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Brambles announces demerger

Brambles (ASX: BXB) has announced a plan to demerge its information management business from its pooling solutions business into a separately listed company to be known as Recall Holdings. Recall operates in three segments: Document Management Solutions, Secure Destruction Services and Data Protection Services. The demerger is expected to be completed by the end of the calendar year.

Recall has often played second fiddle to the well-known CHEP pallet business within Brambles; however, it is a significant business in its own right with operations across 23 countries. In 2012 Recall generated sales revenue of US$845 million and an underlying profit of US$174 million. The business also produced a 16% return on capital invested. Company guidance for the 2013 financial year is for a 3% fall in Recall’s revenues with earnings also expected to fall to between US$138 million and US$142 million.

The demerged entity, as the company announcement stated, “will offer investors exposure to a global, industry-leading information management business with stable revenues and strong cash flow from which to fund dividends and investments in growth.”

As the chart below shows demergers have a habit of creating value. In the past few years, two demergers of note are Orica’s (ASX: ORI) demerger of its paint division into DuluxGroup (ASX: DLX) and Fairfax Media’s (ASX: FXJ) spin-off of its New Zealand online marketplace Trade Me (ASX: TME). Both of these demerged firms have performed very well compared with the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) to date.

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Source: Google Finance

Foolish takeaway

By allowing a management team and company to concentrate solely on one business model without the distraction of another, demergers have on many occasions resulted in significant value for shareholders. Having been unsuccessful in achieving an acceptable sale price for Recall in the past, shareholders will no doubt be cheering this latest move.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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