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New report reveals businesses in retail and consumer sector view divestments as difficult and lengthy

02 June 2015

A new report has revealed how increasingly difficult it is becoming for companies in the retail and consumer sector to sell a business.

The international study from Eversheds law firm, Streamlining for Success, highlights the difficulties businesses are facing at every stage of the divestment process. 

The findings come at a time when there is a greater focus on divestment activity - a trend that is backed up by the findings of the report. One in three (33%) respondents in the retail and consumer sector said their M&A strategy was focussed on divestments.

However, the study examines how changes in the commercial and regulatory landscape have made deals less certain and more complex, with divestments taking longer to complete. Most companies spend an average of three to six months on a routine deal, increasing to one to two years for larger, more complex transactions. The deals that had completed in the retail and consumer sector tended to be far larger than other markets.

The study reveals the most common problematic area of a divestment in the retail and consumer sector was creating and sustaining competitive tension during the bid process. The most common driver of divestments in this space was the need to shed non-core assets, and sellers often entered negotiations with little leverage to drive up prices. Organisations were often forced to choose between accepting unfavourable terms or getting stuck with an asset they had already decided to sell. 

When it came to selling, respondents in the retail and consumer sector were more interested in finding the right buyer than getting the highest price. This was a result of the trend toward selling factories or businesses while cross-licensing their brands back to the parent company. The need to keep a brand strong, even when production has been sold off, meant sellers were particularly keen on finding a reputable and stable buyer. 

With typically well-integrated or centralised businesses, identifying and separating assets was seen as difficult in the retail and consumer sector. IT separation and transfer, centralised finances and crossover of employee and management function emerged from the report as particularly problematic areas. Respondents highlighted how the lack of integration between a business’ legal, IT and commercial personnel makes it difficult to identify potential issues in this area, leading to delays and post-closure issues. 

James Batham, partner and head of the consumer sector at Eversheds law firm, said:
“Put simply, breaking up is becoming much harder to do. Separating assets is increasingly complicated in the retail and consumer sector due to the centralised nature of many organisations. 2015-2017 is likely to see more separations as C-suite executives look for better returns on capital ratios. Deal teams must have the opportunity to prepare their businesses for the challenges they face on complicated divestments. This requires a much closer working relationship between the lawyers negotiating deal terms and regulatory clearances, and the operations team executing the commercial transaction and separation plans - a point that came through very clearly from the businesses involved in the study.

“It is clear from the report that businesses in the sector need to look closely at their current processes around managing divestments to ensure they maximise the benefit of such deals, rather than tying themselves up in separation knots further down the line which could have been avoided at an earlier stage.”

Collectively the respondents to the Eversheds study have worked on more than 2,400 M&A deals across 60 jurisdictions during the past five years. Nearly two fifths of these were divestments. Drawing on this vast experience, the study concludes with six key points to increasing deal value and certainty:
  • Adopt a clear and cooperative approach to communicating with the buyer
  • Keep in regular contact with local management at the target company to maintain morale
  • Have clear separation plans, which you share with the buyer
  • Keep a close eye on conflicts of interest 
  • Build flexibility into legal contracts
  • Plan for delays 

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