The strategic puzzle of carve-outs

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Increasingly, these are operations that are the talk of the town when it comes to very large companies with high (usually secret) transfer sums, significant financial risks and hundreds or even thousands of employees ‘changing hands’.

In 2019, the sale of Nestlé’s skin health business to a consortium of financial investors was worth around €10 billion. Emblematic examples are the sale (under discussion) of BHV by Galeries Lafayette Group or the ‘spin-off’ of casino retail, which will be brought closer to Invivo Retail (the horticultural and food distribution division of the agricultural cooperative) by creating a platform responsible for supplying casino stores with agricultural products in short distances.

Transactions have also been taking place regularly in the telecommunications sector for more than 10 years, with some operators selling all or part of their infrastructures (relay antennas, fibre optics) to specialised investment funds: France Télécom Orange sold its subsidiary Etrali Trading Solutions in 2013, French antenna site operator TDF was acquired by four funds in 2015, Altice France sold part of its fibre network SFR FTTH in 2018, Bolloré sold its 55% stake in Wifirst in 2019, etc.

The case study of Engie

Thales, Orange, Engie, L’Oréal, Imerys, Engie, Casino, Safran… Since the healthcare crisis, these large companies have all carried out carve-outs, primarily with the clear objective of refocusing on their core business, which is the reason for 66% of carve-outs (according to a 2022 study by Eight Advisory). Other main reasons for carve-outs included the sale of assets or subsidiaries in difficulty (14%) that were deemed non-strategic for the group, the desire to increase the value of certain activities, or even internal reorganisation.

This was particularly the case with the Engie Group (see our interview with the energy company’s former head of strategy), with no less than two major spin-offs in 2022. However, the French energy group was not on its first operation of this kind. In 2018, the group had already sold its gas exploration and production division (a legacy of Gaz de France) to UK-based Neptune Energy, “an implementation of the group’s low-carbon strategy,” Bertrand Haas, VP of M&A, confirmed to Consultor. In 2022, Engie sold Endel to Altrad and Equans to Bouygues (a case in which Oliver Wyman was involved) to “exit non-capital-intensive service activities and focus on four global businesses. Renewable Energy Production, Asset-Based Customer Solutions, Large Infrastructure Network Management, and Flexible Assets and Supply,” Bertrand Haas confirms. The Equans and Endel businesses were no longer part of our strategic core, and their sale made it possible to simplify the Group and its understanding. This was in response to the 2023 strategic plan drawn up by CEO Catherine MacGregor, who was appointed at the beginning of 2021.
For these operations, General Management brought in several strategic consulting firms to define the opportunities and prepare the due diligence and annual report for potential buyers. A specialised firm worked on the separation report for Equans, a multi-technical services company.
“We wanted to be able to detail to potential buyers how this business was integrated into Engie, what the separation plan would look like, and what the costs would be. The goal was to allow potential buyers to understand the operational challenges and anticipate how they could integrate Equans into their own environment, particularly IT,” adds VP of Engie’s M&A.
These are certainly strategic operations, but they are also complex, even risky, for Engie, which will have revenues of nearly 60 billion euros in 2021 (44 billion euros in 2020), including Endel, worth several hundred million euros, and Equans, worth 13 billion euros. “Equans was a huge entity in the scale of the group, structured by sales (more than 20% of group sales, editor’s note). This means that we are halving the number of employees in the group, which was about 160,000 before this sale,” it says on VP. This is a very sensitive first social aspect, even before the technical problems of the sale of these activities, which were structured until then.

