Case Study: Asset Divestiture

Busi­ness Devel­op­ment: Analy­sis Shed New Insight – then a Business
 
Chal­lenge: Extract value from an unprof­itable, declin­ing busi­ness and improve the cus­tomers’ value propo­si­tion at the same time.
 
The world is a four dimen­sional place (the best know three plus the ele­ment of time). What filled a strate­gic direc­tive yes­ter­day may be need­lessly suck­ing up crit­i­cal assets today.
 
In the mid-1980’s Show­time Net­works (SNI) setup a retail dis­tri­b­u­tion busi­ness focused on ser­vic­ing the under­served rural mar­ket by lever­ag­ing the estab­lished C-band satel­lite tech­nol­ogy. The rub was that SNI couldn’t just sell its prod­uct. It had to pro­vide a com­plete tele­vi­sion chan­nel lineup. Did it make sense to do this? Absolutely, for if SNI didn’t bring their ser­vice to this com­mu­nity no one would, HBO’s sim­i­lar ser­vice cer­tainly was not an option.
 
Well as you know in the late-1990s DBS can on the scene. With its bet­ter pic­ture qual­ity, less visu­ally intru­sive dishes and over­all lower equip­ment cost it rapidly started to over­take the C-band mar­ket. It was time to re-examine this strate­gic busi­ness unit. 
 
My task, con­duct the busi­ness analy­sis and pro­pose a solution.
 

Action: Review­ing of the account­ing state­ments showed that the busi­ness since day one gen­er­ated a pos­i­tive gross mar­gin. Still, one had to ques­tion putting the com­mit­ted level of sup­port assets behind the oper­a­tion, espe­cially when the finan­cial weight of this bur­den caused over­all prof­itabil­ity to be negative.
 
Action: Devel­oped the mar­ket study and pro-forma finan­cial model that sup­ported the asset divesti­ture deci­sion. Used Dis­counted Cash Flow (DCF) analy­sis to clar­ify exist­ing mar­ket poten­tial and unit’s true bot­tom line contribution.
 
The result of my strate­gic review indi­cated that:
  • Most exist­ing retail cus­tomers were videophiles with expen­sive in-home the­ater sys­tems and would even­tu­ally switch to DBS packages
  • Home the­ater equip­ment retail­ers install and ser­vice both C-band and DBS equipment
  • Home the­ater equip­ment retail­ers were con­sol­i­dat­ing and would pay good money for customers
  • Sell­ing the busi­ness (list) with a guar­an­teed SNI con­tent sales fig­ure and elim­i­nat­ing exist­ing sup­port costs dropped more to the bottom-line
  • Able to real­lo­cate freed asset to the core business
 
Solu­tion: Here are the actions I took:
  • Devel­oped pro-forma finan­cial model that sup­ported the asset divesti­ture deci­sion. Used Dis­counted Cash Flow (DCF) analy­sis to clar­ify exist­ing mar­ket poten­tial and unit’s true bot­tom line contribution.
  • Nego­ti­ated a bilat­eral asset sale and mar­ket­ing part­ner­ship. Develop a “win-win” pur­chase struc­ture that allowed both con­cerns to derive sig­nif­i­cant value.
  • Pro­vided tran­si­tion plan­ning and sup­port to ensure con­ti­nu­ity of ser­vice from a con­sumer perspective.
 
Result: $54 mil­lion of value creation
Locked in con­trac­tu­ally guar­an­teed 5-year rev­enue stream, which fell directly to the bot­tom line, and gen­er­ated $19 mil­lion in cost sav­ings. Cus­tomers gained a smooth upgrade path and enhanced support.
 
By being able to develop inno­v­a­tive analy­sis and shed new insights a bet­ter way came into light. This action­able infor­ma­tion enabled the orga­ni­za­tion to profit from a declin­ing business.