By Carla Mozee, MarketWatch
Universal/Courtesy Everett Collection
Perhaps not all break ups are sad affairs.
There has been a “strong trend” toward so-called demergers in U.S. industrial companies, and investors are beginning to ramp up the pressure for leaner operations at European companies, Jefferies Group said in a Monday research note.
“With global industrial markets sputtering, investors are looking for additional paths to value,” and are finding it through demergers, which Jefferies defines as any strategic action that results in the sale or spin-off of a meaningful portion of revenue or profits.
Jefferies drew up a list of U.S. demerger candidates, which includes Parker-Hannifin Corp. /zigman2/quotes/202924304/composite PH +3.99% and power management company Eaton Corp. /zigman2/quotes/205393239/composite ETN +2.01% . The European list includes Sweden’s Volvo AB /zigman2/quotes/208939564/delayed SE:VOLV.B +0.56% and Swiss power grids maker ABB Ltd. /zigman2/quotes/201477239/delayed CH:ABBN -0.23% .
In Volvo’s case, the company has a solid global truck business and a “weaker construction-equipment division,” said Jefferies.
Shedding assets appears to reliably strengthen value, with Jefferies pointing to a 2009 academic-data review in Scotland which determined that over a decade of demergers generated excess returns of about 3%, with spin offs of a company’s unrelated divisions driving the highest returns.
“Good” demerger candidates are companies with non-related businesses, “often through accidents of history or a previous foray into diversification,” the Jefferies global industrials team said in the note. “They should also trade at a discount to their sum of the parts valuation, although currently this is difficult to decipher as valuations have come down fairly indiscriminately due to global growth concerns.”
Six of the 38 stocks the Jefferies industrials team is now covering have “meaningful” activist investor ownership, and companies with excess cash make good targets, they said.
Jefferies noted that activism is Europe is rising, and said Cevian Capital—Volvo’s largest shareholder—is the “most active activist fund in industrials”. Cevian recently disclosed holdings in ABB.
Activists during the first half of 2015 targeted 31 companies in Europe, more than the total in 2014. “Still, thus far activism in Europe tends to be a more private affair, without major public battles,” said Jefferies.