2022 – the year ahead in healthcare

2021 was a phenomenal year for deal activity in the Healthcare sector. Strong M&A momentum continued across most Healthcare verticals despite, and sometimes because of, extended COVID-19 disruptions. BDA closed landmark transactions across sub-sectors including Pharma Services (CRO/CDMO), Specialty Generics, Healthcare Services, Diagnostics and Life Science Tools, and Medical Devices, which touched on specialty therapeutic areas such as respiratory, renal care, OB/GYN and dental.

It was a busy year for Asian players in healthcare. Among them, Chinese buyers emerged as some of the most active participants, driven by the desire to expand their capabilities to address unmet needs in the strongly growing Chinese market. With our deep sector knowledge and broad network, BDA delivered strong transaction outcomes for our corporate and private equity clients throughout the pandemic.

Enabling client success:

BDA’s senior Healthcare bankers give their predictions for the year ahead.

Andrew Huntley, Managing Partner and Global Head of Healthcare:

In 2022 I believe the 2021 Asian Healthcare M&A tally of US$139.6 billion⁽¹⁾ will grow further. COVID-19 impacts that disguised underlying EBITDA and created valuation and diligence frictions between buyer and seller should moderate. Specialty clinic chains, pharma services (CRO and CDMO), and diagnostic products and services will continue to attract M&A in Asia. Life science tools and technologies is a category for which I see a growing appetite where the region lags developed markets. So is home healthcare. I am waiting for an Asian leader in medical device CDMO to emerge and there are some interesting building blocks out there. Consolidation trends in China will play out; and we might see some multinational divestments of Chinese units in pharma and devices.

Sanjay Singh, Managing Director, Head of India and Co-Head Asia, Healthcare:

India continues to build innovative pharma research and development capabilities on top of its generics base. This is especially the case in pharma services where I see increasingly well positioned CDMO assets in both API (drug substance) and formulations (drug product) which serve global pharma sponsors not just generics customers. These will drive capital raising and M&A transactions, as will early signs of India nurturing some differentiated medical device innovators. Domestic formulation businesses will likely see consolidation as larger companies seek to expand their presence in chronic therapies. Digital health and Healthcare IT are, respectively, new and established exciting segments for investment and M&A.

Anthony Siu, Partner, Co-Head of Shanghai and Head of Financial Sponsor Coverage, China:

Private equity owners of Health assets are going to capitalise on the favourable sector trends to exit their investments, but they will also be very active acquirers, armed with ample dry powder of over US$650 billion Asia-wide. Healthcare regularly features in the top two priority sectors for Asian financial sponsors. China focused sponsors will continue to back or partner with strategic acquirers to drive both consolidation within China and outbound acquisitions in the West. On the capital markets side, growing uncertainties in public markets will increase the appeal of private capital raise rounds before IPO.

We look forward to delivering outstanding advisory services and great outcomes for our clients.

About BDA Partners

BDA Partners is the global investment banking advisor for Asia. We are a premium provider of Asia-related advice to sophisticated clients globally, with over 25 years’ experience advising on cross-border M&A, capital raising, and financial restructuring. We provide global reach with our teams in New York and London, and true regional depth through our seven Asian offices in Mumbai, Singapore, Ho Chi Minh City, Hong Kong, Shanghai, Seoul, and Tokyo. BDA has deep expertise in the Chemicals, Consumer & Retail, Health, Industrials, Services and Technology sectors. We work relentlessly to earn our clients’ trust by delivering insightful advice and outstanding outcomes.

BDA Partners has strategic partnerships with William Blair, a premier global investment banking business, and with DBJ (Development Bank of Japan), a Japanese Government-owned bank with US$150bn of assets. bdapartners.com

The article was originally published in the September 2021 issue of Vietnam Economic Times

Huong Trinh
Managing Director, Head of Ho Chi Minh, BDA Partners

Despite Vietnam experiencing its fourth wave of Covid-19, merger and acquisition (M&A) activities will continue to remain strong. Since the beginning of this year, we at BDA Ho Chi Minh City have seen strong interest from large regional PEs (private equity firms) looking for sizable transactions. We are also observing strong demand for growth capital and exits from both founder-backed and private equity-owned companies, evidenced by numerous current live deals and strong pipelines/opportunities for 2021.

Vietnam’s macroeconomic fundamentals remain strong. In the International Monetary Fund (IMF)’s revised forecast released in July, the country is still on track to remain the fastest-growing economy in Southeast Asia this year, with projected growth of 6.5 percent. Vietnam also has one of the fastest-growing middle-class populations, with rising discretionary spending power, leading to high pent-up demand for goods and services that will contribute to economic recovery as the country opens up again later this year.

Key industries predicted to grow strongly

In general, Vietnam’s economy has remained resilient and maintained good momentum for growth across industries despite the recent surge of Covid-19. In addition to consumer and retail which has always been one of the most active sectors in Vietnam and is expected to rebound strongly in 2022 thanks to the recovery of consumer confidence, the following sectors have been attracting a lot of interest.

We believe that IT & Technology and especially the internet-related segment will achieve the strongest growth in Vietnam, and that there will be a strong pipeline of opportunities for the sector in 2021 and upcoming years. Difficulties caused by the pandemic have driven growth in demand across all industries for technology-related services and digital solutions that help businesses function normally. In a post-pandemic world, there will be a continued push for swift digitalization, and M&As will be the fastest way for businesses to achieve this goal. Also, Vietnam’s internet economy has been growing rapidly during Covid-19, and we expect this trend to continue as there have been long-term changes to consumer habits and dynamics. The pandemic, for all its negative impacts on health, society, and economy, is propelling the growth of e-commerce and digital finance in Vietnam, paving the way for the country to fulfill its digital potential. According to the Ministry of Industry and Trade, Vietnam’s e-commerce market grew 18 percent year-on-year in 2020 to $11.8 billion, while traffic on e-commerce platforms was 150 percent higher than in 2019.

Pharmaceuticals is an industry that has attracted a lot of interest from foreign investors in recent years, with notable transactions including Taisho’s acquisition of a majority stake in DHG Pharma and SK’s recent investment in Imexpharm. According to BMI Research, Vietnam’s pharmaceutical industry could reach $7.7 billion in 2021 and $16.1 billion in 2026. A growing middle class, urbanization, and a young population are driving domestic demand for all aspects of healthcare, including expenditures on pharmaceuticals. As a defensive sector, pharmaceuticals will continue to achieve strong growth as Vietnam transitions out of the pandemic period. The industry is set to benefit greatly from the government’s national strategy to promote domestic manufacturing. To compete with imports, M&As with foreign strategic investors will continue to be crucial for local manufacturers, enabling them to meet global pharmaceutical standards through transfers of technology, R&D, and management expertise.

