Treasury: Managing a successful carve-out
06 December 2017
In the current environment of shareholder activism, we are seeing many Corporates sell off parts of their businesses, particularly to Private Equity houses. A popular view is that they can take neglected assets and generate value by providing renewed focus and investment. I believe the Treasurer can add significant value in the sale process by supporting a smooth separation and assist in making the carved out business attractive to potential buyers.
Separation – get involved early
Controlling cash and liquidity feature on the critical path of any transaction. Treasury is well positioned to identify and explain financial risks in the business and should get involved early on in the deal planning process. Disentangling cash pools and hedging portfolios can be particularly complex and lengthy processes, especially where Treasury is centralised and acts as an In House Bank and/or Payment Factory to the businesses being sold.
Take time in understanding new buyer requirements
One of the first questions I am often asked by sellers is: how much effort should go into preparing the business for sale? Should the seller create a fully operational treasury capability for the carved out business, complete with systems and staff? Or should they leave the design to the buyer, who will have their own view on what is appropriate for them?
I have seen both approaches work well. Where the seller has taken time to understand what future buyers might need and there is treasury complexity, the former approach works well.
Where there is little time the latter approach may be better, particularly if the business for sale has much simpler requirements. However, sellers should note that in my experience any business bought by Private Equity will require a much increased focus on cash forecasting, cash management and working capital management, which can sometimes come as a shock.
Sellers are often wary of commencing separation activities before a deal has been confirmed, but once there is commitment we recommend getting a robust plan in place.
A well thought out treasury separation plan for day one and beyond helps sell the business. It gives buyers confidence that the management team has the ability to deliver the transaction for day one, and this adds confidence that the overall business plan is achievable.
Post day one transition support for Treasury is unusual
We often see sellers consider offering a TSA (Transition Services Agreement) to a potential buyer. For a fee, the seller continues to provide certain services to the carved out business after separation, to give the target business time to set up its own arrangements.
In my experience, it is rare to see an extensive TSA for Treasury and cash activities. From the buyer’s perspective, relying on a third party (often now a competitor) to control cash, risk and liquidity is unattractive. From a seller’s perspective, offering a Treasury TSA could include services which may lead to regulatory complications.
Involve the team and ask for help as required
In an ideal scenario, the Treasurer is able to create a project team who will go on to form the new Treasury capability for the stand-alone business. In reality, most teams don’t have the bandwidth to set up a dedicated project team. This is where external help can be beneficial: interim contractors or professional advisors can assess the business requirements objectively and often have the necessary experience, tools and change management skills to assist the Treasurer through to sale.
Restructuring creates uncertainty for the Treasury team. There are often questions around how many and who will be required for the now smaller retained Treasury organisation, and how many will join the carve-out. The key here is to keep communication lines with the team open: change can be scary, but it can also be exciting and an opportunity to improve ways of working.