GCC carve-out activity has boomed significantly in 2021, with fourteen carve-outs executed, totaling $19.4bn in disclosed deal value.
While the appetite for value creation through divestitures is strong, many sellers do not achieve their optimum sale price and in many cases the sale does not conclude despite a well laid out equity story.
It has become increasingly important that sellers understand the levers which can help minimize value leakage in the sale process leading to a successful carve-out.
Often businesses fail to define the carve-out from a financial, commercial, and operational perspective, for a variety of reasons including bandwidth constraints of senior management in terms of routine business operations, and a lack of in-house expertise. This results in significant value leakage for the seller due to:
- High perceived execution risk and cost associated with the delivery of carve-out
- Insufficient or weak articulation of standalone impact on EBITDA
- Improper assessment of the impact of the carve-out on the remaining business
In addition to these complexities, the seller is exposed to a greater risk of deals getting called off.
In order to realize maximum value from a successful divestiture, sellers should consider the following:
Assess and articulate the carve-out impact upfront
To minimize business disruption and expedite deal closing, sufficient preparation in the pre-bidding phase is essential to properly understand the business’s entanglements, assess the degree of complexity, time, and resources required to carve the business operationally (shared processes, people, support functions), contractually (shared leases, commercial, distribution agreements), and structurally (shared systems, ERPs, data), and design the separation roadmap to standalone or transfer state ensuring a successful carve out.
Short of proper planning the business may be rushed into sign-to-completion with no plan for Day 1 or Day 100, and limited visibility over potential commercial and operational costs to execute the separation and run standalone operations.
Similarly, half-considered implications related to structural separation, including legal entity setup and transfer of ownership, tax and transfer pricing, are likely to result in leakages and inefficiencies, more so with the introduction of a UAE Corporate Income Tax (CIT).
Sellers must consider reorganizing their corporate structure early-on to assess the current and target tax and transfer pricing profiles of the in-scope business and retained business with regard to FTA legislations. In order to optimally structure the deal, whether it is a full carve-out or a partial separation with intergroup company restructuring, involving managed services, cross-selling opportunities, and free zone versus mainland setup are some of the key considerations that should be assessed.
Control the separation cost narrative
A focused pre-negotiation assessment of the carve-out gives the seller the opportunity to accurately factor in the incremental or discontinuing one-time costs, recurring costs, and synergies and dis-synergies of segregating the in-scope business from the retained business. This in turn controls the cost narrative to present a consolidated sell-side view of standalone adjustments and key adjustments on the EV to Equity bridge related to carve-out execution. Above all, it prevents the risk of buyers’ applying aggressive risk premium to reduce the overall value of the asset and limits the number of buyer’s imposed conditional precedents.
Clearly scope and price transitional services agreements (“TSAs”) and any long term agreements (“LTAs”) with the buyers
Sellers looking to exit entirely often prefer to limit the scope and duration of TSAs and LTAs as well as reverse TSAs, to the extent possible without hurting the sale prospect. A consolidated view of entanglements across all pillars of the operating model (people, process, assets, contracts and systems) helps in determining not only the scope and duration of the said agreements but also the practicality of the service level agreement (“SLAs”) attached to delivery and exit clauses.
Careful assessment of the costs incurred with respect to provisioning of transitional services is critical to ensure seller is out of pocket in provisioning of services after deal close.
In many cases, there are mutually beneficial long term commercial (e.g. distribution or supply) agreement as part of the deal. The seller should take the lead in articulating a simple scope while limiting the variables in these agreements.
The duration, exit clauses and notice periods should be carefully designed to allow enough notice to the suppliers and thereby minimize stranded costs for the remaining business.