Assess your strategic options
Choosing the right path
It is not necessary to commit to one path at the beginning of the project. It is common for companies to run dual-track processes from the start or retain optionality to switch at a later stage.
Any carve-out is a lengthy process and market conditions, investor sentiment and business performance can all fluctuate throughout the life of the project, influencing the choice of structure. Exploring all three structures at the start of the project and continually testing the right path can help hone deal structure and terms and give confidence to management and shareholders on the chosen strategy.
Demerger
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Minority IPO
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Sale
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Getting it right
Key issues to consider in a demerger
Tax - The right structure
- A key consideration influencing the demerger structure that should be addressed at the outset
- Consider tax impact on shareholders, the demerged entity and the retained group – does the structure work for all parties?
- Will engagement with tax authorities be needed to test the structure? Ensure this is factored into deal process and planning
Structuring - What is the plan?
- Parent objective determines chosen structure - does the parent wish to demerge all of its stake, monetise part of its interest or retain a stake? Does this fit with the equity story?
- Decide on the preferred listing venue – where is most appropriate (for the demerging entity and existing shareholders)? The demerging entity’s capital structure and financing needs will influence the decision
- Does the current Holdco have sufficient distributable reserves to declare the demerger dividend?
- Is a pre-spin reorganisation required?
Documents and listing process - Prepare for disclosure
- The prospectus is the key document, requiring significant input from a wide range of internal teams, alongside the demerger agreement
- Key prospectus disclosures include the operating and financial review for the last three years, disclosure of historical financial information and an equity story
- AI capabilities can lead to a materially lighter load in due diligence and verification
- Does the transaction give rise to any disclosure or approval obligations for the parent entity?
- Financial disclosures can take a significant amount of time – getting accountants and advisers on board and engaged early is key
Separation - Ensuring a smooth break-up
- Operational readiness for separation and carving-out the demerging entity from the retained group is a long process that can require careful planning
- Is there a natural delineation of employees, customers, functions and processes?
- Consider right-sizing contracts and operations for the remaining group post demerger
- Prepare for any transitional services needed
- Is a pre-spin reorganisation required?
Governance - Achieving independence
- Listing Rules and the UK Governance Code will require the demerging entity’s current operations to be sufficiently independent
- Demerged entity must be ready to stand alone as a public company – with a radical overhaul of systems, controls, governance codes
- Board and committee selection must be appropriate and set the company up for its new public life – do management have recent and relevant experience? Are there sufficient independent voices?
Shareholder reaction - Communication is key
- Build the equity story and investor engagement with shareholders early and bring them along
- Anticipate the shareholder profile and be prepared for activists – are there any major/vocal shareholders or a large retail shareholder base?
- Settlement is not just a matter for closing – consider the most appropriate listing venue early and the influence this may have (e.g. inclusion in indices)
- Establish parameters for any lock-up period, timing of sell down and the use of proceeds
- Demerger dividend?
- Is a pre-spin reorganisation required?
Incentives and awards - Thinking about the teams
- Consider the effect of the demerger on the value of existing share awards
- Establish a plan to preserve the value of existing share awards
- Evaluate options for new incentive arrangements at the demerged entity
Business as usual - Steady the ship
- Planning and implementing a demerger is hugely time intensive for management
- Using temporary resources (including advisers) in the right areas at the right time can lighten the project load on management and help bring experience in particular areas
- Planning for future business focus and strategy as two distinct groups can focus minds post-completion
Our experience
Separations and spin-off listings
GSK on the £30bn demerger of its consumer business to form Haleon plc
Europe, Americas, RoW
BHP on the demerger of South32 and its primary listing on the Australian Stock Exchange and secondary listing of its shares on the Johannesburg Stock Exchange
Africa, Americas, Europe, APAC
Cadbury Schweppes on the demerger of Dr. Pepper Snapple Group Inc and its listing on the New York Stock Exchange
Europe, Americas, APAC
Direct Line on its spin-off from Royal Bank of Scotland and its listing on the London Stock Exchange
Europe
Esure on the demerger of GoCo (then Gocompare.com) and its listing on the London Stock Exchange
Europe
GKN on the demerger of GKN Automotive to form Dana plc
Americas, Europe
Google DeepMind on the creation of Isomorphic Labs
Europe, Americas
Interserve on the separation of its Tilbury Douglas construction division
Europe
Investindustrial on the business separation aspects of its acquisition of CSM’s bakery ingredients business
Europe
Prudential on the spin-off its US business Jackson Financial Inc. and its listing on the New York Stock Exchange
Europe, Americas, APAC
Prudential on the spin-off and listing of M&G plc on the London Stock Exchange
Europe
Reckitt on the spin-off of Indivior and its listing on the London Stock Exchange
Europe, APAC, Africa, Americas
Swire Pacific on the spin-off and separate listing by way of introduction on the Hong Kong Stock Exchange of Swire Properties and on the earlier proposed $2.7bn spin-off and separate listing of Swire Properties
APAC
Tencent on the spin-off and listing of Tencent Music on the NASDAQ stock exchange
APAC, Americas
Whitbread on the proposed demerger of Costa Coffee, which was ultimately structured as a £3.9bn sale to the Coca-Cola Company Europe
This material is provided for general information only. It does not constitute legal or other professional advice.