Business Transaction Strategy

Carve-out and RE-Integration Support

Challenge

A major global automotive OEM and one of its partners had agreed to dissolve their joint venture (JV) and to reintegrate its functions into the parent companies. We were appointed to support in designing the optimal deal structure, Day 1 readiness, and reintegration efforts.

The client had initially established a JV to collaborate on the development of manual, hybrid and electrified transmissions. European manual transmission demand is expected to decline 50% by 2025, driven by electrification and customer preference shifting to automatic transmissions.

The JV had not generated significant third-party business, however, and additional sales or product opportunities were limited. It required significant restructuring to improve its performance, while its future product technology provided limited potential for improving its competitive position.

Our client recognised that dissolving the JV would enable it to eliminate value lost, restructure this area of its business more efficiently and protect future business opportunities.

Approach

We organised a series of separation and integration workshops to identify risks and mitigation actions in HR, IP, IT, and operational readiness. We also advised the client on all other agreements, and supported it in drafting the memorandum of understanding, sale and purchase agreement and the target operating model

Our tax and valuation experts helped to draft and negotiate an optimised deal structure. Our tax team also worked closely with its senior management to establish a robust financial model for the deal mechanics to ensure clear and equitable assignment of the transaction costs. This included reviewing and challenging the client’s model assumptions.

We supported the client’s internal teams during a detailed review of the carve-out plan and provided support on mitigation actions for critical path items. Our assistance also enabled the client to identify and address key Day 1 readiness challenges, including HR separation, ICC processes, governance, and transition service agreements.

Benefits

Our team worked seamlessly with the client across multiple sites, providing support and challenge during the dissolution of the JV and structuring reintegration of some functions.

By providing a mix of deep expertise in deal structure, valuation advice and extensive experience of JV separation, we closely supported the client throughout the journey to ensure Day 1 readiness

Dissolution of a Joint Venture

Challenge

A leading global car manufacturer and its supplier decided to dissolve their long-standing joint venture (JV) and to reintegrate the assets back into the parent companies. KPMG was appointed to support in optimal deal structure design, Day 1 readiness, carve out and reintegration efforts.

The dissolution of the JV would enable the client to eliminate value lost to the partner, restructure its initially contributed business and repurpose some of the repatriated assets for electrical vehicle production.

The dissolution involved multiple geographies, including France, Germany, India, China and the UK. It also involved the creation of a new JV, where assets both parties were unwilling to reintegrate could be kept and restructured.

Approach

We were the lead advisor throughout the transaction and supported the client over 12+ months to achieve a successful outcome.

Our tax, accounting and valuation experts helped in drafting and negotiating an optimised deal structure, which we subsequently helped to implement. Our finance specialists worked closely with the client’s management to establish a robust financial model of the deal mechanics, reviewing and challenging the client’s model assumptions, to ensure clear and equitable assignment of transaction costs.

In addition, we supported client teams during a detailed review of the carve-out plan and provided support on mitigation actions for critical path items.

Our assistant also enabled the client to identify and address key Day 1 readiness challenges, including HR separation approach, ICC processes, governance, and transition service agreements.

Benefits

The complex cross-border deal structure needed to consider many different options to allow a win-win situation for both partners. We changed the initial identified deal structure and added new proposals to move from potential actual tax cost to lower risk tax exposures. This included:

• how the contribution of the French branch was managed
• packaging the deal structure to manage any tax cost from future indemnity claims in particular
• minimising potential gift tax charges in India

considering the issue of appropriate indemnity cover when drafting the memorandum of understanding and sale and purchase agreement.

Joint Venture Strategy

Challenge

Our client, a global confectionery manufacturer, had been considering a joint venture (JV) with an Indian counterparty. Progress had stalled due to internal misalignment on approach and the overall suitability of the opportunity.

It asked KPMG to support in assessing (1) the opportunity, (2) their respective competitive and negotiation positions (including ‘red line’ identification) and (3) formulating a board and approach paper in preparation for negotiations with the counterparty.

The client also required a model to analyse different operating model scenarios.

Approach

We conducted multiple stakeholder interviews with the client’s management team to assess internal alignment and understand the strategic rationale for the JV.

