James Gelfer August 28, 2013
Cost-cutting, productivity gains and an unwavering focus on the bottom line have become part of the “new normal” for businesses operating in the post-crisis era. These measures can only be taken so far, however. To that end, productivity gains have tapered in recent years and most companies have cut costs as far as possible without creating a detriment to the business. But there are still countless large corporations with bloated operations. A popular remedy to this problem has been for a corporation to sell a division of its noncore assets to private equity (PE) firms in carveout transactions.
As can be seen, both the number and value of carveout transactions have been accelerating in the years since the financial crisis. And while the number of these deals declined slightly in 2012, it is primed to rebound in 2013. Furthermore, the amount of capital invested in these deals this year is already more than three-quarters of the total from all of 2012.
Carveout deals can be an advantageous proposition for parties on both sides of the negotiating table. PE firms are able to allocate the time and resources necessary to grow and develop the carved-out business, while corporations are able to add cash to their balance sheet and refocus their attention to fuel expansion in other areas. CVC Capital Partners’ recent sale of the Colomer Group to Revlon is a prime example. CVC originally carved out the salon products business from Relvon for $325 million in 2000 and rebranded it the Colomer Group. For more than a decade, CVC consistently invested in the company, expanded its geographical footprint and introduced a popular line of shellac products. With this growth, Revlon this month was willing to pay $660 million for the business—more than twice what it sold for.
DuPont provides another good example for the carveout trend. The 211-year-old chemical conglomerate has evolved into a sprawling behemoth with operations in industries ranging from agriculture and food & beverages, to construction, health care, energy and mining. In the 2000s, DuPont began to refocus its business by selling many of its ancillary divisions through carveout transactions. Private equity firms have swooped in to purchase a range of assets: Sun Capital Partners picked up the performance films business segment, Carlyle acquired the performance coatings business, and Blue Point Capital bought the commercial explosives business, to name a few. In addition, KKR attempted to purchase DuPont’s protein technologies business in 2011 and the company is currently considering a sale of its chemicals unit.
Of course, there are always risks associated with doing a carveout deal, as the acquired entity will inevitably have operations that were intimately tied to the parent company. But the fact that the acquired entity was simply a division of a large corporation also provides unique opportunities. As Greg Ledford, a Managing Director at the Carlyle Group, recently put it in an interview with Bloomberg Businessweek: “There’s always brain damage pulling businesses out of large corporations. But if done right, there’s also a lot of value to be had.”