'Carve-out': a solution for corporate liquidity in the post-Covid economic context

As in all crises, there will also be opportunities in the present for those who proactively want to take charge of their future and reshape / refocus their business.

The life cycle of organizations is a complex process that poses a set of significant challenges for different stakeholders. Much has been written about the impact of Covid-19 on the lives of companies, and it is pertinent to reflect on the different solutions that they have at their disposal in this challenging, at least.

One of the solutions may go through an M&A process, more specifically through Carve-outs (separation and disposal) of a business unit and / or a set of assets held by a company considered non-core.

There may be several reasons for this divestment operation, namely: (i) seeking to resolve treasury difficulties, which is an option when the company has difficulty in financing itself with conventional means, allowing it to generate liquidity and reduce insolvency risks; (ii) enhance the focus on the business areas considered core (key areas), ensuring the investment plan necessary for its development, which will enhance profitability and the ability to respond to existing challenges.

This may be a more or less linear process, depending on the degree of integration and synergies between the company and the business unit / assets being highlighted, and the existing level of interdependence will condition the appreciation of the opportunity by a potential investor. It is necessary to prepare in advance the separation process, and the areas that typically give rise to “stand alone considerations” (ie, skills that the business will continue to need after the separation) are human resources, IT, supply chain, commercial area, intellectual property, among others.

The challenges will depend on the investor profile (corporate buyer versus private equity). The carve-outs are one of the most complex aspects of M&E, given the difficulties that arise in carrying out the due diligence and in the post-transaction operational preparation.

For a successful M&A operation of this nature, it is essential to prepare quality financial information about the business unit / assets under analysis. Carve-outs that reflects in a rigorous and transparent manner (i) the assets and liabilities to be transacted and (ii) the normalized profitability of the business, in a scenario in which it operates independently and based on a set of assumptions adhering to reality. There are also a number of tax implications that require detailed analysis.

The operations of Carve-outs have shown to be an increasing trend in recent years. In 2020, some of the largest M&A operations carried out were carve-outs, namely the sale of the elevator division by Thyssenkrupp to a consortium formed by Advent and Cinven (17.2 billion euros) and the acquisition by KKR of a division dedicated to recycling (Viriato) belonging to the Pennon group (4.2 billion euros) pounds). Also in the domestic market, these operations are gaining increasing expression, as is the case with NOS 'recent sale of telecommunication towers to Cellnex.

The current situation appears to be favorable to Carve-outs, creating conditions for awin / win for the different stakeholders in this M&E process.

From the perspective of those who sell, it is expected to create shareholder value, as it allows a financial fit and a focus on developing the profitability of your business core. If the process is well conducted, it is expected that the result will be superior to the reality that existed before the Carve-outs. From the point of view of those who buy, it is a new future that offers itself to a business, once perceived as non-core and possibly with some investment deficit, which is expected to have a strong growth potential to be exploited.

As in all crises, also in the present there will be opportunities for those who proactively want to take charge of their future and reformulate / refocus their business, being the Carve-outs, if properly planned, a viable solution with promising results.


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