Spin-offs, demergers and disposals are often good news for investors, although it’s not often a firm sees its share price rise when it has to pay someone to take assets off its hands, especially when those assets were previously thought to be earnings positive.

In the case of hospitality firm Restaurant Group (RTN), however, that is exactly what happened.

The group, best known for its Wagamama chain, agreed earlier this month to sell its leisure division comprising themed restaurants Frankie & Benny’s and Chiquito to private equity firm Epiris for the nominal sum of £1 while paying the buyer £7.5 million for the privilege.

The company claimed there was a ‘compelling strategic rationale’ to the deal, namely the two brands were loss-making so getting rid of them, even at a substantial cost, would improve operating profits while reducing indebtedness and could lead to a re-rating of the shares, which is exactly what happened.

This got us thinking, could other companies be tempted to follow suit and sell or demerge some of their assets with a view to raising their margins and the earnings multiple at which their shares trade?

The benefits of demergers or corporate break-ups

Shareholders are putting pressure on companies to focus on what they do best and not take a conglomerate approach.

It can be hard to manage multiple businesses operating in a range of industries, hence why many companies are going down the demerger or asset sale route to tighten their focus.

A demerged business can allow management to take control and make the decisions that best serve their needs rather than a larger plc conglomerate.

They can be more entrepreneurial when working as part of an independent company and compensation for key personnel can be more closely aligned with business objectives and performance.

There is an argument to suggest demerged businesses tend to be better managed as the directors are responsible for their own profit and loss account, rather than working on initiatives across a wider group.

NEW BROOMS AND ‘FRESH EYES’

Restaurant Group isn’t the only firm to have received a warm welcome to its plans to slim down.

Even though it swung to a thumping first-half operating loss and passed its interim dividend, car and home insurer Direct Line (DLG) saw its shares jump the most on record for a single day when it announced it was selling its brokered commercial insurance operations.

Selling the business for £520 million plus up to £30 million in earn-outs puts the firm on a much firmer financial footing, taking away the risk it might have to raise equity and at the same time giving it the option of restarting dividends.

Interim chief executive Jon Greenwood said the sale ‘crystalises an attractive valuation and focuses the group fully on retail personal and direct small business commercial lines insurance customers,’ and analysts and shareholders duly applauded.

Greenwood was following in the footsteps of Amanda Blanc, chief executive of composite insurer Aviva (AV.), who shortly after taking the top job three years ago set about paring the business back dramatically, selling most of its non-UK operations and refocusing the group while returning billions of pounds to shareholders.

Bringing in a new chief executive can often be a good way to shake up a company. There have been new CEOs at 15 companies in the FTSE 100 this year, with a further four joining in 2024.

At aircraft engine-maker Rolls-Royce (RR.), one of the first firms to change CEO this year, new man Tufan Erginbilgic has certainly lit a fire under the shares, which have more than doubled in price since January, with his ambitious transformation programme aimed at delivering a ‘step-change’ in the firm’s financial performance.

Erginbilgic has also promised a strategic review which will allow the firm to prioritise investments towards the most profitable opportunities. This suggests underperforming businesses could be for the chop.

Rather than speculate on the outcome of the review, its findings – together with a set of new medium-term financial targets – are due to be revealed before the year-end, most likely at the capital markets day in late November.

Consumer products group Unilever (ULVR) – which has been under pressure from shareholders for some time to improve its returns – has a new chief executive as of three months ago and will have a new chair from the start of December, so investors will be looking for signs of change.

One of the most pressing issues facing new boss Hein Schumacher, who promised to view the firm through ‘fresh eyes’, is what to do with its Russian business given many of its peers have already bowed to shareholder pressure and either sold up or walked away.

There probably isn’t an ideal solution, but operating in Russia doesn’t sit with the firm’s highly prized corporate profile and we suspect drawing a line under the problem would go down well with shareholders and non-shareholders alike.

On 2 October, Kellogg’s (K:NYSE) will split into two ‘stronger, more focused’ companies.

The US-listed shares will be renamed Kellanova and this part of the company will focus on snacks and emerging markets including Pringles and Pop-Tarts.

The other side of the business will also trade on the New York Stock Exchange under the name of WK Kellogg and focus on cereals including Corn Flakes, Special K and Rice Krispies. Its stock market code will be KLG.

NEVER SAY NEVER

Meanwhile, with luxury goods firms seeming to have lost some of their lustre and even high-end consumers no longer spending quite as freely as they were, we wonder whether mining group Anglo American (AAL) might consider now to be the right time to demerge its De Beers diamond business.

Ties between the two firms go back almost a century, and it was De Beers which kept the plates spinning during the mining cycle low from 2013 to 2016, but in the light of weakening sales (which were down 10% on the previous cycle in August and down 42% on the same cycle last year) questions are being asked.

Berenberg analyst Richard Hatch argues new boss Duncan Wanblad, who took over from veteran Mark Cutifani last year, should make use of the ongoing discussions with the government of Botswana, which owns 15% of De Beers but has a wider economic interest in the diamonds, ‘to undertake a strategic review of the business and ask whether these assets should remain under Anglo American’s stewardship’.

Hatch points to the fact De Beers’ financial results have been ‘increasingly weaker, and are not showing signs of material improvement’, and the business lags the broader group on most metrics such as ROCE (return on capital employed), operating margins and free cash flow conversion, so divesting it would improve Anglo’s financials and could improve its rating in the process.

Moreover, from a strategic point of view, ‘while management has argued there remains a place for a diamond business in a portfolio centred around future-facing commodities, we question the presence of diamonds in a business focused on enabling the energy transition,’ adds the analyst.

HOW SPIN-OFFS CREATE VALUE

We said at the outset that spin-offs and demergers are often good news, that is because they typically add value for shareholders in both the legacy owners of the assets and owners of the new entity.

The US market has a rich history of spin-offs, from the break-up of AT&T (T:NYSE) or ‘Ma Bell’ as it was known in the 1980s to eBay’s (EBAY:NASDAQ) split with PayPal (PYPL:NASDAQ), Altria’s (MO:NYSE) divestment of Philip Morris International (PM:NYSE), and Abbott Laboratories (ABT:NYSE) spinning off its biopharma business AbbVie (ABBV:NYSE).

UK firms have typically been less proactive, in retrospect, but the spin-off of consumer health company Haleon (HLN), a joint venture between drug giants Pfizer (PFE:NYSE) and GSK (GSK) which was established as an independent company in July 2022, could have been a turning point.

GSK shareholders were given 54% of the shares in Haleon (80% of GSK’s original 68% stake) for free, which wasn’t to be sniffed at as the firm is now valued at £30 billion and is a FTSE 100 company.

Industrial group Melrose (MRO) spun off its automotive components business Dowlais (DLS) as a separate entity earlier this year. Whitbread (WTB) sold its Costa coffee chain to Coca-Cola (KO:NYSE) in 2019 and is now understood to be considering a sale of its restaurant arm, which includes Beefeater, Brewers Fayre and Cookhouse Pub.

Ashtead’s (AHT) UK business has been a drag on the group in recent years and could be a logical contender for a sale. Ocado (OCDO) has a 50:50 joint venture with Marks & Spencer (MKS) and selling its share to the retailer could be a way to raise a decent chunk of money.

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