Through rigorous desktop research and interviews, we assessed the counterparty’s negotiation position and strategic rationale to prepare our client for the initial approach.

We also arranged a client management workshop to address misalignments on negotiation strategy, deal approach and opportunity value.

Following the workshop, we created a high-level JV blueprint for use in detailed negotiations. Our experts also developed a flexible model that enabled to client to assess different operational scenarios.

Benefits

The client’s management team was able to reach alignment on the opportunity assessment, deal approach and operating model preferences through our support and JV blueprint.

We helped the client’s negotiation team formulate its approach strategy and key red lines. By using our model, they were able to understand the financial effects from different operating model changes. This enabled them to make significant progress in the JV negotiations, which had been stalled for some time before our involvement.

Global Divestment Programme

Challenge

KPMG was engaged to provide our separation expertise to support the client’s complex divestment programme. This involved multi-geographical divestments happening concurrently with different buyers, timescales and objectives.

Local country management teams faced significant resource constraints and there was felt to be insufficient group visibility on local separation activities in divesting market.

Perimeter complexity resulted in complex TSA and reverse TSA arrangements. In particular, in relation to an Asian shared service centre which supported several of the markets being divested and Group functions.

There was also considerable technology and data separation complexity and risks associated with multiple data transfer events and approaches.

Approach

We were engaged part way through the programme to review governance and set up. We subsequently implemented the recommendations, with our team injecting programme rigour, separation capability and momentum.

We leveraged best practice separation tools and methodology to establish robust Group-level separation governance to manage regular reporting cadence and improve quality of reporting.

We provided dedicated functional SMEs in areas requiring technical support, including TSAs, technology and data, HR, procurement. We also augmented local country teams with additional PMO resource in four geographies to enhance Group visibility on progress and ensure appropriate escalation of decisions and risks.

In order to build a consistent data framework and principles across all divestments, we embedded industry best practice ‘data in deals’ approach.

In terms of the TSAs, we managed the translation of 2,700 services into TSA bundles, contractually costed, jointly agreed with multiple buyers and developed into TSA schedules. And we supported detailed separation planning and execution, overseeing full separation and the termination of TSAs.

Throughout the project, we leveraged broader KPMG SMEs to provide support relating to specific transaction related challenges, e.g.

• International tax complications on TSA billing challenges.
• Actuarial experts on a separation of actuarial systems and separation of complex ‘mixer' arrangements.

Benefits

Our support enabled the client to successfully complete all deals in line with its plans. Key benefits included:

• Costing and bundling of TSA services resulted in more practical and commercial outcomes for the client by reducing buyer flexibility and discretion over TSA exit sequencing and extension rights.
• Mitigating key risks relating to data loss or sharing of confidential and/or sensitive information to acquiring parties, with key decisions fully documented and defensible.
• Accelerating buyer separation planning and TSA exits in majority of markets.
• Advising on negotiations on a service extension which reduced the client’s stranded cost by c.£2m

Negotiating the agreement of charging buyers separation costs relating to advisors’ time. This allowed the client to recover a proportion of our fees from buyers.

Petrochemical Separation Project

Challenge

We advised one of the world’s largest petrochemicals companies on a complex end-to-end separation project. This involved c.3000 staff across 47 countries, carving out five legal entities including 70 manufacturing plants, c.120 business applications with a new SAP ERP solution.

Our client was faced with the challenge of managing 640 project staff across the globe to extract real-time reporting from complex Excel-based project plans.

Furthermore, the very granular planning required meant the use of distributed Excel project plans with local, impromptu decision making was not feasible.

A significant amount of effort was spent on manually communicating separation KPI targets agreed with management, including sending daily reports to c.300 recipients regionally with small changes, driving version control issues. A centralised system was required for reporting and monitoring with workflow-based data validation.

Approach

After generic programme management tools from the marketplace were rejected by the client for the purposes of a Completion and Cutover Control Centre, we configured a proprietary digital service that provided reporting and management visibility.

We used workflows, use-cases and executive dashboards across the transaction to progress and monitor defects / issues in real-time, with automated escalation.

