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Modelling Divestiture Transactions

Updated: May 4, 2023

A divestiture is the partial or full disposal of a business unit through sale, exchange, closure, or bankruptcy. The article describes key trends in divestitures, types of divestitures, key aspects to consider in a divestiture transaction and available resources

Divestitures have been a trend in the global economy for several years. In recent years, there has been an increase in the number of divestitures globally, as companies look to focus on core operations, improve their balance sheets and increase their return on investment.

Divestitures are often driven by industry consolidation, as companies look to gain a larger market share and improve economies of scale. Private equity buyers have become a significant force in the divestiture market, as they look to acquire undervalued assets and companies with growth potential.

Divestitures have become increasingly global, with more cross-border transactions taking place. This trend is driven by the growing interconnectedness of the global economy, as well as the search for new growth opportunities in different regions. In addition, with the increasing use of technology and digitalization, companies are looking to divest non-core assets and focus on technology-driven operations. Companies are also increasingly divesting businesses that do not align with their Environmental, Social and Governance (ESG) policies and goals.

Types of Divestitures

There are several types of divestitures, including:

  1. Spin-off: A spin-off is when a company separates a subsidiary or division into a separate, independent company. This is often done to allow the subsidiary to pursue its own strategic goals and objectives.

  2. Carve-out: A carve-out is when a company sells a subsidiary or division to another company or group of investors. This is often done to raise capital or to focus on the company's core business.

  3. Sale of assets: A sale of assets is when a company sells specific assets, such as real estate or equipment, rather than an entire subsidiary or division.

  4. Liquidation: A liquidation is when a company shuts down a subsidiary or division and sells off its assets. This is often done as a last resort when the subsidiary is no longer viable.

Key Aspect to Consider when undertaking a Divestiture

Divestitures can have a significant impact on the strategic direction and composition of a company and the following are a number of key aspects to consider when undertaking a divestiture:

  1. Strategic fit: Does the subsidiary align with the company's overall strategic goals and objectives?

  2. Financial performance: How profitable is the subsidiary and what is its potential for future growth?

  3. Synergy: Are there any cost savings or other benefits that can be realized by divesting the subsidiary?

  4. Market conditions: What is the current market demand for the subsidiary's products or services?

  5. Legal and regulatory considerations: Are there any legal or regulatory hurdles that must be overcome in order to divest the subsidiary?

Key Financial Impacts to Analyse in a Divestiture

Divestitures can have a material financial impact on the company with the following being some of the aspects worth modelling and analysing in order to make an informed decision on whether to undertake the divestiture transaction:

  1. Revenue and earnings: How will the divestiture impact the company's overall revenue and earnings?

  2. Cash flow: What will be the impact on cash flow from the divestiture?

  3. Debt and leverage: Will the divestiture change the company's debt and leverage ratio?

  4. Tax impact: different types of divestitures can have significantly different tax impacts, how will tax impact the return on investment from the divestiture?

  5. Valuation: How will the divestiture affect the company's overall valuation?

Available Resources

Projectify offer user-friendly Excel templates (linked below) to model the financial outcomes of a spin-off or cash sale divestiture including:

  • The computation of the pro-forma opening balance sheet post divestiture;

  • Projection of the financial performance and position (3-statement financial forecast) over a 5-year period including and excluding divestiture transaction;

  • Calculation of the intrinsic value of the business including and excluding divestiture transaction using the discounted cashflow (DCF) approach.

  • Comparison of the financial outcome of the business including and excluding the divestiture transaction in table and chart format to support the decision making process.


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