Demergers have been thrust back onto the investment radar after telecoms groups Cable & Wireless and Carphone
Warehouse did the splits. The management’s of both companies had argued that splitting up their group assets into two separate and clearly defined businesses would unlock shareholder value.
The long awaited demerger of Carphone Warehouse on Monday into retail and telecoms operations saw the share prices of both make steady progress in initial trading. Shares in Talk Talk, the old group’s telecoms subsidiary and the UK’s second-largest broadband provider, had risen to 133.5p, as we went to press, while new Carphone Warehouse shares, which holds the old group’s 50 per cent stake in Best Buy Europe, the consumer electronics retailer, was trading around 166p. Analysts at investment bank UBS had expected shares in Talk Talk to be priced at 115p and those in new Carphone at 153p.
Cable & Wireless completed its long-awaited demerger last week and the early reaction of the respective share prices was telling. Cable & Wireless Worldwide, the largely UK-based corporate telecoms services business, jumped close on 23 per cent in early trade to hit highs of 92p, yet in stark contrast, the communications division, which operates telecoms businesses across the globe, fell in opening trading to 56p. Cable & Wireless Communications lost its place on the UK’s blue-chip FTSE 100 index this week.
Corporate demergers have long been seen as valuable routes to unlocking shareholder value thanks to an impressive track record. The value of shares in the former British Gas business have risen almost 10-fold since the group’s 1997 demerger into Centrica, BG Group and National Grid. Other value-adding demergers have included drugs developer AstraZeneca being spun out of ICI, and mobile phones giant Vodafone being demerged from Racal Electronics.
The Carphone Warehouse and Cable & Wireless demergers are just the latest in a slew of spin-offs across Europe over the past few weeks. These have included Taylor Wimpey splitting out US housebuilding arm, oil services group Petrofac demerging its oil wells business, and the separation of the UK banking arm of Spanish group Santander, which includes the old Abbey business.
Undercover Columnist says:
Demergers have a long track record of success in unlocking shareholders value that would otherwise be hidden away. Our picks would be Cable & Wirelesss Worldwide and Talk Talk, which both offer decent growth potential and might well encourage takeover attention.