The urge to demerge

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When companies face periods where natural growth is difficult to come by, they generally focus on other ways and means of improving business performance and hence returns for shareholders.

This usually comes from a focus on cutting costs or selling off non-core assets as we’ve seen our major miners announce recently. Other may consider buying growth by making acquisitions, but that is a higher risk strategy, with the actual benefits often being much less than the trumpeted benefits.

Another less-risky move is to consider a de-merger, something several listed companies are considering presently.

News Corporation (NWS.AX) is slitting its publishing arm from its entertainment business, and to entice shareholders into the ‘old-media’ assets, is gifting the new News Corp with US$2.6 billion in cash and no debt. The entertainment group will be rebranded Fox Group, and contain assets such as movie studios, broadcasting and the Fox news channel.

The new News Corp will contain the group’s newspapers as well as assets like the Wall Street Journal and 50% of Foxtel.

Another company looking to take the demerger path is UGL Limited (UGL.AX). While it’s not a certainty, UGL is looking to hive-off of its property business, DTZ, from its core business of engineering, operations and maintenance services. DTZ now employs 47,000 people in 52 countries and generates around $2 billion revenues, while UGL’s core division employs around 8,000 and has revenues of over $2.5 billion. Investors certainly like the news, with the share price jumping 12% on the day of the announcement.

Going on past history, demergers can certainly add value for shareholders. It may be hard to believe that Origin Energy (ORG.AX) was once part of Boral Limited (BLD.AX). Origin’s market cap is now more than $13.6 billion, compared to Boral’s $3.7 billion. Both ‘protection solutions’ maker Ansell Limited (ANN.AX) and clothing business Pacific Brands (PBG.AX) were once part of the same company, Pacific Dunlop, and it could be argued both are doing much better going it alone.

Foolish takeaway

With Europe still mired in debt issues and growth in the US struggling, we are likely to see more demergers announced or at least considered, as companies look for ways of enhancing shareholder returns.

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More reading

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool writer/analyst Mike King owns shares in Origin Energy.

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