DealMakers - 2020 Annual
For many businesses, sustainable success now demands a focus on core operations
by Dumisani Lepule
Despite a shaky start as the second wave of COVID-19 struck, 2021 has brought with it a glimmer of hope for South Africans. Most look to the rollout of the COVID-19 vaccine as a way of restoring a semblance of normality, so that more people can return to work, to get the physical economy rolling again.
South African business has also had to look for vaccines of their own to survive the COVID-19 crisis and achieve the generally healthy state required to immunise themselves from the ongoing impact of economic insecurity and market volatility. For many, this vaccine has taken the form of streamlining their companies and, in most cases, going back to focusing on their core operations to preserve return on investment for shareholders.
One of the most effective ways that many companies are achieving this is by disposing of some of their assets. Of course, deciding which assets are no longer crucial to the business is not easy. According to a growth-share matrix developed by the Boston Consulting Group, the process of choosing assets to uncouple and sell should be based on careful analysis of two main characteristics: growth (historic and potential) and market share. They argue that these attributes, rather than historic focus, should be the main determinants of what is core and non-core to a business, and that every business asset falls into one of four main categories as follows:
Category 1 – Low growth and low market share
Category 2 – High growth but low market share
Category 3 – Low growth but high market share
Category 4 – High growth and high market share
Using this matrix, the Boston Consulting Group suggests that assets falling into Category 1 and Category 2 should be considered non-core, since they essentially drain company resources but deliver little of value in return.
Unfortunately, choosing which assets to dispose of is not always as simple as just categorising them according to their growth and market share. Companies that are in significant financial distress, or currently overleveraged, may have little choice but to put their Category 3 and 4 assets up for sale. If that is the case, it is vital that these organisations do not allow emotional attachment to these assets to prevent them from making the right decisions.
The importance of level-headed decision-making regarding the disposal of assets is highlighted by the many benefits that a well-considered sale process can unlock. Apart from the potential that a significant inflow of cash and reduction of overheads can have, the sale of a non-core asset is an excellent way to achieve the necessary strategic refocus to restore the profitability and growth path of the remaining assets. Divesting from non-core assets can also be a good way of doing justice to the associated products or service, as the acquirer will likely be in a better position to unlock their full potential. This is a worthwhile way of looking at such a divestment, if there is any type of emotional attachment to the assets that is making it difficult to sell them.
Recently, numerous prominent South African businesses and even industries have been accessing these benefits through divestment from non-core assets. Examples include Sasol’s sale of a 50% stake in its multi-billion dollar Lake Charles Chemicals Project and LyondellBasell, and the divestment of 50% of its equity in Gemini HDPE, both of which not only secured significant cash inflows, but also eased the debt burdens associated with these projects.
Famous Brands also recently reduced its shareholdings in some of its non-core assets, namely Tasha’s (sold 51%) and Matter of Taste (sold 49,9%), but, in this case, both divestments had less to do with generating cash or reducing debt, and more with fine-tuning the group’s focus on the brands that are currently achieving better growth and higher market share, such as Steers, Debonairs, Fishaways and Wimpy.
And the streamlining is not limited to individual companies. In the telecommunications sector, mobile network operators are increasingly looking towards selling their ownership stakes in their passive infrastructure, such as towers, then leasing these back from specialist owners with the necessary core expertise to maintain, service and expand them.
With fiscal and growth constraints expected to continue in 2021, and probably well into 2022, most South African companies will find themselves hard-pressed to maintain or repeat their historic growth and profit trajectories without trimming and streamlining their assets. The coming year is going to be an adapt-or-die scenario for many organisations. While selling off assets is never an easy decision, it will undoubtedly be a necessary one, as companies are forced to return to basics, once again focusing on establishing sustainable operations and profitability before rebuilding their businesses.
Lepule is an Analyst: Corporate Finance with Nedbank CIB.