Corporate Carve-Outs in the Brave New World

At Aurelius, we have been privileged to ride on a ring-side seat of corporate divestment activity over the last 15 years as a long-standing investor and expert in carve-outs. We have transacted through bull markets and recessions, adapting our investment strategy along the way. But our latest annual Corporate Carve-Out Survey was thrown a surprise by the Covid-19 downturn. 

Following an appreciable (and yet understandable) slowdown in corporate carve-outs since March, we are now ready for this market to recover.

Short-term pain

There has been much commentary of how corporates in the UK and across Europe have implemented safeguarding plans since the widespread pandemic lock-down. This has seen them pause divestment M&A processes in order to focus on their key stakeholders: lenders, shareholders, suppliers, customers, employees and governments. Corporates have taken a series of measures to survive in the short-term:

• Almost universally corporates have engaged with their lenders with many electing to draw-down on credit facilities, seek covenant waivers or other financing support
• They have communicated with their shareholders either raising new equity, cancelling dividends or managing down their forecast performance expectations
• There has been intense working capital management to preserve cash and (where possible) achieve extended credit terms from suppliers and landlords
• Corporates have maintained close dialogue with customers whether managing expectations on delivery, order fulfilment, refunds, closure or service changes
• Employees have been widely furloughed or encouraged to be a more flexible resource with corporates leading from the front with senior management pay deferrals or reductions
• Governments have provided pandemic support packages and corporates have been accessing new guaranteed lending facilities, employee cost cover arrangements and other practical support

Long-term gain

As the pandemic lock-down starts to give way to a gradual return to a “new normal”, with social distancing and other measures in place, we expect corporates will move on from the safeguarding measures above and take up other tools that enable them to thrive in the “Brave New World”.

Portfolio management will soon become a renewed focus and act as a major catalyst for new corporate carve-outs. Across the business world strategic re-assessments of corporate potential and prospects in the near-term and longer-term will bring new vigour to the corporate planning cycle. However successful the corporate has been in tapping liquidity and conserving cash, the "new normal" will require them to ration capital and focus their management resource (or be seen to do so).

In our experience, it is inevitable that the pandemic will result in many corporates across the UK and Europe having insufficient capital to maximise the potential of all their portfolio of businesses. We anticipate a strong flow of carve-out transactions later in 2020 and into 2021 and look forward to playing our part in transforming what was a non-core business for a corporate... into a market leader that can play its part in returning the economy to full productivity.