Renewable energy has also become an interesting sector for M&A activity in Vietnam over recent years, and we expect deal flow to resume as the country gradually opens up. With a rapidly growing economy, Vietnam has been at risk of power shortages as demand exceeds supply due to a lack of power infrastructure, and capital injections into the development of renewable energy could provide a good solution. Vietnam became the largest solar energy market in Southeast Asia in 2019, attracting foreign investors in mega plants in Binh Phuoc, Tay Ninh, and Ninh Thuan provinces, given the more attractive feed-in-tariff schemes compared to other countries in the region. Buyers have also been active with acquisitions of onshore and offshore wind farms in the central highlands and central coastal regions, which boast huge potential given their ample wind resources.

In Vietnam’s real estate market, M&A remains the quickest solution for foreign developers to enter the country and for local developers to expand their land portfolio. An increase in real estate M&A activity is expected this year, as various projects will be approved thanks to new improvements in the Law on Investment, after lengthy delays in the review process in previous years. Investors have accumulated a lot of capital, which is waiting to be deployed as the economy recovers, while owners struggling from the impact of the pandemic are willing to sell at lower valuations. Within the sector, industrial real estate has seen more activity in 2021, as multinational companies continue to shift their manufacturing bases from China to Vietnam despite the ongoing pandemic. Meanwhile, deal flow in residential real estate is expected to recover in the latter half of the year, as postponed transactions are resumed when travel restrictions are loosened.

Manufacturing, one of the sectors temporarily hit by Covid-19, will also provide opportunities to buyers who are confident of a strong economic recovery. Vietnam has been emerging as a manufacturing hub in the region given its low labor costs, its strategic location and many seaports nationwide, and its increasing participation in free trade agreements. For these reasons, its manufacturing sector will remain attractive to foreign investors, especially given ongoing China-US trade tensions, resulting in the relocation of manufacturing hubs from China to Vietnam. Domestically, there could also be a pickup in M&A activity, as we might see a trend in the consolidation of struggling small and medium-sized players into respective market leaders. Demand for growth capital from businesses looking for internal transformation and rebuilding post-pandemic will also present opportunities for investors looking for high-quality assets at attractive valuations.

Common risks and opportunities

Some of the common risks include uncertainty in the legal framework, especially new laws that came into effect recently, quality of information, as some companies still do not apply best practices in bookkeeping, an unfamiliarity among Vietnamese sellers with M&As and the basic concepts and processes involved, and cultural differences during deal negotiation and post-deal integration.

M&A transactions in Vietnam are largely governed by the Law on Enterprises, the Law on Investment, and the Law on Competition. Recent changes in these laws have posed additional challenges to potential buyers. For example, under the new Law on Competition, a substantially higher percentage of M&A deals are subject to merger control filing requirements, and the evaluation process could potentially add months of uncertainty to the timeline of a deal. Quality of information is also a common issue for foreign buyers, as target companies do not always have an organized information system that meets their requirements.

The current postponement of inbound international flights due to the pandemic also makes it difficult for buyers to conduct in-depth due diligence through site visits and face-to-face meetings. Additionally, foreign buyers might be unfamiliar with cultural differences in corporate governance practices in Vietnam. Many target companies are founder-owned, family-run businesses, which may not yet see the value-added of foreign strategic and financial partners or be open to international corporate governance standards. Last but not least, Vietnamese sellers lack knowledge in terms of how the M&A process works and is structured, which will create uncertainties.

Despite the existing drawbacks, it is important to acknowledge that compared to a decade ago, the perception of M&As in Vietnam has changed dramatically among government agencies, business owners, and investors/buyers and in a positive way. Authorities are continuously improving their turn-around times and responsiveness, while working toward new guidelines for M&A transactions, with the new Law on Enterprises, Law on Investment, and Law on Securities having come into effect on January 1, 2021. Shareholders are now more open to adding M&A as a strategic option in their growth trajectory and are becoming more educated in terms of M&A processes and key concepts. We see that sellers are taking a much more structured approach for large domestic deals or cross-border deals by engaging relevant advisors, who will help mitigate risks for foreign buyers by working with them through a transparent process. As BDA has a local team in Vietnam, we have been fortunate and pleased to be trusted by many local business owners and have given them advice and helped them run structured deal processes along the way.

We remain confident in the availability of opportunities in Vietnam’s M&A market. From a macro level value creation process perspective, Vietnam will continue to enjoy: (i) stable, unparalleled economic growth compared to other Southeast Asia countries, especially amid Covid-19; (ii) an influx of advantages from recent free trade agreements; and (iii) a strong government push to equitize State-owned enterprises. From a micro-level perspective, Vietnamese companies are becoming more professional with stronger management teams and better corporate governance. They are more open to foreign investors as they see the different values that both strategic and financial investors can bring.

Anticipated M&A deals and volume in next six months

Companies looking to position themselves for recovery in the post-pandemic economy will need new capital injections for internal transformation and further growth to remain competitive, and they will be eager to restart conversations with buyers for deals that were put on hold or lost. Within businesses in industries such as F&B, manufacturing, and industrials that have been negatively affected by the pandemic, there are still a lot of sizable and high-quality assets in the market. This environment will create opportunities for an increase in deal flow linked to dislocation, as sellers are more willing to close deals at a lower valuation in exchange for immediate access to growth capital. Until travel restrictions are loosened, local investors will have an advantage over foreign counterparts in such transactions, given their presence in Vietnam and their ability to run quicker processes and provide liquidity to businesses in need. We also expect to see a consolidation trend in M&A transactions, as market conditions have become challenging for small and medium-sized enterprises (SMEs).

About BDA Partners

BDA Partners is the global investment banking advisor for Asia. We are a premium provider of Asia-related advice to sophisticated clients globally, with 25 years’ experience advising on cross-border M&A, capital raising, and financial restructuring. We provide global reach with our teams in New York and London, and true regional depth through our seven Asian offices in Mumbai, Singapore, Ho Chi Minh City, Hong Kong, Shanghai, Seoul and Tokyo. BDA has deep expertise in the Chemicals, Consumer & Retail, Health, Industrials, Services and Technology sectors. We work relentlessly to earn our clients’ trust by delivering insightful advice and outstanding outcomes. BDA Partners has strategic partnerships with William Blair, a premier global investment banking business, and with DBJ (Development Bank of Japan), a Japanese government-owned bank with US$150bn of assets.

US securities transactions are performed by BDA Partners’ affiliate, BDA Advisors Inc., a broker-dealer registered with the Securities and Exchange Commission (SEC). BDA Advisors Inc. is a member of the Financial Industry Regulatory Authority (FINRA) and SIPC. In the UK, BDA Partners is authorised and regulated by the Financial Conduct Authority (FCA). In Hong Kong, BDA Partners (HK) Ltd. is licensed and regulated by the Securities & Futures Commission (SFC) to conduct Type 1 and Type 4 regulated activities to professional investors. www.bdapartners.com

Huong Trinh, Managing Director and Head of Ho Chi Minh at BDA Partners, shares insights on Vietnam M&A market, including growth sectors, cross-border activity, digitalization, and the rise of SPACs.

