Treasury management of spin-off and carve-outs

No one could contest that there are an increasing number of carve outs and spin offs, with groups refocusing on core businesses. Private Equity investors have revolutionized the M&A business and have specific objectives, often with a precise goal of an IPO in the very near future. The aim of a carve-out operation is that the business that is being separated will rapidly need a fully functional, standalone, and professional treasury organization upon decoupling. Therefore, it means setting up a dedicated skilled team, processes, IT systems, cash-pooling, liquidity structure, own bank accounts or/and standalone financing arrangements. The key issue is “timing”, as usually they must implement a completely new treasury department within tight deadlines or even within couple of months.

Increasing number of spin offs

Over the past five to seven years, on the corporate market, we have noticed (and it will increase over time) a significant upsurge of corporate carves out and spin off operations. This trend is predicted to continue as businesses continue to face increasing competitive pressures and shareholder activism. Is it a response, a reaction, a request from the market? Anyway, multinational companies tend to realign their portfolios and re-focusing on core activities to generate (more) growth, or to create more market capitalization by simply dividing the businesses in parts.

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Treasury organization, the missing piece…

You can certainly name many examples of MNC’s having launched such spin offs or planning such sales. The problem when we talk about such projects, treasury in the newco is seldom addressed, considered, prepared, or organized. This needs to be contemplated prior to the disposal to make it successful. These MNC’s will keep facing problems in case of businesses spun off. How could we help group treasury departments to create value for CFO’s? Solutions are emerging and may help. C-level wants to create value by these operations, splits, and disposals. In some cases, they may keep shareholding in the company /sub-group. It means that even if they keep minority interest or are not controlling and consolidating anymore the spin-off business, they must ensure its best financial management, including treasury. If you sell one fifth of your businesses, you cannot and will certainly not transfer one fifth of your treasury team to the disposed asset and will not be able to transfer freely IT licenses of TMS alike tools.

Treasury management of disposals

When you want to sell an asset or when you sell it, you don't want to sell it as is or with its treasury management accessories. So, the various alternatives are as follows:

(1). The asset is sold "naked", with no treasurer, no cash management tools, and no intercompany financing or hedging. The company is left to itself and its buyer.

(2). We sell an asset with a pre-organized digital autonomy, an available treasury team "sold" with the asset. This requires preparation and is expensive.

(3). We sell the asset but outsource the organization of the treasury on a temporary basis with an "easy treasury" (i.e. TaaS) type solution. You can also leave this choice to the buyer.

(4). We leave it to the purchaser to implement the complete solution from A to Z. Unfortunately, this is a time-consuming and expensive option. What's more, a treasurer must be hired before anything can be implemented.

What is the essence of a carve-out and spin-off project?

A carve-out results in the separation of a business unit(s) or division(s) to form a new independent company that subsequently can be spun off, for example via an IPO or acquisition by Private Equity.? From a treasury perspective, the essence of a carve-out project is that the business that is being carved out needs a fully functional and standalone treasury operation upon ‘go-live’. This typically means setting up a dedicated treasury team, processes, IT treasury systems, cash and liquidity (banking) structure and standalone financing arrangements. The challenge resides in the way to implement a completely new treasury organization under tight timelines (i.e., usually less than a year). Nevertheless, there is no recipe or standardized approach for such a rather complex project. We can gather take-aways from disentanglement projects.

Tips to be considered:

Usually, largest carve-out projects are done on the basis of a ‘copy and paste’ approach, keeping processes, systems and structures for the disentangled part of the company as close as possible to the current situation. This subsequently allows the clone the ERP environment and cash management structures to the standalone business, which, from a business and IT perspective is normally seen as the only viable route when timelines are short. Such an approach means that there will be very limited opportunity to pursue optimization initiatives unless there is a clear compliance reason to do so. It is also advised to design a treasury target operating model for the company sold or IPOed. In a copy - paste scenario the choices that need to be made may be limited, but it is still good practice to explicitly blueprint and sign off the spin off treasury design, ensuring alignment within treasury and with other stakeholders and finance functions. For such a project, the company needs a solid organization and project management. We need to determine objectives, risk strategy, polices, technology to be implemented, financing and bank relationships, staffing, etc… It is obviously important to align workstreams across functions and to involve all other departments like taxes, legal, IT, etc.. Inevitably the configuration of treasury systems is critical for Treasury to be able to perform tests before go-live. From an external stakeholder perspective, they need to involve key banking relations and system vendors as early as possible to ensure full support. In general, there is no time to target improvements and implement more optimal solutions. They need to focus on practical and effective solutions where they can. The project is already challenging enough, without adding further complications at this point. The objective is to make sure the carve-out can survive on stand-alone basis with its own treasury organization, even if temporary. For being successful, it is important to consider outsourcing to make sure the spin-off future treasury organization will work well. Good news, there are solutions. There is no necessity to have a final configuration, aligned to best practices with best-in -class solutions. The carve-out needs an interim solution (although scalable) before implementing a more mature treasury organization. To succeed, a company must involve all stakeholders and engage expert partners and commitment from banks and technology providers. Treasury autonomy remains one element of the spin-off process, although vital. It must be aligned and coordinated with other separation processes. We must eventually keep in mind that transition cannot be always well organized. There are numerous situations for which a clean break is not possible. In some cases, they need more time, they don’t have enough resources to prepare the treasury and digital autonomy. Sometimes, a seller must plan a transition service agreement, for managing the intermediary and transition period. Each disposal and spin-off are a different case and must be analyzed individually and carefully. Treasury remains a major issue to be prioritized.

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Fran?ois Masquelier, CEO of Simply Treasury – Luxembourg