Why portfolio divestments underperform the market

Divesting part of a business can be a strategically smart move for portfolio businesses providing the opportunity to:

• Realise the value of assets
• Raise funds
• Focus operations

Analysis of transactions since COVID suggests that trade sellers achieve multiples 40% lower than the rest of the market with intel suggesting that many proposed transactions are not completed. Given there reasonable expectation that directors maximise shareholder value, the question is why, when many sellers will be amply supported by professional advisors and even have in-house corporate finance capabilities.

Our experience of working with clients to improve value creation in divestments are three key considerations merit attention: 

1. Information provided: Simply, this can fail to meet market expectations, perhaps because the assets being divested lack management attention and intellectual capital. Smart buyers expect more than the financial and legal data room. While a listed company is constrained by how much information it can provide potential buyers, these limitations are often not applicable to the divestment of portfolio assets. Simply put, the assets are presented as not of interest to the current custodians.
2. Sellers perspective: Most divestments are signposted as such rather than presenting an investment opportunity. A lack of planning creates a sense of a fire-sale (especially when assets have already been run down) and not enough consideration goes driving deal tension. Much of this work can happen way ahead of any public announcements to ensure that the market opportunity is objectively assessed, which can also help determine both the timing and the process. From the potential buyers’ perspective, not only are assets that are valued by the seller going to be more attractive but they may also need time to coordinate the resources to process and complete a transaction. 
3. Not anticipating the price chip: A smart deal process will be able to anticipate many of the potential triggers, such as normalised working capital negotiations and adjustments for TUPE consultations and transitional services. Very often the potential buyer will have less developed corporate functions and resources and so these issues can easily be deal-breakers. Experience also suggests that sellers can underestimate the impact of the divestment on their ongoing business, including the working capital, loss of talent or the need to reduce overheads alongside the loss of contribution from the divested assets.

We support demanding corporates run effective divestment plans to optimise value creation.

If you want to know more, contact us.