You're reading: Business Sense: Divest to avoid distress (or worse) during downturn

While the decision to divest is never easy, companies should take the opportunity to refocus on objectives and save their core assets. The current economic downturn has significantly altered the near-term growth prospects of the majority of businesses across most sectors. For some, even long-term prospects are now about survival rather than growth. There may not be a more appropriate time for Ukrainian companies to refocus on their core businesses, as a means to realize value in the form of cash flow, by selling under-performing or non-core operations.

The decision to divest a business is seldom easy, particularly for the region’s proud entrepreneurs who built their businesses from scratch or who privatized and turned around state enterprises. Further, sellers now outnumber buyers. Multiples earned on the sale of business have significantly decreased and, at times, are near or even below zero times EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization).

Thus the mathematics of whether to divest might no longer be based on determining whether the sum of the parts carries greater or lesser value than the whole. Instead, a more appropriate equation might be: “Which of the parts, when divested, will either preserve or increase the value of the remaining operations?” What to divest? So which operations should remain with the business, and which should be separated?

Determining what to divest need not be entirely traumatic. There are also benefits. Identifying core and non-core assets will help a company see what is bleeding and what is generating cash. It will help to crystallize how the ‘group’ benefits each individual business. This can also reassure banks about the focus of a company’s ongoing business strategy, making it easier for them to assess the risk of restructuring loans.

When preparing to divest non-core or underperforming assets, a business must present a “fit for purpose” financial and operational model. To best encourage competition for that asset, the model must be accompanied by a plan that convinces potential buyers the asset will be viable. A seller who can do that will find a broader set of buyers who are interested in a quick decision and willing to pay more.

Many owners and investors of Ukrainian companies are realizing that a rough road lies ahead. This road will challenge the stability of even the best businesses and will certainly bend, and maybe break, the over-leveraged.

Some firms will revisit core objectives and separate and divest certain assets. Others will continue their attempts at cost reduction. And many will ultimately meet their fate in the processes associated with distress.

Lev Holubec is an Advisory Partner at PricewaterhouseCoopers. He leads the group’s Mergers & Acquisition Integration Consulting in Ukraine, and Central and Eastern European countries. This is an edited version of an article that will be published in the summer issue of Transform, the magazine of PricewaterhouseCoopers in Central & Eastern Europe.