-driven divestments increasing.

Divestment drivers

71%

of SEA companies see the number of technology-driven divestments increasing.

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The study found that 58% of SEA companies reinvested proceeds from their last divestment into new products, market and geographies. This strategy helps companies to better respond to cross-sector opportunities and can create longer-term value for shareholders and the company.

Convergence across industry has changed the competitive landscape for some companies in previously well-defined industries. Hence, their challenge now is to find new ways to innovate for the next generation consumer, and drive competitive advantage and shareholder value. Companies that show focus through a well-defined strategy are being rewarded, which drives the need for portfolio rationalization and divestment of non-core assets.

Another key trend that SEA companies are seeing is industry consolidation with companies pursuing inorganic growth strategies for a higher market share. In 2019, 78% of SEA respondents are expecting divestments to drive industry consolidation, up from 54% last year.

How to maximize value for future divestments

The survey highlighted that having a strong value story, backed by early preparation that will address the questions of a broader buyer pool, is more important than ever. Seventy percent of SEA sellers say the price gap between buyers and sellers is greater than 20%, up from 26% a year ago.

Over the past year, sellers are also facing an increased gap in what they think their business is worth and what buyers are willing to spend. Over 70% of Asia-Pacific respondents reported a gap of more than 20% between sellers’ expectations and buyers’ offers, up a significant 41 percentage points from 2018.

Price gap

70%

of SEA companies report a 20% price gap between seller and buyer expectations.

Sellers across SEA are still leaving money on the table in their divestments. Since many sellers are new to the divestment field, they tend not to manage the exits well. It is also important that sellers bring in the bidders into a thoughtful and productive process to drive full value realization.

Additionally, a target operating model is especially important to private equity buyers that have plenty of capital to deploy but lack business synergies. Hence, it is critical to instill confidence that the carve-out has been fully prepared for separation. Quality assets are harder to come by and private equity buyers are competing hard for these assets, which makes them very important buyers. However, businesses will need to prepare a credible and supportable operating model early to get this investor pool comfortable, and it would make sense to engage sell-side advisors in advance.

Speed of divestment also continues to be a concern, as 77% of SEA companies believe they held on to assets for too long. Sellers who do not hold on to assets for too long are twice as likely to secure a better transaction price.

Speed of divestment

77%

of SEA companies believe they held on to assets for too long.

SEA corporates are showing a shift towards deleveraging as a tool for more effective management of their capital agenda. A well-defined portfolio strategy – addressing the timing of sale, pre-sale preparation and the consistent use of advanced analytics – will help them retain value during the deal process.

Summary

The EY Global Corporate Divestment Study focuses on how companies should approach portfolio strategy, improve divestment execution and future-proof their remaining business.

About this article

By

Vikram Chakravarty

EY ASEAN Transaction Advisory Services Leader

Experienced strategy advisor. Thought leader in Asia business. Wine connoisseur, avid squash player, ardent cricket fan and doting father.