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Corporates cash in: Divestitures offer hope amid low overall M&A

Corporate divestitures remain resilient while overall M&A continues to be muted.

For the first eight months of 2023, there were 707 divestitures worth USD 102bn in the US, up from 686 carveouts totaling USD 88.5bn during the same period last year, according to Mergermarket data. Last year finished with 1,021 divestitures worth USD 139.7bn, down from 946 transactions totaling a record USD 452.4bn in 2021.

About 10% of all announced deals in the US this year have been divestitures, up from 8.2% in 2022 and 7% in 2021, though still down from an average of 12% over the last decade, according to Mergermarket.

Room for review

One reason perhaps behind this, according to Mike Niland, head of PwC’s US divestitures practice, is that while divestures can help companies’ de-lever, not enough companies review their portfolios often enough.

Companies often first invest capital in divisions or non-core assets that should be divested, hoping to turn them around, Niland explained. Often, the asset’s value remains the same or even deteriorates, according to Niland.

“Deal volume could be inherently higher if companies improved their portfolio review and took action sooner,” he said.

Valuation mismatch, tough credit markets

To see a continued uptick in divestiture activity and a recovery in overall M&A volume and valuations, there needs to be improved macroeconomic clarity, stable financing markets, and increased corporate confidence, according to Niland.

One of the main reasons deals are not getting done is due to the valuation mismatch between seller and buyer, Niland explained. In the current environment, businesses are less attractive when a buyer needs higher-priced debt to finance the transaction, and buyers take those borrowing costs into their pricing considerations, he said.

 

“The credit markets are still relatively slow, and it's still tough to get that financing in the marketplace,” said Mitchel Nakken, managing director at M&A consulting and advisory firm Palm Tree.

Helping to drive corporate divestitures this year, according to Nakken, are distressed activities. Markets want to see balance sheets lightened, and the best way to do that is to shed unwanted divisions, business units and non-core assets, he explained. A number of Palm Tree’s private-equity clients are expressing interest in distressed assets.

Companies are also looking at other structuring transactions to complete deals, such as asset swaps or minority stakes, among other things, according to Niland.

Pre-pandemic return?

Dealmakers believe there could be an uptick in divestitures in the coming quarters, with investors believing the Federal Reserve has now finished hiking interest rates.

“Corporate activity will likely recover later in the year [and] into early 2024,” Niland said.

Some large divestitures are already in the works. Engineering and architecture firm Jacobs Solutions [NYSE:J] last month took initial bids for its USD 4.4bn Critical Mission Solutions (CMS) business. Albertsons [NYSE:ACI] and Kroger [NYSE:KR] are drawing buyers for store divestitures aimed at securing regulatory approval for their pending USD 24bn merger. Aerospace and defense industry company L3Harris Technologies [NYSE:LHX] last month was in the second round of the sale of its avionics business.

Because interest rates have leveled and the inflation picture is better understood, Palm Tree’s Nakken said he is “cautiously optimistic” there will be an uptick in activity in 4Q23 and 1Q24.

How much of an uptick and “what that ramp looks like,” Nakken said, remains uncertain.

Analytics by Rachel Stone and Izaz Ansari