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US PE houses making £1 billion+ UK carve-out deals

London – PE firms made £10.1 billion of corporate carve-out acquisitions in the UK last year, up from just £765 million in 2019 as the Covid-19 pandemic drove more corporates to sell non-core business units, said Mayer Brown, the global law firm.

Mayer Brown said that the economic disruption of the past year has forced many large businesses to focus on their core operations to a much greater extent, leaving them much more open to sales of less strategically-important business units.

Private equity funds with significant capital to deploy have been a major beneficiary of corporates’ increased interest in divestments and have frequently been bidders in these auctions. This includes large US PE houses, who were involved in all four of the UK corporate carve-out deals worth more than £1 billion concluded by PE buyers in 2020:

  • Viridor Waste Management, bought by KKR and Hermes from Pennon for £4.2 billion
  • The retail and professional hair business of cosmetics maker Coty, bought by KKR for £2.1 billion
  • The infrastructure division of telecoms business GTT Communications, bought by I Squared Capital for £1.6 billion
  • The international business of CDK Global, the automotive software maker, bought by Francisco Partners for £1.1 billion

The pandemic may also have played a role in increasing the number of UK corporate carve-out deals undertaken by PE funds. 2020 saw 14 such deals completed, compared to just six in 2019 and seven in 2018.

Several of the PE-backed corporate carve-outs in 2020 involved large listed businesses, who may have accelerated their restructuring programs as a result of the pandemic. These deals included Ferguson’s divestment of its Wolseley division in the UK, as well as sales by Capita and Saga.

James West, private equity partner at Mayer Brown, comments: “The pandemic has triggered an intense focus on core businesses for a lot of corporates. Even at the best of times, business units within corporates have to compete for executive time and finance. Those business units far down the list of priorities might be far better off sold to another owner.

“With PE funds keen to make deals, carve-outs continue to make a lot of sense for both sides.

“Another significant driving factor is cash flow management for certain corporates as a result of nearly 12 months of COVID related restrictions and disruption to business.

“Corporates also see carve-outs as an opportunity to shed business units that are underperforming and that they don’t have the time to fix. Listed businesses can also see it as ‘addition by subtraction’ — a way to improve their share prices by divesting parts of the group investors are less keen on, that might attract a lower multiple than the rest of the business.

“Some US PE houses have been particularly active in looking for UK carve-out deals during the past year as they look to use some of the firepower they have stored up. The coming year will likely see another wave of these deals as corporate restructuring programs continue.”