Carve out, it's also time to divest

While M&A activity has increased post-Covid, with a record year in terms of deal value ($5,160 billion in 2021, up 58% from $3,264 billion in 2020), the recent period has also been largely conducive to asset disposals or carve-outs.

Carve-outs and other divestitures have been going on at a steady pace over the past few years and have accelerated post-Covid. In the United States, the first half of 2021 has seen a significant increase in the value of Carve-out transactions of around 197% compared to 2020, exceeding $280 billion.

However, while the health crisis has played a major role in this trend, the reasons for a Carve-out can be multiple.

Motivations for a Carve-out operation

a. Economic rationale 

To reduce their debts and increase their cash flow, several groups are choosing to divest certain activities. The health crisis has increased this trend. 

Some groups have decided to sell their infrastructures in order to generate cash to i) invest and ii) reduce their debt. Several operations of this type have been carried out, notably in the hotel industry or in telecommunications, where operators (Vodafone, Orange, SFR) have sold part of their towers to third-party service providers, known as "TowerCo". 

The value of the company may also lead a company to carry out a spin-off (separation of assets that remain within the same group), as its overall value may be lower than the sum of the values of the separate activities. This is one of the reasons that led the Solvay Group to decide to divide its activities into two distinct branches (see Business Case 1).

Business Case n°1 – Solvay 

b. Refocusing rationale

The refocusing rationale has long been the historical driver of asset disposals, with groups seeing an opportunity to refocus on their core business and rationalize their portfolio of activities. This trend has resumed strongly post-covid, with the separation or autonomization of activities that previously corresponded to a diversification logic. It is in this perspective that Engie has sold several non-core assets (see Business Case n°2). 

Business Case n°2 – Engie 

b. Autonomisation and development rationale
Another motivation for a Carve-out is the desire to make a promising activity autonomous/promote it within a group to enable it to develop better. This is the case of Sanofi recently (see Business case n°3) or of General Electric (see Business case n°4).

Business Case n°3 – Sanofi

Business Case n°4 – General Electric

Telecom operators are also very active in Carve-out operations. Some, such as STC (Saudi Arabia) have spun off their ICT services activities (e.g. cloud, cybersecurity, IoT) in order to accelerate the development of this growth vector. The same logic led Orange to formalize at the end of 2021 the spin-off of the management of some of its towers in France and Spain, by creating its own TowerCo. In Africa, mobile financial services activities (MFS / Mobile Money / Fintech) represent a real strategic cut-off option to attract investors and/or partners to autonomously address the markets to be developed. MTN is seriously considering a spin-off of its MFS operations.

d. Sustainable / ESG rationale 

Finally, environmental, social and governance (ESG) concerns have been growing within large groups for several years. Indeed, in anticipation of stricter regulations to come and/or in response to shareholders and customers who are more concerned about these issues, management may decide to divest activities that are not very accommodating or not aligned with sustainability or non-ecological values. Total is an example of this (see Business Case n°5).

Business Case n°5 - Total

Key sucess factors

Rigorous perimeter analysis to ensure a seamless transition

The main difficulty in a Carve-out lies in the degree of dependence of the activity/entity to be extracted on the parent entity. It is important to analyze in detail the activities and their relationships and to identify the perimeter to be diverted. The perimeter can thus be segmented into "streams". The front-end functions (e.g. sales, marketing, branding) are the easiest to identify. The "back" functions (contracts, intellectual property, HR, IT infrastructure, operations) require a rigorous analysis, as these functions may be diluted in the activities of the parent company. HR and IT/IS issues are regularly among the key topics.

Here are three main risks to be aware of in a Carve-out operation:

i) discontinuity of operations

ii) increase in the cost of the operation

iii) failure to meet deadlines.

To manage these risks, an effort of preparation and planning of the operation is required as well as the elaboration of service transition agreements (TSA) supported by a rigorous management. The identification and quantification of possible synergies with the target entity is also important for the acquirer to prepare.

Project management and change management

A strong project management is required in the framework of Carve-out projects in order to ensure a reinforced follow-up of each streams and the involvement of all contributors. Project communication, team accountability and continuous involvement of the project team are key success factors. Separating an activity requires appropriate change management at each stage of the process, from the definition of the scope to be streamlined to the implementation phase, including the actual application of the processes.

Euromena, a partner of choice for your Carve-out operation

Euromena Consulting assists many clients in their Carve-out operations, with numerous references for our clients in Europe, the Middle East and Africa, in many sectors (e.g. TMT, Industries, Chemicals, Transportation). 

We will support you throughout the entire process of asset Carve-out, from the definition of the strategy and objectives to the operationalization, including the pre-deal phase (eg. Vendor Due Diligence). 

For more information, visit our dedicated M&A page or contact us.

Key contacts: 

Fayçal El Darwiche, Managing Partner -

Mathieu Hubier, Partner -

Milot Sulja, Manager - 

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