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M&A Transformers Episode 01

Insights from Essentra plc's strategic separation and refocus

Core components

Insights from Essentra plc’s ambitious separation and strategic refocus to build strength as a pure-play components business. By Dr. Jason Caulfield.

Essentra’s decision, at the end of 2021, to transform from diversified manufacturer to pure-play components business, was a big move. It resulted in the £1bn UK plc carving out and selling its Packaging and Filters divisions, comprising two thirds of its business, within just 12 months. Now, after a year of significant change, as Essentra settles into its new future, we reflect on some themes from its transformational M&A journey.

True to the saying that ‘less is more’, simplifying a diverse business - bringing it back to a singular market focus and purpose, as Essentra has – can be in the best interests of the business and an attractive choice in turbulent times. For Essentra, it acknowledged a growing mismatch between the investment needs of its Filters business and those of the wider organisation. It also recognised differences between its three divisions which made realising synergies between them difficult. Former Chief Executive, Paul Forman likens them to grown up children: ‘At some stage they each have very different personalities and we needed to find the right avenue for each so that they could thrive in their own ways, because what’s good for a packaging business is not necessarily good for Components.'

The double carve out - ripping off the sticking plaster

In early 2022, Essentra began setting up its three divisions as standalone businesses. The plan was to retain Components as a plc and to maximise sale value for Filters and Packaging by carving them out as ready, off-the-shelf assets. It meant that when the right buyers came along, the sales could progress at lightning speed. Packaging went from sign to close in three months and Filters was even faster - just two months, which is rare for a deal of that size.

Running multiple concurrent carve outs is often the most credible move for those who have set their sights on refocussing their core business. It’s a meaningful signal of commitment to your strategy and whilst it can be challenging (and particularly demanding on internal resources), there are other upsides. For example, it compresses the duration for which the remaining organisation needs to provide transitional services and saves on adviser fees. For Essentra, ripping off the sticking plaster minimised disruption, preserved value and avoided a drawn-out period of uncertainty for employees and other stakeholders.

 

Running a dual track IPO and M&A process

Essentra sold its Filters business to a private buyer in early 2023 but it had pursued a dual track for a while before that – working towards either an IPO or M&A transaction. Keeping both options open helped to strengthen its market position and maximise value. ‘We really did give ourselves maximum optionality and keep an open mind,’ says Paul. ‘You’ve got to do the right thing by shareholders so price is an important consideration, but you also want to find a home where these people can thrive.’

There are synergies in preparing for an IPO and trade sale simultaneously but it takes guts and commitment. The additional pull on internal resources adds to the transaction risk and can detract from business as usual and business growth. It can also make it difficult to define the separation strategy – for example, the decision to create a fully standalone business or one tailored to fit into the acquiring business.

The trick to achieving objectives and minimising sunk costs in a dual track process is to plan carefully and identify the right moments in the process to make a ‘go/no go’ decision on IPO vs M&A (or continue with both). In Essentra’s case, activities were sequenced so that tasks were only executed when the M&A transaction route became clear, avoiding potentially redundant steps and limiting cost.

Tips for running an effective dual track IPO and sale process

Consider a dual track from the outset.

Owing to the extra work required for an IPO, it’s much easier to start with an IPO in the mix than to add it down the line.

Stage gate your preparation.

Project manage tightly to ensure the viability of each track and map out the key decision points at which to determine if a preferred track should be selected.

Pursue both tracks seriously until committing to one.

A dual track requires commitment and guts. It’s easy to lose focus on both tracks – for example, when a trade buyer comes into the picture. But flip-flopping between each track won’t create competitive tension within the market and increases ambiguity for the in-perimeter employees and leadership.

Prepare one version of the truth.

Ensure that the value story and financial information prepared for trade and equity buyers tallies. For example, IFRS conversions can lead to a mismatch which can undermine credibility.

Untangling legal entities

An organisation’s legal and people structure will influence the complexity of a separation and this area brought challenges for Essentra. Paul likens it to untangling string: ‘You’ve built up a business here through 50 years of acquisitions and it hasn’t always been tidy so you’ve got a lot of intertwining. You have a ball of string and you’ve got to take some of the threads out.’

In preparing separations and transactions, it’s not uncommon to find that some employees are not in the legal entities they are assumed to be in, and it may be necessary to re-contract employees to different entities. This needs a considered approach. Re-contracting can be unsettling to employees, have tax implications, require lengthy notary and legal procedures and trigger pension funding issues for the business. Pre-deal efforts to clean up the legal entity and people structure are worthwhile. They can significantly reduce deal complexity and increase attractiveness, enabling a clean and quick transaction.

 

Being open and honest

Chief People & Culture Officer, Oshin Cassidy is open in admitting that mistakes were made along the way but that they were dealt with, with honesty and pragmatism. ‘Learn from it and move on,’ was the mantra. Creating an open and honest dialogue is essential in building trust among those leading the change but also with employees who may feel uneasy about the uncertainty it brings.

Frequent and honest conversations with employees is critical throughout the process and shouldn’t be limited to what is legally required as this can give the impression of ‘forced not wanted’ communication. Paul favoured openly sharing the process steps and updates to the degree it was possible. ‘We chose to share partial information early rather than wait until we knew absolutely everything. Leaving people in a communications vacuum for months and months is a worse outcome than saying, “we think we might have a buyer by this date”.’

 

Keeping a focus on the future

While it’s easy during a deal for organisations to get absorbed in the detail of execution, it’s essential to keep an eye on the future remaining business. Paul believes that having a degree of separation from the day-to-day mechanics and keeping an eye on the bigger picture in his Chief Executive role was key to this, along with the additional distance and oversight brought by the Board.

Before the separation, Essentra set out a new strategic vision, operating model and organisational design for the future Components plc along with a clear roadmap for its growth. Having a solid plan has kept a focus on growth throughout the transition. Essentra also considered how decisions throughout the separation process impacted the operation of the remaining Components business - addressing potential risks of stranded costs and planning to reduce shared central functions to an appropriate size as transitional services wound down.

Essentra’s story is a reminder that companies always have a choice about their focus and purpose. It has stopped to ask itself what it wants to be and has used M&A to realise that vision incredibly quickly, bringing new growth and investment potential. Having returned £150m to investors and paid down debt, Essentra is also using the proceeds of the sales to strengthen its position through investment in bolt-on acquisitions and organic growth.

Chief Executive, Scott Fawcett comments, ‘2022 was a year of significant strategic change for Essentra with the organisation delivering two significant disposals and undertaking significant separation work to deliver on our strategic intention. I’m incredibly proud that the Components business is the rock on which the new Essentra has been built and I have no doubt that the next chapter will bring us even greater opportunities for future growth.’

 

How Deloitte supported

Deloitte’s integrated M&A team has supported Essentra through the separation and sale of its filters and packaging businesses in a number of ways including: development and documentation of separate operating models for each division (including the retained Components business), preparation of carve-out financials and standalone cost adjustments, analysis of value creation opportunities, scoping and costing transitional services, separation project management, sale side due diligence (financial, operational, IT, Tax, ESG), tax structuring, working capital modelling, capital markets advice, SPA support and completion accounts.

 

Timeline

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