Companies engage in a variety of methods to add value and enhance returns for their shareholders.
Some may engage in share buybacks or dole out higher levels of dividends.
Others may engage in acquisitions to augment the capabilities and regional reach of the business.
Yet others choose a less conventional method — spinning off a segment or division within the company that promises to unlock value for shareholders.
Boustead Singapore Limited (SGX: F9D) executed this transaction back in 2014 when it spun out shares of its real estate solutions division Boustead Projects Limited (SGX: AVM) as a dividend-in-specie (i.e. a dividend given out in shares rather than cash).
In recent months, other companies such as Olam Group Ltd (SGX: VC2), Yangzijiang Shipbuilding (SGX: BS6), or YZJ, and LHN Limited (SGX: 41O) have joined the bandwagon.
Do such corporate exercises help to unlock value for shareholders? Let’s take a closer look.
Recently-announced spin-offs
Olam’s reorganisation is by far the most complex of the three companies.
It plans to spin off two separate operating groups — Olam Food Ingredients, or OFI, and Olam Global Agri, or Olam Agri.
OFI’s business will comprise Olam’s coffee, cocoa, dairy, and nuts business while Olam Agri will handle the grains, edible oils, rice, cotton, and rubber.
Olam plans to list OFI by the first half of this year on the London Stock Exchange, and the business could be valued at up to US$17.7 billion.
In the process, Olam could raise around S$3.65 billion from the successful listing.
Around 35.4% of Olam Agri was sold just a month ago to Saudi Agricultural and Livestock Investment Company for US$1.2 billion.
This deal values Olam Agri at around US$3.5 billion, which CEO Sunny Verghese says accounts for nearly 70% of what the market is valuing Olam Group now.
For YZJ, it will spin off its investment segment, called Yangzijiang Financial Holding, to be separately listed on 28 April.
Separately, LHN will spin-off and list its logistics arm to raise net proceeds of around S$3.6 million, with the group set to continue being a majority shareholder with an 84% stake.
A myriad of reasons
A quick review of the three companies’ rationale for their respective spin-offs unveiled a wide variety of reasons.
Olam Group stated that the objective of the reorganisation was to enable the current value of each separate business to become more visible, while also simplifying the structure of the Olam group of businesses.
As shown above, the sum of the three segments is also more than that of the original Olam International Limited before the carve-out.
By spinning off these segments, investors can better assign a value to each operating business, rather than trying to value a complex conglomerate structure.
YZJ believes that the spin-off will create a slimmer and sharper shipbuilding division and will allow its financial division to grow and raise funds separately.
LHN also provides a similar rationale — the spin-off can better focus management’s time and attention on its core business and each separate entity will be helmed by its management team.
It also believes the spin-off will allow investors to better value LHN Group and LHN Logistics, similar to what Olam had communicated to investors.
Raising money, sharpening focus
Summarising the above, it boils down to a few key reasons why companies undertake spin-offs.
The first is to raise additional funds that can be used to drive further growth of the business.
Secondly, spinning off a division also helps to crystallise its value better, as investors can now view the spun-out business as a separate entity.
Thirdly, each business can then embark on its separate growth strategies independent of one another, thus streamlining the corporate strategies and decision-making processes for each management team.
Get Smart: Better focus and value
All in, it appears that spin-offs do help to unlock value for shareholders.
Shareholders of the original entity usually receive free shares of the spun-out businesses.
The bonus comes when the spun-out entity gets valued on its own merits, thereby providing an uplift for investors and increasing their capital gains.
The original company is now also “lighter” and enjoys a sharper focus that can enable it to grow more efficiently.
But of course, execution is key.
Investors still need to monitor each business to see how well it is managed post-spin-off.
Macroeconomic risks do come into play as well and may dampen demand or prospects for the newly-listed businesses.
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Disclaimer: Royston Yang owns shares of Boustead Singapore and Boustead Projects.
