Deals

Tara Lachapelle is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

It's almost Thanksgiving in the U.S., but turkey's not the only thing getting carved up.

Like the feathered creatures at the center of Thursday's holiday, companies are going under the knife as chief executives and boards turn to corporate carve-outs to boost their stock prices or appease antitrust officials reviewing mergers. 

Slicing and Dicing
U.S. companies are selling more than $280 billion worth of assets this year. Continued shareholder activism and pending mega-mergers could result in even more carve-outs in 2016.
Source: Bloomberg

It should be no surprise that as corporate takeovers surged to a record this year, so too have asset sales -- at least in the U.S. Also underpinning carve-outs is another fairly new tendency among corporate executives: An inclination toward fewer business lines and a streamlined focus, following a decades-long pursuit of diversification and conglomerate-building. The shift in thinking coincides with the increased influence of activist investors, who often agitate for breakups as a means of unlocking shareholder value. 

Expect the trend to accelerate, given the sheer number of mega-mergers still in the works and the fact that activism isn't going away. In the U.S. alone, more than 500 business units are still up for grabs, after nearly 1,300 were already sold off this year. 

The timing couldn't be better for private-equity firms, which are eager to deploy funds and have a long history of snapping up carve-outs.

"The idea is, if that business is always going to be your fourth priority, then sell it and move on so you can focus on your top priorities," Neil Dhar, a partner in the deals practice at PricewaterhouseCoopers, said in an interview. "Private equity loves buying carve-out businesses."

Financial acquirers had been in exit mode the past couple of years to take advantage of high valuations, which also kept them from pursuing big buyouts. There have been less than 130 private-equity-led buyouts larger than $100 million this year, the least since 2012, according to data compiled by Bloomberg. 

Private-equity firms are sitting on $1.32 trillion of dry powder, and about $481 billion of that is slated for buyouts, according to Preqin's third-quarter report. They could finally spend some of this pile on assets marked for sale -- so-called orphan assets -- which shareholders are happy for companies to part with at a fair price. 

Among the big pending mergers, there's Anheuser-Busch InBev and SABMiller, which may have to sell more assets beyond the disposal of the MillerCoors stake. Oil-services companies Halliburton and Baker Hughes may need to make additional divestitures as well. 

Software maker Intuit is looking to sell three units, including the Quicken home-accounting program. Starwood, which is being acquired by Marriott International for about $12 billion, is also divesting hotels it owns. 

Bloomberg Gadfly columnist Shelly Banjo flagged another batch of potential sales: Slower-growing Kraft Heinz brands may soon end up on the chopping block. Financial buyers love businesses that consistently generate a lot of cash, so Kraft Heinz's trash may be their treasure.

Even as private-equity firms get ready to spend, they’ll face stiff competition from various participants that have held back from doing large deals of their own.

Long Time, No See
Buyouts by private-equity firms have been few and far between when compared with years past. But financial buyers could make a big push for the assets being carved out of public companies.
Source: Bloomberg
PE buyouts larger than $100 million.

Already in 2015, Coty beat out private-equity bidders when it sealed a $12.5 billion deal for 43 of Procter & Gamble's brands. Similarly, cement giant CRH outbid buyout firms for the nearly $7 billion in assets that Holcim and Lafarge were forced to shed as part of their merger.

Financial buyers have had some wins: Sycamore Partners bought 330 Family Dollar stores to settle anti-competitive concerns relating to the Dollar Tree and Family Dollar union, while Apollo Global Management beat out so-called strategic buyers to acquire Saint-Gobain’s glass-packaging unit Verallia.

Buyout firms could also step in should regulators block the sale of Philips NV’s lighting-components and automotive-lighting unit to Chinese investment group GO Scale Capital. 

Instead of bidding against strategic buyers, private equity players can also team up with them, That route provides a built-in exit option -- perfect for buyout firms that tend to sell out some five years after investing in a business. Blackstone has teamed up with Danaher to bid for at least two carve-out assets: Johnson & Johnson's diagnostics unit (which ultimately went to Carlyle Group) and Ashland's water technologies unit (an auction won by Clayton, Dubilier & Rice).

In the pursuit of Nokia's maps unit, Apax Partners joined forces with Uber Technologies and Baidu Technologies, while EQT Partners worked with China’s Tencent Holdings and NavInfo.

We'll be hearing a lot more on this in 2016. The bottom line: Private equity will have plenty on their plates.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the authors of this story:
Tara Lachapelle in New York at tlachapelle@bloomberg.net
Gillian Tan in New York at gtan129@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net