Which industries do you see picking up in the SE Asia region, largely with the focus on Vietnam?

Internet-related businesses have been growing rapidly of late. Consumer behaviour is changing, and this is a long-term sustainable shift in consumer dynamics. Average order value on e-commerce sites rose by over 35% year-on-year in the first half of this year.

For the industrial sector, COVID-19 has been certainly a catalyst for business owners to consider a transaction. The underlying reason was the fundamental change in the economic outlook domestically and globally, which has urged a number of investors to look for a more stable and “safer” destination while its business owners see the
benefits of having a “big brother” who is financially stronger with them to grow the business, especially during unstable periods.

Healthcare is another attractive sector for investors. The sector will likely see lower cash flow compared to 2019. Hospitals face a huge negative impact on revenue as they have had to cancel many profitable surgeries and procedures, while investing more in staffing and getting extra protection equipment for work. In contrast, personal protective equipment companies are seeing a significant revenue growth and the pharmaceutical sector will continue to grow strongly post-pandemic.

Industrial real estate and logistics will also grow, thanks to multinational companies shifting their manufacturing base from China, and the requirement for logistics and supply chains to keep up.

Sectors that have been temporarily hit by COVID-19, such as food & beverage, hospitality and discretionary retailing, present opportunities at attractive valuations for buyers who are confident of a strong bounce back.

How do you see international investors completing transactions with Vietnam’s borders still shut?

We signed/completed 5 transactions so far since COVID-19 without the buyers coming into Vietnam for the signing/closing.

This has been a key concern when COVID-19 started, but as we came along it is really a matter of how much both sides like the deal and how we, as the advisor, add value. We see that people have been very creative in the process, for example the investor can hire a local advisor to do the site visit/management meeting on the ground in Vietnam, the local team can take high-quality video on the assets, etc. These creative approaches will help very much to get the deals done.

We at the BDA Ho Chi Minh City office are observing a large demand for growth capital and exits from both founder-backed and private equity-owned companies, evidenced by numerous current live deals and strong pipelines/opportunities for 2021.

What are the trends you see in cross-border activity?

Compared to a decade ago, perception towards M&A has changed drastically among business owners, government agencies and investors/buyers in a positive way. As Vietnam’s economy opens up, we have witnessed more and more large cross-border deals that brought positive growth to the target companies and benefits to all stakeholders. We see people are taking a much more structured approach for large domestic deals or cross-border deals which require the involvement of all relevant advisors as they see the benefits of having an official process and advisors in place:

better positioning the company
consistent and organised approach
more competitive process can create better valuation and terms
increase the certainty
professional advice will definitely help get better outcome and reduce risks

As BDA has a local team in Vietnam, we have been fortunate and pleased to be trusted by many local business owners to give them advice and help them run a structured process along the way.

Discuss the growth of digitization especially in the M&A environment in SE Asia?

Overall – the digital economy has been growing exponentially. The COVID-19 pandemic, for all its negative impacts on health, society and economy, is expediting the growth of Vietnamese e-commerce and digital finance, paving the way for the country to fulfill its digital potential. Traffic on e-commerce platforms in 2020 was 150 percent higher than the previous year, with approximately 3.5 million visitors per day on various platforms.

Can you comment on the rise of SPACs?

There are tremendous benefits of considering a SPAC buyer in a sale process, opening opportunities for growing companies in developing markets that wish to participate in other established markets’ capital markets:

Valuation: Robust public market valuation with retail participant
Speed to market: Ability to secure capital commitments within 4-6 weeks vs. IPO with 3-4 months of market risk before roadshow
Certainty: Less sensitive to general equity backdrop and market windows
Flexibility: Ability to fully disclose financial forecasts to support investment case; Structural flexibility for integration of earn outs/conditional fees and more incentive driven deal constructs

About BDA Partners

Simon Kavanagh, Partner and Head of Industrials at BDA, shares his views on where we will see the most M&A activity within Industrials in Asia, in terms of sub-sectors, markets and key players in 2021 and beyond.

– Which are the most active sub-sectors in Industrials in Asia in terms of M&A activity since 2020?

There are two sub-sectors within Industrials where we’re certainly seeing a lot of activity. One is general component manufacturing, both metal components and plastic components. The automotive sector in particular has rebounded from a low in 2020, and we are seeing several deals in the marketplace currently. Component manufacturing then extends up into EMS and assembly, and there’s quite a lot of focus on electronic components, especially where there’s a technology angle.

The general trend for 2021 onwards is that technology is key. The R&D capabilities of target companies are scrutinized very closely by investors and the extent of their technology expertise has a meaningful impact on valuation. For pure play component manufacturing companies, with less of a technology angle, there is less demand, and appetite and valuations are lower.

Another sub-sector where we are starting to see increased activity is in waste recycling. This ties into the general mega theme towards ESG, which is becoming an attractive investment sector and one which funds and LPs are actively looking for opportunities.

– At the end of 2020, BDA closed a milestone transaction in the semiconductor sector with the sale of Compart to Shanghai Wanye. Compart is a leading global supplier of semiconductor components and assemblies, headquartered in Singapore with manufacturing plants in China and Malaysia. Do you see more opportunities in this subsector? Who are the most active investors?

The sale of Compart was a very successful transaction, for both buyer and seller. The investment environment is strong and there are several additional semiconductor related transactions coming to the market. BDA is currently working on a number of these, each in a different stage of the semiconductor manufacturing supply chain.

China has made it a priority to strengthen its domestic semiconductor capability and Chinese companies are keen acquirers. There is a strong willingness for Chinese corporates to borrow money and for private equity firms to commit capital to semiconductor related targets.

We expect the Chinese pace of investment in the semiconductor sector to continue for the next few years. It is an industry where most of the manufacturing and the technology is outside of China, either in Taiwan, Korea or the US. So there is a strategic value to the companies they are buying, even if valuation is relatively high. Private equity firms specialising in the semiconductor sector have sprung up. Wise Road Capital is one of the better-known ones: earlier this year it acquired MagnaChip in Korea for US$1bn. It was unusual for a Chinese company to buy something in Korea of that size, but it followed their 2020 acquisition of United Test and Assembly Center.

– How do you view the acquisition appetite of financial sponsors versus strategic investors for the Asian Industrials sector?

Financial sponsors have the upper hand at the moment and that will continue throughout 2021, until the macroeconomic environment stabilises and travel restrictions are lifted. The investor universe for industrial companies is weighted quite heavily towards Asian financial sponsors, with some activity and interest from Asian strategics. However, financial sponsors are much more flexible in terms of considering cross border M&A in the Covid-19 environment and being able to complete due diligence virtually.

