Post demerger, parent beats child in the race for returns
The performance of stocks following demergers tends to vary considerably for both the parent and so-called child entity that is spun off.
Following engineering company UGL's announcement last week that it might split its property and engineering divisions - which resulted in the share price jumping 12 per cent in a day - Macquarie Private Wealth has done a study on demergers.
Macquarie analysts used the UGL announcement - and the coming split of media group News Corporation - to measure how stocks performed after demergers.
They revisited the bank's historical data, which includes 29 spin-offs since 1995, and found the performance of parent and child companies tended to vary "quite consistently" after a demerger.
The report measured the cumulative excess returns six months before and a year after the demerger date for both the parent and child. It found the child stock typically underperformed the market for the first few weeks following a spin-off, and this underperformance continued for at least six months.
"The child entity can underperform by up to 9 per cent in the six months following a demerger," the Macquarie Private Wealth report said. "It is not until 12 months after the split that the child entity typically outperforms."
However, the report also found that child entities having a turnover of more than 5 per cent on the first trading day after a demerger would usually "outperform" in the two months following a split.
When it came to parent entities, the Macquarie analysts said their performance was typically flat leading into a demerger but they performed better after the split.
"After a year, the child entities have typically rebounded to outperform the market ... [while] the parent company tends to perform around a demerger."
BlueScope Steel's spin-off from BHP Billiton is one among the high-profile demergers of recent years. Elsewhere, PaperlinX was carved out of Amcor, and Alumina Limited split from WMC before the bigger copper producer was acquired. More recently, Treasury Wine Estates was demerged from Foster's Group.
Analysts had mixed opinions about the UGL demerger when it was announced. Some raised concerns about the tax implications of the deal, and wondered which entity would carry the bulk of the group's debt.
Moelis & Co analyst Simon Fitzgerald valued the property services business at about $1.2 billion, but JPMorgan said it could be worth closer to $867 million.
News Corporation is planning to demerge in three months when it splits its entertainment and publishing activities into two separate businesses.