Unlocking value through divestitures

The impact of the global financial crisis and significant capital investment programs has driven increased divestiture activity by many large utilities, in a bid to strengthen their balance sheets. In Europe during 2012, divestment and privatization programs emerged as the strongest contributors to deal activity, with power and utility companies keen to restructure their portfolios in an effort to reduce balance sheet debt levels and free up capital for new investment and deployment in emerging markets and technologies.

Disposing of some assets that are no longer aligned to the business strategy can be an opportunity to refresh the business, pay down debt and focus on investments in a company’s core area. But too often, while companies establish rigorous M&A management, the importance of divestitures as a means of raising, reallocating and preserving capital is sometimes overlooked. Power and utility companies that are too eager to simply dispose of assets may rush through the sale of a business or asset, leaving value on the table or overlooking other strategic opportunities.

Creating value in a tight marketA value-focused divestiture process begins with proactive portfolio management. Utilities should review their businesses and assets against strategic goals, performance metrics and industry benchmarks. This allows for an accurate current valuation of each component and helps identify divestiture candidates for each asset or group of assets.

Once appropriate divestiture candidates are identified, the challenge for power and utility companies is to make sure the deal is completed successfully. In our experience, many businesses are focusing too much on the transaction sales process and paying less attention to what is required to ensure real value is derived from the deal. Two key processes will improve the chances of a divestiture realizing value:

Tell the equity story: Most power and utility companies would benefit from spending more time preparing their equity story — that is, the story that attracts potential new investors into the business. In essence, preparing this story means viewing the sale from the buyer’s perspective. A compelling equity story will include comprehensive and consistent data on business strategies and operational performance, along with a well-considered, robust business plan. These business plans need to be credible and demonstrate in detail how management will derive further value from the business in the short and medium term. An equity story must emphasize a company’s strengths and describe its value and growth potential.

Focus on the carve-out: It is important to ensure adequate attention is paid to properly separating the divested asset from its parent business. Companies will need to assess the services currently being shared by both businesses, such as information technology and human resources, and determine the logistics of the separation and potential financial impact. Developing a detailed stand-alone business model that shows “what’s in and what’s out” of the transaction will enable buyers to value the business, while helping sellers rationalize their own value chain.

Divestment programs were the strongest contributor to deal activity in Europe’s power and utilities sector during 2012. But are companies doing enough to drive real value from these transactions? Report by Ian Whitlock.

Unlocking value through divestitures

2 | Unlocking value through divestitures

Appealing to financial investors Over the last 12 months, increasing numbers of financial buyers have become involved in power and utility divestitures, with several infrastructure and pension funds seizing the opportunity to invest in assets with predictable and regulated cash flows and revenues.

Apart from the preparations outlined above, a power and utility company can enhance its transactions with financial investors by building a clear picture of the regulatory regime under which the divested business operates. If regulatory obligations, including those relating to pricing and tariffs, are stable, the asset will be more appealing to buyers.

Financial investors interested in power and utility divestitures are typically pension funds and infrastructure funds that value long-term, low-risk returns. The equity story told to these buyers should therefore

include relevant information regarding long-term capital expenditure requirements and opportunities for the potential investor to improve the operational efficiency of the business.

Prepare early for successSuccessful power and utility companies view divestitures as a crucial element of their overall capital agenda. But the key to obtaining optimum value through these deals is adequate preparation. When crafting a divestiture planning framework, companies must begin early to articulate clear strategic plans and consider a multitude of factors at play during any transaction. Careful preparation that focuses on building a strong equity story and clear carve-out models will help companies extract greater value, increase speed to close and minimize disruptions to the core business.

Ian Whitlock UK & Ireland — Head of Power & Utilities Transaction Advisory Services, London, UK + 44 20 7951 0892 iwhitlock@uk.ey.com

Ian is a Partner in Ernst & Young LLP’s Transaction Advisory Services practice with more than 23 years of experience

providing transaction support services to clients in the power and utility sector.

For more informationRead more about essential considerations for a successful divestiture in Divesting for value.

How Ernst & Young can helpErnst & Young has supported many of the world’s largest utilities through divestiture programs aimed at optimizing portfolios, unlocking value and creating opportunities. Our teams work with companies through the entire process, from the initial considerations around a disposal, to divestiture preparations, including building an equity story and developing carve-out models, to successful completion of the transaction.

3 | Unlocking value through divestitures

About Ernst & Young

Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 167,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential.

Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit www.ey.com.

About Ernst & Young’s Global Power & Utilities Center

In a world of uncertainty, changing regulatory frameworks and environmental challenges, utility companies need to maintain a secure and reliable supply, while anticipating change and reacting to it quickly. Ernst & Young’s Global Power & Utilities Center brings together a worldwide team of professionals to help you achieve your potential — a team with deep technical experience in providing assurance, tax, transaction and advisory services. The Center works to anticipate market trends, identify the implications and develop points of view on relevant sector issues. Ultimately it enables us to help you meet your goals and compete more effectively. It’s how Ernst & Young makes a difference.

© 2013 EYGM Limited. All Rights Reserved.

EYG no. DX0174

This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither EYGM Limited nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.

ED None

EMEIA MAS 1546.0413

Ernst & Young

Assurance | Tax | Transactions | Advisory