Popularity of carve-outs soars as companies continue to grow | White & Case srl


Carve-out deals offer companies and investors an alternative path to growth in a post-COVID global economy

Carve-out deals, whether entered into through a trade sale, buyout or IPO, have become an essential tool for companies to improve their balance sheets and create shareholder value. This trend has accelerated in recent years, with 9,155 exclusions worth a total of US$2.3 trillion announced worldwide in 2021, according to dealogical— up 67% in value compared to 2020.

So far in 2022, carve-out activity has been somewhat weaker. A total of 3,837 transactions worth $641.8 billion were recorded in the first half, down 19% in volume and 44% in value compared to an exceptional first half of 2021.

The energy transition fuels carve-outs

Despite the slight slowdown, the first half of 2022 produced some significant transactions. The global energy transition has been a key driver of transactions globally, with societal, governmental and investor pressures forcing all businesses to make changes to reduce their carbon emissions. Strategic reorganization has become crucial for companies that need to shed carbon-intensive assets and refocus their business goals.

This trend has led to the most valuable carve-out deal of the year so far, in particular the US$17.3 billion spin-off of Constellation Energy, the giant’s power generation unit. American utility company Exelon.

Following the deal, which saw Constellation begin trading on the Nasdaq in February, the newly formed company has committed to a carbon-free future, aiming to achieve 95% carbon-free electricity by 2030 and 100% by 2040.

Another exception that reflects the momentum of the global energy transition is the sale by UK utility company National Grid of a 60% stake in its $10.5 billion gas transmission and metering business. dollars, to Macquarie. The Australian infrastructure investor has teamed up with Canadian asset manager British Columbia Investment to close the deal. Following the deal, announced in March, the buyers pledged significant investment to modernize National Grid for the green economy.

Elsewhere in Europe, Danish energy company Orsted sold a 50% stake in its Hornsea 2 wind farm development in the UK to French bank Credit Agricole and insurer Axa for $3.9 billion. According to Orsted, Hornsea 2 will become the world’s largest offshore wind farm when commissioned at the end of 2022. It is a key project supporting the UK government’s aim to reach 40GW of offshore wind capacity by 2030.

US posts carve-out activity at three-year high

In line with the global trend, the US transaction market was particularly active. A total of 1,483 exclusions worth US$891.2 billion were announced in 2021, making the United States the most active region in the world. This annual value more than doubled the 2020 total (US$400.1 billion), as activity fell amid the pandemic. Transaction volume, meanwhile, was up 15% year-over-year.

The US market has generated significant exclusions so far in 2022, including two of the top five deals in the first half. In addition to the Constellation spin-off, US industrial materials producer DuPont has divested a majority share of its Mobility & Materials segment to Celanese, a US specialty chemicals and materials company, in a deal valued at $11 billion. dollars.

The move is the latest from DuPont to shift its portfolio to focus on high-margin trading. The industrial giant plans to use the proceeds from the sale to pay for its ongoing $5.2 billion acquisition of electronics maker Rogers Corp, as well as fund other acquisitions and share buybacks.

PE players join the action

Private equity firms have also been active in the carve-out space, particularly in high-growth markets. The largest transaction undertaken by a private equity buyout company in the first half of this year was the sale by Japanese conglomerate Hitachi of a 40% stake in logistics company Hitachi Transport to the actor American KKR.

The deal is part of Hitachi’s ongoing transformation to become an IT and digital infrastructure specialist, which has seen the company sell a number of listed subsidiaries. The sales of large conglomerates such as Hitachi offer attractive investment opportunities for private equity groups looking to expand their presence in new markets, with KKR viewing Japan as its second largest source of potential deals, after United States.

Perspectives: back to basics

The pandemic has forced global businesses to hunker down and focus on fundamental operations in a challenging economic climate. This attitude looks set to continue into the post-COVID era. Corporate divestitures allow a company to focus on its primary strategic goals, while disposing of assets that no longer serve its long-term vision.

Business priorities, meanwhile, are displaced by the global drive for Net Zero. This growing pressure will continue to be a key driver of exclusions as companies seek to shed carbon-intensive assets.

Supported by record dry powder, global private equity funds recorded their highest ever deal activity in 2021. Given these factors, they are likely to remain active participants in carve-outs during the year. coming.

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