We enabled a similar digital service to support data validation with full workflow controls and visibility on dependencies between tasks, allowing a single source of truth for the client. Other features included real-time reporting and automatic validation completion notifications.

To support the client with the dual data maintenance requirements arising from the change in operational cutover date (due to COVID), we leveraged our ERP data forensics capabilities to implement a custom solution (based on Alteryx) capable of extracting, transforming and comparing data across two systems.

Finally, to ensure the programme met the go-live date, we worked with the client to design and develop a fully virtualised approach to Cutover and Post Go Live Support (PGLS).

Benefits

Key benefits for the client included:

• Over 6,500 operational cutover activities accessed and updated in real-time by 640 project team members located across the globe.
• Real-time management reporting and dashboards and the use of data to drive decisions and outcomes.
• Automatic alerts for incidents as they arise, with escalations based on elapsed time.
• Reduction in time and effort producing reports from a single source of truth.
• Ability to meet agreed KPI measures put in place by management.
• Reduction of daily emails sent to c300 recipients and eliminating version control issues.
• Delivered advanced data forensics capability to ensure data consistency across systems.
• Fully virtualised approach to Operation Cutover and PGLS (consequence of COVID).

Multinational Private Security Separation

Challenge

Our client, a multinational private security company, was looking for end-to-end support across 20 countries on the proposed spin-off of its cash division. This involved the assessment of several strategic sale options, including an IPO. We also needed to evaluate multiple monetisation scenarios throughout the process at division and country level to support decision making.

Approach

Our expert, cross-functional team provided fully-managed and coordinated support across a number of areas:

• Financial carve-out – drove the creation of carve-out financials for the to-be separated entity. Developed detailed financial packs for each country in the perimeter.
• Capital markets - advised on regulatory requirements and developed a detailed plan to complete an IPO.
• Tax – reviewed and advised on tax structuring and tax steps across all perimeter countries to complete the most effective separation.
• Accounting advisory – comprehensive review of all country financial statements to assess perimeter value.
• Modeling – detailed financial projections to enable the client to further understand future value flows.
• Synergies - performed rapid assessment and quantification of sell-side synergies for specific buyer groups to support effective management decision-making and bidder negotiation strategy development.
• Separation (including IT and HR) activities including:
  • Advised on “As is”, “Day 1” and “Standalone” operating model development and separation planning for all functions, including Finance, HR, IT, Procurement, Legal and Commercial.
  • Tailored separation solutions, using a standard framework adapted for the nuances of individual countries, including separation transition services development (TSAs).
  • Created a dynamic support model to allow multiple monetisation scenarios to be assessed in parallel, using the most complex scenario as a baseline to minimise duplication of work.

We provided agile PMO support that anticipated and identified issues and risks, proactively managed interdependencies and worked closely with other advisers and banks to manage risk. Our team closely supported the client in bidder meetings as the separation expert across multiple functions.

Benefits

Working closely with the client, our support helped to deliver a successful, multi-jurisdictional transaction in line with its strategy. Key benefits included:

• Acting as a one-stop-shop for support on complex issues relating to carve-out financials, operational separation, capital markets, tax, modelling, and valuations.
• Enhancing our existing team capacity and flexing our involvement depending on requirements and workload.
• Working at deal pace to deliver detailed carve-out financials and separation blueprints across multiple countries.
• Providing functional separation-focused expertise within HR, IT and Finance to support core PMO functionality.

Large Financial Markets synergy assessment and integration

Challenge

To deliver the benefits of a US$27 bn acquisition, this leading global financial markets infrastructure and data provider engaged KPMG to complete pre-deal analysis and synergy assessments. This resulted in us being selected as its post-merger integration delivery partner.

In the pre-deal stage, we worked closely with the client to identify and quantify significant revenue and cost synergies that would be delivered from integrating these two multi-billion-dollar revenue organisations.

Post-deal support was focused on executing the integration to deliver the synergies identified from the new group. The group operated across multiple geographies and time zones and employed 25,000 people split between two organisational structures, with two different cultures.

Two years into our post-deal integration support programme, customer and market expectations have been exceeded. Cost synergy delivery is running significantly ahead of target, with additional cost synergies announced to shareholders.

