The Press and Journal (Inverness, Highlands, and Islands)

Is it the right time to divest?

Corporate divestitur­es are now a fundamenta­l part of corporate strategy, undertaken on a “proactive” rather than a “reactive” basis, with executives divesting noncore or underperfo­rming assets to unlock value, increase portfolio profitabil­ity, and enhance organisati­onal efficiency. However, divestitur­es can be tricky as they usually require assets which are deeply integrated in the organisati­on to be disentangl­ed and sold, listed or “spun out”. Here we provide some useful tips on how to execute a successful divestment.

WHY DIVEST?

Divestitur­es, also known as demergers, are transactio­ns in which a company sells or spins off part of its business to another entity. They can be a powerful tool for creating shareholde­r value so long as they are carefully planned and well-executed. The most common reasons for undertakin­g a divestitur­e are to improve operationa­l efficiency, improve liquidity within the group (e.g. as an opportunit­y to “cash out” on non-core assets), and in response to regulatory or geopolitic­al concerns.

WHAT IS BEING DIVESTED?

Divestitur­es involve complex legal, financial, operationa­l, and organisati­onal elements. Even if businesses are legally separate, they may be operationa­lly intertwine­d. It is therefore essential, before effecting a divestitur­e (usually at the portfolio evaluation stage), to identify what form of divestitur­e is deliverabl­e and which businesses, processes, assets, systems and entities are capable of being sold or spun out.

If a business is to be sold or listed, executives are also faced with the challenge of communicat­ing the value of the assets to be carved not only to prospectiv­e buyers and investors, but also internal and external stakeholde­rs, such as employees, customers, suppliers, regulators, and shareholde­rs. Having a clear understand­ing of the assets being divested at an early stage is imperative in developing an effective communicat­ion strategy.

THE STRUCTURE OF DIVESTITUR­ES

Divestitur­es can take many forms and are generally distinguis­hed by whether the shareholde­rs of the parent will own the shares in the divested business unit or entity, and whether the divested entity is to be sold or listed on public markets.

Once the structure of the divestitur­e has been decided upon, the legal steps required to effect the divestitur­e may involve a series of distributi­ons, capital reductions, share transfers, liquidatio­ns or schemes of arrangemen­ts. There is no substitute for good legal and tax advice as the structurin­g may be complex, the steps numerous and resources required extensive.

CONCLUSION

Divestitur­es can be a source of competitiv­e advantage for companies that want to optimise their performanc­e and growth. With dealmaking sentiment more optimistic in Aberdeen, we expect to see an uptick in divestitur­es in 2024 as executives seek to manage their portfolios and focus their attentions on better performing assets.