Why the path to separation is far from easy

By AJ Brown

Today’s utilities are faced with an increasingly complex business model due to slowing electricity demand, lower prices, a shift towards self-generation and emerging changes to the regulatory paradigm. Many utility executives are reassessing their asset portfolios and looking for new rebalancing strategies.  Others are separating assets into regulated and non-regulated businesses with the goal of creating greater value for shareholders and lowering customer rates.

Divestitures can be the key to value creation
Separating and realigning businesses, or “carve-outs,” have become increasingly popular over the last few years. Both management teams and investors recognize the value of focusing on core, profitable operations. By divesting non-core parts of the business, executives can focus on competitive strengths and market differentiators. In addition, carve-outs allow companies to streamline processes and improve efficiency.  

While executives and investors understand the value divestitures can provide, they know that carving out a business segment or acquiring a business segment from another utility is a complicated undertaking that requires as much planning as a major acquisition (if not more). Carve-outs create maximum value when they position the newly independent company for long-term success while mitigating risk. Further value is created through the proper execution of post-close optimization activities that align with the value drivers that prompted the carve-out decision in the first place.

As is often heard in strategic conversations, “the devil is in the detail.” Success is rarely an accident. It is always the result of a commitment to a defined strategy, focused planning, and dedicated effort.  Carve-outs present unique complexities, including how to:

  • Structure and negotiate the right Transition Service Agreement (TSA)
  • Determine the right shared services framework for the new entity
  • Manage internal and external stakeholders through the transition
  • Evaluate and address regulatory compliance concerns
  • Identifying the right employee to come with the business and developing the right go-forward organizational structure
  • Quick execution on the separation to limit disruption in the target business and your core operations.

Proper diligence is critical to divestiture success
A proven methodical approach to a carve-out is a wise undertaking.  Utilities must dedicate the appropriate time and attention to each phase of the divestiture process, from strategy through post-close separation to enable the most value creation. Early carve-out due diligence is a “must do” form of diligence in the divestiture process – proper carve-out diligence provides the following key outputs:

  • One-time carve-out costs
  • Carve out projects and timeline
  • Key inter-dependencies across work-streams 
  • Recommended team structure
  • Ongoing IT operating budget
  • Ongoing IT organizational chart
  • Key IT carve-out risks
  • TSA/APA inputs and recommendations
  • Organization impact analysis
  • Day 1 readiness critical path

These outputs provide the expectation for the cost, time, and resources needed for the separation and future optimization phases of the divestiture process.

Preparing for the future
As the utility business model continues to evolve and executives seek ways to diversify their portfolios, the value of a divestiture could be the means to spur growth. Even if the path of separation seems to have the right strategic appeal, the path to separation is far from easy. Successful carve-outs are the result of proper planning, analysis, and attention to execution. Utilities that can dedicate the proper resources and conduct the appropriate diligence will likely find carve-outs to be vital to long-term growth.  

For more information on how West Monroe can help you manage your next carve-out, please contact AJ Brown at ajbrown@westmonroepartners.com.