Four major demergers have been announced so far in 2013: the already completed demerger of News Corp (ASX: NWS) and Twenty-First Century Fox (ASX: FOX); the expected 2015 demerger of DTZ from UGL (ASX: UGL); Recall from Brambles (ASX: BXB) (late 2013); and Orora from Amcor (ASX: AMC) (December).
Orora is the name given to Amcor's Australasia and Packaging Distribution division and will start trading as a separate company on October 18 pending shareholder approval.
The demerger will split Amcor into its low and high growth components, with the theory being that separating the businesses will allow investors to realise the true value of the separated growth and income components. Orora will take the slower growing fibre, glass and beverage can packaging markets in Australia and New Zealand, as well as the North America and Australia packaging distribution arm. This will leave the new Amcor with the higher-growth flexible and rigid plastic packaging business for overseas markets.
But how will the demerger, or any demerger, benefit shareholders? Demergers allow investors to select the portion of the business that reflects their risk profile and desired returns. For example, yield investors may find value in Orora when they previously would not have been interested in Amcor.
In addition, two recent analyses concluded that the demerged business usually outperforms both the market and parent entity following a demerger. A UBS study found that over the 12 months following separation, the demerged company outperformed the market return by 10.7% and outperformed the parent entitty by 8.5% (22 demergers since 1997). Additionally, a CIMB Group study found that the demerged group's share price rose an average of 9.5% per annum following separation (the study looked at 17 demergers since 2002).
The outperformance could be for a number of reasons, however the most commonly supplied perspective is that there are greatest benefits where the demerged companies have little in common or have very different scales. A prime example of this is Brambles, which has a pool of pallets used to move goods around, and the much smaller Recall division stores and manages documents. Due to the limited overlap between the operations of the two businesses, and the difference in size, Recall stands to benefit from greater freedom to utilise capital and greater management freedom.
Foolish takeaway
Demergers can be a great way of realising shareholder value. With two more significant demergers due before the end of the year, investors still have time to consider whether the demerged companies are right for their portfolio. Historical statistics point to the demerged company being the best bet for investors. With the remaining two splits this year likely to result in high-dividend paying demerged companies, there is every chance they will outperform in the short- to medium-term.
