DealmakersTalk is a series of interactive quarterly webinars, including insights, Q&As and guidance from deal making leaders and KPMG experts. Each webinar focuses on topical and relevant subjects that are shaping the investment and deals space. The objective is to provide informative insights across the deals space, from hearing the first-hand experiences of the deal makers who achieved them.
In the first webinar of the series, we brought together inspirational business leaders to share insights on their recent M&A journeys, discuss how life in a pandemic is informing their portfolio decisions and how they are reshaping and repositioning their strategies, with an overarching focus on long-term sustainable growth.
In this second of two articles, we explore strategies for managing a smooth divestment process.
As we emerge from a year of unprecedented challenges, with the prospect of a return to normality still looking some way off, businesses are reviewing their portfolios closely to ensure they are the best possible size and scope to deliver sustainable growth over the months and years ahead.
This will often include divesting and demerging businesses that do not fit, either as part of an existing long-term strategy, or as a response to the challenging operating environment. But unlocking the true value of a non-core business can be difficult, as they are often deeply embedded within the seller’s organisation. Managing the divestment process effectively to ensure maximum value for the asset and minimal disruption to the rest of the business requires strategic understanding and robust planning.
Both Sarah Byrne-Quinn, Head of Transaction Execution at Anglo American, and Conrad Tate, Corporate Development Director at Imperial Brands, have managed significant non-core divestment processes in their careers.
Imperial Brands divested its premium cigar business for over US$1 bn in April 2020, while Anglo American has announced plans to exit its thermal coal business by 2023. Both these assets are seen non-core to the business. Identifying non-core assets in a portfolio is not only about financial performance and strategic priorities. As these two examples illustrate, environmental, social and governance (ESG) principles are also playing an increasingly influential role in portfolio reviews.
“ESG is at the forefront of our minds as we look at how we need to adapt our business to the future. We aim to develop products that satisfy consumer needs more effectively than we, as an industry, have done in the past. We want to move consumers in the direction of harm reduction and reduce the public health impact of smoking,” explained Conrad.
Sarah agreed, stating that “ESG is extremely important to Anglo American. Above everything else, safety is the top priority within the company. Mining is not a risk-free business and safety is one of the key things we focus on.”
For many businesses, ESG considerations are critical in terms of how they manage their portfolio. Whether it be sourcing materials, human rights, manufacturing, suppliers, there is an expectation that scrupulous business standards are maintained.
Anglo American is investing in renewable energy assets, such as wind in Brazil and solar in South Africa, and is developing new ways to process ore using less water, to reduce its carbon and broader environmental footprint. It also supports local communities where it operates, with a range of initiatives such as financial education assistance and HIV treatment for employees.
“For us, ESG is about being responsible across the whole business. And we are continually looking at ways of doing everything better. It needs to be fundamentally part of how you do your work, not just what you do,” continued Sarah.
Having identified an asset for divestment, one of the fundamental points to consider is who the likely buyer might be, and positioning the asset and the transaction accordingly.
The core distinction is likely to be a private equity buyer versus a trade buyer. Over the past few years, private equity houses have amassed significant funds ready to invest at the right time, in the right assets. As professional investors, they can move quickly and make fast decisions. But their objectives are purely financial: to buy at the best price and make the best possible return on the investment. They are likely to be less familiar with the market than a trade buyer and will place a great emphasis on due diligence. However, due diligence can be costly, so a private equity house will only sanction paying for it once they have exclusivity on a deal. In the meantime, it is incumbent on the vendor to prepare very thorough and detailed information to give them.
Trade buyers, on the other hand, may be less cash rich, but will be more able to leverage the efficiencies that might be critical to achieving maximum value for an asset – and maximum price for the vendor. If they already operate in the same or similar market, they may not require the same degree of ‘spoon-feeding’ as a private equity buyer, either. For a trade buyer, an acquisition will probably be a more strategic decision – but decisions will tend to take longer, so it is advisable to start the process earlier than with a private equity purchaser.
“You need to understand what the buyer universe is and then prepare for that universe. Put yourself in the buyer’s shoes and consider what is likely to be most attractive to them about the transaction,” said Sarah.
It used to be assumed that trade buyers would generally pay more for an asset, as they would be better placed to benefit from synergies between the businesses. This is no longer so cut-and-dry, however. With private equity buyers sitting on significant amounts of ‘dry powder’, they are increasingly prepared to pay more for the right deals.
Running a successful divestment is complex and time-consuming. It is easy to focus on the figures, the data, the process, and neglect another vital component of a successful transaction – people. Politics and personal relationships are as important in a process as the numbers and the analytics, so building trust is vital, said Conrad.
“Being open and honest goes a long way. People don’t like to think they are being kept in the dark. They want to know what to expect: what’s happening, why it’s happening, what it means for them, even if some of those messages are difficult. If you don’t communicate that, it can undermine a lot of what you stand for as an organisation. So being straight, being honest and showing people the respect they deserve is really important,” he said.
The importance of good communication was also highlighted by Sarah, particularly in big transactions that may generate a range of diverse opinions within the business. It is vital to understand where the potential complexities or differences of opinion lie, and to deal with them early.
“We have sometimes been accused of overcommunication in the past,” said Sarah. “But if you ask employees themselves, they would much rather be told more about changes that may affect them, rather than less.”
After an undeniably muted deals market for much of 2020, the early indications suggest that 2021 could see higher levels of M&A activity across the board. The most successful of these are likely to be the ones that put in the most preparation and facilitate the most efficient transaction process.
“It’s about 70% preparation and 30% execution,” said Sarah. “Spending time on preparation enables you to implement a fast and efficient execution, and ultimately, a more successful outcome.”