Divestiture or Spin Planning

There is substantial empirical evidence that companies can increase shareholder value by selling or spinning divisions with substantially lower cash profitability than the company average. In some cases, portfolio businesses that actually subtract from a company’s overall share price are valued on their assets or their synergies or their “turnaround option value” when sold or spun. That said, an important number of divestiture or spin transactions prove that not all divestitures or spins are value accretive. Devon’s proprietary value metrics allow a client to predict the likely value from a divestment or spin-off before the transaction becomes an expensive waste of shareholder value.

One of our clients discovered in considering a spin of a large division that its three investment banks were in disagreement on the likely value the transaction would generate. The banks acknowledged that their differing views would reflect confusion among investors. Devon’s models predicted a compellingly powerful result, supported by a study of the 40 largest spins undertaken in the last five years. The model and the study were used by our client’s investor relations group and the spin created the predicted value.

Another client was contemplating the divestiture of a large division whose industry comparable EBITDA multiples were lower than the company’s other businesses. The Board was pressing the company to do the sale and enjoy an expansion in the company’s P/E multiple as a result. Devon’s analysis suggested that the divestiture candidate was a standout performer in an under-performing market segment. As a standalone company the division would trade at a premium to the client company. The businesses that could be divested with certain value accretion were entirely different from the existing theory. Three years later, the company completed the new list of divestitures and the share price doubled on lower revenue and reduced EPS.