Increase in carve-outs despite Covid-19

A new survey by Intertrust, a global leader in providing tech-enabled fund and corporate solutions, reveals how Covid has impacted the decision making behind carve-outs.

During a recent webinar, addressing how best to create value through carve-outs, a third (33 per cent) of industry professionals said they intended to start looking for acquisition opportunities while 11 per cent planned on initiating a strategic review of potential carve-out opportunities.

A record level of dry powder in the market is a driving factor in the expected rise in carve-outs. M&A is also likely to play a big role in the restructuring of companies that have taken a financial hit as a result of COVID-19, as an increasing number of firms will look to offload business units to generate cash.

However, the survey reveals the added complexities of executing cross-border carve-outs in the face of a global pandemic. When asked to identify which areas would require the most attention in carve-out due diligence, over two fifths (43 per cent) cited the challenge of identifying and mitigating risks. This was followed by the ability of existing management to execute value creation strategies (29 per cent) and growth potential modelling (29 per cent).

When it comes to preparing for completion, half of respondents (50 per cent) cited the difficulty in ensuring that operating and financial models are ready from day one. This was followed by the challenges of negotiating transitional services and issues with the seller (25 per cent) and ensuring the compliance of local legal, accounting and tax regulations (25 per cent).

Daniel Jaffe, Managing Director, Market Offices at Intertrust, says: “Covid-19 has presented additional challenges to completing carve-outs, especially in the context of a cross-border setting. With activity levels expected to increase over the next few months, we are working closely with our clients to help navigate the added complexities of due diligence to ensure a smooth transaction.”

Olivia Tyrell, Lead Cross Border M&A Partner at Baker & McKenzie, says: “Even before Covid-19, our clients were exploring cross-border carve-out opportunities as a means to optimize balance sheets or deploy capital in anticipation of recessionary pressures.  As the economic and operational implications of Covid-19 and the global responses to it are better understood, companies are focusing again on this M&A staple as an element of their overall strategy.  While macroeconomic forces, logistical complications and reactionary governmental action will make cross-border carve-out transactions more complicated in the immediate term,  the overall risk landscape and corresponding mitigation tools are becoming more clear, which we expect will drive deal activity in this space.”

Marco Houscheid, Partner at PwC said: "While Covid-19 has led to a significant drop in M&A activity and an increase in business restructurings, we expect to see many opportunities for deals coming out of the crisis, as corporates will perform strategic reflections on their business portfolio and respond to shifts in their industries. As disposals and carve-outs will be back on the agenda, careful preparation, execution and implementation will be paramount to deliver a successful and value-maximising transaction."   

Tristan Nagler, Managing Director at Aurelius Equity Opportunities, adds: “We anticipate the number of carve-outs to increase as corporates look to rationalise their portfolios in response to the Covid-19 pandemic. Investors looking to take advantage of this must be capable, however. Our own survey revealed that a buyer’s ability to execute a transaction is twice as important as securing the highest price for sellers of non-core divisions, which is especially true in transactions involving cross-border complexity.”