The urge to demerge

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 (ASX: NWS) 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 (ASX: UGL). 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 (ASX: ORG) was once part of Boral Limited (ASX: BLD). Origin’s market cap is now more than $13.6 billion, compared to Boral’s $3.7 billion. Both ‘protection solutions’ maker Ansell Limited (ASX: ANN) and clothing business Pacific Brands (ASX: PBG) 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.

With its legendary, fully franked 28 cent dividend, Telstra is the darling of Aussie investors. Chances are even if you don’t own Telstra shares directly, your superannuation fund does. But with its share price skyrocketing over the past year, is Telstra past its prime? Click here for our brand-new report: Buy, Sell, or Hold Telstra?

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.

Top 3 ASX Blue Chips To Buy For 2019

For many, blue chip stocks mean stability, profitability and regular dividends, often fully franked…

But knowing which blue chips to buy, and when, can be fraught with danger.

The Motley Fool’s in-house analyst team has poured over thousands of hours worth of proprietary research to bring you the names of The Motley Fool’s Top 3 Blue Chip Stocks for 2019.

Each one pays a fully franked dividend. The names of these Top 3 ASX Blue Chips are included in a specially prepared FREE report. But you will have to hurry. Depending on demand – and how quickly the share prices of these companies moves – we may be forced to remove this report.

See the 3 blue chip stocks

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.