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Private equity companies sell non-core units as a pandemic leading to £10 billion in carving out agreements

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The economic upheaval of the last year has caused many major companies to rely even more on their core activities, making them much more vulnerable to sales of less strategically significant units, said the law firm Mayer Brown.

The legal giant found that private share funds with substantial deployable capital were a big beneficiary of increased competition in divestment by companies and were also bidders in such auctions.

This includes large U.S. private equity companies involved in the four UK company sculpting deals worth more than £1 billion purchased by PE buyers in 2020, the Viridor Waste Management department bought by KKR and Hermes in Pennon, Coty, bought by KKR for £4.2 billion, the I Squared Capital department GTT Communication, for £1.6 billion, and CDK Global.

The pandemic may have also played a part in increasing the amount of UK carve-out deals with PE funds. Mayer Brown found that 14 such agreements were completed last year, compared to just six in 2019 and seven in 2018.

In 2020, a number of PE-backed corporate carve-outs included major listed companies who should have expanded their turnaround programs due to the pandemic.

COPYRIGHT_WI: Published on https://washingtonindependent.com/ebv/private-equity-companies/ by Frazer Pugh on 2021-04-29T12:25:47.748Z

These agreements include the divestment of Ferguson's Wolseley division in the UK and sales of Capita and Saga.

"The pandemic has provided a great deal of attention to key markets for many companies. Also at the best moments, administrative divisions continue to fight for management time and finances. These company units well off the list of targets could be sold to a different investor," says Mayer Brown partner James West.

"With PE funds interested in doing transactions, the carve-outs still make a lot of sense on both sides," West said to City A.M.

He added that another important aspect is the handling of cash flow by some businesses because of almost 12 months of sanctions and market uncertainty associated with Covid.

"For companies too, carving-outs have an incentive to shed business divisions that perform poorly and have little time to repair them," West added.

"Listing enterprises may also see it as 'subtracting add-on' – a way to increase their share price by distributing portions of the community owners, which can draw a lesser number than the rest of the business," he said.

"Some PE companies in the United States have worked particularly hard to find UK carving deals over the past year as they want to use some of the firepower they have stored. In the coming year, these negotiations will probably occur as company consolidation programs continue," West concluded.

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About The Authors

Frazer Pugh

Frazer Pugh - I work in the investment management sector as a professional. Previously, I advised top financial services companies on balance sheet management, portfolio planning, and valuations as a consultant. I am currently pursuing a part-time MBA at Melbourne University, where I am a lecturer in accounting and hedge fund strategies, as well as a mentor/coach in a part-time equity analysis initiative. I have a bachelor's degree in economics, a master's degree in finance, and am a Chartered Accountant. I enjoy instructing and assisting others in achieving their objectives.

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