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Divestiture and spin-off

Examples checked

In one minute

Selling a business, or splitting it off as its own company.

The big idea: A business is worth more where it is run best. If the market values a group at less than its parts, or a unit needs a different kind of owner, selling it or spinning it off can create value, as long as the separation costs and lost shared costs are smaller than the gain.

Works when
When the businesses share little, need different strategies or investors, and the parts are clearly worth more apart.
Fails when
When the units shared real costs or customers, separation is costly, or the business is sold cheap in a hurry.
Check this number first
Value of each part on its own. Profit times what similar companies are valued at.
In the worked example
Value of the parts after the split: USD 1,790 (USD millions of value). See it add up

What it is

A divestiture is selling a business to another owner. A spin-off (or demerger) makes a business a separate listed company owned by the same shareholders. A carve-out sells part of a business's shares to the public. Companies do this to focus, to raise cash, or because the parts are worth more apart.

  • Sale. Sell to a buyer for cash; often to a rival or a private equity firm.
  • Spin-off or demerger. Shareholders get shares in the new company; no cash comes in.
  • Carve-out. List part of the business on the stock market and keep the rest.

Why companies do it

The economic logic, most important first. A move usually rests on one or two of these.

  • Focus. Each business gets management attention and a strategy that fits it.
  • Capital efficiency. Each business can be funded the way it needs, with debt for steady units and equity for growth units.
  • Growth. A unit starved of investment inside a group may grow faster on its own or with a new owner.

When it creates value, and when it destroys it

Creates value when

  • The market values the group below the sum of its parts.
  • The units have different growth, risk or capital needs, and different investors want them.
  • Little is shared, so separation costs are small.
  • A buyer can run the unit better, and pays for it.

Destroys value when

  • Shared costs and customers were real, and each part now pays more.
  • Separation costs (systems, people, contracts) are larger than planned.
  • The business is sold in a hurry, at a low price.
  • The remaining company is too small to compete.

The numbers to check

Ask for these, in this order, before you recommend the move.

  1. Value of each part on its own. Profit times what similar companies are valued at.
  2. Group market value today. The gap shows the conglomerate discount.
  3. One-off separation costs. Advisers, systems, new boards.
  4. Extra running costs after the split (dis-synergies). Two head offices, two sets of systems.

Worked example (illustrative)

Rounded numbers for a made-up business, shaped like real ones. Positive lines add to profit; negative lines are costs.

A group has a fast-growing unit earning USD 100 million a year and a slow unit earning USD 50 million. Similar companies trade at 15 and 8 times profit. The group is worth USD 1,600 million on the market.

Worked example for Divestiture and spin-off, in USD millions of value. Illustrative figures.
LineUSD millions of value
Fast unit on its own: USD 100 million x 15USD 1,500
Slow unit on its own: USD 50 million x 8USD 400
One-off costs of separating (advisers, systems)minus USD 60
Extra yearly cost of two head offices, valued at 10 times: USD 5 million x 10minus USD 50
Value of the parts after the splitUSD 1,790

Check: the lines above add up to the total.

The numbers that decide it

Value gained against today's USD 1,600 million
USD 190
Value gained as a share of today's value
11.9 percent

So what: The two parts are worth about USD 1,790 million apart, after costs, against USD 1,600 million together: a gain of about 12 percent. The gain exists because the group is valued as if both units were slow. If the split costs twice as much, the gain shrinks but stays positive.

Real examples

Companies that made this move, by region, with what happened and a source checked on the date shown.

How to recommend it in a case

Answer first, then the reasons with numbers, then the risk and the next step. Three sentences, said out loud.

I recommend spinning off the fast-growing unit, because the parts are worth about USD 1,790 million apart against USD 1,600 million today, a gain of about 12 percent.

The market values the whole group like the slow unit; on its own the fast unit can be valued at 15 times profit, and the two share little beyond a head office.

The risk is that separation costs run over the USD 60 million plan; next I would list every shared system and contract and decide which unit keeps each.

The numbers to quote: Value of each part; Group value today; Separation costs; Extra yearly costs after the split.

The figures in the answer come from the illustrative worked example above. In a case, use the client's own numbers.

Classic interview traps

  • Assuming parts are always worth more apart. Only if the market undervalues the group, or a new owner runs a unit better.
  • Forgetting dis-synergies: shared costs become duplicate costs.
  • Mixing up a sale (cash comes in) and a spin-off (no cash, shareholders get new shares).

Where it is common

Sources

Practise it

Where this move comes up in cases

Related moves