Carve-outs have become ever more popular in recent years, as market players seek different ways to raise or return cash, maximise shareholder / fundholder value, optimise a company’s operations or change the strategic direction of a group. While there has been a lull in recent months, we expect shareholder and LP pressure, along with the well-previewed expected deployment of private capital to come, will see corporate carve-outs back with a bang.
With that in mind, we have drawn together in this publication some practical tips and tricks (and traps to watch out for) from our recent experience of carve-outs across the globe.
Getting it right: practical tips to minimise value leakage
of value leakage. Planning and implementing a carve-out is hugely time intensive and inevitably will result in less focus on maintaining business performance during that process. Using temporary resource (including advisers) in the right areas at the right time can lighten the project management load and help bring experience in particular areas. Bear in mind though that when it comes to detailed operational planning, there can be no substitute for firsthand knowledge of the business in question.
world to your proposed plan.
Buyer Beware: Our top 6 things to focus on as a carve-out buyer
- Bridging the information gap – am I getting what I need? - A buyer is inherently at a disadvantage in a carve-out, as they have less ability to know whether a carve-out is being done well and what the impact on the carved-out business will be. Expert adviser support in diligence and contractual protection can help to some extent. But the best tool is to be clear about the value impact if you don’t get the information you need or an issue is not resolved. Nothing focuses a seller’s mind more than highlighting the direct correlation to purchase price or ability to do the deal.
- Create aligned incentive for both sides - Having the selling business retain a stake in the carved-out business may create complexity, but ongoing exposure can incentivise a seller to ensure the carve-out is done well. Earn-out or deferred purchase price can also have the same effect, in a less complex manner, if it is structured in the right way.
- Am I getting the right people and will they stay? - As a buyer, you need to be particularly alive to whether you have too many (or not enough) people, whether they are the right people and whether they will stay. Insist on meetings with senior managers of the carved-out business (without the seller, if possible) to help close the information gap, give comfort you have the right people (and identify where you need new hires) and help you craft effective incentivisation and retention arrangements to keep them. Investing time to work with the seller on employee comms can help make sure that people are enthused about the future and let you focus post-completion on moving forward, not fixing miscommunications from the past.
- Integration issues? - If failure to implement a carve-out well is near the top of the list of value-destroyers in a M&A transaction, then failure to implement an integration must be at the same level or even higher up. So if you are looking to integrate the carved-out business, focus on how you will do that at the time of acquisition and as part of your diligence, before it is too late. Similarly, be realistic about synergies and make sure to diligence potential blockers to those (e.g. exclusivity commitments in contracts).
- It won’t always be perfect - A buyer will need to accept in any carve-out that there will inevitably be plenty of rough edges. The key thing is to make sure that the separation actions that go to the heart of the business’s value are done correctly (and that you have appropriate levels of involvement in those) and you are well protected for risk if they have not been.
- Can contractual coverage solve the issue? - Creative contractual coverage can bridge value gaps on carve-outs and you need your lawyers to focus on possible solutions along these lines when identifying potential diligence issues. That might be warranties over having what you need to run the business following a separation, undertakings that separation will be implemented in accordance with an agreed plan, indemnities for specific separation risks or even bespoke milestone payments for separation actions. Amidst the urgency and noise of sale negotiations, the temptation may be to defer detailed separation discussions to post-signing – but a buyer should push to agree key separation matters upfront alongside the deal terms rather than relying on mere “agreements to agree” from a position of reduced leverage.
Global carve-out transactions require a depth of multi-specialist experience across many areas, including as corporate, intellectual property, technology, outsourcing and commercial contracting, regulatory and financing paths cross. That is where we excel.
Ageas Insurance Limited on the sale of its
UK commercial lines front book business to
AXA Insurance UK plc
Aviva on the complex disposals of its businesses in France, Poland, Hong Kong, Indonesia, Singapore and Vietnam
Bunzl on the carve-out disposal of its healthcare business to Mediq
Bupa on the divestment of part of its UK care home business to HC One and to Advinia Healthcare, involving highly complex carve-outs of 144 care homes from the existing operating Bupa companies
Centrica on the £2.85bn sale of its North American energy supply, services and trading business to NRG
Essentra on the disposals of its packaging and filters divisions by way of auction sales
Ferrovial on the divestment of the Amey group, including on the prior carve-out of certain business divisions
GSK on various transactions including the demerger of its consumer health business to form Haleon
Hibu Group on the sale of its US business to an affiliate of H.I.G. Capital
Interserve on the complex carve-out disposal of its Support Services division to Mitie
John Wood on the carve-out sale of its Built Environment consulting business to WSP Global, Inc.
Johnson Matthey on the sale of its diagnostic services business to Sullivan Street Partners
Just Eat Takeaway.com on the sale of its stake in iFood to Prosus
Marston’s on the merger of its brewing business with Carlsberg to create the Carlsberg Marston’s Brewing Company
Prudential and M&G on the demerger by Prudential of its UK business, M&G
Reckitt on the sale of its Infant Formula and Child Nutrition business in China to Primavera Capital Group and the disposal of its Scholl footcare products business to Yellow Wood Partners
The Restaurant Group on the proposed sale
of its leisure business
TOKIN Corporation on the sale of its electro-mechanical devices business to NTJ Holdings 1 Ltd
Viridor Waste Management Limited on the disposal of its collections business and certain recycling assets to Biffa plc
Vodafone on various transactions, including the proposed merger of its UK business with Three and the carve-out and sale of Vodafone Hungary
Credit Karma on the acquisition of Noddle from Call Credit
Drax on the acquisition of Scottish Power’s portfolio of pumped storage, hydro and gas-fired generation assets
Equinix on the purchase of UK data centre operating business from IO
Investindustrial on its acquisition of CSM’s ingredients business in Europe and China and subsequent bolt-on of Hi-Foods in Italy
Markerstudy, a portfolio company of Pollen Street Capital, on its acquisition of BGL Insurance from BGL Group
Midlothian Capital Partners Limited and Hattington Capital LLP on the acquisition of Dobbies Garden Centres Limited from Tesco Holdings Limited
M&G on the acquisition from Royal London Group of Ascentric, a digital wrap and wealth management platform for UK independent financial advisers
Ovo Energy on its purchase of SSE plc’s GB household energy and services business
Schroders on its acquisition of River and Mercantile Group’s solutions business
Swire Beverages on its acquisition of the Coca-Cola bottling operations in Vietnam and Cambodia
Virgin Group on Virgin Active’s acquisition of the nutrition assets of South Africa’s Real Foods Group
Vodafone on the acquisition of Liberty Global’s German and Central and Eastern European business