Shares of the struggling grocery giant Metcash Limited (ASX: MTS) have skyrocketed more than 12% today after the company announced that it is considering a spin-off for its auto division following a company-wide strategic review.
Metcash, which is best known for its wholesale connections with independently owned supermarkets such as IGA and FoodWorks, has been slammed in recent years due to its inability to compete with retail behemoths Woolworths Limited (ASX: WOW), and Coles owned by Wesfarmers Ltd (ASX: WES).
In response to its recent woes, a much-needed strategic review was undertaken and management determined that an initial public offering (IPO) of its Automotive Division could allow the group to pay down its debt and strengthen its core businesses.
The company said that the division, which includes brands such as Autobarn, Autopro, ABS and Midas, had generated roughly $250 million in revenue for the year ended 30 April, 2015, while it is believed the IPO could be worth anywhere north of $300 million. As highlighted by The Australian, Credit Suisse has even suggested the division could be worth as much as $460 million.
Although there is no certainty that the company will follow through on this decision (it will provide a further update when it announces its full-year results on 15 June, 2015), a demerger could definitely make sense for the business.
What this means for you
Spinning off the Automotive division could help to unlock significant shareholder value by allowing two different management teams to focus on their own growth trajectories.
Spun-off businesses have historically performed exceptionally well compared to the broader market, with recent examples including Orora Ltd (ASX: ORA) and Recall Holdings Ltd (ASX: REC), which were demerged from Amcor Limited (ASX: AMC) and Brambles Limited (ASX: BXB), respectively.
Furthermore, the Australian automotive aftermarket sector is experiencing strong growth which is expected to continue well into the future. As can be seen in the chart below, the average vehicle count per 1,000 residents has climbed steadily at a predictive pace, which makes an investment in the sector all the more appealing.
At the same time, passenger vehicles are ageing. The percentage of cars aged six-years-or-older has gradually ballooned out to 70% from 67% while total kilometres travelled has also risen steadily, thus creating a bigger market for Do-it-for-me (DIFM) brands such as ABS and Midas to target.
Burson Group Ltd (ASX: BAP) is also benefiting from this trend in a big way. Burson Group is a DIFM specialist that listed on the ASX in April 2014 and has generated fantastic returns for investors in the time since, which could well act as an encouragement for Metcash's management to follow through with its plans.
Although Metcash has had a torrential run over the last 12 months, with its shares having nearly halved in that time, it could certainly be one to put on your watchlist should these plans go ahead.
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