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      Many sellers continue to approach carve-outs as a clean-up exercise rather than a strategic value creation opportunity – ultimately leaving significant value on the table. At the same time, buyers are unlikely to price in upside that is not clearly articulated and evidenced by the vendor. In this article, our deals leaders explain how to present a credible full-potential CarveCo – and critically how to translate this into value buyers are willing to actually pay.

      UK companies increasingly see carve outs as a great way to release capital to reinvest into the business or to return to shareholders (to find out why, read our first article in this series). Yet, for some reason, few sellers tend to take the opportunity to put their assets in the best light when preparing for a carve out. And that means they are underselling the equity story.

      At the same time, buyers don’t just take what a seller tells them at face value. They want to see credible numbers, presented clearly and transparently that reflect the true value of the asset. That means providing three key proofs: a financial baseline for the CarveCo reflective of the separated business, a credible upside plan and a realistic cost to get there. 

      Sophisticated sellers who are targeting strategic buyers get ahead by developing sell-side synergies upfront (i.e. the potential synergy value that potential bidders may be able to realise from the acquisition and subsequent integration of the asset). This enables them to be on the front foot for maximising value from the transaction – including not only deal negotiations (e.g. ensuring that at least some of the bidder’s expected synergy value is also reflected within bids) but even using synergy value as a lens to help identify the most attractive bidders in the first place.

      Finally, whilst not for the buyer, do not lose sight of the impact on the parent company. A sharp CarveCo story will mean little if it leaves behind significant stranded costs. Specifically for a listed business, execution could matter as much as price where your stated corporate strategy includes divestments. Markets will reward clean, credible delivery of divestments, even if it means accepting a lower headline valuation.

      Marc Summers
      Marc Summers

      Partner, Sell-Side Lead

      KPMG in the UK

      Mala Shah
      Mala Shah

      Partner

      KPMG in the UK

      Kelly Martin
      Kelly Martin

      Partner, Accounting Advisory Services

      KPMG in the UK

      Show buyers what an efficient CarveCo looks like

      First, select the deal structure and buyer universe that best suits your organisation’s objectives (this article explains how to do this). Next, you will want to set a clear perimeter for the baseline financials. But rather than simply mapping the ‘as-is’ operations, sophisticated sellers tend to map a ‘full potential’ baseline that adjusts the CarveCo EBITDA to remove the parent entanglements and allocations with replacement costs.

      Leading sellers go further. When we work with companies to prepare their separation plan, we typically help them assess and articulate what the financials of a ‘fit for purpose CarveCo’ would look like - quantifying the separation upside buyers from a leaner operating model, recognising topics such as replacement buildup and TSA exits. The result is a clear, right-sized view of the business. As Mala Shah, Partner at KPMG, who specialises in Separation and Carve Outs, puts it “A carve-out should be designed as a ‘fit for purpose’ business – not as a simple ‘copy and paste’ - with value upside clearly identified and backed by a credible plan to deliver it”.

      Traditional crave out topic

      “Sellers need to decide if they want to accept higher one-off costs for their RemainCo in order to be able to provide buyers with a higher-margin asset. At the same time, nobody wants to win at the CarveCo game by losing at the RemainCo one,” says Marc Summers, Partner and Sell-Side Lead at KPMG in the UK. “You really need to be thinking strategically about exit costs from the very start.”

      Now build the value case

      There will be a number of opportunities that go beyond basic efficiency improvement to unlock the full potential of a carved-out asset. Leaders will want to consider revenue opportunities to drive top-line growth, cost opportunities to improve margins, cash strategies that release trapped working capital and optimise return on liquid assets, and capital strategies focused on lowering the weighted average cost of capital through smarter financing.

      CraveCo operating module

      Yet not all of these opportunities will be applicable under each deal scenario, nor will it deliver the same uplift to valuation. And some will be harder to achieve ahead of the deal than others. That means leaders will need to identify, prioritise and quantify value opportunities in order to prioritise the most impactful and achievable initiatives whilst minimising execution risk and impact to business as usual.

      Start by benchmarking your organisation against competitors across metrics such as revenue, cost, headcount, cash and capex by function. This helps identify where the CarveCo lags behind ‘best in class’ peers in the sector and geography. Quantify each gap with data then stress-test the assumptions with experts. Use this to prioritise opportunities based on value, risk, complexity and execution speed and cost.

      These insights will inform the CarveCo’s operating model for potential buyers, highlighting initiatives that can be evidenced pre-deal and are most likely to attract value. While benchmarks should be treated as directional rather than directive, they provide an important reference point to decision making.

      Once agreed, these initiatives should be built into separation cost adjustments and incorporated into the business plan, ultimately feeding into the equity model. Alongside outlining the initiatives and their financial benefits, they should also be embedded within an integrated implementation plan to ensure clarity on delivery and execution with clear owners, budgets, KPIs and timelines. Buyers reward upsides that they see progressing – anything not evidenced is typically priced at a discount.

      “Buyers place value on initiatives that show a clear, structured plan with visible progress,” adds KPMG’s Mala Shah. “In our experience, sellers who substantiate a quantified value-creation story typically can achieve a 0.5-1.5x EBITDA multiple uplift. Given the costs of developing proof points is usually less than one percent of deal value, this represents a highly attractive return on investment for sellers.”

      Be informed ahead of negotiations

      The most savvy, value-focused sellers have now started to conduct sell-side synergy assessments to prepare themselves for negotiations by understanding the likely areas - and potential value of - synergy for the key trade buyers in their process. By communicating and helping buyers to understand the synergy value that they may realise as a result of the acquisition and subsequent integration, the intention is that the seller can influence the bidders to reflect the maximum potential synergy value in their bids for the business.

