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Demergers: how to unlock value out of your business during a recession

Recessions and tough economic conditions are a real challenge for a business at any stage in its development or life. Often, they bring into sharp focus the elements of a business that are performing well and those which are a drag on the viability and value of the business as a whole.

In these circumstances, it may well be worth you considering a demerger.

Key elements of a demerger

In a demerger, a company splits off one or more divisions into separate subsidiary companies. These new companies can be managed and operated independently or can be sold.

There are several reasons why you might consider a demerger. In tough financial times these include:

  • Being able to realise the value of your underlying businesses. The share price of a group or company often does not reflect the full value of the underlying businesses
  • Dividing out different businesses within the company that do not share a common strategy, market sector or the same or similar potential growth, risk profiles, funding or management needs
  • Spinning off a business, which places a financial burden on the other business or businesses or the company as a whole;
  • Facilitating the exit of a founder or break up of the founders’ relationship

Our in depth article takes a deep dive into demergers, how they are structured and what you can expect.

Advantages of a demerger for your company

Potential tax benefits

There may be capital gains tax relief for both shareholders and the company. Demergers can be a tax efficient method of redeeming shares. However, detailed tax advice should be sought, as this is also an area of potential disadvantage.

Improved strategic focus

Separation of divisions assists you in improving the strategic and management focus of each division, removing hierarchical or complex decision-making and streamlining operations and costs. This particularly applies where you service diverse market sectors and there is more of a down turn in one market sector than another. This separation also allows you to sell any non-core and under performing businesses/assets.

Cost savings and improved profitability

Separation of divisions also allows you to realise potential cost savings and therefore enhance profitability. It also allows teams greater control over their own performance by making them accountable for their own results, generating their own profits and raising their own funding.

Raises cash

A demerger can give you the option of raising funds by selling some of the new subsidiary’s shares via IPO, whilst retaining control. This gives you a welcome cash injection for strategic investment and/or prevents any potential hostile takeover.

A demerger also allows you to sell a division outright.

Advantages of of demerger for shareholders

Enhanced shareholder value

It’s possible to create significant shareholder value through a demerger. If a business would perform better as two companies rather than one, then the aggregate value of the two new companies (and hence the value of the shares) will usually be more than the value of the original single company.

Furthermore, even where share price growth is not seen in the short term, long-term growth is almost always realised, due to the fact that the businesses are more strategically focussed and streamlined.

Increased transparency 

Demerged businesses allow for more transparency for both you and any of your investors, as visibility over operations and cash flow of the demerged business is increased. This allows both you and your investors to make better decisions. 

Disadvantages of a demerger

Demergers can be costly in terms of expert legal, tax and accounting advice. Demergers must be structured carefully to avoid liability to tax.

There may be economies of scale inherent in the company that are reduced by splitting out into separate businesses. The cost of loans and production can increase, and suppliers may be less willing to trade on favourable terms with a new and smaller company. This may cause a reduction in profitability in the short term.

If you feel that elements of your business would benefit from being run independently, then please contact our corporate solicitors who can give you further details on what a demerger would mean for you.

About our expert

Matthew Shakesheff

Matthew Shakesheff

Corporate Partner
Matthew joined Harper James as a corporate partner in May 2021. He has extensive experience of corporate law and corporate finance matters including: mergers and acquisitions, management buy-outs and buy-ins, private equity and venture capital investments, restructuring, refinancing, shareholder and joint venture agreements and commercial contracts. Matthew has also advised a number of high-profile banks on the corporate aspects of their client’s acquisitions and corporate lending.  

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