Posted: 29 Jun. 2020 5 min. read

The divestment dynamic

We interviewed Australian corporate heads of M&A and identified key trends influencing deal activity and the expected impact of COVID-19 to their business in 2020. You can download our full The deal in focus report for data findings from our interviews and actionable insights from our M&A leaders.

Below, we share the highlights from our theme, Divestments. 

 

Key actions for sellers

  • Reassess portfolios now to understand which assets are no longer core and should be exited
  • Use robust economic forecasting and scenario planning to map out what the business will look like through different stages of the crisis – giving the buyer confidence about business prospects is critical
  • Act quickly to improve the underlying value of an asset; accelerate business model improvements and transformation initiatives where these make sense and contribute to value
  • Engage well in advance with potential buyers, including private equity firms, to ensure the equity story is fully understood.

 

Protecting and maximising value

The ongoing economic pressure will likely lead to divestment of both non-core and highly sought-after assets that do not typically come to the market.

With a limit on potential buyers, sellers should be cautious divestments do not result in transaction prices substantially below their fundamental values.

Private equity and cash-rich domestic corporates are well positioned as possible buyers, and sellers need to engage with them well in advance to smooth the sale process.

Understanding who potential buyers are will help in preparing and positioning assets for sale, as will thinking through the end game, as this can influence the value when exiting non-core assets.

There are three ways sellers can protect and maximise value from divestments:

  • Establish value: Be clear about how and who you envisage divesting the asset to and do this by having a clear vision on preparing your divestment strategy.
  • Enhance value: Include all value enhancing considerations in your equity story. As much as possible ensure these changes have been implemented. Make sure production, footprint, commercial, and financial value optimisation strategies are ‘baked in’ to the equity story and the benefits materially ‘run rated’ before and during the sale process.
  • Defend value: Be prepared for the transaction process and get the basics right. Do this by ensuring single sources of truth, robust data and business controls, as well as having an understanding of your deal breakers.

These factors can be the difference between getting a deal done and a buyer walking away.

Divestment strategy

The divestment dynamic building in the corporate world will continue to gather speed. A critical part of the planning is analysis of the value of assets to inform divestment decision making, as their overall value may materially improve if poor performing assets are sold off.

Boldness will be required with divestments to avoid them weighing down the agility of the rest of the business for the ‘next normal’.

As a seller, a clear separation plan outlining the operational complexities of exiting the business, value enhancement opportunities for a buyer to consider (through adopting a buyer’s mindset), possible business risks and mitigating strategies for divesting and exiting are all critical now more than ever.

Sellers who are successful in communicating these effectively – from the way it’s operated today, to the implications of COVID-19 on the cost and value and potential synergies for buyers – will be more likely to deliver better returns.

Divestiture trigger points

  • Fund strategic investments (asset recycling)
  • Shareholder activists pressure company to evaluate its portfolio
  • Desire to unlock value and increase investment potential
  • Pressure to focus on core assets

 

Read the next blog in our M&A series on Why accelerating your digital transformation will pay dividends.
Or download our full The deal in focus report for data findings and insights from our interviews with ASX200 M&A leaders. 
 

 

More about the authors

Jamie Irving

Jamie Irving

Partner, M&A Transaction Services

Jamie leads the national practice of Transaction Services.  He has specialised in transaction services since 1998, with extensive experience working with both purchasers and vendors on transactions.  Jamie’s clients have included both corporate and private equity clients. Jamie has worked in Australia and the United Kingdom and on cross border transactions including Europe, USA and Asia. He is a chartered accountant and a graduate of the Australian Institute of Company Directors.

Wouter Timmer

Wouter Timmer

Partner, Financial Advisory

Wouter is a Partner in the M&A, Integration and Separation team. He has over 12 years of merger and acquisition consulting experiences and specialises in advising corporate clients with the design, planning and delivery of (cross-border) mergers and carve-outs. Wouter has worked across most industries with a focus on consumer goods, financial and professional services, life sciences, communications, media and entertainment.

Tony Garrett

Tony Garrett

Partner, Mergers and acquisitions advisory

Tony provides Mergers and acquisitions lead advisory services to both private and public companies on mergers, acquisitions, divestments, public and private capital raising transactions. He has in excess of twenty five years experience across a broad range of industries including Consumer, TMT and Services Businesses. He has individually led or overseen in excess of 150 transactions in his career.