Close to three-quarters (70%) of companies surveyed by EY expect to execute large-scale transformational divestments in the next 12 months, up from 50% in 2018. Not all of them will have private equity firms in the bidder mix. Too bad.
In a sales process, PE firms can bring a sharper focus on value and a higher multiple. At a time when many sellers are indicating that the price gap with buyers is greater than 20%, those two elements may be crucial to getting a deal done at all.
What other advantages do PE buyers bring to the process? EY’s Global Corporate Divestment survey, released Tuesday, asked 930 corporate executives in what ways they experienced an increase in value based on PE’s involvement. Almost half (49%) said a reduction in the divestment deal’s time to close, 44% an increase in multiple, and 38% an increase in purchase price.
“Reasons for a faster closing may be that PE firms require fewer regulatory disclosures” or “they may already have expertise relative to a particular business based on ownership experience with an existing portfolio company,” EY says in the survey’s analysis. Alternatively, “their clarity relative to the exit strategy and related time sensitivity [can] speed up the process.”
But gaining PE participation requires some extra effort on the seller’s part. The greatest challenge may be an increase in the amount of time required to support lender diligence requests, according to EY’s survey. In addition, PE firms want a realistic picture of the divested asset’s standalone operating costs and a viable standalone operating model.
“A target operating model is especially important to private equity buyers that have plenty of capital to deploy but lack business synergies; therefore, instilling confidence that the carve-out has been fully prepared for separation [is critical],” says EY.
What other tips does EY have for organizations that are planning divestments?
Be prepared to generate granular data. This is required to keep a PE firm in the auction process. “The seller may need to have historical and projected information down to transactional and SKU-level details, often monthly, and for as many as 10 years,” according to EY.
Tell a consistent story. PE bidders want to hear a cohesive message about the financial forecasts, growth opportunities, capital requirements, and the management team, as well as the overall business going forward.
Says Paul Hammes, EY’s global divestiture advisory services leader: “Private equity firms compete hard for quality assets, but corporates need to come to the table with the right story — and supporting facts — to make buyers comfortable with their decision to move forward.”
Help PE firms see the exit strategy. Inherently, the PE firm is already thinking about the nature and time of an exit. “Sellers should articulate their perspective around potential monetization strategies early in the process,” EY advises.
Keep an eye on operational performance. If the business “misses forecasted performance outlined in marketing materials” during negotiations, the PE bidder may get cold feet. Of the 100 PE executives that responded to EY’s survey, 39% said this is the most likely reason they would drop their price or walk away from a deal.