Corporate divestments: Time to sell?

About one-third of the 32 PE buyouts announced last year with valuations of $500 million or more were corporate carve-outs. This compares to five out of 20 in 2016. According to a survey by EY, divestment deal flow could increase exponentially: the number of Asia Pacific companies considering asset sales over the next two years has doubled in the last 12 months.

In 2015, only 17 of respondents said they expected to complete divestments. This rose to 35% in 2016 and then 83% last year. 

It is worth noting that Asia is conforming to a global trend. Companies globally are reviewing their strategic positioning, with pressure to evolve business models in response to technological change the most frequently cited driving factor. There is an impetus to invest in core areas to remain competitive, which means divisions that are relatively small contributors to the bottom line are more likely to be sold in order to raise the required funds.

Private equity investors cannot expect to snap up all these assets, but there are certain markets in Asia where carve-outs are becoming more prominent. In China, for example, CITIC Capital has solely or jointly acquired four corporate divisions in the last 18 months. A common factor is that multinationals face a more difficult operating environment: local competition is intensifying, on-the-ground management might be lacking, and keeping up to speed in a market that leads the world in digitization in an uphill battle.

Japanese conglomerates, meanwhile, are under more pressure to focus on return on equity and governance issues, and they increasingly recognize that third-party capital and expertise is required to make their businesses globally competitive. Five private equity deals of $1 billion or more were announced in 2017, compared to six during the six years to September 2016. Four of the five are corporate carve-outs.

At the same time, for owners of certain businesses, there has never been a better moment to sell. Barely five months into the year and announced global M&A has already surpassed $1.7 trillion. If companies put their houses in order – insufficient due diligence materials, inflexibility in deal structure, failure to address tax risk, and competing priorities are the biggest impediments to divestments – they can take advantage of a very liquid environment.

Poorly timed and managed strategic reviews are another problem, resulting in companies holding onto assets for too long or struggling to identify teams with the analytical skills to make sound assessments. But here private equity might be taking the initiative. Opportunistic situations, including unsolicited approaches by prospective buyers, triggered 71% of the most recent major divestments by Asia Pacific corporates. 

While it is unclear how many of these were the work of financial sponsors – and most large divestments end up as competitive processes – it is likely no coincidence that private equity firms have record amounts of capital to deploy and are therefore knocking on as many doors as possible.

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• Topics
• Greater China
• North Asia
• Buyouts
• Southeast Asia
• China
• Japan