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5 ways to make a demerger a success
There’s been a recent surge in company spin-offs and demergers in the Australian market - what does it take to make a demerger successful? Taxand Australia gives 5 key lessons on how to navigate through a demerger.
1. Choose the right entity to demerge
Consider the balance sheet needs for each business, the relative size of each entity and certain tax considerations. Dividend policies for each company will be relevant - the demerged entity will generally not have any franking credits because these usually remain with the parent company. The need for third party approvals or consents will also depend on which entity is demerged.
2. Give the new business a good start
Don't use the transaction as just a way to remove low-growth assets from the parent company’s business portfolio. At some point in the process the entity to be demerged should usually obtain its own independent advice.
3. Remain civil
The new entity may be part of group arrangements when it comes to tax, financing and purchasing and procurement. For some issues it can be difficult or costly to cut ties immediately, so transitional services arrangements and post-demerger committees with representatives from both companies can help smooth the transition to the new world for both parties.
4. Avoid tax traps
Critical to any demerger is determining whether the transaction would qualify for income tax relief. A demerger that does not qualify for relief will deliver far less value. Section 45B of Income Tax Assessment Act 1936 is an integrity measure to ensure that only “genuine” demergers receive tax relief. The focus is on purpose – the tax benefit of demerger must be merely incidental to the commercial objectives, rather than an end in itself.
5. Be prepared for a take over
Parent companies and demerged entities are both particularly susceptible to takeover bids, given a narrower business focus and smaller size may appeal to a bidder. Bidders will also benefit from significant disclosure in the explanatory booklet for the demerger, thereby allowing them to conduct detailed public due diligence ahead of any approach.
Quality tax advice, globally
Demergers can open up better growth prospects for companies as well as giving investors greater choice. The evidence indicates that the vast majority of company break ups are well-justified. Demergers generally result in a lift in corporate performance and higher returns for shareholders.