Approach

We provided deal advisory, strategy, project management, business analysis, value tracking and specialist support across all divisions and functions in the combined group. This included delivering:

• The right expertise on hand – 200+ KPMG consultants and subject matter experts helping with strategy, project management, and business analysis across Deal Advisory, Management Consulting, Technology, Tax and Legal.
• Robust governance – We established the governance structure and a central integration management office to oversee integration activities, including cost tracking, resource management and efficient use of capital.
• Planning and process – We developed and managed detailed implementation plans for the integration, supported the development of new products and services and helped define new organisational operating models to drive synergies and integration.
• Strong and clear communications – We maintained clear and regular communications, particularly focused on merging the two different cultures

Benefits

Our experience providing end-to-end support from pre-deal synergies to the set-up and delivery of a multi-year integration, transformation and benefits realisation programme as a multi-disciplinary team is unique to KPMG. We were able to partner the client on this multi-phased integration programme, mitigating deal execution risk throughout the transaction.

We understood that work done pre-deal was just as important as following through post-deal. We have experience implementing large post-close benefits tracking frameworks successfully to ensure that estimated synergies are being tracked and translated into BAU.

Global Mining Company

Client Challenge

Our client, a multinational mining company, looked to KPMG for assistance in preparing and executing the separation and stock market listing of its thermal coal assets in South Africa.

Our Approach

We assisted with the following activities:

• Options assessment of the potential exit routes: separation timing, difficulty, cost, likely post-transaction support.
• Ringfencing of assets and internal reorganisations to create a separable asset perimeter.
• Mapping of “as is” and design of Day 1 target operating model for the demerging business, including ongoing support required by TSA.
• TSA governance and execution, and joint migration planning and execution.

Benefits for client

The assets were successfully listed as Thungela Resources on the JSE and LSE. The transition support mechanisms are still in execution and one-third of the TSA services have already successfully migrated to Thungela six months earlier than expected.

Supporting multiple carve-outs from a PE-owned global aerospace and defence components business

Client Challenge

Our client, a global aerospace and defence components and systems manufacturer, was acquired via a public-to-private transaction.

Following the acquisition, the buyer quickly began to restructure the group in line with its strategy to maximise the value through a ‘sum of the parts’ approach.

The majority of group-provided services were pushed down to reporting units – equivalent to £80m of historical annual cost. The intention was to make reporting units more independent in advance of likely sales, but the change represented a fundamental change in the operating model over a short period of time. This was further complicated by the reliance on legacy technology platforms which were not easily separated.

Additionally, there were a number of shared sites occupied by multiple business units which had to be physically separated between multiple legal entities.

Our Approach

KPMG was initially employed by the portfolio company itself, rather than the buyer, but we worked primarily with the PE deal team and their other advisors, as well as the vendor’s central function leadership, and management teams from the various carve-outs.

We supported key activities from inception to completion including: options analysis, standalone costs analysis, separation management (design, planning, and execution), Day 1 readiness (including transitional agreements).

We deployed a broad team of sector experts from within our Deal Execution team, alongside technology specialists to support management’s development of the “to be” operating model.

We supported management in identifying the people and non-people standalone cost adjustments, both for trade and financial sponsor scenarios. Additionally, we drew on previous experience supporting the buyer with previous disposals.

Our support took a variety of forms, from vendor assist, through to vendor due diligence and pre-sale diligence, dependent on the scale and complexity of the carve-out.

Benefits for client

We successfully positioned the sale of the carved-out businesses to a mix of trade and financial buyers in accelerated timelines.

The disposals saw our client receive proceeds of sales close to their original take-private investment.

The benefits have not only been financial, but have also been completed in short periods of time with limited requirement for the vendor to provide transitional support to the divested businesses.

Our experience of previous divestments and our knowledge of the vendor’s business enabled us to quickly increase our support and conclude our work more efficiently, and we were able to quickly identify and mitigate the more complex areas of separation.

Our work on the client’s various disposals supported the buyer’s initial deal thesis and subsequent successful offer to acquire an electronics company. This is likely to be combined with the acquired business to create a leading major player in the aerospace and defence  sector, leading to significant further opportunity for KPMG support.