Sponsor investors across the board are looking to increase their exposure to the region. Several international private equity firms have raised large Asia-only focused funds since 2020, including KKR, Blackstone and Carlyle. China-focused private equity firms (Boyu, Primavera, Fountainvest, BPEA, Hillhouse and PAG) are also investing or raising billion-dollar funds.

Strategic investors tend to be a little more conservative. It has not been a priority for US or European corporates to make significant investments in Asia these past couple of years: they have tended to focus on their home markets. The difficulty of doing site visits under the current Covid-19 travel restrictions has more of an impact on them, than on financial investors. However, while it is early stages, BDA is starting to see a change in the trend with a noticeable increase in the number of corporate clients calling us in 2021 to discuss buyside roles in Asia.

– China outbound M&A in 2020 was the lowest level in the last decade. Do you still see Chinese investors having a conservative view in outbound industrial deals in 2021?

The volume of China outbound M&A has come back from the low of 2020. Outbound volume in Q1 2021 was up 15.9% YoY. But in general, yes, the heyday of Chinese outbound diversification has gone. US assets are still out of favor due to geopolitical tensions. Europe is attractive, but acquirers are far more cautious, both in terms of what they buy and how much they pay for it.

When they do make acquisitions it’s the technology that is most critical. China’s next stage of development is very much towards being at the forefront of technological leadership and R&D capabilities. They are looking at what this target can bring to them in the industry. Does it have something that is not essentially in China already? What can a new Chinese owner do to win Chinese customers for this foreign company? Does the target company have some special intellectual property or is it the leading expert in a particular niche? Technology will remain the key driver for outbound M&A for many more years.

– SPACs have been a hot topic recently. What impact do you think SPACs will have on the industrial sector in Asia?

Not much of an impact. SPACs tend to focus on high growth companies that are looking at raising capital and want to do an IPO, but are less suited to the more traditional routes for public listing. There are not many industrial companies that fall into that category. Local Asian SPACs are still not regulated or available / approved by regulators in either Hong Kong or Singapore, although that will change in due course. In order to pursue the SPAC route in either the US or Europe, the business needs to be big, like Grab. But if you’re a US$1 billion valuation Industrials company, you won’t need to sell new shares to raise capital, and if you’re looking for liquidity you will probably just go and do a normal route IPO or sell to a financial sponsor.

– Is the shift of manufacturing capacity to Vietnam, at the expense of China, continuing?

Yes, the trend will continue for the foreseeable future. Vietnam still has a significant cost advantage over China, particularly for labor-intensive industries. Companies are not necessarily moving their entire supply chain from China to Vietnam, but if they are adding capacity, it’s less likely that they will be making that capital expenditure in China. Vietnam, as well as Malaysia to some extent, are continuing to benefit because of their well-qualified workforce of engineers and a friendly FDI regulatory environment.

With our strong BDA Partners team on the ground in Vietnam, we are seeing and working on a lot of founder-owned sellside transactions where the target companies are very attractive bolt-on acquisitions for strategic investors. We’re witnessing the start of a shift, where a generation of founders of some very successful Vietnamese companies are looking for liquidity, and they need access to an international investor universe and an advisor to help guide them through an M&A process.

About BDA Partners

We spoke with Howard Lee, Partner and Head of Seoul at BDA Partners, who discussed the outlook of the M&A activities in South Korea, the impressive growth of the Korean private equity market and the role of a great financial advisor.

What are the latest trends in the M&A inbound and outbound market in South Korea?

Inbound acquisitions of Korean assets by foreign investors have been inactive over the past year. It is largely related to the impact of Covid-19 on overseas buyers. For example, when I talked to potential buyers in the US or China about Korean assets, the general feedback was, under the Covid situation, we were unable to organize ourselves to seriously look at the asset. The Korean inbound market will be more active when the Covid situation improves globally during 2021.

Also, overseas acquisitions by Korean companies in the US and European market have not been particularly active over the last decade. Only few top conglomerates in Korea, like Samsung, LG and SK, tend to execute such M&A transactions. In general, most Korean companies tend to take a conservative stance when it comes to allocating considerable resources for cross-border M&A transactions. The problem resides in their limited exposure to cross-border M&A as well as in post transaction steps such as PMI (Post-Merger Integration). Thus, in order to penetrate overseas market through M&A strategy, it is important that they approach and confront the deal confidently but with proper preparation. Secondly, out of those major conglomerates, their hands are tied up by regulations. So, even though they would intend to go out looking at M&A opportunities, there are sometimes issues at the corporate level or sometimes at the level of key individuals.

What are the key factors to the rising presence of financial sponsors in the Korean market?

Korean financial sponsors are quite capable, in terms of sourcing capital and executing transactions. Most Korean financial sponsors are supported by large limited partners such as the National Pension Service, the largest public pension fund in South Korea. As private equity funds continue growing in Korea, they are pressured to invest capital and make investments. Moreover, the Korean private equity market is relatively mature compared to other Asian countries and the private equity professionals are very capable and intelligent, exerting high level of professionalism in sourcing high quality assets and undertaking extensive due diligence.

The growth of Korean private equity has quite a unique story. In Korea, conglomerates divest certain affiliates every year. However, for various cultural reasons, transaction between corporates in Korea is very rare. For example, if Samsung sells one of its affiliates to LG, it would be considered exactly a kind of betrayal to employees. So, rather than directly selling the affiliate to another corporate, they would likely have an indirect discussion and sell it first to a private equity fund. A few years later under private equity ownership, the fund would then sell the asset to another conglomerate. This is a pretty typical process in Korea, and that is why financial sponsors are very active in acquiring assets, without many challenges divesting to corporates a few years later.

Korean M&A market is expected to face an unprecedented boom in 2021. What are your views for the Korea M&A market in 2021?

The expected booming M&A activities in 2021 will be largely driven by the pent-up in transactions. Many private equity funds had good assets ready to be divested in 2020 but the M&A process was disrupted by Covid-19. These funds are now looking to resume these M&A processes in 2021. We will likely see a number of large assets come to the market in 2021. In the case of corporates, their outbound investments in the US, Japan and European markets have also been put on hold because of Covid. As we were seeing the light at the end of the tunnel by the end of 2020, these activities are also likely to resume during 2021.

As far as my knowledge goes, the market has already begun its process to rejuvenate M&A activities. A number of advisors/bankers are already in the process of developing deals and we can soon expect the market to be flooded with deals.

How have chaebols (large local conglomerates) changed over the last few years and what do you expect going forward?

In my perspective, each chaebol has been focusing on building up their internal taskforce in 2020 looking to identify and resolve potential in-house issues related to liquidity, financial performance, etc. As a result, there were no significant transactions in 2020, other than SK Hynix’s acquisition of Intel’s NAND memory business for US$10bn.

