Report: 49pc of firms to sell off part of their business in two years

Nearly half of the world’s companies plan to do away with some business lines in the next two years. Another 46 per cent are open to the possibility.

The latest Global Corporate Divestment Study by UK firm Ernst & Young (EY) shows that the appetite for companies to trim down their investments has grown.

Of the many companies selling their business holdings or part of the company, 70 per cent utilise the proceeds in growing their core business. This is mostly through investing in new products and markets, or acquiring a complementary business.

Some 42 per cent return such funds to shareholders, while 29 per cent divest to pay down a debt.

“On the whole, compared with last year, companies are more focused on investing in organic growth and less on using divestment funds for an acquisition or pursuing new markets,” says the report.

Positive impact

Of the more than 900 corporate executives and 100 private equity executives surveyed, all study respondents already made a major divestment in the past three years. Further, 38 per cent said their most recent divestment exceeded — while more than half said their divestments met — their expectations.

“This is an indication of how deeply embedded divestments have become in corporate strategy. Moreover, 60 per cent expect the number of strategic sellers to increase in the next year alone,” notes the report.

In Kenya, the latest company to announce a significant divestment is Kenchic, which last week said it would close its fast food eateries in March.

Other companies that have had similar realignments in business interests include Essar, which sold its yuMobile infrastructure to Safaricom, and subscribers to Bharti Airtel last year. In November, Orange Group also announced it would be selling its 70 per cent stake in Telkom Kenya to Helios Investment Partners. Centum Investment also sold its holdings in UAP Insurance and AON Kenya Insurance Brokers, and bought shares in K-Rep Bank and agricultural firm Rea Vipingo.

As a pointer that divesting is quickly becoming the go-to corporate strategy, 84 per cent of respondents surveyed by EY believe it creates long-term value in their remaining business.

Further, larger divestments seem to have a greater positive impact on the remaining company, and even boost share prices.

“For strong companies, the more transformational the divestment, the greater their stock price outperforms the index in the year following the sale,” says the report.

This is as a result of increased investor confidence in the remaining company, stemming from an increased focus on the core business and improved growth prospects.

However, for under-performing companies, while divestments often improve their value relative to the market, the report cautions that a divestment on its own does not tend to fix systemic weaknesses.

But as much as divesting is increasingly becoming popular, according to the report, not many companies make strategic plans before divesting.

More than half (52 per cent) say their last divestment was opportunistic, and a further 46 per cent say their next asset sale, if any, will likely be opportunistic as well.

It is because of this lack of planning that the survey found that over half of companies end up holding on to assets longer than is necessary.

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