Amcor's demerger a lucrative opportunity

Breaking up may be hard to do. But it usually provides more benefits to shareholders than an overpriced acquisition.

If history is any guide, Amcor’s plans to split itself in half should provide the goods for shareholders.

While the overwhelming majority of takeovers and acquisitions destroy value, the opposite is true of demergers.

Corporate takeovers usually are hatched when the stock market is running hot and money is easy to obtain. And all too often, human nature takes control. The ego and pride of those managing the predator often overtake logic and, with enormous fees riding on the outcome, advisors become agitators for the deal, regardless of the price.

Wesfarmers’ takeover of Coles, just as the global financial crisis was gathering steam, was a classic example. Despite all the froth now about the Coles recovery, the purchase and capital raising to fund the Coles deal heavily diluted Wesfarmers earnings per share.

Demergers on the other hand often are executed during periods such as this when there is minimal corporate action, forcing management to abandon plans for an overpriced sale. Sometimes, management simply want to rid themselves of a troublesome division. Occasionally, it is because there no longer is a natural fit between the two groups.

Origin Energy is now far bigger than its former parent Boral. CSR shareholders did fabulously well out of the Rinker demerger. More recently, Woolworths recently spun off a property division and Brambles is in the process of hiving off its Recall division.

Demergers often pay off for shareholders because a reinvigorated management with a clearer focus and less bureaucratic oversight can extract value and seize growth opportunities that previously were denied them. Capital allocation becomes more efficient.

Amcor’s decision to hive off its Australasian And Packaging Distribution business has come about because it no longer fits the narrowly defined market segments that Amcor’s Ken MacKenzie has identified for the company.

But it is no dog (see Cliona O'Dowd's Collected Wisdom). More than $1 billion has been invested in the business and it has undergone massive rationalisation in recent years, the fruits of which have yet to be realised.

Once again, this could well turn out to be a classic case of two companies delivering far more than one.

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