If an ASX share announces a demerger, here's why you should listen

The demerger between Coles and Wesfarmers was highly lucrative. Here's why you shouldn't ignore a spin-off among ASX listed companies.

dog listening through tin can with string attached signifying listening regarding asx share demerger announcements

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Mergers, demergers, acquisitions, stock splits… it's all very exciting stuff. When an ASX share announces a fundamental change to its company structure, we investors are pretty much trained to sit up and listen. And fair enough too. Investing shouldn't just be about sifting through annual reports or numbers on a spreadsheet. Investors are human too, and who doesn't like a bit of drama every now and again. And that's what mergers and demergers bring us. It's the financial equivalent to a celebrity marriage (or divorce).

So let's talk about demergers today.

Although demergers have been largely shunted off the table in 2020 thanks to the coronavirus pandemic, there were a few in the works last year. Notably, Woolworths Group Ltd (ASX: WOW) had plans last year to spin-off its Endeavour Drinks businesses (containing the BWS and Dan Murphy's bottle shop chains as well as some pubs/hotels). I have a hunch that was behind the Woolworths share price climbing more than 24% in 2019.

But why would a demerger cause investors to destroy the buy button, and revalue a company as mature as Woolworths by almost a quarter higher?

Well, it's because, in the past, most demergers have been raging successes, and investors know it.

Coles and Wesfarmers shares: a successful demerger

Take the recent demerger of Coles Group Ltd (ASX: COL) from its old parent company Wesfarmers Ltd (ASX: WES). Prior to November 2018, Coles was a wholly-owned subsidiary of Wesfarmers after the conglomerate bought it out back in 2007. But Wesfarmers decided to let Coles fly the nest and listed Coles shares at $12.49 on 20 November 2018. All existing Wesfarmers shareholders received one share of Coles for every Wesfarmers share owned. On the first day after Coles hit the boards, Wesfarmers shares were asking roughly $31.50.

Fast forward to today, and the Coles spin-off has been hailed as highly successful for Wesfarmers shareholders. Coles shares have raced almost 50% higher since they first flew the nest. Just today, in fact, Coles has clocked a new record high of $19.26 per share.

Meanwhile, Wesfarmers shares have also performed very well. They are also up close to 50% since November 2018 and are going for $47.31 at the time of writing.

And both of these companies have been paying substantial, fully franked dividends to shareholders along the way as well.

Coles and Wesfarmers isn't the only recent demerger success story either. BHP Group Ltd (ASX: BHP) and South32 Ltd (ASX: S32) split up back in 2015 at the strong encouragement of shareholders. Both have performed well on their own since. Ditto with the old Fairfax Media (now part of Nine Entertainment Co Holdings Ltd (ASX: NEC)) and Domain Holdings Australia Ltd (ASX: DHG).

Foolish takeaway

All evidence points to a demerger being a potentially lucrative process to benefit from. I myself considered buying Wesfarmers shares before the Coles spin-off, but I decided against it as I thought Wesfarmers was too expensive at the time — in hindsight a foolish (and not the good kind of Foolish) decision. So next time an ASX company announces a demerger, be sure to pay attention.

Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of COLESGROUP DEF SET, Wesfarmers Limited, and Woolworths Limited. The Motley Fool Australia has recommended Nine Entertainment Co. Holdings Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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