Getting rich through demerger

UGL hopes property division will be even more profitable on its own.

a woman

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The board of UGL Ltd (ASX: UGL) has announced a review to determine its optimal corporate structure, singling out the growth in the property business, DTZ, as the catalyst for the review.

DTZ now represents approximately 50% of group earnings and while there would be some potential from cross-selling services, there is merit in running the businesses on a standalone basis. The property division was created via an acquisition in 2002 and then grew both organically and through the purchase of DTZ in 2011. It now employs 47,000 people in 52 countries and generates $2 billion in revenue — an impressive growth story indeed.

UGL’s remaining division is the engineering, operations and maintenance business, which is domestically focussed, employing 8,000 people and with annual revenues over $2.5 billion. This division has significant exposure to mining contracting and competes with the likes of Transfield Services (ASX: TSE) and Downer EDI (ASX: DOW).

The market certainly liked the sound of a demerger with UGL’s shares closing the day up 12%. Assuming the board is trying to maximise value for shareholders, they presumably believe this may be achieved by splitting UGL up. A look at past demergers provides insights into the appeal of separation. For example, both Boral’s (ASX: BLD) spin-off of Origin Energy (ASX: ORG) and Orica’s (ASX: ORI) spin-off of Dulux (ASX: DLX) have created value for shareholders. There are of course also examples where the cost and benefit of past demergers are harder to determine and where potentially shareholder wealth was destroyed.

Foolish takeaway

Demergers are often value enhancing to shareholders by allowing two businesses to be managed independently and valued independently. In other words, the sum of the parts is worth more than the whole. Investors have certainly profited in the past from such corporate moves, which makes demerger proposals worth investigating.

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