CRITERION: Demergers bolster shareholder value – but only over time and not every time

This week’s Webjet demerger highlights the pros and cons of such corporate bifurcations
KPMG says 19 out of 29 demergers since 2000 have outperformed the broader market
Over a two year period, the average gain has been 32 per cent but there have been disasters as well

This week’s demerger of Webjet’s mature flight booking business from its go-go hotel portal raises the question of whether such bifurcations increase shareholder value for investors in both – or either – entities.

The thinking is that both sides of the business become nimbler and more focused – attributes which outweigh the added costs such as an additional board and compliance infrastructure.

At the time of writing, the combined value of Webjet Group (WJL) and Webjet Travel Group (WEB) was 2% above that of the old Webjet in a relatively flat market – so investors are marginally ahead.

Assessing the success of a demerger is tricky, mainly because no-one knows how the company would have performed as an ongoing combined entity.

Other factors such as the broader market’s movement and industry-specific developments also come into play.

Having said that, KPMG has a heroic stab at quantifying the performance of mergers in its independent expert report on the Webjet demerger.

The short answer is that they are worthwhile, but with more caveats than a US investment bank disclaimer – often longer than the note itself – and with the benefits emerging only over time.

The firm’s work starts with 28 major demergers since 2000. Resources stocks are excluded, given the vagaries of commodity prices and exploration performance.

The firm then compares the combined performance of the two demerged companies with that of the all-ordinaries index.

Over three months, only nine of the parent/demerged combos underperformed the market and this number fell to seven laggards over 12 months and two years.

The average outperformance was 8.8% over three months, 16.6 per cent after a year and 32.8 per cent over two years.

Bear in mind that this excludes the underperformers, which by year two hadn’t lagged all that much (the worst culprit being Toll Group and Asciano. which halved in value after parting ways in 2007).

The best two-year performer by far was the 2020 demerger of engineer Cardno Cardno (ASX:CDD) and its assurance testing unit Intega, which saw their combined valuation more than double.

Interestingly, Cardno/Intega was also the second worst three-month performer, down around 30 per cent after the CEO resigned and the company withdrew earnings guidance.

The worst performer over this short period was Abacus Group (ASX:ABG) and its Abacus Storage King (ASX:ASK) spin-off, hammered by around 60 per cent after splitting last year.

Coming back to the two-year measure, among the best performers were Home Consortium (ASX:HMC) and its HomeCo Daily Needs REIT (ASX:HDN) spin-off, Wesfarmers (ASX:WES) /Coles Group (ASX:COL), Amcor (ASX:AMC)/Orora (ASX:ORA), Amcor/Paperlinx and Origin Energy (ASX:ORG)/Boral (ASX:BLD).

On rationale for demergers is that investors can keep the part of the business they want and can discard the bit they don’t. KPMG puts the relative outperformance of the demerged arm at 20 per cent over two years and 14 per cent for the continuing entities.

There are glaring exceptions: while Amcor/Paperlinx fared well over the two years after demerging in 2000, Paperlinx eventually was a disaster and the company entered administration in 2015.

Another demerger rationale is that one or both parts of the company become more attractive to acquirers.

Given that six of the 28 companies resulted in at least one of the demerged entities being subject to a takeover within two years, this appears to be the case.

Examples of takeovers (not necessarily within two years) are Intega Group, United Malt (demerged from Graincorp), Dulux Group (Orora), Rinker (CSR (ASX:CSR) and Boral (Origin).

KPMG’s numbers also show that 18 of the 28 demergers outperformed the index on the day of the demerger announcement, albeit by only 4.4 per cent. On the day of the subsequent listing of the demerged entity, 20 outperformed by an average 3.7 per cent.

The message is that demergers do deliver value – but not all the time.

And memo to boards: don’t demerge for de sake of it.

This column does not constitute financial product advice. You should consider obtaining independent advice before making any financial decision