Why do companies consider a de-merger?

There are many reasons why a company may consider a de-merger, whether that is for profitability, reducing risk or transferring assets.  Stacey Browne, Solicitor in our Company Commercial team, explains more here about the reasons why you may be considering a de-merger for your company, how these reasons can be developed in practice and discusses how we can assist you with your decision.

What is a de-merger for a company?

A de-merger allows a company to separate different business units.  In most cases the ultimate aim of a de-merger will be to increase shareholder value by refocusing on their most profitable units and reducing risk. However, plans can be driven by other factors including, but not limited to:

• a means of separating assets of a company following a shareholder dispute (most commonly involving a family run business);
• the transfer of assets (either shares or business) to some or all of the original shareholders (sometimes transferred to a new company owned by these shareholders);
• to invite or prevent an acquisition;
• to raise capital by selling off components that are no longer part of the business’s core purpose;
• to create separate legal entities in which to deal with different operations.

The term de-merger describes the division of business activities which are then initially held under common or related ownership. There are a variety of reasons why a company may consider a demerge, for example:

1. Unlocking the value of underlying businesses

The share price of the de-merging company may not reflect the full value of the underlying businesses but by demerging, the full value of these businesses can theoretically be realised and increase shareholder value.

An example of this is The Carphone Warehouse Group PLC demerger of TalkTalk Telecom Group which created two distinct listed companies offering discrete investment propositions, clearer market profiles and providing flexibility for each company to pursue independent long-term growth strategies appropriate to their respective markets. It also enabled a more efficient and transparent capital allocation, providing each company with direct access to capital by creating capital structures and shareholder distribution policies appropriate for the future requirements of each business.

2. Separating divisions where one part of a group places regulatory or financial restrictions on another

If a company provides financial services as well as a product based business, part of the commercial rationale behind a de-merger may be that the product based business may be hindered by the regulatory requirements applicable to a financial services business.

An example of this is the esure de-merger in 2016 which separated the UK motor and home insurance business from the UK price and comparison business, allowing both esure and GoCompare to optimise their business to the relevant regulatory environments within which they operate.

3. Alternative to company sale

If a company cannot find a buyer to sell its business to, it may opt for a de-merger instead.

An example of this is Cadbury Schweppes who were reportedly interested in selling its American Beverages business to focus on its main confectionary business; however, the 2007 debt market meant that a sale was unlikely to happen for an acceptable price and so they opted for a de-merger of the business instead. Had the de-merger not happened, Cadbury Plc may have been too large to attract a successful takeover bid by Kraft in 2010.

4. Dividing a jointly owned group

Following a joint acquisition, a de-merger may be used to unravel a group company or used to facilitate the sale of part of a business to a third party.

5. Change in focus

A de-merger may be initiated to facilitate a material change in strategy in order to eliminate an under-performing division or maximise investment opportunities.

De-mergers are an effective corporate strategy and can be used to unlock value as well as streamline the operations of a company. There are primarily five types of de-merger structures depending on your business needs and the ultimate outcome you wish to achieve.  If you are considering a de-merger for your company, we can discuss these different options with you and agree with the best strategy to achieve your objectives.  Contact Stacey today on 023 8071 7411 or email staceybrowne@warnergoodman.co.uk to review your requirements today.

ENDS

This is for information purposes only and is no substitute for, and should not be interpreted as, legal advice.  All content was correct at the time of publishing and we cannot be held responsible for any changes that may invalidate this article.