carve-out

Subscribe to carve-out

Buyers and sellers can make the most of divestments through a value-centered approach to planning and post-closing transitional service agreements.

By Richard Butterwick, Robbie McLaren, Emily Cridland, and Katie Campbell

In the current deal market, corporates are taking an increasingly strategic and value-centred approach to planning carve-outs and divestments in order to maximise value. According to advisory firm EY, 84% of corporates recently questioned said they plan to divest an asset within the next two years, up from 20% in 2015. Streamlining operating models and managing a unit’s position in the market are most commonly cited as triggers for divestment. While financial distress can be a factor, EY’s findings demonstrate the analytical approach corporates are taking to divestments. This is echoed in recent deals we have advised on, including Telenor’s sale of its Central and Eastern Europe Business to PPF Group and Allergan’s sale of its global generic pharmaceuticals business to Teva.

In our view, corporates should approach each step of the carve-out process with two key factors in mind — what drives value in the carved-out business and how such value drivers will translate once the business is in the buyer’s hands.

Subcontractors, security, and audit and termination rights will require special consideration under forthcoming EBA outsourcing guidelines.

Richard Butterwick, Deborah J. Kirk, Fiona M. Maclean, Samantha Peacock, Kirsty Watkins, and Catherine Campbell

Recent growth in divestiture and carve-out deals in the M&A landscape, including the financial sector, has brought renewed focus to transitional services agreements (TSAs), which typically feature in such deals. TSAs can facilitate an M&A deal by allowing a seller to continue to provide services to the divested business for a period after closing, providing operational continuity while the parties seek to untangle joint operations and effect integration with the buyer or to establish the target as a stand-alone business.

In our view, deal teams are increasingly aware of both the challenges of structuring a successful TSA and the burdens on parties of relying on such agreements long term. Parties are seeking to address issues prior to closing, and if a TSA is unavoidable, to establish a clear action plan and timeline for executing the necessary steps to exit the TSA in a timely manner. However, as buyers and sellers look to create efficient TSAs, both sides should understand the potential impact of the European Banking Authority (EBA) Guidelines.