Companies shed bigger assets to slash debt, get lean

The size of completed divestment deals is up about 11% so far this year at $350.5 billion, according to financial data analytics provider Mergermarket, even as the number of such deals fell about 10% during the same time. In the second quarter, the value of completed deals has jumped by more than 50% year-over-year while the number completed deals fell about 11%.

The data suggest a shift toward larger transactions, rather than “routine portfolio-pruning and selling small businesses here and there," Mergermarket analyst Kevin Ketcham said.

The trend is being driven by prolonged, tough macroeconomic conditions, according to dealmakers and advisers, who are pushing companies to get more aggressive about streamlining and divesting parts of their business that are hurting margins, gunking up the balance sheet or no longer fit management’s vision of the company.

Divestitures can be a boon to shareholders as well. A recent PricewaterhouseCoopers analysis found that since the beginning of 2023, sellers have posted shareholder returns that exceeded the wider market by almost 10%.

“Even with a higher interest-rate market, we really are seeing sellers get the benefit of shedding their assets to then reinvest in their business and lower their debt," PwC partner Liz Crego said.

Several recent divestitures have topped $1 billion, including Vans and North Face owner VF’s deal to sell its Supreme Brand for $1.5 billion, and Clearwater Paper agreeing to offload its tissue business for $1.06 billion. Industrial manufacturer Dover said this week that it would sell its garbage truck-making unit for $2 billion in cash.

An uptick in divestiture activity often follows slow economic growth, usually after struggling companies have already exhausted capital-saving options like cost cuts or layoffs.

“Companies have to return something to shareholders, or demonstrate that they’re doing something at least," said Brad Haller, a senior partner at the Chicago-based consulting firm West Monroe. “This is a material way to do it, though it’s not an easy way to do it."

Haller leads West Monroe’s merger and acquisition practice, which had been expecting to see divestiture activity heat up this year as companies look for more ways to pay off debt.

Some companies are opting for carve-outs, in which they separate part of their business but retain some control over it, instead of complete divestitures. Krispy Kreme this week said it sold a majority stake in its cookie-delivery subsidiary Insomnia Cookies to a pair of investment firms for more than $170 million.

“Usually these are good assets, but they’re not getting the care and feeding that they need to grow, or they’re outside the core capabilities of what the business wants to be now," Haller said.

The push for bigger asset sales comes as M&A activity generally bounces back from a sluggish 2023. After years of waiting for the Federal Reserve to bring down rates, private-equity firms and other buyers are sitting on unused capital and don’t want to stay on the sidelines, while promising assets are put on the auction block.

Moderating inflation and expectations for interest-rate cuts have also given bidders a little more confidence to explore divestitures.

Even so, executives tend to be more reluctant to shed an asset than buy a new one, according to PwC’s Crego.

Companies are prone to continue investing capital into underperforming divisions with the hope of fixing them rather than cutting them loose, Crego said. More than half of executives surveyed by PwC admitted that a business unit they tried to fix, rather than sell, ultimately lost value or stayed the same.

Crego advises that companies gear up for a sale as soon as their portfolio review indicates that an asset might be a bad fit. “That’s the key time when the business probably has the most value," she said.

Write to Dean Seal at dean.seal@wsj.com