The recent success of business break-ups has deal makers predicting that more restructurings aimed at boosting a company’s value will play out this year, helping to maintain a record-setting pace of mergers and acquisition activity.
In 2021, companies in a variety of sectors – including retailer George Weston Ltd. WNGPF, industrial conglomerate General Electric Co. GE-N and H&R Real Estate Investment Trust – focused their operations by spinning out or selling divisions.
Positive investor reaction to these moves – Weston stock price rose 42 per cent over the past 12 months as the Loblaws Inc. parent sold its baking and Selfridges department store division – has law firm Torys LLP predicting more companies will restructure. In a report on the outlook for M&A in 2022, Torys said investors should expect to see “more businesses undertaking spinoff transactions and divestitures in 2022 as a way to return value to shareholders and refocus their strategic direction.”
Restructurings will be driven by both boards and executive teams that are reviewing operations and external forces such as activist investors, said Torys partner John Emanoilidis, one of the report’s three authors. In an interview, he said: “One rationale for pursuing these transactions is to allow management to sharpen the business focus.”
H&R REIT spun out its shopping malls to concentrate on apartment buildings and industrial properties, a restructuring that was tax-free for unit holders. Venerable GE, a stock market laggard for two decades, is splitting into three public companies, specialized in aviation, health care and energy.
Canadian companies were involved in a record US$350-billion of M&A deals last year
Any Canadian public company with distinct business units is a potential candidate for this type of transaction, said Mr. Emanoilidis. He said that one common starting point for boards is the concept of a restructuring that separates high- and slow-growth businesses, “with the expectation that they will each benefit from more focused management and investor interest as a stand-alone company.”
Institutional investors, including private-equity funds and pension plans, have supported spin outs as either buyers of business units or investors in newly minted public companies. When H&R REIT spun out 27 enclosed shopping malls under the brand name Primaris REIT, the Healthcare of Ontario Pension Plan contributed eight properties valued at approximately $800-million, including debt, in return for a stake in the business.
Primaris REIT began trading last week on the Toronto Stock Exchange and its share price is up by 14 per cent. The company has a $1.4-billion market capitalization. When it announced its restructuring last year, H&R REIT said it also plans to sell an office property portfolio worth $2.3-billion and additional retail properties anchored by grocery stores, which it valued at $600-million.
Last year, the value of M&A deals in North America in 2021 hit a record US$2.5-trillion, according to S&P Global Market Intelligence. Takeover activity has only exceeded US$2-trillion on one previous occasion, in 2015.
North American companies did a record 23,720 transactions, topping the previous high of 22,782 that was also set in 2015, according to S&P. In a recent report, S&P analysts said: “Cash-rich North American companies are expected to extend their deluge of mergers and acquisitions in 2022.”
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Andrew Willis