What is a divestiture commitment?
What it means and how to read it on a deal.
What it is
How much the buyer has agreed to sell or give up to win antitrust or regulatory approval.
Hell or high water means any remedy needed; most agreements set a limit.
What the commitment is for
Regulators sometimes approve a deal only if the buyer gives something up. It may sell part of a business, license something or accept limits.
That is called a remedy. A sale of part of a business is a divestiture.
Say Woodgrove agrees to buy Litware, and both run stores in the same towns. A regulator may approve only if Woodgrove sells some stores.
The divestiture commitment says how far the buyer must go in accepting remedies to win approval.
Three kinds of commitment
Agreements fall into three groups:
- Any needed
- The buyer must accept whatever remedy regulators require. This is often called hell or high water.
- Up to a limit
- Only remedies within a limit the agreement sets, such as a number of stores or an effect on the business.
- None
- The buyer need not accept any remedy.
A clause called hell or high water can still carry limits. So the words of the agreement are what count.
How limits are written
Kroger's 2022 agreement to buy Albertsons didn't require it to divest more than 650 stores.
Microsoft's 2022 agreement with Activision Blizzard set limits too. Among them, it didn't have to accept a remedy with more than an immaterial impact on any Microsoft business.
How common they are
How often a hell or high water clause appears depends on the sample, and on how the clause is defined.
In one sample of 2019 deals, 3 of 26 that got a second request had one, against 9 of 36 others. In that sample, the clause was rarer where an agency looked closer.
From 2004 to 2019, 45.8% of deals that got a second request had some divestiture requirement, against 37.1% of others.
A real example
In 2023, the UK's CMA blocked Microsoft's first deal for Activision Blizzard. Microsoft then restructured it.
Ubisoft received the cloud streaming rights outside the European Economic Area for Activision's PC and console games. That covered current games and those of the next 15 years.
The CMA cleared the restructured deal on October 13, 2023, and Microsoft completed the purchase that day.
What was sold here was a set of rights, not a whole business.
What it means for shareholders
The wider the commitment, the less room the buyer has to refuse a regulator's demands. A narrow one lets it decline a remedy, and the deal may then fail.
Say the regulator asks Woodgrove to sell 50 stores:
- Any needed
- Woodgrove must agree to sell them.
- A limit of 20 stores
- Woodgrove may refuse, and the deal may then fail.
On Tracking Alpha
- Any needed
- The buyer must accept whatever divestiture or other remedy regulators require, sometimes called hell or high water.
- Up to a limit
- Only remedies up to a limit the agreement sets, such as a revenue threshold.
- None
- The agreement says the buyer need not accept any.
The fourth protection dot: solid for any needed, outlined for up to a limit, faint for none.
- Any divestitures needed
- Divestitures up to a limit
- No divestitures required
- Divestitures not in the filings
Easily confused with
- Duty to litigate
- Whether the buyer must fight in court when a regulator sues. A divestiture commitment is what it must give up to avoid or settle that fight.
- Reverse termination fee
- What the buyer may owe if approval fails. A divestiture commitment is what it must accept to get approval.
Questions
What is a hell or high water clause?
A buyer's promise to accept whatever remedy regulators require, such as selling assets, to get the deal approved. Some clauses called that still carry limits.
What is a divestiture in a merger?
A sale of part of a business. A regulator may require it as a condition for approving the deal.
How common are hell or high water clauses?
It depends on the sample and the definition. In one sample of 2019 deals, 3 of 26 that got a second request had one, against 9 of 36 others.
Sources
- Albertsons, Agreement and Plan of Merger with Kroger, Form 8-K exhibit 2.1 (October 2022)
- Activision Blizzard, Agreement and Plan of Merger with Microsoft, exhibit 2.1 (January 2022)
- Wilson Sonsini and NERA, Risk allocation in merger agreements in an era of increased enforcement (2020)
- UK Competition and Markets Authority, Microsoft concession a gamechanger that will promote competition (October 13, 2023)
- Microsoft, Form 8-K on completing the Activision Blizzard acquisition (October 13, 2023)
Tracking AlphaBy Jera Value · Reviewed
