May 25, 2021

Divestment: Breaking the Cycle of Inaction

One of the most interesting takeaways from EY’s recent Global Corporate Divestment Study is that 78% of companies surveyed said that they held on to assets too long before divesting them. This excerpt provides some tips on how to break the cycle of inaction when it comes to assets that no longer make strategic sense:

There are instances where the cyclical nature of a business unit can entice a company into holding onto it. For example, companies in cyclical industries, such as steel or oil and gas, identify a business as a divestment candidate at the bottom of the cycle, but have held on to see if it can be sold for a higher price when the cycle turns. However, when the business does improve, management may decide not to divest. Then the cycle turns, the process is repeated and the decision to divest is repeatedly postponed.

To break that cycle, CFOs may want to consider recommending strategic alternatives such as:

–  Staged or stepped exits: Selling a majority interest while maintaining a minority investment can provide the best of both worlds. It removes the business from the balance sheet and brings in new external capital that a non-core holding will not receive under a strategically determined capital allocation plan. At the same time, it provides continued exposure to the business’s upside through the reduced stake retained.

Asset-light approach: Companies may take this approach if a business is important to the firm’s operations, but not a core competency. One example is Dow’s sale of its US and Canadian rail infrastructure in July 2020 for about $310m. Notably, the transaction also included a long-term service agreement with the buyer, logistics firm Watco, thereby allowing Dow to maintain the necessary services while removing the rail assets from its portfolio.

Joint ventures with strategic partners: This structure may be particularly attractive if the business is an important supplier to the parent company.

The report notes that companies pursuing divestments can capture  strategic benefits that support future portfolio decisions. 53% of companies cited an improved credit rating and access to capital as strategic benefits of their last major divestment, while 48% say they were able to make clearer capital allocation decisions.

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–   John Jenkins