Demerger / Spin-Off – Mandatory Corporate Action
A spin-off / demerger is when a company decided to break away part of its business into a new entity. There are various reasons why a company may do this. Multinational corporations may want to set up new brands within other countries. Generally it is a branding decision, in that a company may decide that the parent brand is not suitable for marketing a new product. Sometimes demergers follow takeovers for this reason. For example, a telecoms giant may takeover a smaller shortwave radio company, but then spin off the company again so that it can continue to operate with its old brand in tact. Possibly the most famous example of this in recent years was the Mannesmann-Vodafone merger and the spin off of Orange.
A spin-off is a new organization or entity formed by a split from a larger one, such as a new subsidiary company spin off from its parent company. The shares are issued under a specific ratio. Resulting shares are received under a new ISIN code and company name, shareholders will get to keep their existing ordinary shares and will receive new shares in the newly formed company.
Demerger is the converse of a merger or acquisition. It describes a form of restructure in which shareholders in the parent company gain direct ownership in a subsidiary (the demerged entity). Underlying ownership of the companies and/or trusts that formed part of the group does not change. The company or trust that ceases to own the entity is known as the demerging entity. If the parent company holds a majority stake in the demerged entity , the resulting company is referred to as the subsidiary.
As usual, if you hold share in a company and it announces a demerger, you should not be disadvantaged, as the resulting market value of the two individual stocks should equal the previous market value of the parent stock.