Corporate divestiture activity is sagging year-to-date, but dealmakers expect it to turn the corner in 4Q22 and ramp up in 2023.
For the first nine months of 2022, there were 859 divestitures worth USD 152.70bn, roughly one-third of the USD 476.42bn reached in the same year-ago period, according to Dealogic data. Last year did finish with a record USD 585.42bn in divestitures, but the drop-off since is stark.
Only 12% of all announced deals in North America this year were divestitures, down from 20% in 2020 and an average of 18% of all transactions since 2015, according to Dealogic. Several factors explain why divestiture activity has fallen faster than the wider M&A market.
Companies have been busy trying to integrate last year’s purchases, clean up their balance sheets, and reassess where they can find value by selling off an asset or bundling some of what they bought into a new package to sell, says Nicole Islinger, partner at Pillsbury Winthrop Shaw Pittman.
Audit delays, valuation concerns
Contributing to the decline is a delay in company audits, many of which were pushed well into the summer from the typical April completion, Islinger says.
Ongoing labor shortages combined with the record-breaking M&A activity across the board last year has left accounting teams unable to hire enough people. In some cases, mid-tier accounting firms aren’t even taking on new clients, instead prioritizing existing customers, she explains.
Now that companies have audit results, they can start determining paths forward, including whether to divest of non-core or underperforming assets.
Valuation concerns have also hampered divestiture plays this year, according to Matthew Wiener, managing director at Aon. Companies were waiting to put assets on the block, hoping slashed valuations might recover. Now, as valuations remain depressed and may even drop further, some of those companies might finally bite the bullet.
Uptick then surge in 2023
While corporate divestiture activity is expected to tick up to close the year, the swell of deals isn’t expected until 2023.
Contributing to the year-end runup are debt instruments that have certain covenants and other compliance features that companies must meet by year-end to avoid defaulting as well as private equity shops with money they need to spend.
The trouble for PE is finding good assets to buy and finding service providers like lawyers to execute deals with limited resources.
Going to market is difficult right now. Unless a deal is already in the market with a goal of closing by year-end, companies are likely waiting until 2023, Islinger says.