Study: corporates to accelerate divestments

A concerted effort by big corporates to raise ‘fast cash’ – as evidenced in a new Ernst & Young study – could have tangible benefits for private equity firms.

More than three-quarters of big companies are planning to ramp up their divestment activity over the next two years, according to a report by Ernst and Young.

Ernst and Young commissioned the Economist Intelligence Unit (EIU) to poll 600 senior corporate executives globally, and 49 respondents in the UK, on their appetite for divestments in the near future. Seventy-seven percent of respondents said that they were planning to accelerate sales over the next two years, with the figure reaching 85 percent for UK respondents.

Some market observers believe this could be good news for private equity. “It will give more deal opportunities to people, in an area where it's potentially a very fertile ground for private equity,” Tim Wright, a partner at SJ Berwin, told Private Equity International. “There will be chances for private equity to get into what, by definition, are unloved businesses, and put the capital in that's required to develop those businesses. So it's really very good.

However, other observers were less confident. “A lot of strategics don't necessarily have the same imperative to get realisations as private equity firms have; they're not compelled to do these significant divestments,” said Graham Defries, a partner at Dechert.  “And they're also seeing that's it's not that easy to sell companies at the moment.  Buyers are very cautious.”

According to the EY report, seven out of ten respondents think the main driver behind this divestment drive is the desire for a quick cash injection, as opposed to longer-term strategic motives. As a result, only a minority of sellers carry out the steps needed to enhance the value story of their divestments, the study suggested. Seventy-six percent of them allegedly “leave money on the buyer’s table,” as they often fail to extract the fullest possible price from future acquirers.

But industry insiders had mixed views on whether private equity firms were able to acquire assets cheaply in the current environment. “I wonder how much really there is left on the table,” Wright said. “Sometimes there is … but a lot of acquisitions don't work as intended and many a buyer wishes there had been rather more left in the table.”

In fact, in many cases, prices have yet to come down noticeably, Defries argues. “I'm always hearing complaints from buyers that valuation expectations are very very high on the part of sellers. Even in areas where there are willing sellers, the buyers may be frightened off by some of the multiples that the sellers are expecting.”

Part of the reason is that the M&A environment remains very competitive, he said. “The strategics are often able to pay more than private equity firms. They still have a lot of cash, and they're interested in the buy-side. Meanwhile, credit conditions remain very difficult.”

Another issue, according to the study, is that few respondents were ready to present their case to potential private equity buyers specifically: only a very limited number expected to sell to buyout firms over the next two years.