Not just about cost synergies ♦ Growth is also on the menu ♦ Addressing four questions that confront dealmakers when ordering up 50:50 consolidation deals
SOMETHING BIG SEEMS TO BE happening at corporate lunch counters the world over. We’ve recently been involved in a series of client conversations involving the formation of new consolidation JVs – that is, ventures to combine mature businesses into a jointly-owned entity. The oil and gas industry, beset by low oil prices but unable to conclude as many mergers and asset sales as it would like, is looking in earnest at such structures for the first time in a generation.
Meanwhile, in the telecom industry, C.K. Hutchison and Vimpel have announced that they will consolidate their Italian mobile businesses, 3 Italia and Wind, into a 50:50 JV. With more than 6,000 employees, €6.4 Billion in combined annual revenues, and 32 million mobile subscribers, the new JV will be larger than rivals Vodafone or Telecom Italia, promising to deliver considerable scale and cost synergies. In the alternative energy sector, Areva and Gamesa recently combined their wind turbine businesses into Adwen, a 50:50 JV. On the surface, these deals look like classic consolidation plays designed to unlock cost synergies in mature, non-core businesses (see Exhibit 1).
Capturing cost synergies is definitely a driver in each of these ventures. But each is also notable for its crucial role in helping the parent companies advance bigger – and longer lasting – objectives. In the case of Adwen, the strategic rationale is to blend complementary technologies and value chain expertise into an entity better positioned to win supply contracts in the fast growing, but highly competitive, offshore wind turbine business. With Raizen, a massive JV that consolidated the Brazilian downstream oil and gas operations of Royal Dutch Shell and Cosan, the partners have used the venture to accelerate the global development and commercialization of next- generation sugar-based biofuels. With Penguin Random House, another prominent consolidation JV, the partners saw the joint venture as a way to impart added resilience and strength to their thrust into digital publishing and emerging markets.
These JVs are recent additions to a long list of prominent consolidation JVs. Changes in technology, declining commodity prices, and increased competition from emerging market players will likely prompt further additions to this list. Companies will certainly continue to fully divest mature, low-return businesses, but consolidation JVs can be a viable alternative when the parties cannot agree on a sale price, when they cannot secure regulatory approval to conclude a sale, or when the businesses are so integral to the companies’ other businesses and operations (e.g., through shared assets, common research or technology platforms, interdependent sales strategies, and common customers) that they would introduce risks if sold to a third party. More strategically, however, consolidation JVs are an attractive way to generate scale, spark innovation, reset the business’ culture, optimize a network of assets, and transform a slower-growth, mature business into a source of sustained growth and innovation.
We recently concluded a cross-industry analysis of consolidation JVs. When combined with our client experience over the last 20 years, this analysis revealed that companies are recognizing the attractiveness of consolidation JVs, but struggle with four main questions when structuring the deal:
- How do we bridge valuation differences to get to equal control if our contributed businesses are not of equal value?
- How do we structure joint decision making so that the JV is not prone to constant gridlock?
- How do we enable sustained growth, such that doing the deal (and capturing cost synergies) does not simply defer a day of reckoning for a few years?
- As an unnatural buyer, how do we structure exit provisions to avoid being forced into buying our partner’s share, or selling at a discounted price?
Answering these questions is critical to unlocking the potential of consolidation JVs – and getting the counterparties to do more than simply talk over lunch about consolidation.