Not my words, but this explains it better than I could!
What is a demerger?A demerger or a spin-off is a corporate action in which a business unit or a part of a large organisation or a conglomerate, is carved out and listed as a separate company on disallowed.In a demerger, the parent company transfers a proportional number of shares in the spun-off entity to its shareholders. Usually, the parent company continues to hold a substantial shareholding position in the spun-off company.What does a demerger mean for shareholders?When a spin-off happens, shareholders in the original entity automatically acquire shares in the newly created business. The original entity will also adjust the ‘cost base’ of their shares, and also set the cost base for the shares issued in the demerged entity.Many analysts have looked at the performance of demerger announcements and their impact on shareholders’ equity. The general belief among many analysts and observers is that a spin-off is usually beneficial to shareholders (see chart below) of the parent as well as the spun-off companies.Demerger example: Fairfax (ASX:FXJ) - Domain (ASX
HG)While ultimately the market decides the value of shares for each demerged or spin-off company, for tax reasons, a company demerger or spin-off will follow a structure similar to below.Let’s work through a real example of the Domain group’s demerger from Fairfax media group.The salient features of the demerger from the Fairfax shareholders website were:Fairfax media(FXJ) would hold 60% share in the new Domain group(DHG)For every 10 shares an investor in Fairfax holds, s/he would get 1 share of Domain group(DHG)The tax cost base of FXJ shares should be reduced by $0.233 per shareThe tax cost base per DHG share can be calculated by taking your Capital Reduction Entitlement ($0.233 times the number of FXJ Shares held on Scheme Record Date)and dividing it by the number of DHG shares received. Subject to rounding, the DHG shares should have a tax cost base of approximately $2.33 per shareThe Scheme Record Date is 7:00 pm on 17 November 2017If an investor owned 10,000 shares in FXJ on 17 November 2017, s/he would be issued 1,000 shares in DHG. Let’s assume that s/he had bought these 10,000 shares on 1 November 2016 at a price of $0.825, therefore a investment cost base of $8,250.On 22 November 2017, s/he would own both 10,000 shares in Fairfax media (FXJ) and 1,000 shares in Domain (DHG). The cost base of the 1,000 DHG shares would be $2.33 x 1000 = $2,330.The cost base of the FXJ shares would be adjusted by $0.233 x 10,000 = $2,320 from the original cost base of $8,250 through a return of capital corporate action. This means that the new adjusted cost base of the FXJ shares would be 8,250 - 2,330 = $5,920.The below table shows the performance of the Fairfax and Domain holdings a year after the demerger or spin-off.
(20min delay)
