Introduction

With the numerous challenges that have been facing Nigeria; from Covid 19, inflation, increase in the exchange rate, debt problems, effects of the Russia-Ukraine war, increasing poverty and more. A lot of Nigerians would have been more agitated when they heard International Oil Companies (IOCs) who produce most of the oil Nigeria exports to generate a large chunk of its income have been selling off (divesting) some of their assets due to oil theft, pipeline vandalism, and concerns over the disruption of their operations by local communities.

Naturally, people would fear a potential reduction in revenue for the government, an inability of the government to service its debt, more exchange rate problems, and loss of jobs if this trend continues and IOCs continue to sell off their assets in Nigeria.

In this article, I intend to help you understand corporate restructuring, why it happens, and how the Nigerian government is trying to solve the issues making IOCs restructure their companies by divesting from Nigeria’s Oil and gas industry.

What is Corporate Restructuring?

First, let’s start with the opposite of corporate restructuring; mergers and acquisitions(M&A). To put it simply, this is when a company (A) decides to merge or acquire another company (B) to achieve more growth, synergy, or market share. This happens when the directors and shareholders of both companies believe that they would be able to perform better together than individually over the long term. In mathematical terms:

2 + 2 = 5……(i)

Corporate restructuring is the opposite of M&A. This happens when a company decides to sell off divisions or business units that no longer fit into the company’s long-term strategic plans. The business division being sold may be a previously acquired business, a subsidiary, or a business unit in the business.

Corporate restructuring can happen due to poor performance, lack of synergy between different business parts, and the parent company facing financial constraints (an example was when Ford sold a division of its business Hertz in 2005 to pay off debt and enhance product development in its core business).

Before corporate restructuring occurs, the directors and shareholders of the company often realize the company is better off selling or restructuring a division of its business into a new entity. In mathematical terms:

                                                            4 – 1 = 5……(ii)

Reasons for Corporate Restructuring

1. Poor strategic fit of business division:this happens when a business decides to sell off a business division that no longer strategically fits into its long-term plan. Regardless of whether the division is profitable. The proceeds from the sale are then used by the company to pursue its overall strategic goal.
2. Poor performance: a company might want to divest a business unit because it is not profitable, or it is diluting the overall performance of the business whilst consuming large resources.
3. Regulatory purposes: this happens when an industry regulator issues or changes regulation on the structure industry players must adopt. An example was when the CBN issued a guideline in 2011 forcing banks to give up their non-banking license or restructure into a holding company. The CBN did this to avoid the risk of banking services entangled with other financial services. 
4. Capital market factors: A business with diverse divisions or subsidiaries in the pharmaceutical and oil & gas industry might struggle to raise capital as investors might be interested in investing in just one division of the business, not a single entity combining both companies.
5. Cash flow needs: a company may decide to sell off even a well-performing business unit if it has urgent liabilities or obligations to settle and the unit is not essential to its corporate strategy.
6. Abandoning core business: A popular example of this is Greyhound, a bus business in 1987. The management of the business decided to leave its core business because they believed the industry had matured and presented little growth opportunities. They used the proceeds from the sales to grow new businesses they diversified into.

Forms of Corporate restructuring

Corporate restructuring happens in different forms, I would list some of the common forms below:

1. Divesture: this occurs when a business disposes of some of its assets by selling or exchanging its asset for marketable securities, cash, or a combination of both.
2. Equity carve-out: the private company sells an equity interest in its company usually through an IPO, thus establishing the subsidiary as a stand-alone company.
3. Spinoff: This is often also called spinout or starburst. It is the creation of a new independent company through the issue of new shares distributed to shareholders of the parent company pro-rata.  
4. Split-off: in this form of restructuring, new shares in a subsidiary are issued and shareholders must choose between holding shares in the parent company or exchanging it for shares in the new company at a premium.

Corporate Restructuring Process

No two corporate restructuring process is the same. However, they usually follow some key steps which are described below:

Step 1. Make a divesture decision: this happens after a company’s management has done a thorough financial analysis of various options with the help of financial advisors or investment bankers.

Step 2. Formulate a restructuring plan: this involves planning on various issues such as how assets would be disposed of, the relationship between the parents and subsidiary after the transaction has been completed, human resources issues and more. Expert lawyers, investment bankers, and management consultants might be needed at this stage.

Step 3. Sell the business: at this stage, the company and its investment banker look for potential buyers and negotiate with them.

Step 4. Get shareholder approval of the plan: depending on the jurisdiction the transaction is happening; a shareholders’ agreement might be needed. This is usually secured by the company’s management in a shareholders’ meeting.

Step 5. Register the shares: this stage is necessary when the issue of shares is required in the transaction.

Step 6. Close the deal: Once the steps above have been taken, the transaction can be consummated, and considerations exchanged.

Conclusion: Back to Nigeria and the divestments in the Oil and Gas Industry

Over the past few months, several IOCs have made announcements that they are selling off their oil assets. Total Energy for example announced in April it was selling a 10% stake in its Nigerian JV with NNPC, Shell, and ENI. This is equivalent to 13 onshore fields and 3 in shallow water producing oil of 20,000 barrels per day (BPD) and a 3,500km pipeline connecting 2 key crude export terminals between Bonny and Forcados.

With all of these happening, some might say the exiting of giant IOCs will create opportunities for indigenous oil and gas firms to acquire the assets IOCs are selling, grow and consolidate the industry. Truth be told, we have been seeing indigenous companies like Seplat and Ardova plc, carry out several acquisitions over the past few years. However, setbacks like the regulatory issues that prevented Seplat from acquiring Mobil Producing Nigeria Unlimited (MPNU), the underlying issues that made the IOCs leave their operations in local communities need to be addressed by the government.

Promising steps to curb some of the menaces have started to be taken. Recently, NNPC announced it is adopting Saudi Aramco’s model of using video surveillance to monitor its pipeline carrying crude oil from wells to flow stations in the Niger Delta.

Hopefully, all stakeholders will take the right steps necessary to solve the challenges over the coming weeks and months to improve investors’ confidence in the industry and ensure Nigeria can achieve its oil quota of 1.83 million BPD to OPEC.

Author: Habeeb Olusanya. Finance Analyst, Leonine Investment Services.