Maximising the value from carve-outs: Five steps to successful separation

Shane Horgan Partner, Delivering Deal Value, PwC United Kingdom May 2022

Carve-outs are a growing feature of the deal market as the need to speed up portfolio transformation and the transition to net zero has triggered a wave of portfolio and strategic reviews.

Separation and divestment offer sellers opportunities to raise funds, rationalise complex group holdings and refocus resources on growth priorities. In turn, buyers, many of whom are private equity firms and specialist consolidators, can breathe fresh life into previously peripheral non-core divisions.

Potential pitfalls

However, poor planning and execution could mean that a lot of the potential value from separation is lost. The potential pitfalls include unforeseen costs, complex operational dependencies and the need to agree with buyers on the terms for transitional support.

What’s also clear from our work on a number of major recent carve-outs is that the success factors are evolving and the margin for error is receding. This reflects shifts in buyers’ priorities, closer focus on environmental, social and governance (ESG) issues and more complex operational considerations in the wake of digitisation, rising costs and supply chain disruption.

Maximising deal value

So, how can your business make the separation a success? In our experience, five key priorities stand out:

Step one: Clarify what’s going and how

Clarify what is for sale and what isn’t, upfront. This will prevent a lot of difficulty and wasted costs further down the line.

With the scope defined, you can work out the most appropriate exit strategy – IPO, spin-off or sale. You can also begin to evaluate and tackle deal costs up front. From stranded costs to retaining key talent, early planning and mitigation are needed to avert needless expenditure and boost deal returns.

If perimeters do need to change, it’s important to analyse the implications across all work streams (e.g. operational or legal) and ensure all relevant decision-makers are engaged.

Step two: Identify the value potential

Pinpoint and analyse the opportunities for growth, for example in adjacent markets or sectors.

Identify cost savings. Separation can provide the catalyst for challenging operational assumptions and realising efficiencies in areas such as headquarters administration and supply chain consolidation.

Gather the right data to support the sale – including relevant source information for the carved-out operation’s balance sheet and profit & loss. Who has it? How can you extract it? The business may rely on disparate data sources that contain co-mingled or incomplete information. Complex processes may therefore be needed to extract data, bridge gaps, resolve issues and analyse the information so that it’s in a suitable format to meet the needs of stakeholders.

Step three: Assemble the right people

Identify appropriate decision-makers early on, establish clear governance structures and make sure advisors are involved to support them. This will help to resolve issues and clear bottlenecks.

Bring together the right project team to work with advisers to develop the value creation plan and walk this through with potential buyers.

Assign the right management team to oversee operational transition, then take the standalone business forward. Alongside incentive and retention plans, it's important to keep these key personnel informed and address their potential concerns and uncertainties.

Step four: Carry out ESG due diligence early

ESG due diligence can often be left to the end. But it could have a make or break operational and reputational consequences and should therefore be carried out up front.

Step five: Build the separation blueprint around a clear target operating model for the standalone business

With the end state defined, you can establish separation plans and carry out due diligence in key areas including financial (e.g. pensions), workforce and transition planning, as well as ESG. This will enable you to identify risks and define expectations for buyers.

Carve-outs can involve complex decisions that are inherently more difficult to navigate than the sale of a standalone business. If you would like to discuss any of the steps above and how to maximise value, please get in touch.