The many ways to hive off a business
But timing of the action and getting the chosen process right is absolute
a dividend payment to the shareholder. While debt capital is available and often at reasonable terms, it is important to recognise the tightening of liquidity in the market at present, where banks are more cautious lending now than they were say two years ago before the crash in oil prices.
As a result, increasingly, companies are considering alternative debt providers, including looking at private equity houses who are able to provide debt through credit funds or at Islamic financing options.
Consider exploring which aspects of the business could be restructured into an “asset light” model. This is very common in many sectors and usually involves a sale-and-lease back option. This usually involves the business selling some of its assets (usually real estate, but it could also work for certain intellectual property) to release capital, and immediately lease that asset back from the purchaser, so that the business can continue to use those assets on terms it is happy with, but the business now has the proceeds of sale to deploy elsewhere. IPOs are the golden ticket for many business owners. A wellrun IPO could achieve a much greater return to the exiting shareholder. However, not every business is suitable for an IPO.
The time, cost and effort required to restructure the relevant business to prepare it for an IPO should not be underestimated. Failure to invest fully into the IPO process can result in a very public failure.
Therefore, an IPO is often seen as a last resort exit, especially for institutional investors who would often prefer the certainty of a trade sale or a secondary transaction (sale to another institutional investor) over an IPO process. Increasingly, it is necessary to decision-makers to consider a “dual track” process, whereby they would run two of the above processes in parallel, so that if one fails, they have a fall-back option of the other, and can still extract the value required from the target business.
There are certain issues to navigate when running a dual track process (not least, confidentiality), but there are plenty of examples in recent times where a dual track process has worked extremely well and ensured a successful transaction.
John O’Connor is a Partner at CMS Dubai. Mohammed Majid is a Partner at Nabarro Dubai.