Unlocking value from treasury in carve-out acquisitions

Corporate carve-outs have become increasingly popular over the last few years, with a threefold increase in the number of transactions from 2016 to 2019[1]. While COVID-19 has significantly slowed down M&A activity, there are many factors that point to a continuing increase in these numbers from now on: 

  • Record levels of dry powder in the private capital market ($2.5tn in August 2020)[2], leading to fierce competition on deal sourcing and search for new investment opportunities
  • Brexit implications, forcing firms to split operating entities
  • Distressed assets as a result of the decreased demand during the crisis, leading firms to dispose of carve-out non-core assets to re-balance financial performance.

Despite the high potential of value creation through carve-out transactions, the complexity of such deals has historically kept many private equity firms (especially mid-sized buyouts) from entering this market. However, this shouldn’t be the case if careful preparation and expert guidance is in place from the early stages of the deal.

A very important, and sometimes overlooked, aspect of a carve-out transaction is the setup of new finance and treasury functions at the new carved-out entity. Depending on the Transitional Service Agreement (TSA) between the parent and new entities, the new entity may have access to a Financial Shared Service Centre (FSSC) for a period of time only, or very limited support from the parent on the creation of a treasury function. 

In either case, it’s imperative to assess the requirements in the due diligence stage and make sure a robust treasury structure is in place from Day 1; which may prove to be a challenge.

As an example, these transactions often leave little cash in the carved-out entity and use relatively high debt financing. This places high importance on Day 1 liquidity planning, working capital requirements, cash flow visibility and cash management operations.  

Therefore, the use of external advisors may be key to a successful transition. At Rochford, we work with clients in carve-out situations to:

  • Prepare for Day 1 cash and liquidity requirements
  • Establish and implement new finance and treasury functions
  • Improve existing processes
  • Create more transparent reporting and managerial oversight
  • Reduce the amount of support required from the parent company
  • Assist in hiring and upskilling internal personnel as required

From a finance and treasury perspective, some of the areas that require careful planning during a carve-out include:

  • Funding and security rightsizing
  • Cash flow forecast and liquidity planning
  • Global cash management across different subsidiaries
  • Interest rate hedging (either required by lenders or desired from a risk-mitigation perspective)
  • FX and/or commodities hedging, depending on the exposures at the new entity level
  • Hedge accounting
  • Transactional banking requirements: novations, systems and operating requirements
  • ERP migration
  • Payment and payroll systems
  • Bank accounts/leases novation

In our experience, a comprehensive planning and improvement process of the treasury function can unlock anywhere between 1% and 5% of the notional sums under management. In a low margin business, the gearing impact of such a project is highly compelling.

To find out more, get in touch with our team:

Thomas Alexander, Partner
Tel: 02 8916 6115
Marilia Shewchenko,
Managing Director UK
Tel: +44 208 057 9180

[1] Source: Thomson Reuters and Dealogic

[2] Source: Preqin

The information contained in this report is provided by Rochford Capital Pty Limited – ACN 143 601 594, AFSL 361276. This report is provided for general information purposes and is solely intended for use by persons who are Australian wholesale clients. To the extent that any recommendations or statements of opinion constitute financial product advice, they constitute general financial product advice only. As such, any advice contained in this report does not take into account your objectives, financial situation or needs. You should consider whether this advice is appropriate for you and seek independent professional advice before making any investment decision.