What are Carve-Outs? Has your time come?
The outbreak of Covid-19 and the measures adopted to control it have drawn a new economic scenario and have led to a review of the business plans designed for these years.
Companies have abandoned their growth objectives and have focused on survival, with liquidity and funding being the main focus of attention. The fall in demand has meant, for most sectors, a drastic reduction in revenues in the short term and little visibility of them in the medium term. Companies have focused on working capital management, cost reduction and financial leverage, often through ICO loans.
In this new economic environment, Carve-Outs are considered a very interesting alternative for Companies. The Carve-Outs consist of the segregation of business units, non-core investees or non-core assets of the parent company. The divestment and monetization of assets allows the Companies to focus on their main activity and allocate said resources to reduce debt or CapEx.
These industrial divestments respond to four strategies:
1. Give visibility to the value of an Asset
2. The need to deleverage the Company
3. Get rid of a business with little strategic fit
4. Growth opportunity with a new partner
Carve-Outs not only make economic sense, but also strategic since they allow the management team to focus on the main business areas. These operations are usually carried out by large multinational companies that decide to focus on more operational markets and businesses. It is also a natural tendency in certain companies such as Sacyr, ACS or Ferrovial to rotate the portfolio within their strategy of disposing of mature businesses.
They have been a common practice in sectors such as Telecommunications, where infrastructure owners have appeared that sublet assets to mobile operators, allowing the latter an increase in CapEx for the arrival of 5G . The financial sector has been another of the protagonists, banks have sold portfolios of non-performing loans, asset managers, and investees in the real estate sector to focus on purely banking activity.
In the sectors most affected by the crisis (tourism, restaurants, automobiles, leisure) there will be an accelerated concentration, so there will be more mergers and divestments than usual. These disinvestment processes are going to be a window of opportunity for Venture Capital.
The cash needs of the Companies coincide at a time when the Private Equity funds have 4,000 million Euros of “dry powder” – money committed and ready to be invested. Almost 70% of corporate operations are carried out by this type of managers. That is why the Venture Capital industry is considered as part of the solution to the new economic scenario.
By Javier Navarro Enguídanos, Analyst at Vinca Capital Corporate Finance