The divestment dynamic

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.