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ACCA Strategic Professional · Advanced Financial Management · Business re-organisation

Orion plc has two divisions. Division A has a value of $90m and Division B has a value of $60m, giving a combined value of $150m under common ownership. The market applies a conglomerate discount so that Orion's shares are valued at $120m in total, and Orion has no debt. If Orion spins off B and the market values the two separate entities at the divisional values given, what is the total gain to Orion's shareholders from the demerger?

Shareholders gain $30m. Post-demerger the two businesses are worth $90m plus $60m, which is $150m, compared with the $120m market value of Orion before the split, so removing the conglomerate discount creates the gain.

  1. A$30mCorrect
  2. B$60m
  3. C$90m
  4. D$0m

Explanation

After the demerger, shareholders hold A worth $90m and B worth $60m, totalling $150m. Before it, they held shares valued at $120m. The gain is 150 - 120 = $30m. Using only one division's value or ignoring the discount gives wrong figures.

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