Financing in Difficult Times: Spin-Off Transactions (Part 1 of 2)
It is not an easy time for mining companies looking to raise financing. With that stark reality in mind, our colleagues Gary Litwack, Roger Taplin and Sam Adkins recently presented on a variety of alternative financing solutions for mining companies. A copy of their presentation, delivered at the 2013 Prospectors & Developers Association of Canada convention, can be found here.
In assembling their list of alternative financing solutions, the focus was on companies with limited mining assets (and possibly as few as one). For companies with a number of mining assets, however, there are other avenues available to help stimulate investment – foremost among them the spin-off transaction.
Generally speaking, a spin-off occurs when a division of a company is separated into an independent business. It is a form of reorganization in which the parent company (the “Parent”) establishes a new entity (“Spinco”) and distributes shares in Spinco to the shareholders of the Parent on a pro rata basis. In the end, the Parent will have divested itself of Spinco, and the shareholders of the Parent will have retained their respective interests in both the Parent and Spinco.
These sorts of transactions have become increasingly popular. Last year alone, according to Dealogic, there were 85 spin-offs worldwide worth a total of $109 billion.
Canadian mining companies that are interested in pursuing this method of unlocking shareholder value want to know why they should use the spin-off transaction, how they should implement it, and what the attendant risks are. In our first of two posts on corporate spin-offs, we answer the first question.
Why Should I Use It?
Allows Parent to Focus on “Core” Business, Improving Corporate Accountability and Efficiency. First and foremost, spin-offs improve management focus by allowing a company to optimize its business lines or focus on particular “core” assets. For example, Petrobank Energy and Resources Ltd., in its recent spin-off of their 57 per cent interest in subsidiary PetroBakken Energy ltd., was motivated by the “long-held corporate goal of enhancing shareholder value by creating strong, independent and focused companies.” Over time, spin-offs have the effect of reducing agency costs and allowing for a better alignment of managerial and shareholder interests.
“Liberates” the Market Value of Spinco and Enables Spinco to Access Capital Markets Directly. The separation of non-core assets into Spinco has the secondary effect of improving the identification and valuation of Spinco’s assets. In turn, Spinco may become more attractive to investors. In Canada, the mining and mineral resource sectors have used spin-off transactions for this purpose. Spun out divisions have the ability to access capital markets directly, allowing Spinco to raise more money than would be the case as a division within another company.
Allows for the Separation of Asset Bases with Different Risk Profiles. A spin-off may also enable the Parent or Spinco to separate company asset bases that carry different risk profiles. Petrobank Energy and Resources Ltd.’s spin-off of Petrominerales Ltd. in May 2008, for example, was motivated by a desire to isolate the company’s heavy oil explorations in Albania from its shale gas operations in North America. In announcing the spin-off, Petrobank Energy Chairman Bob Cross acknowledged that “the two asset bases have different risk profiles and typically appeal to different types of investors, both geographically and sectorally.” A spin-off may likewise be used to group asset bases in similar development stages (or according to any other relevant metric).
Stay tuned for our next post, in which we outline three of the most common methods used to implement the corporate spin-off, as well as some of the expected risks.
alternative financing asset bases core assets financing parent company PDAC PetroBakken Energy Petrobank Energy and Resources Prospectors & Developers Association of Canada risk spin-off