Spinoffs an option to unlock value
The relatively successful debut of Brambles' document management business and Redcape's pub chain on the Australian Securities Exchange will give ammunition to company boards to push the go button on demergers and asset sales to unlock shareholder value during a period of flat income growth.
The $1.4 billion Brambles spinoff of its Recall business made its debut on the ASX at $4.21 and closed at a healthy $4.50 on a day when the overall market was flat partly due to the shock downgrade by QBE, which saw its shares plummet 30 per cent in two days.
Redcape Hotel Group shareholders also couldn't complain at the performance of its Hotel Property Investments pubs chain, which was oversubscribed five times at $2.10 making it a roaring success for the seller and to a lesser extent the buyer who bought the spinoff for its 7.5 per cent long-term yield. On its first day of trading, the stock closed at $2.07, which was more a reflection that the total REIT market and equity markets are down since the bookbuild.
Amcor's Australasia and Packaging Distribution (AAPD) is the next demerger to hit the bourse next week. Its debut is expected to be a watershed for other companies to start looking at the merits of asset sales and demergers.
Releasing AAPD from the Amcor empire not only unlocks value for Amcor shareholders but gives the smaller entity a chance to focus on growth. The reality is Amcor has performed well on the ASX but has historically traded at a discount to its global consumer staple peers.
Other companies that have already flagged a demerger or reshuffling of assets include UGL's property services business DTZ and the two listed Westfield property trusts. The trend is expected to put the spotlight on Wesfarmers, which has a number of divisions that could be sold or listed as separate entities.
In the case of Qantas, its boss, Alan Joyce, has flagged a complete review of its structure, indicating that capital expenditure and asset ownership would be reviewed, which could include the sale of non-core assets including its stake in Helloworld, Sydney Terminal, the freight business and a partial float of its frequent-flyer business or a sell-down of its domestic business.
Deutsche Bank estimates the Qantas loyalty business is valued at $2.8 billion based on the pricing of two other listed frequent-flyer programs that are comparable to Qantas Loyalty, Multiplus and Smiles, trading at 10.3 times and 19.6 times enterprise value to
pre-tax earnings respectively.
Qantas shares hit a record low on Tuesday, putting it on a market capitalisation of $2.1 billion as investors continued to react to last week's news that it would lose up to $300 million in the half year and its credit rating had been downgraded to junk bond status.
In Qantas' case, there is an argument that the parts are worth more than the whole. Under Joyce, the airline mothballed a plan to spin out the frequent-flyer business during the global financial crisis. The original plan was to keep a controlling stake and bring in a partner such as Groupe Aeroplan, spun out of Air Canada in 2002 and listed on the Toronto Stock Exchange in 2005 at a market capitalisation of $C2 billion. This year it changed its name to Aimia and is now valued at $C3.3 billion while Air Canada is valued at $C2.1 billion.
In the past few months a number of brokers have issued reports examining demergers including Macquarie Equities, which studied 29 spinoffs since 1995 and found the "child entity" can underperform by up to 9 per cent in the six months following a demerger, but 12 months after the split it typically outperforms.
Merrill Lynch analysed 19 demergers since 2000 and found that, on average, the spinoff does not outperform the market for 30 days from listing, and there is modest outperformance for 90 days. "This could be because some investors do not want to hold the spinoff longer-term (for mandate or other reasons) and hence they sell soon after the demerger." It says a year after the float, the spinoff outperforms the market on average by 15 per cent.
With 2014 expected to be another year of relatively flat earnings growth and sluggish activity, pressure will be on companies to pull a rabbit out of a hat to justify the high price to earnings ratios. It means asset sales, demergers and capital returns will keep bankers busy.