For the past few years, chaebols were not active about overseas M&A. However, they now realize the future depends on their capabilities in AI, semiconductor, data, platform business, etc. As evidenced by Hyundai Motors’ recent investment in a global robotics company in the US, I think that these kinds of investment and acquisition by chaebols will be flourishing going forward.

What are the most attractive sectors in Korea for M&A over the next five years and why?

One of the most attractive sectors in M&A over the next five years will be the industrials sector as it needs to be consolidated or restructured. Large industrials companies in Korea such as Samsung, LG and SK will need to complete some consolidation or restructuring, whether it is acquiring a competitor or exiting this sector soon in preparation for the ESG era. Based on the expected market dynamics as mentioned above, there will be a myriad of acquisition opportunities of legacy business under the consolidation or ESG preparation.

In addition, other attractive sector to look out for is the tech-driven industry which Korean chaebols and conglomerates are focusing on at the moment. Businesses related to AI, data, cloud computing, semiconductor are the ones that the conglomerates not only have strong fundamental on but also heavily investing in as well.

How do you think the role of M&A financial advisory will evolve under such fierce competition?

Over the past decade, I think the top five or six conglomerates in Korea accounted for more than 80% of the fees paid to M&A financial advisors. That is because those conglomerates have sizable revenues and there are many M&A deals being sourced from them. In recent years, the private equity sector has been growing fast, contributing more and more to the financial advisory business across Korea.

Therefore, an advisor needs to focus on these two client types, and be able to deliver what they require. Corporate clients value the advisory firm’s network in both domestic and global markets. Private equity clients tend to look at each individual banker, their capabilities and track record for instance. So, I think M&A financial advisory needs to be built up in these two ways. Any advisory firm that is successful in building extensive local and global networks, and continuing to hire great professionals, will end up in a better position compared to the competition.

Another perspective here is the M&A financial advisory firms need to act like a bridge between corporates and private equity funds. If we build up a private pipeline between the two, we can arrange the one-on-one deal between private fund and corporate.

BDA has an edge in our unparalleled local Korean and global networks, extended experience in sell-side process, and seamless execution by the global team of professional bankers. Going forward, BDA Seoul will keep hiring highly competent people and delivering bigger transactions.

In this light, BDA Seoul is currently in discussion with a U.S. law firm to help Korean corporates elevate their knowledge of rules and practices to be considered when acquiring U.S. publicly-listed companies and will hold a session in March where all M&A staffs from most of major corporates in Korea will be invited. I believe this will greatly improve our reputation in the Korean market and strengthen our relationship with the potential clients.

About BDA Partners

Euan Rellie, Co-Founder and Senior Managing Director of BDA, in New York, recently joined a webinar International Business Briefing: What is the Future of the China Market, hosted by the US-China Business Council and Faegre Drinker.

Euan shared insights on M&A trends in China and Asia:

China M&A Overview
- In 2019, China-related M&A transactions slumped significantly, reaching the lowest transaction value since 2013
- Major drivers were: Drop in outbound M&A (dropped 37% in value) and Drop in Private equity deals (dropped 22%)
- Outbound deals have been discouraged by increased scrutiny of CFIUS review in the US; national security review in Europe; Beijing’s controls on outbound capital flows
- Inbound transactions reached US$20bn in 2019, representing a 5.6% growth YoY
China as a market for US companies: Large inbound acquisitions in China have always been rare; acquisitions by US companies have mostly been small/medium sized
Impact of the trade war: Punitive actions against China will continue. Even if Trump loses in November, investors don’t expect a significant change in the US approach to China. The tone and tactics will change
Developments during the pandemic: China becomes a refuge for US companies after overcoming COVID-19. China’s economy is slowly recovering, growing by 3.2% in Q2 2020 as retail and luxury sales experience a strong rebound. The recovery is unbalanced, which has widened the wealth gap
Hong Kong isn’t over for foreign investors, despite the National Security Law: Hong Kong will remain the hub for inbound and outbound mainland investments
China M&A going forward:
- In the short term, Chinese investors will be focused on domestic consolidation and less active in outbound M&A. Growth in inbound deals is expected, but a red-hot IPO market and high valuations in China could prevent this from growing fast
- In the medium/long term, we expect frequent sales of family-owned businesses. As China faces rising tension with the US, the PRC Government work to ease regulations on inbound M&A

If you want a copy of the slides, or would like to discuss any of these topics, please contact us.

About BDA Partners

BDA Partners is the global investment banking advisor for Asia. We are a premium provider of Asia-related advice to sophisticated clients globally, with over 24 years’ experience advising on cross-border M&A, capital raising, and financial restructuring. We provide global reach with our teams in New York and London, and true regional depth through our seven Asian offices in Mumbai, Singapore, Ho Chi Minh City, Hong Kong, Shanghai, Seoul and Tokyo. BDA has deep expertise in the Chemicals, Consumer & Retail, Health, Industrials, Services and Technology sectors. We work relentlessly to earn our clients’ trust by delivering insightful advice and outstanding outcomes.

BDA Partners has strategic partnerships with William Blair, a premier global investment banking business, and with DBJ (Development Bank of Japan), a Japanese government-owned bank with US$150bn of assets.

We spoke to Huong Trinh, Managing Director and Head of the BDA Partners Ho Chi Minh City office, about the latest exciting developments in M&A in Vietnam.

You worked on the largest inbound private sector industrial transaction in Vietnam in the last three years, the sale of Thipha & Dovina to Stark Corporation, for US$240m. Why were Thipha & Dovina such an attractive investment opportunity for an international buyer?

Thipha & Dovina are a leading electric cable and non-ferrous metal group with a 30-year history. The companies grew revenues at an average 20% per annum for the period 2015-2019, and revenue exceeded US$500m.

This asset offers direct exposure to Vietnam’s economic growth. Vietnam has been emerging as a manufacturing hub in the region given its relatively low labor cost and strategic location. In 2019, Vietnam recorded GDP growth of ~7%, and is expected to remain a regional outperformer. Significant investment in infrastructure is underway. The government and business led spending will drive demand for cable and wiring for the foreseeable future.

Thai buyers are consistently interested in Vietnamese assets, and have made several significant investments in Vietnam over the last few years.[1]

Do you think there will continue to be inbound interest in Vietnamese companies from the rest of Asia and further afield in the future? If so, what are the key reasons?