      Sell-side synergies should also focus on trying to identify and mitigate potential dis-synergies that the buyer may perceive or expect, and would price into their bid. In our experience, this risk can often be mitigated through robust analysis and communication.

      "The final piece of the value puzzle? Sell-side synergies. In our experience, arming bidders with a clear, robust synergy case always drives higher asset valuations. It surprises me that this is not a market-standard element of any carve-out... I think that at some point it will be” says Francesca Scott, KPMG’s UK Head of Synergies.

      What will buyers price in?

      Ultimately, value creation depends on the quality of evidence sellers can provide. Identified upsides only tend to translate into multiple uplifts when they are credible, backed by the target management team and clearly evidenced.

      When supporting companies on carve-outs, we focus on where they should prioritise their energy and cash pre-divestment to maximise value. Initiatives are typically grouped into three buckets – those to accelerate immediately, those to maintain and those to quantify but not progress.

      Standalone upsides tend to fall into the first category. These relate to costs that can be eliminated or optimised once the CarveCo separates – for example, group reporting or other corporate requirements that are no longer needed or can be rightsized. Buyers generally value these upsides close to one-to-one, especially where the benefits are clearly quantified such as through reductions in FTEs or other directly attributable costs.

      Buyers also tend to assign value to ongoing initiatives, including transformation projects with clear revenue or cost targets and demonstrable early results. Examples include new systems, footprint optimisation, automation sprints and similar projects. In these cases, buyers typically factor in between 30 to 70 percent of the identified upside, depending on the strength of the delivery plan, the maturity of execution and the credibility of the implementation roadmap.

      “Investing time upfront in planning and execution is critical as it can materially reduce reliance on transitional services and limit the amount of work required from the buyer post close. Key actions include front loading initiatives that accelerate the buyer’s ability to operate independently from Day 1. These may include: systems separation design and data cleansing, legal-entity restructuring planning and contract transition roadmaps, supply-chain independence, Day-1 organisation and retention, SKU rationalisation, and ensuring brand and IP readiness. These are actions that tend to raise buyer confidence and can shorten the deal cycle.” notes Mala Shah.

      The third group comprises initiatives that have yet to be implemented. These range from more tactical projects “whiteboard” opportunities that have not yet been fully explored to larger, more strategic ideas with significant value creation potential but large capital requirements. While these initiatives are inherently less certain, it remains important to quantify them where possible and clearly articulate them as part of the overall value creation narrative and equity story presented to buyers. When supported by robust analysis and a credible case for delivery, we often see buyers attribute up to 30 percent of the identified value in their pricing.

      Finally, relating to synergies, it is almost unheard of for any bidder to price in 100% of expected synergy value. However, in a competitive process for an attractive asset, it is not uncommon for approximately 50-70% of cost synergies to be reflected.

      Keep value at the forefront of restructuring steps

      Many carve-outs require a reorganisation of legal entities which can enhance (or erode!) CarveCo value. Our key tips include:

      • Ensure the buyer inherits a clean, easy to understand structure to reduce diligence risk and complexity. Eliminate cross-perimeter balances. Tidy up complicated webs of intercompany balances within CarveCo.
      • Demonstrate a clear pathway for future cash extraction. Repair dividend blocks and assess whether withholding taxes would apply on cash repatriation.
      • Leverage accounting policy choices to optimise CarveCo’s balance sheet and P&L. Do tax attributes survive the carve out and can value for them be recognised on the balance sheet?
      • Carefully consider the steps that will bring the transaction perimeter together and assess whether tax reliefs or exemptions are available to mitigate any taxable gains that are triggered as a result of the carve out.
      • Consider legal entity rationalisation where the structure is carrying unnecessary annual costs and risk with dormant and redundant entities.
      • Plan for works council and employee consultation obligations to avoid potential delays and cost leakage.

      Remember who you are doing this for

      While optimising CarveCo to build a compelling equity story is essential, what really matters at the end of the day are the implications for the RemainCo and its shareholders. Throughout the process, sellers will need to balance the strategic goals of RemainCo and CarveCo in order to weigh up the costs and benefits of setting certain perimeters, operating models and allocation decisions. Working through the stranding implications for RemainCo and how these will be mitigated, alongside the planning for CarveCo, enables better informed decision making.

      “Increasingly, we are seeing sellers considering how to use the carve out as a catalyst to wider transformation across the organisation – it's not only about stranding mitigation but also about having a critical eye on the opportunities for real and sustainable transformation” adds Mala Shah.

      Get ready for a flawless transfer

      This article is part of a series that explores each step of the carve-out process. We’ve already looked at the importance of a great portfolio and carve-out strategy. Our final article in this series will explain how to choose the right separation model and execute the final handover with precision, while minimising disruption and maximising value.

      • Chapter 1

        How to maximise the value of your carve-out: How can we embed value creation into our year-round BAU portfolio management to help ensure we are always fielding the strongest team and make optimal divestment decisions? How can I build organizational capabilities long ahead of the race day?

      • Chapter 2

        Setting the carve out strategy: There are four strategic race-plans for a carve-out: Business-in-a-box, Partial Standalone, Synthetic Standalone(a), and Integrated with RemainCo. How do I choose the playbook which best fits the deal and positions us to win?

      • Chapter 3

        Building the value case (this article): How do I enhance the performance of the CarveCo – moving beyond baseline performance, to create a winning proposition that bidders can fully value and price into the deal?

      • Chapter 4

        Executing a flawless exchange (Separation in Practice): How do I choose the right separation model so that I can run the separation, and execute the final handover, for a clear win?

      In the meantime, we encourage you to contact us to discuss your own carve-out and divestment strategies – or to get some tips and tricks based on our work with other sellers (and buyers) in the market.

      Winning the carve-out relay: from team selection to the finish line

      Designing, executing and winning Consumer and Industrials carve-outs.

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