Demerger: Meaning, Benefits, Types, Examples

Learn what a demerger is, the pros and cons, different types, and some real life examples.
Section
Types of demerger
Demerger advantages and disadvantages
Demerger examples

 

What is a demerger?

A demerger is when a company’s business unit is separated from the original company. It sounds similar to a company divestiture – and indeed some demergers are divestments – but there is more than one type of demerger, which we’ll cover below.

 

 

Types of demerger

1. Spin-offs

In a spin-off, the parent company separates off a business unit and makes it its own entity. Shares in the newly created company are distributed to existing shareholders of the parent via a dividend. In a spin-off transaction, the parent can, if it wishes, retain an interest in the spun-off company (as long as it is no more than 20%) but no funds are raised as no stock is sold. 

Learn more: Spin-Off Company

2. Splits

Split-off

A large company consisting of multiple businesses may want to split them into separate companies. In a split-off, the shareholders are given the opportunity to exchange their ParentCo shares for new shares of the subsidiary (SplitCo). This “tender offer” often includes a premium to encourage existing ParentCo shareholders to accept the offer. 

Split-up

In contrast to the above, in a split-up the parent company does not survive. It is liquidated into the new companies that are created as part of the transaction. 

3. Carve-outs

Spin-offs and split-offs can be preceded by an IPO in which a portion of the share of the subsidiary is sold to the public, with the proceeds either retained by the subsidiary or distributed to the parent. This is called a carve-out.

The significant difference with this type of demerger is that it results in an injection of cash whereas spin-offs and splits do not.

Learn more: Equity Carve-Out

In reality, more than one type of demerger is often executed simultaneously. For example, an equity carve-out is typically executed ahead of a split-off to establish a public market valuation for the subsidiary’s stock.
 

 

Demerger advantages and disadvantages

All three types of demerger can benefit from the same following things: enhanced shareholder value, tax benefits, and improved profitability. There are also some specific advantages and disadvantages depending on the type:

Spin off

Advantages

  • The parent company can retain a non-controlling interest in the subsidiary.
  • Existing shareholders enjoy the benefit of holding shares in two companies instead of  one. 
  • Can be a non-taxable event.
  • Removal of the parent company from the management and decision-making of the subsidiary.

Disadvantages

  • No funds are raised as no stock is sold.
  • Possibility of shareholder churn if shareholders were against the spin-off decision.
  • The price of the shares of the parent company declines by the market value of the spun-off business.

Splits

Advantages

  • A split-off is a tax-efficient way for ParentCo to redeem shares.

Disadvantages

  • Potential for shareholder lawsuits if the premium offered by ParentCo is deemed unfair by activist shareholders. 
  • No funds are raised as no stock is sold.

Carve-out

Advantages

  • Raising capital while holding control proves a win-win situation.
  • Opportunity to sell a non-core business unit.
  • Allows the parent company to get an evaluation of the subsidiary's market value.
  • Prevents subsidiary from being purchased by a competitor

Disadvantages

  • Parent company can offer up to 20% only of its shares in an IPO to obtain tax benefit.

See also: Benefits of demerger

 

 

Demerger examples 

GSK

On Monday 18 July 2022, GSK plc (“GSK” or the “Company”) separated its Consumer Healthcare business from the GSK Group in a spin-off to form Haleon plc (“Haleon”), an independent listed company. 

Paypal

When PayPal split from eBay in a spin-off transaction, eBay shareholders received one share of PayPal for each share of eBay that they owned. 

GE

A notable split-off example is Synchrony Financial (SYF) from its parent General Electric (GE). GE offered existing shareholders the opportunity to exchange each share of GE stock for 1.0505 shares of newly formed Synchrony stock.

United Technologies

On November 26, 2018, United Technologies announced its split-up into three separate companies: United Technologies, Otis Elevator Company, and Carrier. While the United Technologies name continued, the newly created company (UTC) was an entirely new entity from the parent (UTX). 

American Express

An example of an equity carve-out transaction is American Express in 1987 when it sold 39% of Shearson Lemon.


 

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