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Divestment activity to continue at pace as half of companies plan to divest three or more businesses in next three years

28 December 2012

  • Offloading non-core assets is primary reason for divestments but 21% have done so purely to improve their financial position;
  • 36% of companies only complete strategic reviews when a business unit is underperforming;
  • Financial services, consumer business and oil and gas sectors to be focus of activity;
  • Just one in five companies has sold a divested business to private equity.

Slow growth and difficult debt markets are forcing companies to reassess their business portfolios, according to a new report by business advisory firm, Deloitte.  Nearly half of the companies surveyed for the report, Is breaking up hard to do?, say they plan to divest three or more business in the next three years, with over 90% intending to divest at least one of its businesses.

Although divesting non-core assets is seen as the primary motivation for such activity, around a fifth of respondents have also sold a business unit just to improve their financial position.  This indicates that a significant proportion of divestment activity has been driven by distress situations.  The report also found that 36% of companies only conduct a strategic evaluation of individual businesses when they are already underperforming, although 51% carry out such assessments on an annual basis.

Dan Beanland, partner in the corporate finance practice at Deloitte, said: “Whilst we expect the overall rate of divestment activity in the next three years to be broadly similar as the past three years, there are differences in the motivations for companies to sell.  In the past, much of the activity has been fallout from the financial crisis with companies taking remedial action to shore up their finances.  This will continue to some degree, but we expect to see a far greater proportion of activity in the coming years occurring due to companies taking a strategic decision over the future direction of their business.

“Our biggest concern from this survey is that over a third of companies only evaluate individual business when they are already underperforming.  Companies that regularly review the performance of their individual business units are likely to generate higher prices when they come to sell.  Corporates need to look more closely at the private equity model, where exit planning is incorporated into their business plan from the start.”

The financial services, consumer business and oil and gas sectors are likely to see a higher volume of divestment activity in the years ahead, according to the report.  

Beanland added:  “Capital adequacy rules and risk compliance requirements contained in Basel III, Target 2 and Solvency II regulations are likely to lead to further financial services divestments.  In the consumer sector, below trend growth in Europe will result in assets being sold off, while in oil and gas, an increase in investments into higher margin upstream businesses has resulted in the divestment of downstream activities.”

The report found that just 10% of divested assets have been purchased by domestic private equity houses, with a further 10% bought by cross-border private equity firms.  In contrast 41% of businesses were divested to a domestic corporate, with 38% going to a cross-border corporate.

Beanland said: “Businesses tend to have a preference to sell to trade buyers because they have a deeper relationship with them and believe the deal process will be smoother and therefore generate higher value than with a private equity firm.  However, opening up to include private equity has the potential to generate a higher deal value.”

Ends

Notes to editors:
40 companies took part in this survey.  All of the respondents were either FTSE250 or private companies of an equivalent size.

About Deloitte:
In this press release references to Deloitte are references to Deloitte LLP, one of the country's leading professional services firms.

Deloitte LLP is the United Kingdom member firm of Deloitte Touche Tohmatsu Limited (“DTTL”), a UK private company limited by guarantee, whose member firms are legally separate and independent entities. Please see www.deloitte.co.uk/about for a detailed description of the legal structure of DTTL and its member firms.

The information contained in this press release is correct at the time of going to press.

Member of Deloitte Touche Tohmatsu Limited.

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Mark Smith
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Deloitte
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