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Divestment intent remains near record levels in region: poll

SOUTH-EAST Asian enterprises' intentions to divest remain near record levels as they look to gain a competitive edge in the face of changing technology and sector convergence, EY Global Corporate Divestment Study 2019 has shown.

The survey found that divestment activity is poised to continue, with 85 per cent of South-east Asia (SEA) companies (Asia-Pacific or APAC: 82 per cent) planning to divest within the next two years. This is a significant increase since 2018 from low previous averages, with divestment intentions of SEA firms at just 26 per cent (APAC: 35 per cent) in 2017.

More than four out of five companies (SEA: 85 per cent, APAC: 81 per cent) said streamlining their operating model would impact their divestment plans this year, demonstrating a growing desire for companies to be more agile as they face new and existing competition.

The major geopolitical shifts that will impact divestment plans were the increased cost of operations (SEA: 73 per cent, APAC: 79 per cent), cross-border trade agreements (SEA: 60 per cent, APAC: 71 per cent) and tax policy changes (SEA and APAC: 60 per cent).

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Notably, SEA  enterprises were most concerned with the legal and regulatory developments in 2018, as 73 per cent – the highest in the region compared with 45 per cent of APAC companies – viewed regulatory change as a major geopolitical challenge that would impact divestment plans.  

Further, SEA enterprises that expected divestments rising as a result of technology-driven changes, such as changing consumer preferences, habits and supply chain, have increased to 71 per cent of the respondents, from 68 per cent in 2018 (APAC: 75 per cent, up from 68 per cent).

Some 58 per cent of SEA companies (APAC: 53 per cent) reinvested proceeds from their last divestment into new products, markets and geographies. This strategy had helped them to respond better to cross-sector opportunities and create longer-term value for shareholders and the company.

Industry consolidation was a major factor as well, in driving companies to pursue inorganic growth strategies to win a bigger market share. In 2019, 78 per cent of SEA respondents (APAC: 81 per cent) were expecting divestments to drive industry consolidation, up from 54 per cent (APAC: 63 per cent) last year.

According to the findings, having a strong value story, backed by early preparation that will address the questions of a broad buyer pool, is more important than ever. More than two-thirds (70 per cent) of SEA sellers (APAC: 71 per cent) said the price gap between buyers and sellers was greater than 20 per cent; last year, only a quarter of sellers (SEA: 26 per cent, APAC: 30 per cent) reported such a gap.

EY Asean transaction advisory services leader Vikram Chakravarty said: "Sellers across SEA are still leaving money on the table in their divestments. Since many sellers are new to the divestment field, they tend not to manage the exits well. We have seen sellers with untidy accounts, who lack a growth story and do not dress a business up appropriately for sale. Furthermore, many sellers do not bring in the bidders into a thoughtful and productive process to drive full value realisation."

Speed of divestment also continued to be a concern, with 77 per cent of SEA companies (APAC: 71 per cent) saying they held on to assets for too long. Globally, sellers who do not hold on to assets for too long are twice as likely to secure a better transaction price. Some 60 per cent of SEA executives (APAC: 61 per cent) said shortcomings in their portfolio or strategic review process had sometimes resulted in failure to achieve intended divestment results.

Mr Chakravarty pointed out: "SEA corporates are showing a shift towards deleveraging as a tool for more effective management of their capital agenda. A well-defined portfolio strategy – addressing the timing of sale, pre-sale preparation and the consistent use of advanced analytics – will help them retain value during the deal process."

The latest annual survey includes over 900 global executives with nearly 320 in APAC, of which over 70 were from SEA.