Posted On September 13th, 2022

Private-equity firm New Mountain Capital is scooping up a piece of manufacturer PerkinElmer Inc. for as much as $2.45 billion in a type of deal that industry insiders expect to see more of over the next few months: a carve-out.

Carve-outs are expected to revive as more companies cope with depressed stock prices and seek to bolster their balance sheets through asset sales to buyout firms that are flush with cash. Private-equity firms held some $1.2 trillion in undeployed capital at the end of June, according to research provider PitchBook Data Inc.

"There's a ton of conversations going on," said Paul Lennick, senior vice president of M&A services at ContinuServe LLC, which advises private-equity firms on carve-out deals. He said the "summer swoon" in deal making is coming to an end and calendars are beginning to fill up.

Carve-outs involve separating a product line or enterprise from its corporate parent, often to operate as a stand-alone business. Companies typically use such transactions to raise cash, reduce debt or narrow their focus.

According to PitchBook figures, last year's deal boom saw 1,420 carve-outs with an aggregate value of $258.5 billion completed by private equity -- a record for both metrics.

While market watchers say a broader slowdown in deal making also depressed carve-out activity, the latter category shows signs of a rebound. Since June, data provider Dealogic has recorded 65 private-equity carve-outs completed globally through Aug. 15 after a 5.4% decline in the first half compared with the first six months of last year.

Many in the industry remain bullish on carve-outs.

"It's a time delay," said ContinuServe's Mr. Lennick, a former Apollo Global Management Inc. executive. He expects a significant number of transactions, including carve-outs, during the fourth quarter.

The three-way split of General Electric Co. announced last fall could offer carve-out opportunities, Mr. Lennick said. The Boston-based manufacturer is dividing into separate healthcare, energy and aerospace businesses and that could lead to carve-outs, analysts have said.

Manoj Mahenthiran, private-equity practice leader at PricewaterhouseCoopers LLP, sees plenty of carve-out opportunities emerging at companies whose stocks have been battered by this year's market rout and need to shore up their balance sheets.

"Their stock price was their currency," Mr. Mahenthiran said. "So now they're going to have to look for alternatives, and...spinning off noncore, nonstrategic assets is going to be a top priority."

That should be a boost particularly for middle-market buyout firms, or those that generally back transactions of up to $500 million, said Joe Hartman, a KPMG LLP partner who co-leads the consulting firm's U.S. private-equity transactional services.

Some buyers, such as KPS Capital Partners, a New York firm that takes on complex carve-outs like the 2012 acquisition of a Robert Bosch GmbH automotive brakes business, say they haven't seen a slowdown in such transactions.

"Large corporations have and will always continue to make changes in their portfolios," said Michael Psaros, a KPS co-founder and co-managing partner.

In general, Mr. Psaros said, M&A activity is tied to the confidence of chief executive officers and stock prices. Recent market turbulence, with the S&P 500 index losing about 20% in this year's first half, has erased trillions in paper value. Markets have regained some ground in recent weeks, with the S&P rising 17.4% in the 41 trading days ended Thursday, though the index has sold off since then.

"Whether or not [market volatility] will have an impact on CEO confidence and carve-out activity remains to be seen," Mr. Psaros said.

One thing he has noticed is that corporate sellers are increasingly opting to retain a stake in what they sell in anticipation of gains.

"It is the ultimate having your cake and eating it too," he said.

Kate Withers, a private-equity partner at law firm Ropes & Gray LLP, said she too has noticed this trend either through retaining some direct ownership or through entering a joint venture with the buyer.

"If you have a carve-out transaction where the buyer brings greater operational expertise, there may be a hesitation to give up the upside opportunity in the business," she said. In some cases, the seller merely maintains a business relationship with the carved-out unit, as a supplier for example.

In one such case, consumer packaging maker Crown Holdings Inc. kept a 20% stake in its European tinplate business last year when it was sold to KPS Capital.

Similarly, when GE sold its aircraft-leasing unit, GE Capital Aviation Services, to rival AerCap Holdings NV last year, it retained a roughly 46% stake in the combined business.

At PerkinElmer, agreeing to the planned sale to Steven Klinsky's New Mountain Capital came down to assessing the value presented by the deal and how quickly it could be done, as well as determining the best growth path for the businesses to be sold, CEO Prahlad Singh said.

"We had three levers that we wanted to make sure that we got covered: speed, certainty and valuation," Mr. Singh said.

The company, whose founders Richard Perkin and Charles Elmer produced precision optics such as bombsights, is parting with the PerkinElmer name and logo through the transaction, along with its analytical, food and enterprise-services businesses. Company management is retaining the remaining life-sciences and diagnostics parts and will run them under a new name.

"Ultimately we believe the combination of upfront cash and future contingent consideration provided the most value to us that was also agreeable with the buyer," Mr. Singh said.

Original Post: Corporate carve-outs rebound following market turmoil

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