Companies Selling Off Non-core Business In A Bid To Garner Liquidity
Godrej has sold off its air care brand, Ambi Pur
, to Procter & Gamble for Euro 40 million. As per reports, under the deal the Godrej Group, which had the rights to market the brand in India till 2012, has relinquished these to Sara Lee, which, in turn, will hand Ambi Pur to P&G, the new owner.Over the past few months, Indian companies have been on a spree to sell off their non-core businesses/ assets. These include the country"s biggest conglomerates to mid-sized companies like Piramal Healthcare and real estate player Unitech, among others.
Non-core asset/ business sale over the past few months
Close on the heels of Godrej"s sale announcement came the news of Reliance Communications (RCom), the flagship telecom company of Reliance Anil Dhirubhai Ambani Group"s (ADAG), approval to dilute 26% equity in a strategic sale. The stake sale, it is believed, is to finance future expansion plans such as the rollout of 3G mobile services.
Similarly, GMR Group sold a majority stake in GMR Industries, its sugar business, to E.I.D Parry for about Rs 110-120 crore in line with its overall strategy to divest non-core assets and focus on infrastructure and energy businesses in the future.
Real estate firm Unitech Ltd, in April said it would spin off its infrastructure businesses including its investment in a telecoms firm into a separate company in a bid to unlock value. Similarly, DLF Ltd. has sold non-core assets worth 2.94 billion rupees.
Around the same time Tata Motors announced its plans to sell part of its shareholding in Tata Cummins JV, a diesel engine joint venture company as part of the company"s plan to raise money to repay debt by divesting its non-core assets.
Why are companies selling off non-core businesses?
The reasons are many and include the pressing need for liquidity to de-leverage. Sale of non-core businesses comes handy for companies looking to ease their debt burden. The spate of spin offs was triggered by the slowdown witnessed in the global markets. The companies, looking for liquidity had to fall back on the non-core assets/ operations to generate the same.
On the other side of the scale are companies with surplus cash who are looking for profitable investments.
These non-core businesses, perhaps acquired with the view to diversify, do come in handy at a time when the companies need to de-leverage.
To concentrate better on core business: The spin-offs are also directed at cutting the "flab" in order to concentrate on the core competencies which will enable them to become lean, mean and globally competitive.
To garner liquidity for investments to boost core businesses/ fund acquisitions: In addition to the increased focus on the core businesses, by divesting their non-core assets the companies are also cutting out a drain on their balance sheets. Thereby, they are also saving money, which can be better utilized to improve efficiencies in their existing operations as well as towards acquiring businesses which complement the core efficiencies.
Ease the debt burden/ Pay off debt: The trigger for such hectic activity can be summed up with one four-letter word: Debt. Debt, that was used""or overused""to make acquisitions big and small, to expand operations, and to flag off new ventures.
Mergers & Acquisitions in April-June 2010
According to reports as many as 65 M&A"s were announced in the month of May (Source: VCCEdge), backed by the robust domestic economy and improving overseas scenario, which has pushed firms to relook at strategic expansion options.
The deal value touched USD 24.8 billion in April-June 2010 taking the total M&A value in the first half of 2010 to USD 48.1 billion, up from USD 16.3 billion for the whole of 2009. The most targeted sectors include telecommunication services, healthcare and finance.
Conclusion
In order to consolidate their positions/ businesses, companies not only need to make strategic buy outs but also spin off their non-core operations. It is believed that the valuations for strategic M&A"s are still fairly priced in the current market situation.
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