Of the many ways a corporation can divest its assets or shares to create value, asset sales, equity carve outs and spinoffs are some of the most common methods. In an asset sale, a business sells its assets in exchange for cash proceeds or other forms of consideration. An equity carve out is where a company separates out assets into a separate company (usually a subsidiary) and issues a minority interest in the subsidiary to the market through an IPO. A spinoff transaction is where assets are spun off into a new independent business and existing shareholders receive shares of the new company in proportion to their original shareholding.
In 2015, the market saw a significant increase in divestiture activities. Globally, the value of corporate asset sales increased from US$403.9bn in 2014 to US$523.6bn in 2015, representing a 30% year-to-year increase. A recent Mergermarket and RR Donnelley report predicts that this trend will continue into 2016. Out of the practitioners surveyed in the report, 80% of the respondents believe that the level of asset selling activity will increase in 2016, while 20% believe that the activity level will remain the same as 2015. Interestingly, not a single respondent expects the divestiture activity level to fall this year.
The report also provides insight on deal-making drivers and barriers in 2016. Some of the major drivers to spinoff, carve out and asset sale activities include:
- Increased debt level and risk of default: U.S. corporate debt has risen by 59% since 2010, and some respondents think the increased risk of default will force companies to restructure and sell unprofitable assets.
- Falling oil price: 56% of the respondents believe that the energy, mining, and utilities sector will have more divestiture activities than other industries. Record low oil and commodity prices are pressuring companies to divest non-core assets in order to focus their attention on core operations and stay afloat amid the commodity trough.
- Regulatory pressure: About a quarter of the respondents expect to see asset sales in the financial services industry due to regulatory pressures. Notably, the financial services industry has experienced the highest number of asset sales in 2015 among major players, such as GE Capital, HSBC and Deutsche Bank, amounting to a total deal value of US$4bn. Respondents commented that companies will continue to carve out certain assets in 2016 in order to minimize the risk of regulation non-compliance or fraud.
- Stalling Chinese market: 44% of the respondents foresee the Asia-Pacific region having the most asset sales in 2016 given the slowing Chinese economy will likely cause companies to divest in Asia. In addition, companies may also find it challenging to raise money through equity in the Chinese market given the recent market crash; they may be more likely to sell assets in order to raise capital.
- Shareholder activism: 20% of the respondents consider shareholder activism to be a main driver of asset sales in 2016. The level of shareholder activism is expected to be high in the energy and financial sectors given their falling profit margin.
- High private equity activity: 60% of the respondents predict that private equity companies will start to deploy their capital and become more active buyers in 2016 given the attractive valuation of certain corporate assets.
The report also explores barriers to deal activity. More than two-thirds of the respondents forecast low valuation as a major obstacle to asset sales in 2016; others think challenges such as elimination of synergies, diminishing market value from sellers and, the loss of competitive advantages will stand in the way of divestiture activities in 2016.
The author would like to thank Lucy Liu, articling student, for her assistance in preparing this legal update.
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