Is this the end of European conglomerates?

The end may be in sight for European conglomerates. Activist investor Christer Gardell of Cevian Capital predicts a growing trend of “demergers” in the next five to seven years, due in large part to an increasing number of European conglomerates engaging in in spin-off transactions, or “spin-offs.”

Generally, a spin-off refers to a transaction in which a parent company sells or distributes new shares of one of its business units, after which the business unit then becomes a new legally distinct and independent company. The use of spin-offs by conglomerates to “demerge” may suggest a recognition that the path forward requires an unbundling of operations, rather than consolidation.

The growing list of spin-offs in Europe

European conglomerates have been at the centre of spin-off rumours for some time. Recent behaviour suggests that such transactions are rising in popularity. Recent examples include:

  • Shire, an Irish pharmaceutical company, has separated its operations to create two distinct businesses, specializing in neuroscience and rare diseases, respectively;
  • AP Moller-Maersk, a Danish conglomerate, has spun off its oil business in order to concentrate on its container shipping business, earning $7.5 billion in the sale;
  • German utility companies E.ON and RWE each have sold off parts of their portfolios;
  • Honeywell International has announced a spinoff of its transportation systems business and homes product portfolios, both of which will be two publicly traded companies.

The increase in spin-off activity has led to more rumours. Industry experts have predicted that Prudential Financial may spin-off certain business units following its merger with M&G. Similarly, Whitbread PLC is rumoured to be separating two of its business units, Costa Coffee and Premier Inn Brands, in the near future.

Why are conglomerates becoming less desirable in Europe?

As a business model, conglomerates are increasingly viewed as difficult to manage. The need to effectively allocate resources, coupled with increased focus on specialization, has placed tremendous pressure on management teams to devise strategies for maximizing returns.

In announcing its spin-off, Honeywell’s CEO Darius Adamczyk stated that the proceeds of the spin-off would help the conglomerate repurchase shares, repay its debts and potentially create opportunities for future acquisitions. In other words, by spinning out portions of its business, a conglomerate can theoretically open up opportunities more in line with its core business.

The growing number of European conglomerates using spin-offs to reduce their portfolios suggests that this may be a viable strategy going forward. However, it is unclear if this is a phenomenon specific to the European market. Only time will tell whether conglomerates in other regions of the world will follow suit.

The author would like to thank Monica Wong, Articling Student, for her assistance in preparing this legal update.

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