Mergermarket, in association with RR Donnelley, has recently released the March edition of its Venue Market Spotlight (VMS) publication, presenting an overview of a study conducted on market participants’ expectations for corporate breakups in the near term. Corporate breakups or demergers, usually carried out in Canada by means of a statutory plan of arrangement or a similar reorganization transaction, are a way for a corporation to separate distinct self-sufficient lines of business from one another with a view to unlocking value and creating strategic focus, or a means to separate a specific asset from the corporation where such asset is underperforming or no longer represents a strategically valuable investment for the corporation as a whole.
According to the VMS study, most respondents expect the volume of corporate breakup transactions to increase over the next 12 months. VMS reports that the majority of the responders to the survey expect that the volume of breakups will be the highest in the Technology, Media and Telecommunications sector, followed closely by the Energy sector; that most of these transactions are expected to occur in the upper segment of the market with values in the over US$5 billion range; and that geographically, breakups will occur predominantly in European and North American markets.
As the VMS article explains, the Technology, Media and Telecommunications sector is the favoured area for corporate breakups as a result of the market’s changing demands, while the Energy sector is primed for restructuring activity as a consequence of the depressed oil prices. The reason the upmarket segment is seen as most favourable for these transactions is the fact that corporations of a significant scale will often have difficulty optimizing the performance of non-core units. In fact, the respondents to the VMS survey cited “focusing on core competencies” as the leading reason corporations will consider undertaking breakup transactions in the next 12 months.
VMS notes that corporate breakups are not without risks. Cited by most respondents to the survey as the most significant risk to undertaking a demerger was the potential loss of synergies present within the larger operating entity prior to a split. Other challenges and risks to corporate separations cited by the study were diminished market value, loss of financial backing, loss of diversification, and loss of economies of scale, among others.
The study does not directly speak to market conditions in Canada. It is difficult to predict whether the expectations of the study will be met north of the American border, given that Canadian market conditions are not identical to those in the United States. Of specific interest is the question whether, given the size of western Canada’s oil sector, the volume of spin-outs and separations will increase in the oil patch in the next year, or whether increased consolidation will be the outcome of the current stage of the commodities cycle.