* European spin-off trend set to continue, investors say
* Industrial, energy conglomerates targeted
* Spin-off, carve out benefits often come with a delay
* GRAPHIC - Europe's spinoffs tmsnrt.rs/2fQNKRV
By Toby Sterling
AMSTERDAM, Nov 29 The days of the European
conglomerate may be numbered, as activist shareholders are
pressing diversified groups to spin off secondary businesses and
focus on doing one thing well.
Many investors and analysts - and some managers - say that
in a world where good returns are hard to come by, breaking up
businesses that don't belong together can be profitable.
In theory, spinning off business divisions allows the parent
company and the spin-off alike to focus better on their
respective strategies, while investors tend to value both more
highly due to greater transparency.
"I think demergers and the destruction of conglomerates is
the next major trend in the M&A market," said Christer Gardell,
co-founder of Cevian, a Swedish-based activist investment fund.
"The trend has already started, it's going to run for the
next 10 years," said Gardell, who is pushing Swiss-Swedish
engineering giant ABB to spin off its power grid
equipment division from its robotics and other operations.
While some conglomerates such as ABB are trying to hold
their businesses together, others are embracing the trend either
under pressure from investors or even willingly.
A wave of spin-offs through initial public offerings (IPOs)
among energy and industrial groups is already underway. Philips
of the Netherlands, Fiat Chrysler of Italy
and Germany's biggest energy groups E.ON and RWE
have all floated major divisions this year. German
engineer Siemens has announced similar plans.
Companies with many business lines are "mostly too
complicated, too bureaucratic, too slow, and they usually suffer
from poor capital allocation and poor performance", Gardell
told Reuters. "Obviously for investors to invest in these
complicated structures, they require a discount, and usually
it's a significant discount."
Remove these obstacles, and the need for a discount will
fade, Cevian argues. It says ABB shares, which are below 21
Swiss francs, would be worth 35 francs if its separate business
arms traded in line with listed peers.
ABB disagrees that it power grids business should be spun
off. "As part of the strategic review process, we examined all
options for the division. The outcome of the review was clear
that the most value would be created through the continued
transformation of Power Grids under ABB's ownership," spokesman
Saswato Das said.
Not every spin-off works out for shareholders. However, a
JPMorgan study in 2015 of spin-offs in the United States, where
the trend began earlier than in Europe, appears to support
Gardell's arguments in general.
It found that U.S. shares typically rose a relatively modest
2-4 percent against the S&P 500 average when a spin-off was
announced. But over the next two years, the combined value of
the parent company and its spin-off rose 15-20 percent - with
the relative values of both usually rising.
Marc Zenner, one of the study's authors, said this U.S. data
would show activist investors that there is also potential
across the Atlantic to create value through spin-offs. "In
Europe one reason why you could see more in the future is that
there are more conglomerate companies there," he said.
Conglomerates have lasted longer in Europe due to a mix of
factors that can insulate managers from unhappy shareholders.
These include "poison pill" rules to discourage hostile
takeovers and higher levels of family ownership.
Some countries also have laws stipulating that managers must
consider the interests of employees and other groups along with
those of shareholders.
Some firms are willing to accept limited change. One such is
German industrial group ThyssenKrupp, which is in
talks to merge its struggling European steel business with that
of India's Tata Steel.
However, ThyssenKrupp has so far resisted calls to isolate
its most profitable business, making elevators. It also sells
car parts, and engineers military ships and chemical plants.
The company announced worse than expected profits for 2016
last week and a gloomy outlook for 2017, which analysts said
strengthens the case for a breakup.
MANAGEMENT FOCUS OR INVESTOR TRANSPARENCY?
Advocates argue that spin-offs do better because smaller
companies have a stronger focus and their chiefs have a greater
incentive to succeed than division heads. But for investors, the
biggest benefit seems to be increased transparency.
"When (spin-offs) do work, it is more often the market
valuing the standalone business more accurately than a stronger
clarity of focus by management," said Drew Dickson, managing
director of Albert Bridge Capital.
Dickson doesn't look for breakup candidates as a strategy.
But he said revaluation paid off for one of his firm's
investments, Fiat Chrysler, after the group floated its Ferrari
sportscar division in October 2015. "The market knew that
Ferrari was valuable, but only could answer the question (of how
valuable) once it was standalone," he said.
Under the deal, Fiat Chrysler shareholders were handed an 80
percent stake in Ferrari in January. While
the parent company's shares are down 13 percent year to date,
the value of their Ferrari stock is such that investors who held
onto both have made a gain of roughly 60 percent.
However, the jury is still out on strategies adopted by the
German power companies, which are under pressure from
government-subsidised wind and solar electricity.
E.ON spun off its fossil fuel operations into Uniper
, while RWE carved out its green energy operations as
Innogy in an IPO, while still holding a controlling
Both parent companies have lost around 60 percent of their
value over the past five years. Uniper and E.ON, if still
regarded as one unit, would be up 1.2 percent since they started
trading separately in September. RWE is down 12.5 percent since
Innogy listed in October.
Philips CEO Frans van Houten is an example of a manager who
has embraced the spin-off trend. In May, the group floated
Philips Lighting, its original business dating back
to 1891, allowing the parent to focus on healthcare equipment.
Both divisions were "great opportunities with a lot of room
to grow (but) both required investment; the commonality was
minimal other than the Philips brand," Van Houten told Reuters.
Proceeds from the IPO will be reinvested in the high margin
health operations while the spin-off, the world's largest
lighting company, hopes to have greater access to capital
markets to fund M&A.
During his career Van Houten has seen Philips eclipsed in
value by not one but two former divisions it has spun off:
semiconductor equipment maker ASML, and
computer chip maker NXP.
He left Philips to oversee NXP's restructuring after it was
sold to private equity investors in 2006, returning to Philips
in 2011. NXP, which had a new IPO in 2010, is now in the process
of being acquired by Qualcomm for $38 billion.
"Definitely my learning there helped me in my thinking," Van
After lacklustre performance for most of Van Houten's
tenure, Philips shares are up 17 percent year to date.
(Additional reporting by Maiya Keidan, Thomas Escritt, John
Revill and Georgina Prodhan; editing by David Stamp)