Divestment intent remains near record levels as Southeast Asian companies streamline to compete

Singapore, 19 March 2019

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  • 85% (APAC: 82%) plan to divest by 2021, up from 26% (APAC: 35%) two years ago
  • 85% (APAC: 81%) say that desire to streamline operating models will impact divestment plans
  • Need for sellers to address growing valuation gap with buyers, as 70% (APAC: 71%) report price gap of at least 20%

Companies are gearing up to divest business units to gain competitive advantage in the face of changing technology, and sector convergence, according to the EY Global Corporate Divestment Study 2019.

The annual survey of more than 900 global executives, including close to 320 in Asia-Pacific, including Japan and India (APAC), of which over 70 are from Southeast Asia (SEA), shows the elevated environment for divestment activity is poised to continue, with 85% of SEA companies (APAC: 82%) planning to divest within the next two years. This continues to reflect a significant increase since 2018 from low previous averages – SEA divestment intentions was at just 26% (APAC: 35%) in 2017.

More than four out of five companies (SEA: 85%, APAC: 81%) 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.

Vikram Chakravarty, EY Asean Transaction Advisory Services Leader says:
“Corporates in Southeast Asia are starting to go through or have been through a paradigm shift, and are now looking to streamline their operating model across 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 without turning to capital markets.

“Management teams realize that business units that are underperforming or deemed to have a weak competitive advantage are not necessarily bad assets. Instead, these may have been neglected or were 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 (SEA: 73%, APAC: 79%); cross-border trade agreements (SEA: 60%, APAC: 71%); and tax policy changes (SEA and APAC: 60%). Interestingly, SEA companies are most concerned with the legal and regulatory developments in 2018, as 73% – the highest in APAC (45%) – viewed regulatory change as a major geopolitical challenge that would impact divestment plans.

Tech-driven divestments increasing

Seventy-one percent (71%) of SEA companies, up from 68% in 2018 (APAC: 75%, up from 68%) see the number of divestments increasing from technology-driven changes, such as changing consumer preferences, and supply chain development.

Fifty-eight percent (58%) of SEA companies (APAC: 53%) reinvested proceeds from their last divestment into new products, markets and geographies. This strategy helps companies to better respond to cross-sector opportunities and can create longer-term value for shareholders and the company.

Abhay Bangi, Partner, Transaction Advisory Services at Ernst & Young Solutions LLP says:
“Convergence across industries has changed the competitive landscape for some companies in previously well-defined industries. Their challenge 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.”

Industry consolidation is also a major factor driving companies to pursue inorganic growth strategies to win a higher market share. In 2019, 78% of SEA respondents (APAC: 81%) are expecting divestments to drive industry consolidation, up from 54% (APAC: 63%) last year.

Why aren’t companies getting the price they want?

According to the survey findings, having a strong value story, backed by early preparation that will address the questions of a broad buyer pool, is more important than ever. More than two-thirds (70%) of SEA sellers (APAC: 71%) say the price gap between buyers and sellers is greater than 20%; last year, only a quarter of sellers (SEA: 26%, APAC: 30%) reported such a gap.

Chakravarty says: “Sellers across Southeast Asia 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. We have seen sellers with untidy accounts, who lack a growth story and do not dress a business up appropriately for sale. Furthermore, many sellers do not bring in the bidders into a thoughtful and productive process to drive full value realization.”

A target operating model is especially important to private equity buyers who have plenty of capital to deploy but lack business synergies, it is critical to instill confidence that the carve-out has been fully prepared for separation.

Daniel Tan, Partner, Transaction Advisory Services at Ernst & Young Solutions LLP says:
“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, with 77% of SEA companies (APAC: 71%) saying they held on to assets for too long. Globally, sellers who do not hold on to assets for too long are twice as likely to secure a better transaction price. As well, 60% of SEA executives (APAC: 61%) say shortcomings in their portfolio or strategic review process have sometimes resulted in failure to achieve the intended divestment results.

Chakravarty concludes: “Southeast Asia 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.”

View the study online at https://www.ey.com/en_gl/divestment-study

Follow us on Twitter: @EY_TAS (#divestments)

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About EY Transaction Advisory Services (TAS)

How you manage your capital agenda today will define your competitive position tomorrow. We work with clients to create social and economic value by helping them make better, more-informed decisions about strategically managing capital and transactions in fast-changing markets. Whether you're preserving, optimizing, raising or investing capital, EY’s Transaction Advisory Services combine a set of skills, insight and experience to deliver focused advice. We can help you drive competitive advantage and increased returns through improved decisions across all aspects of your capital agenda.

About the EY Global Corporate Divestment Study

The EY Global Corporate Divestment Study focuses on how companies should approach portfolio strategy, improve divestment execution and prepare for a widening pool of buyers in a resilient yet volatile market. The results of the 2019 study are based on more than 930 interviews with corporate executives worldwide surveyed between September and November 2018 by Acuris. Key sector findings can be found at ey.com/divest.