Obviously yes, as we have received lots of indications of interest for high-quality industrial assets, as well as other sectors, from both global and regional buyers. We believe the strong inbound interest is mostly driven by the following factors:

Vietnam’s economy is driven by consumer spending, which accounts for close to 70% of its GDP. With the third largest population in ASEAN, and the expansion of upper and middle-income earners, the economy is expected to grow further. Despite the disruption from COVID-19, Vietnam is expected to still enjoy ~3% economic growth this year and is expected to bounce back to 6% growth in 2021[2]
Vietnam will benefit from recently signed Free Trade Agreements (CPTPP & EVFTA), which encourage more foreign direct investment into the country and put in place lower tariff structures. This is also an indicator of strong EU-Vietnam relations
Vietnam has been emerging as a manufacturing hub in the region given its relatively low labor cost, but with increasing quality and a strategic location with many seaports nationwide. Global companies started shifting operation to Vietnam in 2010, and this trend has been accelerated by the ongoing US-China trade tensions

Are there opportunities in Vietnam for BDA to sell founder owned businesses in the future?

We believe there are still many more opportunities in Vietnam to advise founders on the sale of their businesses in the short term. There are still a lot of sizable and high-quality assets in the market that have grown into market leaders over the course of several decades and which have undergone different phases of development. They may need a new “growth engine” or investment to remain competitive and in some cases the founders are simply looking to exit and step back from the company they founded.

In addition, improved legal framework and corporate governance are making it easier and more transparent for foreign investors, giving them greater confidence to acquire majority stakes.

We are currently mandated on a number of projects thanks to: (i) a combination of our strong relationship with both strategic and financial sponsor buyers because of our global network; (ii) a senior team on the ground in Vietnam (especially important during COVID-19); and (iii) excellent execution capabilities which are laser-focused on delivering the best outcome for our clients.

Which will be the most attractive sectors in Vietnam for M&A in the post COVID-19 environment and why?

Internet-related businesses have been growing rapidly during COVID-19. Online, or online-to-offline, products and services have seen significant growth. This is not just a short-term effect; consumer behaviour is changing, and this is a long-term sustainable shift in consumer dynamics. Average order value on e-commerce sites rose by over 35 percent year-on-year in the first half of this year.

People are still spending money on shopping, a good sign given the fears that demand would fall during the COVID-19. The best performer was the groceries and fresh food, following by household supplies, homecare and healthcare products. Shopping malls are now packed with people like COVID-19 was never here.

For the industrials sector, COVID-19 has been certainly a catalyst for business owners to consider a transaction. The underlying reason was the fundamental change in the economic outlook domestically and globally, which has urged a number of investors to look for a more stable and “safer” destination whilst business owners see the benefits of having a “big brother” who is financially strong together with them to grow the business, especially during the unstable periods.

Healthcare is another attractive sector for investors. Some of the healthcare sub-sectors are performing well during COVID-19, while some are not. The sector will likely see lower cash flow in 2020 compared to 2019. Hospitals face a huge negative impact on revenue as they have had to cancel many profitable surgeries and procedures, while spending more on staffing and getting extra protection equipment for work. In contrast, personal protective equipment companies are seeing significant revenue growth, and the pharmaceutical sector will continue to grow strongly post pandemic.

Industrial real estate and logistics will also grow, thanks to multinational companies shifting their manufacturing base from China, and the requirement for logistics and supply chains to keep up.

Do you see any changes in perception towards M&A processes in Vietnam? Have handshake deals been completely replaced by more structured processes?

Compared to a decade ago, the perception towards M&A has been changed drastically among business owners, government agencies and investors/buyers in a positive way. As Vietnam’s economy has opened up, we have witnessed more and more large deals that have brought positive growth to the target companies and benefits to all stakeholders. As awareness of the positive benefits of M&A has grown, shareholders are now more open to adding M&A as a strategic option in their growth trajectory and strategy. Sellers are becoming more educated in terms of an M&A process and key concepts. I still remember 15 years ago, it took me a lot of time to explain to the business owners how investors would value a business, which was not only based on how many land use rights the company held or how famous their company was.

For small deals, or deals between two domestic parties, handshake deals are still common, with all the decisions being made quickly, top down. However, we see people are taking a much more structured approach for medium and large domestic deals or cross-border deals. These deals will involve a variety of advisors as shareholders see the benefits of having an official process and professional advice: (i) better positioning the company; (ii) consistent and organised approach; (iii) a more competitive process will result in better equity valuation and terms; and (iv) increase the certainty of the deal completing and reduce the associate deal risks.

As BDA has a local team in Vietnam, we are happy to be trusted by local business owners to give them advice and help them to run a structured M&A process.

How do you see international investors completing transactions with Vietnam’s borders still shut?

BDA has signed and/or completed three transactions so far in 2020 without the buyers coming into Vietnam for the closing/signing.

This was a key concern when COVID-19 started, but as things have progressed, it is really a matter of how much both sides like the deal and how we, as the advisor, add value. We have been very creative with our sale processes. For example, helping the investor hire a local advisor to do the site visit/management meeting on the ground in Vietnam; arranging for the seller to take high-quality videos of the factories and assets, and so on. These creative approaches help to get deals done.

According to the AVCJ, 2019 was a record year for the number of PE / VC investments in Vietnam. Do you expect to see a rise in domestic and international private equity investment in Vietnam continuing in 2020 and 2021?

From a macro level value creation process perspective, Vietnam will continue to enjoy: (i) stable, unparalleled economic growth compared to other Southeast Asia countries, especially amid the COVID-19 situation; (ii) an influx of advantages from the recent free trade agreements; and (iii) strong government push to privatize state-owned enterprises. From a micro-level perspective, Vietnamese companies are getting more professional with stronger management teams and better corporate governance. They are more open to foreign investors as they see the different values that both strategic and financial investors can bring to the companies.

There is increasing demand for growth capital in 2020-2021. The private sector in Vietnam, with its strong momentum, will need more capital to pursue transformational changes and achieve further growth. The start-up ecosystem is seeing robust expansion, with internet related companies as the most attractive sector.

We, at the BDA Partners Ho Chi Minh City office, are seeing strong demand for growth capital and exits from both founder-backed and private equity owned companies. This is visible from our numerous live deals and strong pipeline/opportunities for 2021.

[1] In 2014, Berli Jucker Pcl announced a US$879m transaction to acquire Metro Cash & Carry Vietnam. In 2015, Central Group through its subsidiaries, Power Buy, bought 49% stake in Nguyen Kim Trading Company. In 2016, Central Group acquired Big C Vietnam, a supermarket chain, with a transaction value of US$1.0bn. In 2017, ThaiBev Group, through its subsidiary Vietnam Beverage, has acquired majority stake in Sabeco, Vietnam’s largest brewery company, with a deal size of US$4.8bn. SCG, a Thailand conglomerate, has done a number of transactions in construction materials and packaging in Vietnam.

[2] HSBC research shows Vietnam enjoying very strong internal domestic demand even during COVID-19. Nielsen research indicated that Vietnamese consumers remain 2^nd in ASEAN in terms of being positive.

About BDA Partners

Unparalleled economic disruption, a resurgence in COVID-19 cases and heightened trade tensions are stealing newspaper headlines but also mask fundamental developments in trade and investment. In this piece, we examine some of the latest market trends that are taking place in Asia and globally against a backdrop of increased economic uncertainty and geopolitical tension.

