Cross-Border Carve-Outs: Complexity, Continuity and Value Creation

For PE buyers, carve-outs offer access to attractive assets in a market where attractive standalone targets are increasingly scarce and unstable markets are encouraging a more creative approach to deployment of capital. Carved out targets typically involve less competitive tension, present an opportunity to leverage undervalued assets and to drive operational improvement through streamlining complex structures.

From both a seller and buyer perspective, the key to implementing a successful carve-out transaction is ensuring that the carved-out business is capable of operating as a standalone entity, maintaining business continuity and minimising operational disruption.

However, whilst the objective is clear, implementation can present a number of complexities and unique planning demands that are not typically seen on more straightforward M&A transactions, a concern that is only heightened in a cross-border context where local regulatory and structuring considerations must be factored into the transaction playbook. This note outlines the key stages and practical considerations for achieving a successful cross-border carve-out.

Defining the Transaction Perimeter

The target in a carve-out transaction is, by definition, structurally integrated with the seller organisation. Such integration typically arises in a legal context (e.g. contracting framework, structural formation), an operational context (e.g. talent organisation and CRM functions) and a financial context (e.g. banking facilities, cash pooling). It is therefore essential to establish the transaction perimeter early by identifying what constitutes the autonomous business unit – in particular what assets, liabilities and operational functions are in or out of scope and mapping dependencies.

Clear alignment is needed early on in relation to the steps needed to implement the separation of assets in order to limit value leakage and facilitate planning for scenarios where separation is not achievable in a streamlined manner. This is particularly key in the absence of coherent standalone financials that allow testing of the perimeter balance sheet and quality of earnings.

Once transaction perimeter is mapped and value attributed, the parties will need to agree on legal and commercial solutions to issues identified during the mapping exercise considering that the buyer organisation in a PE context using an SPV may not have the financial or commercial credibility of the seller organisation. 

Comprehensive planning and perimeter mapping will also enable parties to implement legal aspects of the transfer in a more coherent manner, with a clear understanding of the relevant transfer processes and tailored suite of legal documents, including a focused transitional service agreement.

Transaction Implementation and Cross-Border Considerations

The governing document implementing a cross-border carve-out is a master implementation agreement which sets out the overall commercial terms of the transfer and separation. This is then supported by parallel local transfer documents for individual assets in each jurisdiction. Implementation terms and approach are driven by tax considerations, location of asset location and ownership, regulatory requirements, consideration mechanics and the preparation of carve-out financials.

Key transaction terms are similar to on a straightforward M&A transaction but take on heightened significance in a carve out situation. In particular, the parties should consider conditionality and deal certainty, the scope of consent rights, pricing and adjustment mechanisms (especially on a local asset-by-asset basis), wrong pocket arrangements, the warranty suite and warrantor identity, disclosure requirements, cost allocation and communication protocols.

Third party approvals are often a critical workstream and can significantly influence deal timing. These may include general transaction approvals e.g. merger control and foreign investment filings, landlord and lender consents, customer and supplier approvals, together with sector-specific authorisations and municipal or local licences. Conducting a consent mapping exercise at the outset helps identify what approvals are strictly required, what approvals the parties actually want to obtain and the timeframes for doing so.

Local transfer processes vary widely - formal notarisation meetings and specific documentation may be required depending on the asset transferred and local tax rules should be considered to ensure the funds flows accounts for these costs, which can be more than de minimis. Employment considerations, including works council consultation, add further complexity. These processes may give significant power to local teams where their approval is required, or may require a consultation process only, which although not prohibitive, does impact transaction timing. Consultation processes can also be sensitive from a confidentiality perspective, requiring careful planning.

Separation and TSAs

Transitional service arrangements (TSAs) underpin operational continuity from completion until the carved out business can operate independently by facilitating continued access for the carved out entity to seller support in respect of e.g. IT, HR, procurement, real estate and treasury support functions. 

The parties must agree, based on diligence and modelling, what service levels are required (typically pre-transaction standards are preferred), the duration of support and appropriate cost structures. Costs should be managed on a disciplined basis and take account of bilateral service flows (where relevant), duplication of running costs and one off separation charges.

Transition periods will vary by function so extension mechanisms should be agreed upfront. Where third party consent is required to provide a service, the timing implications, service continuity and allocation of liability must also be addressed.

Round up: A Practical Carve-Out Checklist

Preparation: Identify autonomous business unit and define transaction perimeter; map required consents and related timeframes to obtain; agree structure for implementation, taking account of tax, asset location, regulatory issues and carve out financials.

Implementation: Agree key transaction terms; establish procedures and timelines for obtaining consents; address any employment and works council requirements.

Transition: Define the scope of transitional services; agree service levels aligned with past practice; establish transition periods and any extension options; set out cost structures, including any incremental charges or margins.

Our Experience

Our corporate teams are highly experienced in delivering complex, multi jurisdictional carve-out transactions for both buyers and sellers. With more than 750 partners and 3,000 lawyers across a global platform - and a significant European presence in over 25 countries - we offer integrated, cross border support tailored to the specific needs of each transaction.