Considering releasing capital through the sale of non-core assets?
Maarten Wolleswinkel, Partner, Oaklins, Amsterdam
As the impact of COVID-19 continues to unfold, corporations need to navigate through the uncertainty of the current financial climate. Release of capital through the sale of non-core assets can have a significant impact on a company’s future strategic position and economic development.
The fallout from the COVID-19 pandemic may lead to a need to focus on home and nearby markets and, consequently, activities in other geographies may become non-core and, therefore, candidates for divestiture. Selling off certain assets or activities may be required to free up liquidity, help reduce debt, enhance shareholder value, regain profit and ultimately steer a company back to focusing on its strengths.
Should you sell your non-core assets now?
It is a question that many business owners will ask themselves. Often the background of the question concerns the valuation. In other words: do you expect a strong buyers' appetite for a non-core asset. Although it's a fair question, the assumption underlying the question is wrong. It assumes an almost immediate sell-off possibility at a premium price but this is rarely the case. Structured, well-prepared sales processes take on average six to twelve months, from the decision to divest until the moment the money is exchanged for shares or assets. Therefore, the question about timing should be rephrased:
- Is now the right time for strategic choices regarding company focus, and as a result, to start preparations for selling non-core assets in the near future?
- Do you expect enough market appetite for these assets and do you expect to close a deal in six to twelve months?
Understanding non-core assets
If a corporation needs extra liquidity, the answer to the first question is a simple yes. Since most lenders are hesitant at the moment, bringing down debt levels or increasing cash is a good way to increase financial resilience. As a result, company owners need to redefine their strategic priorities and determine which non-core assets should be sold now or in the near future. What we often see is a selection of the product or service portfolio with relatively small market shares, foreign subsidiaries or non-operating assets, like real estate.
If you have determined your non-core assets, its time to answer the second question. Do you expect market appetite for these assets and is it worth putting time and effort into the preparation of a sale process? Which assets should you sell now and which ones later? It' all about the quality of an asset.
Defining the quality (attractiveness and value) of non-core assets
This concerns the value drivers of non-core assets. Based on selling over 3,000 companies, we have identified three key drivers for premium valuations:
- Market valuations of comparable companies
- Stand-alone growth potential
- Sale process
Market valuations of comparable companies
Market valuations of similar stock market listed peers are an important indication of potential value of non-core assets. Here we can share some good news. Although COVID-19 has had a huge impact on the economy, stock market valuations have shown great resilience and for many sectors, valuations are at 2019 levels. Some are obviously worse (like high street retail), and some are even better (companies active in digitalization).
Many characteristics drive the stand-alone potential of a company. We have identified the following points that have the most positive impact on the valuation:
- High independence from the mother company. Assets that have a stable own management team, excellent reporting (monthly, quarterly, including key KPI’s) and no need for complex corporate carve-out measures (shared IT, shared housing, no CFO, etc.), are ideal for selling
- Platform potential. The company can be used as a platform for buy-and-build and as a result be highly attractive for Private Equity buyers
- Synergetic potential. The company is active in a sector that offers huge cost synergies when combined with competitors (i.e. back offices that can be cut out, factories that can increase utilization, etc.)
- COVID-19 has little or no impact on the long-term attractiveness of the business model, and markets for its products or services are relatively predictable (i.e. it is not dependent on events, travel or the restaurant business)
The key to successful transactions and premium valuations is diligent preparation. It is our experience that value is best maintained by running a structured and diligent process. We orchestrate the process from start to finish and we are an active partner throughout. Key elements that will positively drive the valuation are:
- A solid vendor due diligence. Detailed assessment of the historic financial performance, underlying margin trends, extra ordinary impact (and normalization) of COVID, etc.
- Well-prepared documentation of the “Equity Story”. Assessment of key strengths, buy-and-build opportunities and market (growth) trends
- Smart process tactics. Approach a world-wide buyer audience, connect with C-level contacts at an early stage and make buyers comfortable with a competitive process
Preparing for what's next
With an 850-strong group of committed colleagues in over 45 countries globally, and a long tradition of working in cross-border teams with proximity to both the client and specific buyers, we are perfectly equipped to help you deal with the challenges that characterize carve-out transactions of non-core assets.
Our commitment and integrity towards every deal gives you an unbiased opinion on a variety of financial matters. Contact us if you’d like to discuss your options, confidentially, with an experienced advisor.