Post demerger, parent beats child in the race for returns
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.
Frequently Asked Questions about this Article…
Macquarie Private Wealth analysed 29 spin-offs since 1995 and found performance varies a lot: the report measured cumulative excess returns six months before and a year after the demerger date and concluded parent and child stocks often move differently after a split.
According to the Macquarie report, child stocks typically underperform the market in the first few weeks and can underperform by up to about 9% in the six months following a demerger, with typical outperformance only emerging around 12 months after the split.
The study found parent entities tend to be flat leading into a demerger but often perform better after the split; overall the parent company generally performs around the time of the demerger rather than showing a large immediate move.
The report noted that if a child entity records turnover of more than 5% on its first trading day after a demerger, it will usually outperform in the two months following the split.
When UGL announced it might split its property and engineering divisions, the company’s share price jumped about 12% in a single day, illustrating how markets can react quickly to demerger news.
Analysts gave differing valuations: Moelis & Co estimated the property services business at about $1.2 billion, while JPMorgan suggested it could be worth closer to $867 million, highlighting how demerger valuations can vary.
The article cites several recent and high-profile demergers: BlueScope Steel from BHP Billiton, PaperlinX from Amcor, Alumina Limited from WMC, and Treasury Wine Estates from Foster’s Group.
Based on the article, investors should consider historical performance patterns (short-term child underperformance vs longer-term rebound), first-day turnover for the spun-off stock, analyst valuation differences, and practical issues raised by analysts such as tax implications and which entity will carry the bulk of the group’s debt.
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