Increase in M&A as crisis spurs sale of problem assets

With the pandemic taking its toll on earnings, it is spurring companies to sell underperforming units, as they come under pressure from investors to shore up their balance sheets and pay down debt.
International companies spanning a range of industries have been looking to unload non-core assets that are dragging on profits, as they shift their attention to higher-growth areas to prepare for tougher times.
Global head of mergers and acquisitions at international law firm Sullivan & Cromwell, Frank Aquila, said the rise in non-core asset sales is for myriad reasons.
“Some are selling simply because they need to fix their balance sheets, others are selling because they can no longer afford to invest in a business that is not core and others are selling to invest in their higher-margin businesses.”
By mid-2020, with countries in the grip of coronavirus, the sale of underperforming assets began to accelerate.
Marathon Petroleum agreed a $21 billion sale of its gas stations to the owners of the 7-Eleven convenience store chain in the third quarter of the year.
Prior to that was BP’s sale of its petrochemicals business to Ineos for $5 billion and Unilever planned to sell its tea brands in the same period.
Head of UK investment banking at Jefferies, Philip Noblet said: “The public market is rewarding companies that are going to be the structural winners coming out of this crisis and that has accelerated conversations in board rooms as to what the shape of the company should be going forward, which is driving the decision to shed certain businesses.”
Managing partner, strategy and transactions at EY, Tom Groom, said that fiscal stimulus has prevented the need for firms to sell off distressed assets but COVID-19 has prompted firms to reassess their business portfolios.
He said: “While a number of actions were taken pre-COVID-19 to reduce costs, the reductions in interest rates, and likely increase in impairments puts a greater focus on costs than ever before and therefore some bigger strategic decisions may be required to support bottom-line returns costs.”
Another trigger for shedding under-performing divisions could be companies looking to tidy up their businesses in anticipation of merger activity when the outlook stabilises in the wake of the crisis.
Dwayne Lysaght, co-head of M&A for EMEA at JP Morgan, said: “Some bidders will not want exposure to one part of the business where there are no obvious synergies as it will dilute the case for a combination.”
The pandemic has led to a partial unwinding of globalisation, as firms look to pull back from foreign markets after years of international expansion.
Governments have become more protectionists of strategic assets, as key firms have become more vulnerable during the disruption caused by the COVID-19 crisis.
Wilhelm Schulz, Chairman of Europe, the Middle East and Africa M&A at Citigroup, said the move away from globalisation will spur more corporations to divest divisions outside of their home countries.
“Companies want to deploy their capital in local markets so they can have full control of the value chain.”
British Gas owner Centrica, for example, struck a deal back in July to sell its North Americas subsidiary Direct Energy for $3.6 billion to US integrated power firm NRG Energy, to concentrate on the UK and Ireland, as well as pay down its £2.8 billion net debt.
Buyout groups will seize the opportunity to pick up some of the assets being sold.
Bankers say those in the consumer, technology and communications sectors are particularly attractive to private equity firms looking to deploy their uninvested capital of $1.5 trillion, according to data from Preqin.

(The writer is our foreign correspondent based in the UK)

Andy Jalil