How do ASX shares typically perform following a demerger?

Do ASX demergers ever actually work out for investors?

A couple sits at opposite ends of a leather couch in their loungeroom representing the demerger of ASX shares.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Mergers and demergers have been all the rage on the ASX over the past few years. It seems we can only go for a month or two these days without finding out about a new plan to split or merge an ASX share or two.

Just this week, we had the splitting of Tabcorp Holdings Ltd (ASX: TAH), which spun out The Lottery Corporation (ASX: TLC) on Tuesday. This follows several high-profile demergers before it.

Endeavour Group Ltd (ASX: EDV) flew the Woolworths Group Ltd (ASX: WOW) nest last year. Iluka Resources Limited (ASX: ILU) split with Deterra Royalties Ltd (ASX: DRR) back in 2020.

There's also a debate raging within AGL Energy Limited (ASX: AGL) as to whether going down the demerger route is the best way forward for the company. A vote will take place on 15 June.

But demergers, despite the hype, don't always work out for ASX investors.

Since its demerger in 2020, Deterra Royalties shares have gone backwards. Lottery Corp shares haven't exactly had a kind first few days of trading either.

Is a demerger ever a bad thing for ASX shares?

According to a report in the Australian Financial Review (AFR) this week, this is no accident. Macquarie analysts have run the ruler over the ASX's history of demergers and found that "demerged businesses usually underperform by up to 10 per cent in the first six months".

Not only that, but the analysts also found "the trend has only become stronger in the past five years, with spun-out businesses taking at least 12 months to trade well with spells of underperformance longer and stronger".

But that's only for the spun-off company. In the parent company's case, Macquarie revealed the picture can get even bleaker still:

For the parent, the wait to returns has been even longer. Macquarie found it's not until 18 months after the demerger goes live that the head stock starts to outperform. The parents have done slightly better in recent years because of stronger run-ups in the share prices between the announcement and the implementation, but it's still taking them up to 12 months to outperform.

Of course, there are exceptions. Endeavour had a relatively successful split from Woolworths. And until this year, the Coles Group Ltd (ASX: COL) split from Wesfarmers Ltd (ASX: WES) back in 2018 looked like pure genius.

But still, numbers don't lie. Macquarie's analysis indicates that investors in a demerged or demerger company face an uphill battle for returns.

No doubt Tabcorp and Lottery Corp shareholders will be hoping their companies turn out to be trend-buckers. But we'll have to wait and see.

Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has positions in and has recommended COLESGROUP DEF SET and Wesfarmers Limited. The Motley Fool Australia has recommended Macquarie Group Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Mergers & Acquisitions

A man sits in a chair hunched over a laptop and covered head to toe in frozen icicles to represent Envirosuite's trading halt
Mergers & Acquisitions

APM share price placed on ice as $1.8 billion deal goes dud

It's all question marks and raised eyebrows for shareholders of this ASX company today.

Read more »

Young man sitting at a table in front of a row of pokie machines staring intently at a laptop. looking at the Crown Resorts share price
Mergers & Acquisitions

Could Star Entertainment shares be next in line to catch a takeover bid?

Star shares have been battered, but could a buyout be coming?

Read more »

Contented looking man leans back in his chair at his desk and smiles.
Bank Shares

Own CBA shares? Here's the tech stock the banking giant just invested in

CBA has made an interesting investment. Here's what you need to know.

Read more »

Man pointing at a blue rising share price graph.
Mergers & Acquisitions

Guess which ASX 300 stock is rocketing 10% on a $985 million cash bid!

Investors are piling into the ASX 300 stock on the back of a $985 million cash takeover bid.

Read more »

Shot of a scientist using a computer while conducting research in a laboratory.
Mergers & Acquisitions

Guess which ASX blue-chip share is throwing $202 million at another acquisition

This Aussie healthcare company is growing its presence in Switzerland.

Read more »

A man stands with his arms crossed in an X shape.
Mergers & Acquisitions

Boral share price falls after rejecting Seven Group takeover

The offer 'undervalues' Boral according to its committee.

Read more »

Miner looking at a tablet.
Materials Shares

Mineral Resources share price marching higher on new lithium project acquisition

ASX 200 investors are bidding up the Mineral Resources share price on Monday.

Read more »

A man sitting at a computer is blown away by what he's seeing on the screen, hair and tie whooshing back as he screams argh in panic.
Technology Shares

Appen shares plunges 17% after takeover collapse

Well that didn't take long...

Read more »