Corporate divestments decline across Europe

Corporate divestments are a natural source of private equity dealflow. In an affluent economic environment, the mergers and spinoffs of organisations are simply a way to improve the efficiency of businesses. This arguably fits the value-add proposition of private equity: Ensure efficiency when the parent companies do not have the resources to do so.

The current economic landscape of Europe, however, has changed this. While many private equity funds are hitting the news for difficulties in fundraising, there are another group that are struggling just as much with the opposite issue: the challenge of deploying capital in an environment with low visibility and a slow deal pipeline. The lack of dealflow from corporates may be a reason why a Grant Thornton study in November predicted that SBOs would increase.

unquote" data shows that corporate divestments have been hit hard by the global financial crisis in 2009, when the number of spin-offs almost halved. There has been little improvement since.

For 2011, unquote" data shows that, while overall figures remained flat, the number of spin-offs sourced from domestic parents decreased. This is likely due to crisis management strategies of many companies, which are increasingly focusing on their domestic core business. This could also explain the corresponding rise in foreign corporate divestments.

Considering businesses based outside Europe, letting go of European subsidiaries may also be related to mitigating currency risk, which has increased with the intensity of the eurozone crisis. Within Europe, staying local can help drive prices down while maintaining the core business as mentioned above.

Furthermore, industry practitioners focusing on this type of transaction often point out that many corporate groups already refocused their strategy on their core activities during the 2002-2004 period and divested their peripheral assets then. Those that did not might be holding on until buyers display enough appetite and can find sufficient leverage to meet their price expectations.

As for other investment segments, there is hope that 2012 could be a better year for business, provided that the European situation stabilises. Otherwise, as expected for private equity deals in general, the coming year might be even slower than 2011 – in which case, a return of corporate divestments to pre-crisis numbers is unlikely to occur.

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• Performance
• Unquote Data