February 8, 2018 / 4:56 PM / in 6 months

U.S. corporate spinoffs to boost bank lending

NEW YORK (Reuters) - Bankers are gearing up to finance an expected wave of new spinoff deals as US companies such as General Electric and Honeywell International consider shedding businesses to streamline and enhance profitability after a busy January for mergers and acquisitions (M&A).

Eleven transactions over US$5bn each for a total of US$94bn last month represented the largest number of mega-mergers globally for any January on record, according to Thomson Reuters Deals Intelligence.

General Electric is considering breaking up or listing businesses separately, Honeywell has said it will spin off divisions into two independent publicly traded companies, and a number of large tie-ups may have to sell assets to receive favorable antitrust rulings.

This is expected to generate opportunities for bankers to arrange syndicated loans to finance the new stand alone companies, or asset sales to new strategic buyers.

“We will see more spinoffs driving M&A opportunities, because the age of conglomerates is over. It’s now the age of efficiency,” said Art de Pena, managing director and head of loan syndicate & distribution at MUFG.

“As we drive deeper into the economic cycle, most companies have wrung out profit, reduced headcount and expenses,” he said. “Their next step is to look at each of the business lines to see how they are contributing to the overall organization.”

Increasingly that push is being forced by activist investors, particularly in companies they perceive to be undervalued or less competitive that could be a better fit with other buyers.

The recent steep stock market sell-off, including Monday’s all-time largest single-day point slump in the Dow Jones Industrial Average, wiped out all of this year’s gains and will be closely watched for its staying power. Stocks have been mixed and much more contained the rest of this week.

Nonetheless, a growing US economy and newly lowered corporate tax rates this year still promise heavy M&A activity and related spinoffs, bankers and attorneys said.

“As companies look at reconfiguring their portfolio of businesses and believe that they can unlock value by separating a particular business, spinoffs provide an attractive alternative to a sale in creating shareholder value,” said George Casey, global head of mergers and acquisitions at Shearman & Sterling.

HIVING OFF

US syndicated lending for mergers and acquisitions reached US$537bn last year, the second-highest on record, according to Thomson Reuters LPC.

As companies grow by acquisition, or are pressured by activist holders, they may look to hive off some non-core businesses and reinvest the sale proceeds, a senior banker said.

“Whether they are non-strategic assets or whether regulators dictate for antitrust reasons, I think we’re going to see more M&A-driven spinoffs that will create opportunities with new standalone borrowers that banks will hopefully be able to take a crack at,” he said.

GE Chief Executive John Flannery in January said he was looking at a range of options for the most optimal structure, following news of a US$6.2bn after-tax charge for losses on reinsurance, a business it exited more than a decade ago. Reuters reported that US securities regulators are investigating the charge, among the conglomerate’s challenges as it struggles with deep declines in some units and looks to sell off US$20bn in assets.

US drugmaker Pfizer is expected to accept bids for its consumer health business that could be worth US$20bn in a sale.

Honeywell, facing activist hedge fund pressure to spin off its aerospace division, has said that it would spin off other units worth US$7.5bn in sales.

Other spinoff candidates also include Newell Brands, which said in late January that it would consider options for some assets, including Rubbermaid Commercial Products.

Among recent loan-funded deals, Brighthouse Financial’s separation last summer from MetLife Inc was supported by a US$2bn five-year revolver and US$600m term loan, according to a regulatory filing. Hewlett Packard Enterprise’s spinoff of most of its software business into Micro Focus International, for which a U$2.6bn term loan was issued, was completed in September, a filing said.

“Activists are agitating for some of the big multi-vertical conglomerates to clarify their strategy,” another senior banker said, adding “we think there’s going to be a fair amount of activity around spinoffs and divestitures.”

One lingering question is how much new debt financing companies will have to raise, or whether they will be able to access overseas cash stockpiles more cheaply under the new US tax system.

Banks with strong relationships to the parent companies are looking to be first in line to lend to the new businesses that will be created.

“We’re not seeing that yet but we’re expecting it, given the market has been extremely active and we’re at the top of equity valuations, which signals high M&A activity, especially spinoffs, as companies tend to sell off assets at the peak of the market,” a third banker said.

Reporting By Lynn Adler; Editing by Michelle Sierra and Tessa Walsh

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