For managers charged with overseeing a portfolio of businesses, a regular appraisal of each part of the group is a fundamental part of the role. They will assess past performance against targets and will look forward to consider the outlook for each business and its potential for growth.
Consideration will be given as to what are “core assets” — those which are best performing and central to the overall group — and what are non-core and/or underperforming. For non-core or underperforming assets, the manager will need to decide whether holding on to them is in the best interests of the group as a whole, or whether they are better sold off or otherwise monetised to generate cash.
This could be for general working capital purposes, for deployment elsewhere across the group, to expand into new lines of business or to return value to shareholders. However, monetising non-core assets becomes even more important in a challenging business environment where pressure to deliver returns or release capital may be high while the opportunities for doing so may be harder to find.
Timing is key: a successful sale is always better run as a strategic sale, rather than a distressed situation. Identifying a business unit that is suitable for potential sale at an early stage will often allow the seller to achieve a higher purchase price, quicker execution, better terms and (crucially) remain more firmly in control of the message delivered to the market about the process.
Selling on the back foot makes it increasingly difficult to achieve these objectives. Overall, if run correctly, a well-timed and organised sale can be a very successful and reliable method of releasing capital and re-aligning strategy.
However, in the current market, where both liquidity and investor confidence has been falling, a full divestment opportunity may not be available on terms acceptable to the investor, or the investor may not be ready to completely exit the investment. In such cases there are normally a range of alternative strategies which can be considered to release value from a business, including a partial sale, a restructuring of the business, or an IPO.
A partial exit may be appropriate in a variety of circumstances, for example if the group wants to keep some exposure to the particular portfolio business/sector, but no longer wants a controlling interest. Stepping back into a minority shareholder position to remove that company from the group’s consolidated accounts may be ideal. Especially if the incoming investor can open new markets to the target business or add a strategic skill set to the business that the company lacks.
The likelihood of success with this route will depend on the nature and performance of the underlying business, the existing shareholder structure and the amount of equity the seller is seeking to raise, which will determine to a large extent which kind of investors might be willing to look at it.
For companies with a strong balance sheet and reliable income, taking a working capital facility from a bank may be all that is required to free up capital and facilitate a dividend payment to the shareholder. While debt capital is available and often at reasonable terms, it is important to recognise the tightening of liquidity in the market at present, where banks are more cautious lending now than they were say two years ago before the crash in oil prices.
As a result, increasingly, companies are considering alternative debt providers, including looking at private equity houses who are able to provide debt through credit funds or at Islamic financing options.
Consider exploring which aspects of the business could be restructured into an “asset light” model. This is very common in many sectors and usually involves a sale-and-lease back option. This usually involves the business selling some of its assets (usually real estate, but it could also work for certain intellectual property) to release capital, and immediately lease that asset back from the purchaser, so that the business can continue to use those assets on terms it is happy with, but the business now has the proceeds of sale to deploy elsewhere.
IPOs are the golden ticket for many business owners. A well-run IPO could achieve a much greater return to the exiting shareholder. However, not every business is suitable for an IPO.
The time, cost and effort required to restructure the relevant business to prepare it for an IPO should not be underestimated. Failure to invest fully into the IPO process can result in a very public failure.
Therefore, an IPO is often seen as a last resort exit, especially for institutional investors who would often prefer the certainty of a trade sale or a secondary transaction (sale to another institutional investor) over an IPO process.
Increasingly, it is necessary to decision-makers to consider a “dual track” process, whereby they would run two of the above processes in parallel, so that if one fails, they have a fall back option of the other, and can still extract the value required from the target business.
There are certain issues to navigate when running a dual track process (not least, confidentiality), but there are plenty of examples in recent times where a dual track process has worked extremely well and ensured a successful transaction.
John O’Connor is a Partner at CMS Dubai. Mohammed Majid is a Partner at Nabarro Dubai.
