Corporate Divestiture Guide for the Transportation & Logistics Sector

Corporate Divestiture Guide for the Transportation & Logistics Sector

On the heels of recent T&L sector volatility, corporations are sharpening focus on their core lines of business. Going forward, we believe corporate divestiture activity (or “carve-outs” as referred to in this analysis) may become an increasingly important strategic lever for value creation.

When considering a divestiture, a number of factors should be evaluated, as detailed below, including the recognition that separation value extends beyond the headline purchase price. Disciplined planning can reduce separation cost and effort, while potentially improving transaction certainty and maximizing net proceeds.

When a Company Should Consider a Divestiture

When undertaking a strategic review to ascertain whether a division is a divestiture candidate, the following high-level questions are a helpful test for boards and
management teams to evaluate whether continued ownership and investment into a business line makes sense:

• Is the business unit strategic to the Parent’s long-term plan?
• How would a divestiture impact ongoing customer and vendor relationships for the
  remaining company (positive or negative)?
• Does the business unit have sufficient scale/can it effectively compete over the long
  term?
• How standalone is the business today (customers, people, systems, assets)?
• Is the current market value to a buyer greater than the expected future contribution to
  the Parent?
• What dis-synergies are likely to be incurred by the remaining business, and are they
  able to be eliminated over time?
• What level of investment is required to grow the business? Are there higher returns for
  that capital elsewhere in the other businesses?
• Are there any pending regulatory changes that will change the competitive
  landscape?
• For public companies, how will investors perceive the sale, and will the investor relations
  story meaningfully change?

Once a Parent company deems a business non-core, taking action to develop a divestiture plan is critical. In our experience, business segments deemed non-core are typically under-resourced, suffer from elevated turnover and low morale, become less competitive, and, therefore, value erodes over time. Proactive divestitures can strengthen strategic focus, improve capital allocation and returns, and support a clearer ownership narrative.

Sell-side Guide – Investing in Preparation is Critical to Unlocking Value

Divestitures are more complex and time-consuming than regular-way M&A. Rigorous preparation is paramount to create a market-ready opportunity with a clear transaction perimeter, clean financials, and an executable separation plan.

As a best practice, the Parent company should assemble a team of 3rd party advisors with carve-out experience to support value optimization, efficient execution, and certainty of a transaction, while reducing ongoing support burdens and operating limitations of the Parent. A typical 3rd party advisory team to support a carve-out transaction would include the groups below, each with their own area of focus:

Key Steps in Preparing for a Corporate Carve-out Transaction

Step 1: Defining a Transaction Perimeter and Establishing a Separation Plan

At the onset of considering a divestiture, the initial focus needs to be on establishing a transaction perimeter, which involves identifying the key components of the business that will transfer to a new owner. In parallel, the Parent should begin building an executable separation plan that defines how the business will operate on Day 1 and how remaining dependencies on the Parent will be unwound post-closing. Developed together, these two workstreams could reduce buyer uncertainty, support credible carve-out financials, and possibly minimize late-stage surprises that can drive delays or re-trades.

Standard transaction perimeter items to consider include:

• Assets and liabilities transferring (including working capital items)
• In-scope legal entities, IP, and trademarks/branding
• Real estate, leases, and equipment (as applicable)
• In-scope employees
• Key customer and vendor contracts (and required consents)
• Proprietary technology, infrastructure, and IT support
  

Separation plan components that the Parent should focus on include:

• Stranded Costs: Identify fixed costs that cannot be transferred to the divested business, which reduce go-forward economies of scale for Parent, and mitigate where possible.
• Commercial Agreements and Contracts: Identify shared agreements and, where possible, begin separating into division-level agreements in advance.
• HR and Benefits: Develop an employee go-forward strategy, including benefit plan review, open enrollment timing, and communication plans.
• Legal and Tax: Entity structuring, separation steps, and tax planning aligned to the transaction structure.
• Intercompany Arrangements: Map intercompany revenue, cost-sharing, and service agreements, and put in place replacement contracts and commercial processes at close to avoid disruption.

Step 2: Preparing Clean Financials

Once a perimeter and a separation plan have been established, the Parent's focus should shift to preparing pro forma financial statements for in-scope operations. The financials should reflect the revenues and costs associated with all perimeter-defining items, as well as requisite standalone costs. For a portion of the financial statement line items, this is often as straightforward as revised general ledger and trial balance mapping; however, for other line items, such as corporate overhead, contemplating allocation methodologies in detail is necessary to produce marketing-ready, clean financials. Sellers should also give early attention to pro forma personnel costs, including any headcount additions required to replace shared services, and benefits normalization where the divested business has historically participated in Parent-level plans. These adjustments are often assumption-based and, as a result, can drive re-trades or disagreements on standalone earnings if poorly considered. Ultimately, buyers will expect corporate support expenses to reflect true cash costs as opposed to some other internal accounting methodology (i.e., percentage of revenue). Corporate cost allocations often take considerable time and thought to keep assumption-based expenses logical and defensible during buyer diligence.

Step 3: Drafting the TSA Services Schedule

The TSA is a contract under which the Parent provides specified transitional services to the divested business beginning Day 1 and continuing for a defined period. The TSA typically sets the scope of services, service standards, pricing, governance, and an exit timeline as the divested business stands up standalone capabilities. Although the TSA agreement and its details will be primarily drafted and negotiated during the process, planning ahead for the services a buyer may require is critical to effectuating a seamless transition of ownership from the Parent. For this exercise, Parent should develop a preliminary list of services currently provided by the Parent to the divested entity that will still be required post-close, together with descriptions of those services, the required personnel, the cost to deliver, and an estimated separation timeline. In our experience, being prepared with a well-formed TSA services schedule often minimizes timing delays and value leakage associated with an expanded scope of services post-close.

Key Stumbling Blocks to Avoid: Common issues that could derail carve-out transactions or cause value leakage:

• Unclear Transaction Perimeter: Marketing or diligencing a potential transaction without a clear transaction perimeter is one of the most common failure points in a carve-out or divestiture, often resulting in wasted diligence time on entities that could be in the transaction, and often leading to unforeseen tax impacts.
• TSA Scope Creep: Scope creep can emerge both in drafting and through the transition period. Buyers may push to expand services beyond what is operationally necessary or extend durations through initial terms and renewal options, ultimately distracting the Parent's employee base and/or forcing it to provide services at a loss.
• Contract Overlap: Key customer and vendor agreements are often shared across multiple business units within the Parent – waiting until in a process to separate agreements creates delays and/or leads to a complex TSA arrangement post-close.
• Employee Attrition and Information Leaks: Without clear retention incentives and confidentiality controls, carve-outs can quickly devolve into employee uncertainty, leadership turnover, and internal or external information leaks – all of which distract the business and may unnecessarily pressure value.
• Timing Disruptions: Lack of process continuity and lost momentum in a transaction could negatively impact operations, burn out management, and cause a buyer to second guess its thesis.

• Parent Non-compete: Non-compete language in the purchase agreement is standard protection for a buyer. Appropriately tailoring such language to avoid go-forward impediments to the Parent is critical for post-transaction continuity.

For more information on Stephens’ divestiture and carve-out capabilities, please contact any of the authors below: