Divestments are vital to many businesses’ strategy. Leading companies focus on selling assets as rigorously as acquisitions. EY’s recent annual Global Divestment Study highlighted how the best performing companies regularly perform portfolio reviews.
However, it can be tough for M&A teams to sell at short order businesses identified as non-core and/or non-performing during a review. Many M&A directors wish they had a rigorous, efficient way of challenging the exit timing and strategy. Many believe that, with a little time and investment, many assets could generate a better exit value/timing than if sold immediately. If the aim is to release capital, selling a business on a rising, rather than falling, curve is better.
Faced with the instruction to divest, how should the M&A team engage with the decision to sell, whilst challenging the timing and manner of divestment? What’s the optimum divestment strategy? What analysis can the company perform efficiently to assess whether, with measured investment and time, the sale could play better to potential buyers’ equity cases? And can this be performed without losing momentum after the portfolio review?
Divestment Trigger Checkpoint
The objective methodology we use in this scenario – the Divestment Trigger Checkpoint – can be deployed in five days, and is both focused and cost effective in its approach.
It focuses on two areas – divestment rationale and exit readiness – to produce a balanced exit plan. We find that a typical “hold” period of nine to eighteen months can often generate increased sale value (based on proceeds, reduced execution risk and a more predictable close) than an immediate sale.
From a strategic perspective, corporate portfolio reviews look at the value to the seller. Once companies decide to divest, that issue becomes secondary and potential buyers’ views become the focus. A buyer shortlist should be drawn up (approximately 3-5 businesses), supplemented with their explicit equity case for buying the business.
When estimating the value to the most likely buyers and the cost/effort to dispose of the asset, companies should run the assessment of the business with and without the hold period. This reveals differences in value, makes for a more precise exit execution plan and can support the case for holding the asset for longer before selling. Companies need to be honest in their appraisal: “Have we brought an independent assessment of the buyers’ views of this business into our thinking?”
The review needs to cover the operational challenge. Given the cash and people needed to execute: does the plan generate sufficient added value? How does the current state of the business versus its later potential – after immediate investment – compare? Do we have the answer from the view of the most likely buyers?
The operational assessment identifies implementation “blind spots” that increase the execution risk. Examples include broken commercial terms/supply chains, lost synergies, stranded costs, and a lack of clarity in the assets, people and trading that comprise the business. Operational precision at this time makes the difference to a divestment strategy.
By reforecasting the business finances on the assumption that it will be sold, clients are able quickly to identify where buyer information is lacking. It often reveals a mismatch between the vendor’s KPIs and those that will underpin a buyer’s equity case. Experience shows that the most common differences include revenue, margin, constant currency and working capital definitions. Focusing on these aspects of financial information helps the business line up with the bidders’ equity cases.
Reforecasting also acts as a “data cleanser”. Internal trading and recharges and funding, non-recurring items and irrelevant group items obscure the financial data and the evidence of value to bidders. Cleansed data and a reforecast based on assumptions predicated on a change of owner helps present the business’ potential.
This process identifies potential stranded costs post divestment. It also helps model the retained group – including the impact of, for example, reduced economies of scale, one-off costs or the vendor’s residual tax rate.
Armed with this strategic, operational and financial analysis, the M&A team can develop a clear strategy of how it will market the business for sale, who might buy, at what price and over what timescale.
Exit Readiness Diagnostic
This diagnostic focuses on the state of the business to be sold, how its management will deliver the structural, operational and financial aspects of the sale process at the pace determined by the M&A team. It identifies the steps that the business needs to execute, what needs to be done to fill any gaps in the evidence to be presented to buyers, and the tasks that need resources and expertise. It also helps the M&A team focus on the four key stakeholders to the sale – vendor, management, bidders and advisers.
With the two elements of the Divestment Trigger Checkpoint dossier to hand, the M&A team can decide whether to accept and proceed with the divestment without delay, or to challenge with a clear rationale as to why a delayed sale is preferable.
The key here is that the process is fast, efficient and does not take too much time or money. We know it’s a process that can be done in five days. The benefits are worth the intervention, even if they involve tough conversations.