Carve-outs: A valuable tool for European firms

Strategic carve-outs continue to present a strong business case, as companies shed non-core assets and position themselves for growth

Carve-outs remain a popular route to growth, with many European businesses increasingly choosing to divest themselves of non-core assets amid challenging macroeconomic conditions.

Certain high-growth sectors, meanwhile, require a level of investment that some European businesses cannot match, due to either high debt levels or dwindling profits. And the risk of a global recession—albeit less likely now than it seemed in early 2023—is only undermining corporate confidence.

The case for carve-outs

Besides presenting a route to growth, carve-outs also offer highly geared groups a way to realize cash and to de-lever in the face of increasingly expensive refinancings.

They also come with the opportunity for strategic acquirers to pay all, or part of, the deal fee in their own stock. This has the benefit of avoiding increasingly expensive debt, outbidding debt-reliant financial sponsors, and affording the seller access to potentially large value synergies.

These market dynamics are pushing strategic carve-outs up the agenda, with a record 3,808 deals announced in 2022. Those transactions were worth US$429.4 billion in aggregate, according to Mergermarket data.

While there have been several corporate shakeups so far in 2023, activity has yet to reach last year’s peak. A total of 1,591 carve-out deals valued at US$121.5 billion were announced in H1, representing an 18.8 percent decline in volume and a 49.8 percent drop in value compared to the same period in 2022.

Zero-carbon race drives strategic change

Europe’s energy transition was the catalyst for some major carve-outs in H1 2023, as companies look to pivot toward more climate-friendly consumer solutions. A case in point is US multinational Carrier Global’s purchase of Viessmann Climate solutions, a Germany-based manufacturer of heat pumps and other climate-friendly heating services. The mammoth US$12 billion deal was the second-largest M&A transaction to be announced in EMEA in H1.

Carrier Global, a provider of heating, ventilation and air conditioning solutions is using the combination as an opportunity to expand its climate-friendly heating options. The transatlantic deal exemplifies the increasing attractiveness of renewable energy solutions such as heat pumps, battery storage systems, and photovoltaics.

The renewables industry is also providing plenty of opportunities for carve-outs, particularly in offshore wind, with the high-growth subsector attracting international attention. In March, Japanese energy company JERA acquired Parkwind from local renewable energy firm Virya Energy for US$1.7 billion. The cross-border purchase of Belgium's largest offshore wind platform will allow JERA to accelerate its renewables and offshore wind activities consistent with its decarbonization goals.

Colruyt, the Belgian group that owns the majority share in Virya, cited heightened competition and a greater need for investment in the sector as reasons for the sale. These market dynamics, encouraged by the European Green Deal, look set to generate further divestments in the near term as investors flock to the sector.

Telco consolidation fuels landmark carve-out

Consolidation within Europe’s fragmented telecommunications sector has long been anticipated as a key driver of regional M&A activity. Divestments have become a common feature of the deal landscape as mobile operators look to restructure their operations to compete with global market leaders.

This trend resulted in the second-largest European carve-out of the year—the proposed merger of Vodafone and CK Hutchison Group’s UK businesses, Vodafone UK and Three UK. If the deal passes regulatory approval, it will create the UK’s largest mobile phone operator, worth £15 billion and boasting an estimated 27 million subscribers, and overtaking current market leaders EE and Virgin Media O2.

It is yet to be seen whether the deal will be stymied by regulators, who have traditionally taken a tough stance on consolidation within the European telco industry. Yet the UK government recently appeared to soften its stance on mega-mergers in the sector. While regulators previously suggested that a merger of any of the big four UK mobile operators should be blocked at all costs, the government said there is no “magic number” and mergers should be assessed on a case-by-case basis, reigniting the possibility of further carve-outs down the line.

Cash-rich shipping firms bulk up logistics 

The French transport and logistics industry is also undergoing a shakeup, with changes in strategy post-pandemic prompting businesses to reshape their portfolios. One such high-profile example to arise this year was transport conglomerate Bolloré Group’s sale of its logistics business to shipping giant CMA CGM.

CMA CGM has been on a buying spree, with the global shipping industry benefitting from bumper profits during the pandemic. Previously this year, the shipping firm bolstered its media assets with the acquisition of La Tribune newspaper. Yet the purchase of Bolloré Logistics is its largest deal yet. 

Bolloré Group, meanwhile, is in the process of shedding its logistics footprint, having sold its African ports and logistics operation to Swiss shipping firm MSC Group in December 2022 as it focuses on its media business. According to reports, Bolloré Group’s sale of its logistics arm, which generated a third of its profits last year, was prompted by the high level of investment currently required within the rapidly expanding sector.

Carve-outs here to stay 

As the challenging macroeconomic climate and restrictive financing market make transformational M&A a less attractive option, strategic carve-outs remain an important tool for businesses looking to reposition themselves for growth.

For some, this will mean divesting non-core assets that are either inconsistent with their business strategy or require too much of an investment—a trend playing out in the high-growth renewables and logistics markets.

But those able to weather the storm and maintain strong balance sheets will benefit from a healthy pipeline of deal opportunities coming their way.

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