Digital & Operating Treasury Autonomy, the recipe for a successful spin-off, whatever the exit road chosen.
Today, many companies have to or want to separate one of their businesses/divisions from all the others for several reasons: financial reasons (e.g. profitability differential), strategic refocusing (e.g. the business is no longer essential or necessary in the group's new strategy), reorganization, raising funds to ensure the survival of the rest of the group (e.g. source of financing for the rest of the group), market and investor demand, and eventually because simply 1 + 1 in terms of spin-offs can make more than two (e.g. opportunity to optimize the company value).
In this context, many companies are looking to spin off one or more activities. Alas, they are thinking narrowly, focusing more on the amount to be recovered than on how to dress up what is being sold, which nevertheless, like a bride with a pretty dress or dowry, would be sold piously. We can only be surprised that MNC's are not getting ready. Yet a "beautiful bride" will sell much better. This gave rise to the idea of preparing the spin-off and preparing for autonomy of the treasury, and in particular digital autonomy.
If a division to be "sold" or disposed of is prepared from a cash flow point of view, with its own team, dedicated tools on its own bodies, its own policies and procedures, etc., it will be even more attractive. Preparing for a demerger is neither pointless nor gratuitous, even if it were to be sold to another industrial group. It is possible to prepare a stand-alone entity, without in any way compromising the current organization (until the sale/separation of the assets). On the other hand, buying an entity that has been prepared from a cash flow point of view will provide immediate financial efficiency and enormous comfort. Yet few people prepare for a demerger. This is even more important if the exit is via an IPO. Here, the cash flow aspect will be a crucial focus for the auditors in charge of due diligence. The success of an IPO also depends on this preparation. This takes time and cannot be done by wave of a magic wand. So, you need to prepare as early as possible and be flexible, agile and responsive when the opportunity arises or becomes apparent.
How to prepare a spin-off?
Preparing for a spin-off of a business involves careful planning and execution across various functions, including treasury management. Here are steps to prepare the treasury management and operations for a spin-off, considering the future acquirer's perspective:
1.??? Understand Current Treasury Structure:
o?? Conduct a thorough assessment of your current treasury operations, including cash management, debt, investments, and risk management strategies.
2.??? Define Objectives for the Spin-off:
o?? Clearly outline the objectives and goals of the spin-off, including how it will impact treasury operations and what the future acquirer might expect in terms of financial structure and risk management.
3.??? Establish a Transition Team:
o?? Form a dedicated team that includes treasury, finance, legal, and operational experts to oversee the spin-off process. This team should have a clear understanding of both the current business and the spin-off entity.
4.??? Review and Segment Financial Assets and Liabilities:
o?? Identify and segregate financial assets (cash, investments, receivables) and liabilities (debt, payables, derivatives) that will be transferred to the spin-off entity. Ensure clarity on ownership and responsibilities post-spin-off.
5.??? Optimize Capital Structure:
o?? Evaluate the capital structure of both the parent company and the spin-off to optimize financial flexibility and efficiency. This includes assessing debt levels, equity structure, and potential refinancing options (external financing).
6.??? Ensure Compliance and Documentation:
o?? Review all treasury-related contracts, agreements, and financial arrangements to ensure they are transferrable and compliant with regulatory requirements for the spin-off entity.
7.??? Develop Standalone Treasury Policies and Procedures:
o?? Create standalone treasury policies and procedures tailored to the spin-off entity’s needs. This includes setting “best-in-0class” guidelines for treasury, cash management, liquidity management, FX risk, commodity, counterparty risk, and interest rate risk management.
8.??? Prepare Financial Reporting and Transparency:
o?? Enhance financial reporting capabilities to provide transparency and clarity to potential acquirers. Ensure that financial statements, cash flow projections, and other financial information are readily available and accurate.
9.??? Address Tax Implications:
o?? Consider tax implications associated with the spin-off, including potential gains or losses, transfer pricing, and any tax-efficient structuring that could benefit both entities.
10.?????????????????? Communicate Effectively with Stakeholders:
o?? Maintain open communication with stakeholders, including employees, investors, creditors, and regulatory authorities, to manage expectations and ensure a smooth transition.
11.?????????????????? Plan for Integration with Future Acquirer (Optional):
o?? If possible, anticipate the needs and expectations of potential acquirers regarding treasury operations. Align policies, procedures, and reporting standards (e.g. IFRS, ESG, EU Regulations) accordingly to facilitate integration post-acquisition.
By following these steps, you can effectively prepare the treasury management and operations for a spin-off, demonstrating readiness and value to potential acquirers. This preparation not only streamlines the spin-off process but also enhances the attractiveness of the spin-off entity in the eyes of future stakeholders.
There are examples of multinational groups that have understood that preparing and optimizing their exit, whatever it may be (because we never really know what it will be, or its precise timing), requires both digital and operational autonomy from the treasury, and this is where an MNC can demonstrate all its intelligence and maximize the creation of value for all its shareholders. Disposing of an asset is no longer a matter of putting it up for sale, but of preparing it to make it as attractive as possible, whatever the exit ultimately chosen. That's what intelligence is all about: preparation and adaptability to optimize your decision and keep your shareholders happy. A more complicated route, certainly, and longer without question, but more profitable because it is open to all types of exits, without altering financial and cash management in the period leading up to the exit. The IPO is the most complicated, the longest and the most demanding exit, and if you prepare properly, you can only save time, money and efficiency. But this can unfortunately include...
Fran?ois Masquelier, CEO of Simply Treasury – Luxembourg – June 2024
Disclaimer: This article was prepared by Fran?ois Masquelier in his personal capacity. The opinion expressed in this article are the author’s own and do not necessarily reflect the view of the European Association of Corporate Treasurers (i.e., EACT).