2011 Report on M&A: Welcome to Splitsville

M&A? For some, 2011 was the year of the breakup. Here’s how Toromont caught the wave

Interview by Paul Brent

What do Tyco, McGraw-Hill, Hewlett-Packard, Abbott Laboratories, Kraft Foods, ConocoPhillips and Sara Lee all have in common? In 2011, all of those giant U.S. corporations discussed or executed company-rending spinoffs, splits or demergers. All the action wasn’t south of the border either. On June 3, industrial equipment supplier Toromont Industries Ltd. (TSX:TIH) announced it had completed the spinoff of its natural gas compression business into a separate public entity, called Enerflex Ltd. (TSX:EFX). To learn more about the rationale behind the move and the process involved, Listed spoke to Toromont chief financial officer Paul Jewer.

Listed When did the idea of spinning off the Enerflex division first arise?

Paul Jewer The initiative to spin off Enerflex was a topic for discussion at our fall 2010 strategic planning retreat with the Toromont board. At that time, we assessed the progress of integrating the legacy Enerflex Income Fund into our legacy Toromont Energy Systems Inc. business, since renamed Enerflex Ltd., and were generally pleased with the advanced stage of this process. With this assessment, we turned our attention to how else we might create shareholder value including through a separation of the Enerflex business. This might [have included] a complete or partial IPO of the business, another form of sale or a distribution to our shareholders. We chose to distribute the business to our shareholders through a butterfly transaction as it continued to provide shareholders with the long-term growth opportunity evident in the natural gas compression space, in a tax-effective way.

Listed What had to happen from initial idea to ensuring that it would succeed?

Paul Jewer The first key step was to develop our plan. Clearly, a spinoff of this nature is a complex transaction and we needed to identify all that needed to be accomplished. Our legal advisers at Davies, Ward, Phillips and Vineberg and financial advisers at TD Securities were key to mapping out these requirements.

The key milestones that needed to be accomplished included gaining shareholder support, establishing the successor boards of directors, the submissions to and dialogue with the Canada Revenue Agency in support of receiving a satisfactory tax ruling, preparing the various regulatory filings, negotiating the financing for each of the successor companies, separating out the various contractual obligations and arrangements, together with a myriad of other tasks.

Listed How challenging was the implementation of the spinoff plan?

Paul Jewer It was a lot of work, and a great learning experience, however I would not say that it was overly challenging. Once the plan was established, the core elements fell into place pretty much as expected.

Listed What are the anticipated benefits to Toromont? Enerflex?

Paul Jewer Before the spinoff, the Toromont story was complicated due to its split personality. Roughly half of the business was in the equipment space, while the other half was in the energy space. That had a number of implications including understandability of the growth prospects, analyst coverage, and strategic and management focus. Separating the businesses addressed these points while also providing the successor companies with separate public market currencies and the ability to pursue growth opportunities that may not have been available to the consolidated enterprise while also providing shareholders with the capability to better manage their portfolios.

Listed What was the board involvement during the process?

Paul Jewer The board was very heavily involved through every step in the process. We could not have accomplished the transaction without their direct guidance and support.

Listed What recommendations would you give other boards contemplating such a step?

Paul Jewer Be clear with what you want to achieve with the transaction and stick to your convictions, communicate with your key shareholders to ensure they are onside and select advisers who’ve been through a similar transaction before. It’s a lot easier if you don’t have to reinvent the wheel at each step.

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