While shareholders were licking their lips amid a record half-year result from Incitec Pivot Ltd (ASX: IPL) yesterday, another snippet of news derailed the euphoria. Plans to split the company into two left Incitec Pivot shares down 3.7%.
Unfortunately, the pain is continuing today with the fertiliser and explosives manufacturer weakening a further 1.67% this morning. This places the company's share price approximately 15% below the 52-week high that it reached last month.
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What does the split mean for Incitec Pivot shares?
The united explosive and fertiliser business has operated for 14 years under the Incitec Pivot banner. The Australian fertiliser maker acquired Dyno Nobel back in 2008, yet the combined company has never seen the same heights in its share price since.
Fast forward to the present, Incitec's plan is to break up the two segments of the business and list them individually on the ASX.
This would see the currently-listed entity become known as Dyno Nobel Limited — a global leader in industrial and mining explosives manufacturing. Meanwhile, the company's fertiliser division would list separately on the ASX as Incitec Pivot Fertilisers Limited.
After undergoing a strategic review, the company concluded the demerger would be beneficial for several reasons. The rationale included: a declining synergy in ammonia manufacturing; an improved focus on technology specific to the industry; and, a potential re-rating for shares in Incitec Pivot and Dyno Nobel from investors.
If approved, shareholders will receive a proportional holding of both companies as per their existing holding. The company is targeting separation completion of the two businesses in the first half of 2023.
What do analysts think of the proposal?
The proposal to split up Incitec Pivot was also not received well by analysts. The teams at Citi and Jefferies have both reduced their price targets on Incitec Pivot shares following the latest announcement.
According to Citi, it is unclear whether splitting into two companies will deliver more value than the cost of doing so. At a one-off separation cost of $80 million to $105 million and ongoing costs of $25 million to $35 million each year, Citi is not confident in the value proposition of the separation.
The two brokers cut their price target on Incitec Pivot shares to $3.70, representing a paltry ~4% upside.
