The value of UK carve-out deals has increased 182 per cent to GBP30.8 billion in the past year as major corporates dispose of businesses that are no longer relevant to their long-term strategy, shows research by RPC, the international law firm.
The value of UK carve-out deals has increased 182 per cent to GBP30.8 billion in the past year as major corporates dispose of businesses that are no longer relevant to their long-term strategy, shows research by RPC, the international law firm.
As well as a way of shedding non-core assets, carve-outs can help firms strengthen their balance sheets by raising capital from those disposals. The coronavirus pandemic has encouraged companies to focus their efforts on the more “core” or profitable parts of their business and consider selling off those businesses that are “non-core” to their strategy and/or either consume too much capital or executive time.
The biggest deal over the past year saw the GBP14.2 billion sale of a UK-based electricity provider to a national utility company. Other notable deals include a chemicals firm buying the petrochemical assets of an oil and gas major for £4 billion, and a medicine wholesaler buying the pharmacy of a large retailer in a deal worth GBP4.8 billion.
Jeremy Cunningham, Corporate Partner at RPC, says: “The commercial rationale for carve-out deals ranges from financial or investor-related pressure to strategic or regulatory, amongst others. Businesses are often separated and prepared for sale on the basis that they have the potential to grow or be valued or leveraged at different rates and in a different way compared to the retained business. The value of carve-out deals has increased significantly during the pandemic as companies have taken strategic action to dispose of non-core businesses and assets, raise much-needed capital and focus on their strengths.”
“Carve-out deals are often more complex than the acquisition of a stand-alone business which can narrow the potential buyer market. However, this can also present an opportunity for buyers to acquire assets at a lower price in order to mitigate these complications and offer synergies and economies of scale to buyers operating in the same space.”
The complex legal, operational and financial considerations in a carve-out deal often relate to separation issues and include the challenges of assessing the value of the business to be carved out and operated on a standalone basis or as part of a wider buyer group.
Separation issues to be addressed invariably relate to a wide range of assets including intellectual property rights, IT, real estate and transitional arrangements to allow the spun-out business to stand alone in terms of payroll, tax, HR and other business support services. Equally, the business being sold and the retained business often share contracts, assets and people, all of which need to be handled carefully to avoid value leakage and loss of supply, etc – TUPE and pensions are often critical areas to address early in carve-out deals. How costs have been shared between the parent company and the business being spun out will also impact the value of a deal and will be subject to significant scrutiny.
Despite the significant increase in the value of carve-outs over the past year, the total number of carve-out deals fell to 26, compared to 34 the previous year.
Tom Purton, Commercial Partner at RPC, says: “It is now very rare for a corporate deal to not have some element of separation involved. Businesses rarely operate on a truly standalone basis within corporate groups. Having the right team to support the separation process and ensure both the buyer and seller have what they need to move forward is a critical part of making carve-out deals successful. ”
