Carve-Outs’ Popularity Soars as Businesses Pursue Growth

Gregory Pryor and Germaine Gurr are partners at White & Case LLP. This post is based on a White & Case memorandum by Mr. Pryor, Ms. Gurr, Lindsey Canning, and Jun Usami.

Carve-out deals, whether conducted through a trade sale, buyout, or IPO, have become a vital tool for businesses to boost balance sheets and deliver shareholder value. This trend has gathered momentum over recent years, with 9,155 carve-outs worth US$2.3 trillion in aggregate announced globally in 2021, according to Dealogic—up 67% in value compared to 2020.

So far in 2022, carve-out activity has been somewhat softer. A total of 3,837 deals worth US$641.8 billion were recorded in H1, down 19% in volume and 44% in value compared to a bumper H1 2021.

Energy transition fuels carve-outs

Despite the slight cooling-off, the first half of 2022 has produced some big-ticket transactions. The global energy transition has been a key driver of deals globally, with societal, governmental and investor pressure all forcing businesses to make changes to cut their carbon emissions. Strategic reorganization has become crucial for companies needing to shed carbon-intensive assets and refocus business goals.

This trend led to the highest-valued carve-out deal of the year so far, specifically the US$17.3 billion spin-off of Constellation Energy, the power generation unit of US utilities giant Exelon.

Following the deal, which saw Constellation begin trading on the Nasdaq in February, the newly formed company has committed to a carbon-free future—aiming to achieve 95% carbon-free electricity by 2030, and 100% by 2040.

Another carve-out that reflects the momentum of the global energy transition is the sale by UK utilities firm National Grid of a 60% stake in its gas transmission and metering business, valued at US$10.5 billion, to Macquarie. The Australian infrastructure investor teamed up with Canadian asset manager British Columbia Investment to secure the deal. Following the agreement, announced in March, the buyers have promised significant investment to upgrade National Grid for the green economy.

Elsewhere in Europe, Danish energy company Orsted divested a 50% stake in its Hornsea 2 wind farm development in the UK to French bank Crédit Agricole and insurer Axa for US$3.9 billion. According to Orsted, Hornsea 2 will become the world’s largest offshore wind farm once commissioned in late 2022. It is a key project supporting the UK government’s target to achieve 40 GW of offshore wind capacity by 2030.

US posts three-year-high carve-out activity

In line with the global trend, the US deal market has been especially active. A total of 1,483 carve-outs worth US$891.2 billion were announced in 2021, making the US the most active region globally. This annual value more than doubled 2020’s total (US$400.1 billion), as activity dipped amid the pandemic. Deal volume, meanwhile, increased by 15% year-on-year.

The US market has generated some significant carve-outs so far in 2022, including two of H1’s top five deals. Aside from the spin-off of Constellation, US industrials materials producer DuPont divested a majority share in its Mobility & Materials segment to Celanese, a US-based chemical and specialty materials company, in a deal valued at US$11 billion.

The move is the latest by DuPont to tweak its portfolio in order to focus on high-margin operations. The industrials giant is reportedly planning to use the sale proceeds to pay for its pending US$5.2 billion acquisition of electronic materials producer Rogers Corp, as well as to finance further acquisitions and share buybacks.

PE players join the action

PE firms have also been active in the carve-out space, particularly in high-growth markets. The largest deal undertaken by a PE buyout firm in the first half of this year was Japanese conglomerate Hitachi’s divestment of a 40% stake in logistics company Hitachi Transport to US player KKR.

The deal is part of Hitachi’s ongoing transformation to become an IT and digital infrastructure specialist, which has resulted in the firm selling a number of listed subsidiaries. Sales by large conglomerates such as Hitachi offer attractive investment opportunities for PE groups looking to expand their presence in new markets, with KKR reportedly viewing Japan as its second most important source of potential deals, after the US.

Outlook: A return to the core

The pandemic forced global businesses to look inward and focus on fundamental operations amid a challenging economic climate. This attitude looks set to continue in the post-COVID era. Corporate divestments enable a company to focus on their core strategic goals, while shedding assets that no longer serve their long-term vision.

Corporate priorities, meanwhile, are being shifted by the global drive to Net Zero. This rising pressure will continue to be a key driver of carve-outs as businesses look to shed carbon-intensive assets.

Bolstered by record dry powder, global PE funds recorded their highest ever deal activity in 2021. Given these factors, they will likely remain active participants in carve-outs over the coming year.

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