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Creating Value Through Demergers

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Creating Value Through Demergers Creating value through demergers FW moderates a discussion on creating value through demergers between Sanjay Thakkar, Ina Kjaer, Jonathan Boyers, Nicola Longfield, and Caroline Bott at KPMG. Marco Schwartz, Naveen Sharma, Jeremy Welch and Matt Watkins also assisted on the production of content. Sanjay Thakkar Sanjay Thakkar is a partner and a member of the executive committee of KPMG Head of Deal Advisory in the UK. He is head of deal advisory which advises clients to buy, sell, fund, fix KPMG in the UK and partner. In a career spanning 26 years, Sanjay has worked across the globe in T: +44 (0)20 7311 1000 both emerging and developed markets including London, Frankfurt, San Jose and E: [email protected] India. He is a banking and telecoms market recognised partner and has extensive experience advising global funds. Ina Kjaer Ina Kjaer is a partner within KPMG's integration & separation team in the UK. A Partner Brazilian native with over 15 years' experience of managing cross-border KPMG in the UK integrations & separations, she has broad and extensive M&A advisory T: +44 (0)20 7311 8901 experience, having advised on financial, commercial and integration issues on E: [email protected] numerous cross-border acquisitions and disposals. Additional areas of expertise include identifying, delivering and tracking revenue and cost synergies and complex cross-border integrations and separations. Jonathan Boyers Jonathan Boyers is the KPMG partner who leads the firm's corporate finance Partner practice in the UK. Jonathan also oversees KPMG's wider deal advisory business KPMG in the UK across the North region, which comprises corporate finance, valuations, debt T: +44 (0) 161246 4136 advisory, transaction services and infrastructure advisory, and also involves M&A E: [email protected] tax, consulting services and legal services. He has advised hundreds of companies regarding strategy and corporate finance transactions, with deal sizes ranging from £1 to £600 million. Nicola Longfield Nicola Longfield is a partner and head of KPMG's deal advisory consumer Partner markets team in London. She has over 15 years' experience with KPMG as a KPMG in the UK transaction services specialist, advising corporate and private equity clients on sell- T: +44 (0)20 7311 4383 side, buy-side and refinancing projects. Nicola has worked on a wide range of E: [email protected] transactions within the consumer markets sector, including acquisitions, disposals, IPOs, refinancing and sell-side support. Caroline Bott Caroline Bott is a partner and leads KPMG's valuation services group in the UK. Partner Caroline has specialised in commercial valuations since moving to KPMG KPMG in the UK corporate finance in 2004. She has experience of a full range of commercial T: +44 (0)20 7311 8371 valuations for both public and private companies in the context of mergers and E: [email protected] acquisitions, joint ventures, fund valuations, restructuring, disputes, expert determinations, fairness opinions, reorganisations and tax and accounting valuations. She also leads KPMG's consumer and healthcare valuations businesses. © 2018 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Mergers & Acquisitions FW: How would you describe If a corporate feels it needs to slim Thakkar: Nevertheless, divestments general demerger activity in the down its focus on a smaller number are not confined to a particular region current market? What factors are of businesses, and therefore exit a or sector. Successful deals are driving this trend? particular area, now is as good a time ultimately defined by strong business as ever to achieve full value. fundamentals rather than being Thakkar: Our economies have been defined by sector or geography. operating in a low return environment Longfield: We are certainly seeing a Other key drivers of deals include the for a number of years. Lower yields lot of global businesses really think disruptive forces caused by are prompting shareholders to assess about their portfolios and focus on technology, innovation and whether they are receiving adequate what they see as strategically geopolitics. returns for the level of risk and important, which has led to a number amount of capital invested. This of sizeable disposals or demergers, FW: Could you provide an ongoing hunt for scarce returns is across various sectors. The overview of the benefits a ultimately what is driving deal consumer and life sciences sectors demerger can bring to a business? activity. Where a shareholder are two particular examples. The aim Kjaer: Demergers and divestments believes that someone else can is often to free up large amounts of can deliver huge savings through extract greater value from a business, capital to then focus on areas they simplification. Some of these it makes absolute sense to crystallise see as absolutely core in the future. businesses are very bureaucratic, this by divesting this business. The In addition, financial institutions are really complex beasts and ultimately, term ‘demerger’ itself is too narrow continually having to assess that can be expensive. Take out that as it is simply a mechanism through shareholder returns in light of complexity and you actually have an which a shareholder is able to increasing pressure from regulators enormous amount of cost savings in monetise future value, in the same to strengthen their capital base. a much more straightforward, more way that divestments, joint ventures Banks in particular are having to focused business which is able to and strategic alliances can. reassess their portfolios and different concentrate on what it is good at. We businesses attract different levels of Boyers: Activity is driven by a desire often find that demerged businesses regulatory capital. to continually refine and drive are more agile and fleet of foot in portfolios. There has probably never FW: Are there any regions or their operations and also that been a better time to sell a high- sectors where demergers appear decisions are made with closer quality business than over the last six to be occurring with particular proximity to the customer. to 12 months. The amount of private frequency – and if so, why Demergers are less successful when capital that has been raised in order they fail to shrug off legacy Boyers: There has been strong to buy businesses is phenomenally bureaucracy and business culture. activity across a number of sectors. high and we are also seeing We have seen high levels of activity Boyers: I would add that from a enormous interest from US, Far East in food and drink, both in the UK and commercial perspective, sellers can and Middle East corporate buyers globally, where a number of also enjoy a corporate finance thanks to the devaluation of sterling. businesses are looking at reshaping arbitrage if they sell for more than Put these two factors together and their portfolio of brands to more their own investors thought it was sellers are achieving multiples above specialist groups. There has also worth. anything people can remember – been quite a bit of activity in media, certainly several turns higher than FW: What fundamental technology and, more widely, in two or three years ago. The fact that characteristics of a business gambling and gaming with a a large number of private equity typically make it a sound consolidation of players in this sector. houses have been exiting over the proposition for a successful Power – both its distribution and last year or two demonstrates the demerger process? retail – is the other area to mention buoyancy of the market. as one primed for activity. We have Bott: In a lot of the disposals we see, already seen a number of corporates describe the business as independent electricity companies 'non-core'. I think it is important that emerge on the back of government when businesses describe a unit that Successful deals are policy for switching, and reports way, they do not infer that this ultimately defined by suggest the independent power business is underperforming, sector could go from 2 percent of the because that is often the assumption strong business market in 2013 to something closer made. Often it is more a case of a fundamentals rather to 30 percent in 2019. I think a business lacking strategic alignment number of those independent power or sufficient scale for the parent, but than being defined companies will start to consolidate, actually having significant growth by sector or and that will spur activity among the potential. 'Big Six', which will offload non-core geography products across distributed power, combined heat and power, and Sanjay Thakkar renewable energy, which in tum will be snapped up by private equity or KPMG in the UK specialist businesses. © 2018 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Mergers & Acquisitions Boyers: Once a company has FW: Could you highlight any decided on strategy of divestment it examples of demergers which needs to make sure the assets in illustrate the value creation Deciding where the question are in a position where they aspects of the process? To what company wants to can be marketed. Can they stand extent can they be used as a tool alone? Can they be stripped out of to boost shareholder returns? play in future is central overhead structures, central Thakkar: PE absolutely loves probably the most reporting structures or head office disposals from a value-creation structures? Do they have an strategically perspective. Often a business might independent business plan that can be the unloved second cousin as part important point.
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