How do ASX shares typically perform following a demerger?

Do ASX demergers ever actually work out for investors?

| More on:
A couple sit at opposite ends of a leather couch in their loungeroom representing demergers 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

Woman using laptop sitting in cloud cheering
Mergers & Acquisitions

Why is the PTB share price rocketing 35%?

The company's shares are flying today with a takeover offer on the table

Read more »

Rubbish and waste around a green recycling logo.
Earnings Results

Cleanaway share price halted amid results, $400m cap raise and acquisition

Let's analyse all the major news that has come out today.

Read more »

A female superhero dressed in shiny green with a mask leaps in the sky with leg and arm outstretched in a leaping action.
Mergers & Acquisitions

Genex share price leaps 8% on revised takeover bid from Atlassian founder

The new bid values the renewable energy company at more than $346 million.

Read more »

Four PointsBet customers and football fans put heads in hands and look disappointed while watching television
Technology Shares

Betmakers share price slips despite new $20 million deal

The betting technology provider has amended a key contract. Here are the details.

Read more »

One young boy jumps off a step ladder and is captured mid-air about to land on a seesaw where his friend is standing with a wide smile on his face looking at the camera and holding his thumbs up as though he is excited for the ride to come. Both young boys are wearing business suits.
Mergers & Acquisitions

Nearmap share price jumps 30% on takeover news

The Nearmap share price rallied 33% to $2.01 in early trade on Monday, but remains below the bid price.

Read more »

A frustrated young woman shopper holds her hands up with a pained, annoyed expression on her face as she stands next to her trolley in a grocery store and examines the stock offerings on the shelf in front of her.
Mergers & Acquisitions

Woolworths share price slides following MyDeal ACCC nod

MyDeal shareholders will vote on the proposed acquisition next month.

Read more »

A person with a round-mouthed expression clutches a device screen and looks shocked and surprised.
Consumer Staples & Discretionary Shares

iSelect share price explodes 75% on takeover news

The iSelect share price is sky high after the company revealed a takeover offer from the owner of www.comparethemarket.com.au.

Read more »

Two men in business attire play chess.
Resources Shares

OZ Minerals ‘completely in play’: Broker on BHP takeover bid

BHP's bid for OZ Minerals may not be over...

Read more »