Unbundling: the corporate action du jour?

After a handful of Johannesburg Stock Exchange-listed companies unbundled shares in subsidiaries or announced plans to do so – some with hopes of eliminating inefficiencies and others with promises of enhancing shareholder returns in trying times – unbundling may well emerge as the corporate action du jour. What is now driving the corporate break-ups, and is unbundling effective in creating value for shareholders? 

Unbundling refers to transactions in which equity shares in a company are distributed by another company to shareholders of the unbundling company.

Recent cases include Old Mutual PLC’s (PLC) managed separation, which was achieved through the spin-off of the multinational insurance group’s constituent businesses into four separate businesses including the Africa-focused Old Mutual Limited (Old Mutual). Old Mutual, following its September listing, then successfully unbundled its majority stake in Nedbank such that it now owns 19.9% of the banking group. 

Upcoming unbundling transactions include those of Imperial Holdings – which is to split into logistics and motoring divisions in the fourth quarter of 2018 – and Naspers, which is to unbundle and list its video entertainment businesses as the MultiChoice Group in the first half of 2019. Investec has also announced plans to unbundle and list its asset management unit separately, following a strategic review of its business. 

Simon Brown, founder of JustOneLap, says recent unbundlings and intentions to unbundle businesses are a sign of the “wheel turning” following a rush by companies to build giant conglomerates and diversify their interests. Now, he says, companies are opting to unbundle as their business models evolve and as tough times demand the building of stronger, more resilient businesses.

According to Jean Pierre Verster, portfolio manager at Fairtree Capital, the timing of recent unbundlings is coincidental. But he notes that unbundling is a trend, first popularised around 30 years ago. “Unbundlings have been popular for a number of years now as companies have realised that shareholders prefer to own focused operations and have companies operate in a specific niche or in a specific market rather than investing in conglomerates. Management teams realised that conglomerates usually trade at a discount to the sum of their parts, and to address that unbundlings became popular in the 1980s.”  

In most cases, unlocking value for shareholders is the main driver behind unbundling. But whether value is unlocked, and if the share price performance of a company is an accurate measure to determine this, is questionable.

Wayne McCurrie of FNB Wealth and Investments says it is difficult to really determine whether value has been unlocked as there is no saying what the share price of a company would be had it not unbundled. “Shareholders own shares for the value to go up, and if the value goes up that is all shareholders are fundamentally interested in”. An argument can be made that unbundling is good in that it creates simpler structures, a more focused business and dedicated management teams, but companies would not unbundle if they didn’t think the share price would go up, he adds.

While the share price is the only proxy that can be used to determine whether a company has more value before or after an unbundling, Verster notes that share prices in the short term may not necessarily reflect a company’s value but should broadly do so over the long term. “The share price is not necessarily an absolute objective indicator but it is the best indicator we have. The longer that time goes by post the unbundling, the more one can have certainty that the share price actually reflects what happened in terms of the value-unlock transaction.”

Old Mutual’s share price performance following the managed separation of its former parent company is reflective of how external factors can affect short-term share prices post unbundling, with analysts saying the value unlock has yet to be fully realised.

“Old Mutual’s performance should be seen in the context of weak markets since the managed separation,” says Renier de Bruyn, an investment analyst at Sanlam Private Wealth. “However, shareholders have received a positive return of around 3.6% versus -7% for the JSE All Share Index since June 25, when Quilter was separated from Old Mutual.”

That emerging markets are currently out of favour is also likely to be weighing on the insurer’s performance, as is a potential overhang from PLC shareholders, the rebalancing of passive index funds and the performance of its peer group, adds Adrian Cloete, a portfolio manager at PSG Wealth.

Similar to its former parent company, Old Mutual trades at a discount to its adjusted embedded value. But both de Bruyn and Cloete say that there is still value to be unlocked. According to the former, further value will be unlocked as investors realise how ‘cheap’ the remainder of Old Mutual is following the series of unbundlings and special dividends, while the latter says value will be unlocked as Old Mutual chief executive Peter Moyo delivers on his strategy.