The Asian Century
The rise of Asia remains undisputed and will continue to power global GDP growth going forward. A brief glance shows unparalleled milestones:
– 50% of world GDP is expected to be Asian by 2024, and drive 40% of the world’s consumption
– 21 of the top 30 largest cities are now in Asia
– From 2000 to 2019, China increased its GDP from just over US$1trillion to US$14trillion

While 2021 will see some rebound in western economies as they emerge from COVID, this economic growth is likely to be lacklustre compared with mid and long-term growth rates in Asia.

In our latest piece, Shifting sands: changes in trade and investment in an uncertain world, the BDA team examined some of the latest market trends that are taking place in Asia and globally against a backdrop of increased economic uncertainty and geopolitical tension. We look forward to helping you make sense of these changes and navigate through uncharted waters.

Download the report

We hope you find it helpful. If you would like to discuss, please contact us:

Jonathan Aiken, Managing Director, London: jaiken@bdapartners.com

Simon Kavanagh, Managing Director, Hong Kong: s kavanagh@bdapartners.com

About BDA Partners

BDA Co-Founder and Senior Managing Director Charlie Maynard talks about opportunities in the Asian M&A market and how BDA runs an excellent sellside process and delivers the best results for clients.

In this working-from-home chat with BDA senior leadership, we talked to Charlie Maynard. Charlie co-founded BDA Partners with Euan Rellie 24 years ago in Singapore and New York. He has spent many, many years in different countries in Asia before and after founding BDA. We talked about the opportunities he sees in the Asia M&A market, and how BDA runs excellent sellside processes and delivers the best results for clients.

What opportunities did you see in the Asian market when setting up BDA in 1996?

We realised that there was a gap in the market, because the big banks were talking about being interested in global M&A and how important Asia was to them, but in reality they were much more focused on Western M&A and Chinese IPOs, where the big bucks were. While we understood that Asian M&A was a tough market, but we reckoned we could build a business by entirely focusing on it.

How has BDA evolved over the years?

When we started out in 1996, we were largely a buyside shop, working for large, primarily Western MNCs looking to acquire in Asia. The buyside work was very useful in terms of helping us understand sectors and what clients wanted. For the first ten years of BDA, the sellside market and particularly the private equity buyout based sellside market didn’t really exist. But around 2006-2007 there were signs that it was beginning to take off, and that was when we made the switch to focus on the sellside which is 80% or more of our business today.

The other two big changes were a few years back when we started both to build out and focus on our six core sector expertise including Industrials, Chemicals, Health, Technology, Consumer & Retail and Services as well as to set up a dedicated financial sponsors group coverage team which would focus full time on our relationships with sponsors.

How are BDA set up to deliver the best results for clients?

To run excellent sellside deals, you need to have global reach in order to access all buyers and be agnostic as to where the buyer comes from. There are very few parties that can really access all relevant buyers, regardless of geography, and why this business that we’re selling is attractive. We are one of the very few M&A advisories who can do that.

You also need to have the sellside process nailed. We are very, very process oriented. We systemize and automate the basic bits of a sellside process, which are normally repetitive, so we can focus on the difficult, critical bits which are specific to individual transactions and help our clients as fully as possible by adding real value. This is another key differentiator that we have in terms of systems and processes compared to our peers and competitors.

What can we expect from BDA Partners for the next five years?

If you do M&A, you want to be doing sellside M&A. The growth in the buyout market over the last 5- 10 years has been enormous in Asia. And if you look at the capital that has been raised over the last 1-3 years, it’s clear what we have seen to date is only a fraction of what we are going to see in the future. It’s a huge and rapidly growing market, but because of the complexity and global reach required, there are very few advisors that can effectively service this market. Sellside M&A advisory will remain our core business and we’ll continue to focus on raising our deal size.

Beyond that, we started to get involved in debt advisory and restructuring by a partnership with Zerobridge, as well as trying out principal investing with BDA Capital Partners. There are quite a lot of exciting opportunities for other avenues of growth in addition to the core M&A business.

What have been the biggest challenges in BDA’s journey so far?

The hardest challenge has been creating the global network we have today, where each person in each office can deliver much more than they are able to do individually. This has taken a lot of time and it is completely and utterly about the people inside BDA. It’s ever evolving and must always be improving and progressing through our team efforts. Keeping the team moving forward and focused across nine different offices and 12 different time zones will always be challenging.

What are you most proud of about BDA?

It is the team that has created this seamless global network that allows us to deliver the best results for our clients. I love our team and I love our team spirit. Very, very few organisations have as diverse and international a team which truly works together in a fast, coordinated and intelligent way. I love the fact that we have so many people from so many countries liking each other and enjoying working as a team – and that this teamwork delivers great results.

Get in touch with us today

Latest insights from BDA

About BDA Partners

BDA Partners has a long track record of completing complex cross-border carve-outs. As one of the most active M&A advisors in Asia, we complete several carve-outs for clients each year. We share our insights below on how to complete a cross border M&A carve-out transaction successfully.

Carve-outs are a growing feature in the current M&A deal market for multi-national corporations (“MNCs”) and financial sponsor-backed companies, particularly as CEOs and shareholders assess non-core segments and assets and look to improve financial return metrics.

Acquiring a carved-out business is attractive. Significant value can often be created through margin improvements and revenue / cost / operational synergies with the new owner. Carve-out transactions require buyers who are experienced with reviewing, diligencing and identifying the value-add opportunities, and have an experienced investment team to implement changes from day one. These criteria make financial sponsors ideal acquirers of carved-out businesses. The growth in dry powder with private equity funds, estimated at US$830 billion for buyout funds at December 2019[1], is increasing deal volumes and competition between private equity funds searching for acquisitions to put committed equity to work. This in turn is having a positive impact on the valuations MNCs can realise.

During the current COVID-19 pandemic, we see management teams and shareholders using this time to identify any non-core segments and assets which could be carved out in the future; either to raise cash to improve liquidity; or as part of a wider restructuring of the Group. If the potential carve-out is not urgent due to a distressed financial position, this time during the COVID-19 pandemic is being used to assess and plan for future carve-out transactions when local and global economies begin to recover.

Carve-outs are not for the faint of heart. They present the seller with a range of complex, time consuming and potentially challenging deal hurdles from day one. Deal complexity arises from company business operations including international subsidiaries, logistics, procurement, HR, back office functions and IT systems, resulting in an array of deal challenges. No carve-out deal is the same, which means customised solutions will be needed to bridge the needs of the buyer and seller of each deal. Early preparation with an experienced financial advisor is critical in order to avoid potential pitfalls.

