Across the mining and metals industry — in Canada and around the world — we’ve seen companies facing capital constraints turn to lower-risk value-creation and growth strategies. Continued economic uncertainty and commodity price volatility has created a breed of new risk-averse investor. Gold prices, for example, fell by more than 28% in 2013, polarizing gold mining companies to either rich buyers or poor sellers. Chief among the considerations companies in search of capital are pursuing is the divestment of non-core or non-strategic assets. More and more players are viewing these transactions as an opportunity to raise and reinvest capital into areas that lend to the company’s strategic advantage or long-term success — rather than the mark of failure that was once perceived. EY’s Global Corporate Divestment Study shows that 81% of companies across sectors that based divestment decisions on portfolio review experienced a higher valuation multiple after their last divestment.
But carving out assets is not without its challenges — on both the buy and sell side. Each party must manage complementary and conflicting priorities to ensure a successful transaction on either side.
Seller steer clear
The temptation for many companies on the sell side, particularly those struggling in the more recently tumultuous mining industry, is to dispose of the asset as quickly as possible without negotiating the deal aggressively and potentially leaving money on the table. Other common costly mistakes on the sell side include a lack of executive leadership, inadequate resources (either in numbers or skills), weak coordination or governance policies and failure to acknowledge the complete pool of buyers, anticipate their needs and consider their day-one functionality.
Buyers considering acquiring a carved-out asset face a different set of challenges. This side of the transaction often struggles with valuing the assets, performing diligence on the seller’s financial and operating statements, and maintaining and continuously updating their own deal analyses and models. A buyer must also prepare for day one and overall integration — which will likely entail negotiation with the seller for one or many transition service agreements (TSAs). Buyers often rely too heavily on the seller in TSA discussions which conveys advantage to the seller.
Capturing value in any transaction begins by considering the perspective of both buyer and seller. Both parties share the common goals of preserving value, maintaining credibility, enhancing reputation and minimizing post-closing disputes. Only when companies take the time to consider alternative perspectives can they gain a better understanding of where value can be created and destroyed. It’s that kind of proper due diligence that greatly reduces the chance of surprises interfering with the transaction completion. Important steps can’t be neglected.
Companies can make a good deal better by:
- Understanding buyers’ motivations
- Preparing carve-out financial statements
- Being transparent about costs
- Considering the impact on the remaining business
- Coming to terms with the components of the asset
- Assessing up-front and ongoing costs
- Making readiness a priority
- Focusing on the details of TSAs
The trend towards divestments isn’t set to slow in the year ahead. Mining and metals companies in search of capital are continuing to look closely at their portfolios. Though non-core, easier-to-extract assets first made the mark, underperforming, high-cost or high-risk assets are beginning to fill the divestment pipeline in the mining and metals industry as companies seek to remove costs and reinvest capital. Portfolio optimization is an ongoing discipline, however, not a short-term strategy. And knowing the ins and outs of selling and buying carve-outs can become powerful means of managing capital to increase shareholder value.
At the end of the day, it’s about creating a stronger competitive advantage in the marketplace. Buyer or seller, the opportunity to capture value is there, if you’re willing to work for it.
*The authors are partners in EY’s Transaction Advisory Services practice in Toronto. For more information on EY’s mining and metals rpactice or its Global Corporate Divestment Study, visit ey.com.ca.