16 July 2014
Companies that divest divisions are creating significant shareholder value for their shareholders, making them a good bet for investors, research from Brewin Dolphin has shown.
The wealth manager suggests that, instead of focussing on those companies that hit the headlines because of M&A activity or IPOs, they should seek out companies that are about to divest part of their existing assets.
Despite huge public interest, just over half of all UK IPOs over the last twelve months were down one month after trading, but companies that have divested divisions have outperformed their peers. The most high profile example is Vodafone’s $130bn sale of its stake in Verizon Wireless and huge return of value to shareholders. Also in Telecoms, Cable and Wireless Communications benefitted from the divestment of Monaco and Islands (M&I) and Macau divisions over the last two years.
Another recent example is RSA which has benefitted from the sale of several small, non-core divisions for greater than book value (including Polish/Baltic operations, its Canadian broker Noraxisand its Asian operations).Also in the financials space, Phoenix (the closed ended life insurer) sold Ignis Asset Management to Standard Life (the life insurer) – both Phoenix and Standard Life shares outperformed when the deal was announced.
Brewin experts have identified the companies that they believe will be the next to divest assets.“Reckitt Benckiser (the household and personal care company) has been trying to sell its pharma business for some time – a successful divestment (such as an IPO) could help Reckitt Benckiser shares,” said Nik Stanojevic, equity analyst.
He also tipped Smiths group (an engineering company), that could benefit from the sale of its medical division.BG Group could benefit from the further sell down of its stake in QCLNG (the Australian liquid natural gas business) and the sale a stake in its Brazilian assets. Vodafone could outperform if it is able to IPO its Indian business, which is a possibility in 2015.
“Investors can get very excited about IPOs and M&A activity but not all generate positive returns for shareholders,” said Stanojevic.“With M&A and IPO activity both up substantially over the last year, our investors are asking which generates the highest returns.”
IPOs that initially do well tend to be priced at a discount to fair value, and one important factor driving longer term performance is whether the incentives of the sponsoring company are aligned with investors. It is well known that M&A tends to benefit the target more than the buyer – the target gets a premium on day one, but the buyer bears all the risk of executing its strategy and extracting synergies, which do not always succeed.
Both strategies present problems for private investors. With respect to IPOs, choosing those which are attractive and then getting a reasonable (or any) allocation is challenging. With respect to M&A, identifying the potential targets is,ofcourse,very difficult.
However, investors can seek a third way. In the recent past some companies have created shareholder value by divesting divisions. These companies tend to be easier to identify (management teams announce their intentions) and controversies such as price, regulatory issues and antitrust are easily identifiable.
ENDS
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