Demerger: Does breaking up create value?
Baker Young Advisor, Alex Martin, discusses the potential demerger of Woolworths’ Endeavour Group…
Since 2019 Woolworths has discussed the notion of demerging the alcohol/pubs/hotels part of their business (Endeavour Group). As this demerger gets closer and closer to fruition I thought it was a good opportunity to discuss the potential upside to either or both businesses.
The demerger of Endeavour Group is subject to shareholder approval at the General Meeting on June 18, and if approved, will create two independent ASX-listed companies with Endeavour Group likely to be a top ASX50 company. Eligible Woolworths’ shareholders will receive one new Endeavour Group share for every Woolworths share held at the demerger record date of June 25.
How have other companies traded post demerger?
Morgan Stanley has done an analysis of 23 demergers in Australia since the year 2000. This shows both the de-merged entity and the parent entity have outperformed the market, particularly in the first year after de-merger. Median outperformance was 17% for the demerged entity and over 7% for the parent entity. A recent example of this is Wesfarmers and Coles.
Dividend upside?
Woolworths currently has a dividend that is slightly below average for the market (2.5% plus franking credits). This is due to most of the group’s debt historically being within the drinks and hotels business. This debt will now sit with the standalone Endeavour Group business, resulting in a net cash position of $75m for Woolworths. As a result, Woolworths has stated it will be exploring capital management options, possibly returning up to $1.6bn-$2.0bn back to shareholders.
Ethical benefits?
Environmental, Social and Corporate Governance investing, or ESG Investing as it is referred to, has become more and more prevalent in the past five years. Statistically, it is the fastest-growing investment sector in the world with more and more investors only investing in companies with a socially responsible and ethical mindset. Why is this relevant you ask? Well, currently Woolworths as an entity does not meet these criteria. The alcohol, pubs, hotels and pokies make it an investment that ethical funds cannot touch. Post demerger, however, they suddenly meet the eligibility and become a potential investment for the fastest-growing pool of funds.
What presents now is statistically a good time to own Woolworths shares. History suggests that demergers offer shareholder value, particularly in the short term. From a medium-term point of view, there is a strong case to see Woolworths becoming a staple holding in ESG funds across Australia.
If you would like to discuss Woolworths further please feel free to Alex directly on (08) 8236 8871.
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