Could a new Orica Ltd spin-off be a DuluxGroup-style stock winner?

Orica Ltd (ASX: ORI) is considering spinning off its chemicals business. It has a third-party interest in a trade sale of the chemicals division, but the company believes that a demerger and floating of the separate company on the ASX may be best to extract value. The majority of Orica’s revenue comes from its commercial explosives, ground support and mining divisions.

This is not the first spin-off from Orica businesses. In 2010, Orica demerged from DuluxGroup Limited (ASX: DLX), the paint and garden maintenance supplies producer. DuluxGroup, with such product brand names as Dulux, British Paints, Selleys and Parchem, was a big success for shareholders, more than doubling in share price since listing.

The chemicals business includes industrial chemicals (like caustic soda), watercare and its Bronson and Jacobs subsidiary that deals in such things as dairy, food and health & personal care goods.

It would mostly be like a trading company since about 80% of revenue comes from traded chemicals. According to Orica’s half year report in May, the chemicals division contributed about 8% of total group earnings before interest and tax (EBIT).

Orica is the leading global producer of commercial explosives. Although the mining industry in Australia has slowed down, the company seems to want to stick to its core business. Some analysts estimate the separate chemicals business may be worth as much as $1 billion.

Will this spin-off be as successful as DuluxGroup for investors? The chemicals business doesn’t seem to have big name brands that could draw premium prices if it listed.

Still, other recent spin-offs have been relatively beneficial to new shareholders. Packaging producer Amcor Limited (ASX: AMC) spun off Orora Ltd (ASX: ORA) last December and it is up about 24% since listing.

Also, supply-chain logistics giant Brambles Limited (ASX: BXB) demerged from its information management solutions company Recall Holdings Ltd (ASX: REC) back in December as well. Recall has gained about 20% after listing.

Spin-offs can be successful at the start for several reasons. They are usually well capitalised because the parent company wants to ensure they can successfully operate independently. Likewise, the spun-off company may be given other businesses and assets to give them a good headstart.

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For investors, I would keep up on this story. Orica stated it would release a further update on the proposed separation in November, so we may have a better picture of what to expect then. As for the parent companies of spin-offs, they usually don't get a share price boost after a spin-off in the short-term. If you are interested in Orica, you should still follow the company fundamentals to see if it would make a good investment for you.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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