Shareholders and followers of pooling solutions company Brambles (ASX: BXB) will no doubt be aware that the company has announced plans to spin-off its document storage division Recall into a separately listed company.
Current shareholders in Brambles will need to decide if they wish to continue owning the shares they receive in Recall. Outside investors now have another company to analyse and consider the investment merits of. To help inform shareholders and investors, Brambles has released a presentation outlining the Recall business. The key takeaway is that Recall is a leading information management solutions provider in large, growing and fragmented markets. Recall has strong market positions in 23 countries, including many higher growth emerging markets, and operates with a business model that provides stable and recurring revenues and strong cash flow.
Following the demerger Recall is expected to carry around $500 million in net debt, which will equate to approximately 2.4 times underlying earnings before interest, tax, depreciation and amortisation. Importantly, for income-seeking investors Recall is forecast to target a payout ratio of at least 60% of profits, although franking will be low.
Just as Recall may be an attractive standalone company for investors, so too could be the soon to be demerged Australasia and Packaging Distribution division of Amcor (ASX: AMC). Amcor currently operates in 43 countries, from over 300 sites with 33,000 employees and has over $12 billion in sales. As CEO Mr Ken MacKenzie said recently, "To be a successful market leader, that delivers continuous improvement in customer value, a company must be focused in terms of product portfolio and end markets." It's this focus that both Brambles and Amcor are trying to achieve via demerger.
Demerged companies don't generally enjoy the same hype as initial public offerings (IPO). Whereas IPOs garner excitement and demand as investors clamour for the "next new thing", demergers are quieter affairs and often involve some shareholders selling their holding soon after the demerger occurs for one of a number of reasons. These reasons include the position size being considered too small to warrant keeping in a portfolio, to the demerged company falling outside of a specific mandate of an institutional investor.
For savvy investors, these lacklustre conditions can create great buying opportunities in decent companies that experience a short burst of selling in what amount to 'technical' reasons.