Carve-out of a naval activity within a Swiss high-technology engineering group
Carve-out of a naval activity (Switzerland)
Project description: carve-out of a naval activity within a Swiss engineering group
The engagement covered the carve-out of a naval activity developed within a Swiss high-technology engineering group, historically positioned in space and aeronautics. The objective was to rebuild the standalone profitability of the activity, in order to measure its real contribution and its effect on the value of the group.
Key issues: isolating costs, normalising profitability, measuring the effect on value
- identify the costs specific to the naval activity, tracked each year over several financial years, without confusing them with those of the core business;
- rebuild the normalised profitability of the core business once the naval activity is isolated;
- measure the effect of the carve-out on the valuation of the group, by distinguishing the two perimeters;
- allocate the shared costs (premises, support functions) using a defensible allocation key.
Approach and results: rebuilding the accounts, then measuring the effect on value
The carve-out followed a two-step methodology:
- rebuilding the accounts of the naval activity, by direct allocation of its own costs and distribution of shared costs, then isolating the normalised profitability of the core business;
- measuring the effect on value, by comparing the valuation of the group before and after isolation, using the DCF method and transaction multiples.
The deliverable is a carve-out factbook presenting the rebuilt accounts of the naval activity and the measurement of its effect on the value of the group, as a complement to the group's business valuation.
Summary: rebuilding the accounts, measuring the effect on value, factbook as the deliverable
Carve-out engagement for a Swiss high-technology engineering group, covering a naval activity. Two steps: rebuilding the accounts of both perimeters, then measuring the effect on value. Deliverable: carve-out factbook.
Documents delivered to the client:
- the carve-out factbook, gathering the rebuilt accounts of the activity;
- the methodology note on allocation keys and the treatment of shared costs;
- the model used to rebuild the accounts and measure the effect on the value of the group;
- the summary report presenting the conclusions.
Definitions: carve-out, demerger and spin-off
A carve-out consists of isolating an activity of a group in a separate legal entity, ahead of a sale, separate financing or a reorganisation. The operation requires the accounts of the activity to be rebuilt before any valuation.
In Switzerland, a demerger (scission) transfers part of the assets and liabilities of a company to one or more existing or new companies, under the Swiss Federal Act on Merger, Demerger, Conversion and Transfer of Assets and Liabilities (FMA).
A spin-off creates a new company separated from the group, whose shares are allocated to the existing shareholders. A carve-out may precede a spin-off, a sale or a fundraising, depending on the objective pursued.
Methodology: rebuilding an activity before valuing it
A carve-out starts with separating the cash flows. Costs directly attributable to the activity are allocated in full. Shared costs, such as premises, IT or support functions, are distributed using a key justified by the nature of the cost: revenue, headcount, time spent or floor space occupied.
Internal development costs require particular attention. A distinction must be made between those expensed in the year and those capitalised on the balance sheet, because they affect the result differently. These two treatments are restated separately, never combined, so as not to distort the rebuilt profitability.
The value of the isolated activity is then measured twice: once on the group before isolation, and once on the separated activity. The gap between the two shows the real effect of the carve-out, and allows it to be discussed without confusing the perimeters. The general principles are set out in our publication on rebuilding accounts and valuing a division.
Points of attention: what makes a carve-out reliable
- Cost traceability: costs identified consistently over several financial years make the rebuilding reliable and defensible.
- Consistency of allocation keys: a key that changes from one year to the next without reason undermines the credibility of the rebuilt profitability.
- Separation of teams and contracts: shared employees, suppliers and customers must be identified before any legal separation.
- Neutrality between the two perimeters: the value of the core business must not be inflated or reduced by the choice of the isolated activity.
FAQ: the essential questions on carving out a naval activity
Introduction: what to remember before the questions
The following questions cover the most frequent concerns of business leaders when isolating an activity within a group, from rebuilding the accounts to protecting information.
Q1: Why rebuild the accounts before valuing a carve-out activity?
An activity integrated into a group's accounts usually has no income statement or balance sheet of its own. Rebuilding the accounts is an essential prerequisite, without which no valuation is reliable.
Q2: Why isolate an activity before selling it or financing it separately?
Because an acquirer or a financier cannot assess an activity buried in a group's accounts. The carve-out makes its returns, needs and risks readable, which strengthens the negotiation.
Q3: How are shared costs allocated between the isolated activity and the rest of the group?
Costs directly attributable to the activity are allocated in full. Shared costs are distributed using a key justified by their nature, such as revenue, headcount or time spent, and that key must remain stable from one year to the next.
Q4: Do shared costs distort the result of the isolated activity?
They can, if the allocation key is arbitrary. A justified and documented key avoids this bias and makes it possible to defend the rebuilt result in front of an acquirer.
Q5: How is the effect of a carve-out on group value measured?
By comparing the valuation of the group before and after isolation, applying the same methodology to both perimeters, so that the gap truly reflects the isolated activity.
Q6: Is a long track record needed to value an isolated activity?
A track record of several financial years helps, because it shows the consistency of the identified costs. Without it, the valuation relies more heavily on the business plans and the assumptions adopted.
Q7: Can a carve-out improve the value of the group?
It can make it more readable, but it does not create value by itself. It reveals the value of each perimeter, and it is then the negotiation that determines the outcome.
Q8: Which documents should be prepared for a carve-out?
The group's accounts, the breakdown of costs by nature and by financial year, the shared contracts, the list of employees assigned and the business plans of the activity. The more precise these items are, the faster the work.
Q9: Which risks should be anticipated before separating an activity?
The transfer of employees and contracts, dependence on common suppliers, the confidentiality of shared information, and clarity on the rights to intangible assets. These points must be framed from the outset.
Q10: How can the information of the activity be protected during the transaction?
Through confidentiality agreements signed before any exchange, access to data limited to those who need it, and written rules on the use and circulation of working documents. Uncontrolled circulation is one of the most underestimated risks.
Q11: Does a carve-out necessarily prepare a sale?
No. It can prepare a sale, the entry of an investor, a legal demerger, or simply allow the activity to develop with its own financing.
Q12: How should business leaders read the conclusions of a carve-out?
As a basis for discussion: the rebuilt accounts show the real profitability of each perimeter, the value is only one reading of it, and the assumptions behind it must be understood before any decision.
Similar engagements: other mandates involving separation of activities and structuring
The transactions shown include those completed by, or with the involvement of, Hectelion team members in current or previous professional roles. They are presented for illustrative purposes only and do not imply exclusive responsibility by Hectelion.
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The transactions presented were carried out by, with the contribution of, or with the participation of members of the Hectelion team in the context of functions performed currently or previously.