Being poorly prepared for a carve-out can have a major impact on the chances for success. Poor preparation or neglect of key areas may jeopardise the transaction itself, and will certainly:

Increase scope and time of buyer due diligence
Lead to value mismatch between the shareholders and the buyer
Damage potential post deal synergies
Impair post transaction relationship with the seller where Transitional Service Agreements (“TSAs”) are required

We believe there are a number of common themes and actions which can be considered to help address these risks and challenges of completing a carve-out transaction, and ultimately increase the likelihood of successfully completing the transaction.

Appoint experienced external advisors as early as possible

Areas of deep complexity and risk include standalone financials, legal risk and integration planning / implementation with the new owner, employee transfer and shared IT/compliance. In advance of a process we recommend appointing a financial advisor and other sell-side advisors to help manage the process in a disciplined approach. This would include a Big 4 accountancy firm and a legal firm as a bare minimum, but IT and HR advisors may also be needed. Advisors who have past experience in carve-outs will help maximise value and provide confidence to buyers about the carved-out business they want to acquire.

Identify the carve-out business senior management team early

The senior management team of the carve-out business needs to be identified and aligned with the carve-out transaction and strategy early in the process. The potential buyers will need to meet and hear the management team discuss the business early in the process and give the buyer confidence about the carved-out business they are looking to acquire, including the short-to-medium term strategy and growth opportunities.

To ensure the management team are aligned and motivated, the seller should ensure there are transaction and retention bonuses in place as part of the sale process. This will motivate the senior management team to get the deal done, but also provide confidence to the buyer they will inherit a senior management team that knows the business inside out and will drive the integration and growth plans from day one.

To the extent there are full time employee (“FTE”) gaps in the senior management team being carved-out, it is best to be upfront and communicate this early in the process to the buyer, so they are aware the positions which need to be filled on day one. However, the costs for such unstaffed positions, should always be included in the historical and forecast financials.

Finally, if needed, the seller should bring in dedicated cross departmental support as part of the sale process to help buyers understand a particular area if not covered by the senior management team. For example, the seller may have a Group Head of IT who is not transferring with the carve-out transaction, but they will be important for educating the potential buyers on the IT framework / systems in place.

Prepare a “what’s in, what’s out” analysis

Early in the sale process, the seller along with external advisors should prepare a detailed “what’s in, what’s out” analysis setting out all the assets including real estate, contracts, back office / IT services and people by entity / location that will be included in the transaction perimeter. This exercise is fundamental to complete early in the sale process as it will dictate how you approach preparations of the historical / forecast financials and how you sell the equity story to potential buyers as you take the carved-out business to market. If this analysis is detailed, thorough and well thought through, it will give buyers confidence about the business they want to acquire. This analysis will help identify any services such as IT, finance, procurement, contracting, etc. that might need to be covered by a TSA on day one.

Prepare the standalone financials

Once the “what’s in, what’s out” analysis is completed, the preparation of the financials will be somewhat easier. To the extent possible, the financials should be prepared and presented with the buyer and its due diligence in mind. For example, the financials should be split by key segment, geography and even a customer / products / services / SKU level, if possible.

You should ensure that the carved-out financials have all the costs required to run the business on a standalone basis from day one, post carve-out. For example, if a sales or finance person previously spent 50% of their time working for both the carved-out business and the parent group, then you should include the costs for one full FTE and not a half FTE in the carved-out financials. This will be a key focus of due diligence for a buyer, so it is important standalone costs are detailed and well thought through.

In the current COVID-19 environment, forecasting the financial performance of the carved-out business will be inherently challenging and difficult to set out accurate and reliable assumptions. Time should be taken to assess the impact of financial forecasting under COVID-19, and if needed, you should delay the process until the financial forecasts can be modelled accurately with solid underlying assumptions, and when the local / global economies have stabilised.

In our experience, the carve-out financials and operating model are certainly the areas where clients believe there would be significant room for improvement if they could start the sale process again.

While this may appear straightforward, accumulated habit and internal company shared resources may give a false impression of true standalone costs and requirements. Deep review and analysis are required to verify the completeness and accuracy of the standalone accounts.

Prepare the equity value add story for a new owner

There will be a fundamental reason why the MNC or private equity fund wants to divest the carve-out business, and this could include being a non-core business, lack of senior management focus, lack of investment, better management of asset portfolio, or struggling financial performance in the face of market competition. It is critical to tell the equity story to the buyers as to why it is a great business to own and how under the right owners, the business has great growth opportunities and can create significant value for the new owner. This could be achieved through investments in new plant & equipment, geographical growth, product development, or from positive market forecasts. If required, consider engaging commercial due diligence providers to prepare a report to help tell the market story.

Legal, tax and jurisdiction complexities

The legal aspects of a carve-out transaction tend to be one of the more complicated areas. This is largely associated with how to separate the in-scope legal entities (or assets) from the wider Group, along with how to legally separate customer & supplier contracts, IP, fixed assets and employment contracts. Critical assets or employees may fall out of the perimeter of the carve-out and may need to be re-assigned to the carved-out entity before or on closing. There may also be change of control clauses in customer, supplier or lender contracts which need to be communicated. Furthermore, there may also be tax implications for the seller or the carved-out business from the carve-out, and if so, internal or external tax advisors should be consulted.

As the business is being carved-out from a wider Group, it is likely there could be legacy issues or provisions from the prior owner or day-to-day operations, such as legal or environmental provisions. Assessing these legacy issues early in the process can help to prevent further value erosion from material debt-like items.

For a successful outcome of the transaction, to preserve value and provide protection to the seller, it is crucial that the Sale and Purchase Agreement (“SPA”) is prepared early and sufficient time is provided for sell-side and buy-side lawyers, consultants, and investment professionals to negotiate and share the mark-ups back and forth. Furthermore, schedules to the SPA should be added which set out the assets, customer & supplier contracts, and IP for example, that will be included in the transaction perimeter.

Finally, it is crucial to have the TSA designed, planned and fully costed for immediate implementation. Drafting should begin early, with a draft TSA in the dataroom, as part of the buyer’s due diligence will be understanding how quickly and challenging the separation transition period will be, and what the associated costs, penalties, services provided, and performance reporting are. There will be significant additional one-time start up transitionary costs to be borne by the buyer and seller in preparation and implementation of the TSA.

Despite rigorous preparation for a corporate carve-out, flexibility is needed by both buyer and seller to arrive at an agreement. TSAs may include sharing of commercially sensitive information, IT infrastructure, expose the seller’s customers to a new party in the form of a buyer, and lead to potential legal ramifications if handled poorly. A well-designed and managed process will build trust which is the essential ingredient to achieve agreement.

If you would like to discuss carve-outs further, or if you are considering a carve-out transaction, please reach out to any of the BDA Partners team members listed below.

Jonathan Aiken, Managing Director, London: jaiken@bdapartners.com

Ruari Sinclair, Vice President, London: rsinclair@bdapartners.com

[1] Bain Global Private Equity Report 2020