Expectations of an uptick in corporate carve-out deals in 2025¹ have been borne out by increased activity this year in the UK M&A market, which is likely to grow as the year progresses. The rising number of these deals has been accompanied by appetite from corporate clients for W&I coverage for these complex transactions.
In the current uncertain economic climate, with many corporates under pressure to return value to shareholders and seeking ways to streamline their businesses, there has been an increase in companies looking to divest non-core assets.²
At the same time, private equity appetite has remained steady over the past few years for acquiring corporate assets which are being spun-off,³ and is likely to grow in the second half of 2025. This appetite is typically seen in sectors where acquirors have developed a specialism and are looking to ‘buy and build’ – combining assets from different businesses to create a single entity and add value through realising synergies.
Significant carve-out transactions have been seen recently in the healthcare sector, such as Mallinckrodt Pharmaceuticals’ sale of Therakos to CVC Capital Partners⁴, and in manufacturing, with Reckitt Benckiser announcing a multi-billion dollar carve-out of its portfolio of leading homecare brands.⁵
We have also witnessed a trend for global businesses to carve-out entities in specific territories in order to limit their exposure to more challenging markets or to consolidate business in other countries. Corporates are also being challenged by an increased regulatory burden in certain jurisdictions, which is driving sentiment for territory-specific carve-outs.
Alongside this, PE firms under pressure to return capital to their investors, but not seeing buyer appetite for certain businesses in their portfolio, may instead be looking to sell the most attractive portions of those businesses.
Key considerations for carve-outs
With a higher proportion of corporates looking to buy W&I coverage for carve-outs, the insurance market has become increasingly familiar with such deals and more comfortable with underwriting these complex risks. However, there are some key risk areas that are of particular focus on such transactions:
- One of the complexities of underwriting corporate carve-out risks is that the assets being sold often don’t have standalone accounts. Insurance carriers are commonly reliant on financial advisors to produce either a reconciliation for the carve-out from the company’s consolidated financials or a set of special purpose accounts prepared to a limited audit standard.
- Separation points are another key consideration for underwriters – in terms of dividing up the assets and/or separating out commercial contracts. Some contracts might not be assignable or there may be burdensome change of control provisions to be satisfied. Any restrictions on assigning and subcontracting contractual obligations to third parties may require the consent of the counterparty – as will the novation of contracts – all of which will require careful diligence.
- There are also important tax considerations which arise on business separations. Underwriters typically take the position that, providing there has been robust tax due diligence into the separation and steps for the tax plan have been agreed by both parties, they are comfortable with covering those risks – so long as both parties follow the agreed steps.
- Regulatory considerations add further complexity to these types of deals. For example, who holds the regulatory licences that the carved-out business requires to carry out day-to-day operations? If licences are held by the parent company, will the parent get them re-stated and are they transferable?
- Across all M&A transactions, one of the most important elements for W&I underwriters to get comfortable with is the quality and adequacy of the target company’s current insurance programme. A significant complexity for carve-outs is whether that insurance programme, which will typically be held by the parent company, will be available to the carved-out business and/or have a retrospective effect after the transaction has completed.
- The transfer of existing employees to a new standalone entity can add an additional layer of complexity in determining which roles remain with the seller and which go to the buyer with the carved-out business. Any such transfer must be undertaken in compliance with local labour laws to avoid liabilities arising.
Carve-outs are also commonly accompanied by transitional services agreements (TSAs) between buyer and seller, for shared functions such as finance, IT and human resources. These will need to be carefully scrutinised by the underwriter alongside the primary transaction documents to ensure that the W&I insurance is not being used as a ‘’stop-gap’ for insufficiently robust separation planning.
Insurers will want to determine if the sale and purchase agreement includes a ‘wrong-pockets’ clause, enabling the parties to the deal to transfer assets between themselves, post-completion, in a pre-determined manner. With larger, more complex carve-out deals, there’s a strong possibility that some assets may be unintentionally retained by the seller, or erroneously transferred to the buyer, which will need to be remedied after completion using a pre-agreed mechanism that each party is comfortable with.
Outlook for carve-outs in 2025
As we approach Q3, there may be a flood of pent-up demand for W&I coverage on carve-out transactions, as deals which have been slowed or paused amid the current economic uncertainty regain momentum.
Looking to the future, there is likely to be continued appetite for new carve-out deals. Businesses experiencing suppressed share prices and under pressure from shareholders and investors to add value are increasingly viewing carve-outs as an attractive solution to these challenges.
From the insurance buyer’s perspective, they need to be certain ahead of the deal that all their key insurance advisors are experienced with carve-outs and that an appropriate level of due diligence has been done on the transaction, to enable accurate and efficient underwriting of the risks.
From the carrier’s perspective, the three key elements we would expect to see from the beginning of the process are: (i) the plan for the accounts and how the buyer is diligencing them; (ii) due diligence on the existing insurance programme for the target company and its availability post-closing; and (iii) a clear, detailed and agreed plan and documentation for the carve-out and separation of the relevant businesses (including a fulsome tax separation plan).
Given the complexity of carve-out deals and the time that may be required to iron-out details around contracts, debt and taxation, our advice to insurance buyers is to get their carrier and preferred broker involved as early as possible in the process, and well in advance of the proposed signing date. In an ideal scenario, initial instructions to insurers would come from the seller allowing a hard or soft staple policy to be negotiated and ready to be finalised once bidders for the target business are engaged.
¹ Carve-out activity set to increase in 2025 | Aurelius
² ‘Unlocking hidden value: corporate carve-outs.’ Travers Smith, 21 Jan 2025
³ ‘A carveout can cut a path to a brighter future.’ Grant Thornton, 18 Apr 2024
⁴ ‘CVC Completes Acquisition of Therakos from Mallinckrodt.’ CVC, 2 Dec 2024
⁵ Speed, Madeleine. ‘Reckitt and Unilever join the consumer giants slimming down.’ Financial Times, 26 Jul 2024