A very specific consulting competence

Support for carve-outs has thus accelerated depending on the companies present in this cross-industry market: L’Oréal’s sale of Roger & Gallet to the Impala fund in 2020, Engie’s divestments in 2022, two ongoing Thales divestments (the Land Transportation Systems division to Hitachi and the Aeronautical Systems division to Safran) and, in early 2023, the sale of the High Performance Materials division of Imerys (one of the world’s leading suppliers of mineral specialties to industry) to Platinium, etc.
These are contracts in which the companies are involved at different stages of the process. “We intervene at several stages, up front, in the strategic consideration of the portfolio, with the question I invest, I change the model/ I sell. Then with strategic management and/or the CEO on the feasibility of the carve-out, looking at the whole value chain. Because a carve-out is a technical matter: there are some very good ideas that are simply not feasible, for example, for regulatory or labour reasons, or because of split teams,” explains Nicolas Cohen-Solal, partner at Eight Advisory. And once the decision is made, the firm performs traditional strategic and operational due diligence tasks in addition to financial and tax due diligence.
These engagements, which are at the intersection of the various practises, vary in length depending on the nature of the engagement, from 3 to 6 weeks for a due dil’ (such as a strategy-only due dil’) to several months… And they are performed by generalist strategy consultants with strong M&A skills.

The headache of divesting financial services assets

Divesting financial services assets is another matter. Ares & Co, which specialises in this sector, knows the intricacies well.

These divestments in the banking and insurance sectors, about ten a year in the French market, are of particular interest to PE ‘s funds because “financial services are stable, with very interesting business models and high cash flow,” notes Giovanni di Francesco, associate partner in charge of private equity at the firm.

This is the case with HSBC France, which is in the process of leaving the HSBC division and is being bought by the fund My Money Group, a subsidiary of the American group Cerberus, which wants to revive the former Crédit Commercial de France. The former French network of Barclays was also bought in 2018 by the investment fund AnaCap and became Milleis Banque. Milleis Banque acquired Cholet Dupont-Oudart, a former subsidiary of Swiss private bank EFG International, which managed nearly €4 billion in assets, to establish itself in the market in 2021. On the other hand, some spin-off projects are cancelled, such as Mutuelles niortaises, which tried to sell its subsidiary Socram Banque to Crédit Mutuel Arkéa in 2019, which broke off the ongoing exclusive negotiations.

These are very complex operations for the firm, which intervenes mainly upstream in exit strategies, mobilising 4 to 5 advisors between 6 and 8 weeks. “The regulatory and supervisory context is extremely important in this regulated sector. It is therefore important to model the financial balance sheets and the various regulatory metrics of the company leaving its initial scope of consolidation,” confirms Antoine Destombes, associate partner at Ares & Co.

A “surgical” operation

Everyone agrees that the carve-out process is equally complex, regardless of the sector. For a company, the separation of an entity, an activity or a site is particularly risky in legal, tax and social terms. It can also lead to a loss of value for the selling company. It is also risky for the buyer, of course, as the value of the subsidiary being sold may fall.

This raises many questions about the spin-off of the sold company and its integration into another company. What about the teams? Is the transfer automatic (all employees go with the company) or voluntary, with the necessary negotiations? A voluntary transfer is particularly dangerous if the competencies are not taken with them and the risk of devaluation of the asset is the consequence.

Another complexity of the carve-out is the regulatory obligations. This was the case with Alstom’s acquisition of Canadian competitor Bombardier Transportation, which was completed in early 2021, making it the world’s second-largest rail company. A transaction approved by competition authorities on condition that the assets of the new division are sold. And Alstom has agreed to sell the Coradia Polyvalent main platform and its Reichshoffen production facility in Alsace.

And what about the D-One, the day of separation of the assets of the seller group? “This moment of closing, of transfer of ownership, is crucial because everything has to work, just like a company that is newly established: Customers have to be supplied, employees have to be paid,” adds Nicolas Cohen-Solal of Eight Advisory.

In this operation, there is an aftermath for both the divested company and the divestor. “The operational phase after the sale is equally critical. Where is the group going and how does it fit in? For example, when Clarins sold its fragrances to L’Oréal, some of the group’s countries (i.e., production sites/customers) became marginal. The group had to review its entire international organisation,” says the Eight Advisory partner.

As with a corporate turnaround, it takes several years to know whether these divestments are a success or a failure. In the short term, it can be costly for the seller. An example of this is the sale of HSBC’s French business, which saw its 2022 pre-tax net income drop by more than 7% due to the $2.4 billion in additional costs associated with the sale. In any case, these divestments are an accepted – and irreversible – strategic decision by existing management.