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Diversified Industrials: Horizons

Digitalization. Complex supply chains. Growing regulation and compliance. Conglomerates and industrials operate in an increasingly dynamic environment – one which requires creative solutions and forward thinking.

Carve-out transactions must be clean cuts. But getting untangled can be easier said than done

By Elizabeth Donley and Jens Uhlendorf

Carve-out transactions will remain a popular option for chemical companies looking to shed non-core business activities in the face of numerous market challenges – among them tighter regulation, need to generate cash resulting from the business down-turn during the COVID-19 pandemic, mounting pressure to recycle carbon products, shareholder activism, and digital transformation.

But carve-outs can be thorny, especially in a capital-intensive industry that requires factories with large numbers of workers and produces a very tangible – not digital – product, often on tight margins. There might be a significant level of complexity to splitting up a business, be it with regard to manufacturing capacity, labor forces, or cross-border IP rights. Deciding what to sell – and who to sell to – can be a challenge in itself: chemical conglomerates regularly have assets and contracts that apply not to one business division but several, and antitrust issues can come into play with strategic buyers.

The intertwined nature of such business divisions makes an “entanglement analysis” imperative to these transactions’ success. For instance, existing supply contracts might cover both the business division being carved out and the parts of the business portfolio that will remain with the seller and will still need the materials going forward; those contracts will need to be split or adapted into new, sub-supply arrangements. Same goes for customer contracts and the manufacturing sites needed to fulfill them.

In the end, sellers will need to align their business such that they can operate successfully without the assets of the business division in question, while buyers will need to assess whether the business division they purchase can operate effectively on its own.

Carve-outs may sound like clear-cut transactions, but the complex makeup of large companies – especially in the chemical industry – means fruitful deals require extensive due diligence on both sides of the equation.

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