Why Divestitures are important for Value creation

Divestitures are important for value creation

Divestitures are important for value creation. In this blog, we shall understand the importance of divestitures and four best practices that best acquirers engage in to extract maximum value from their deals.
To substantiate this, we shall take the case study of Divestitures of 21st century fox assets to Disney and learn how this created value for both Disney and Rupert Murdoch’s 21st Century Fox.

Why Divestitures are important for value creation

  1. In this uncertain and changing economic climate, enterprises need to constantly revisit their portfolios to ensure their strategic rationale and their core competencies are aligned to each other.
  2. With Digital disruption, companies need to constantly evaluate their business models, redefine their service offerings in order to remain relevant and add value to customers.
  3. To compete with Digital natives, legacy companies look at acquisitions as inorganic growth strategy to fuel growth and market expansion.
  4. Much of the capital needed for acquisitions can be raised by divesting non core assets which are no longer strategic to enterprises.

Divestitures of 21st Century Fox assets to Disney

  1. Rupert Murdoch of 21st century fox has built a massive media empire primarily through acquisitions.
  2. Recently the company divested 75% of its assets to Disney for $52 Billion.
  3. The deal value was at much higher premium than the pre-deal market price.

Four key lessons that this deal teaches us are:
Always strategically refocus your Businesses

  • From this Divestitures transaction, 21st century fox has retained its Fox sports, Fox News, FS1, FS2 and Ten network.The remaining assets are spun off and sold to Disney.
  • 21st century Fox would create a new entity which would be agile, flexible and can compete with Facebook, Apple, Amazon, Netflix and Google.
  • The value from the divestitures can be used to fuel the new entity strategic investments and growth plans.

Select the Right Buyer

  • The most important mistake that enterprises make when deciding to divest is that they take a long time to finalize.They wait for their non core assets to stagnate by not making any additional investments and also reallocate the resources from these assets to more strategic businesses.As a result they do not get a good price for these assets and the buyer always bargains for a discount price for these assets.
  • In the case of 21st century Fox transaction, other interested buyers were Comcast and Verizon.Among the buyers, Disney was best positioned to gain maximum value as Disney can get access to Europe market through Sky media and to Asia market through Star network.
  • Disney also gets access to “The Simpsons” and other interesting films and TV content which can be added to its entertainment library.
  • Further Disney gets access to National Geographic channels to strengthen its existing media capabilities.
  • Disney was able to strengthen each of its capabilities after buying these assets.Hence Disney was ready to even pay a premium to acquire these assets as it was the right buyer among others.

Communicate the Deal rationale early

  • One of the biggest factors why Disney and 21st century Fox deal was a huge success is because both the company clearly communicated to their investors on the strategic rationale of the deal and how this deal will benefit both companies at longer term.
  • This communication was not only intended to employees and internal stakeholders but also to customers, suppliers and other external stakeholders.
  • This effective and early communication was the main reason why the stock prices of both companies increased after the deal announcement.

Don’t ignore Stranded costs and Assets

  • One of the key factors that sellers cannot ignore during a carve out is the Stranded costs.Stranded costs is the excess costs that are left out after the buyer absorbs the divested assets of the seller.
  • Most of these Stranded costs are on IT infrastructure segment where IT applications or servers would be left out in the Corporate shared services environment which would be borne by the seller.In some case Stranded costs can also be the excess headcount of resources in IT and HR who are not absorbed the buyer.
  • Though eliminating Stranded costs is nearly impossible, the seller can plan on reducing the Stranded costs.As the separation planning and operating model design is defined for the standalone entity of the divested assets, the seller can also create a revised budget, headcount plan and operating model for the parent company.This can help in reducing the excess stranded costs.

Conclusion

  1. Divestitures are important for value creation. Companies need to focus equally on acquisitions and divestitures so that their business portfolios are strategic and relevant.
  2. Divestitures are more complex than acquisitions due to the lack of seperate financials for divested assets and need to evaluate the revised tax structure post divestitures. Proper Seperation planning followed by right operating model and drafting a proper Transition services agreement is essential to create value for both buyer and seller.


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