Industrials

Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

Svenska Cellulosa, whose forests cover 6 percent of Sweden, is doing the splits. Investors have cheered and sent the stock to an all-time high.

It's a neat demonstration of how a little corporate-finance alchemy can lift a share price without doing anything to add substantial value to the underlying business.

Break Up Bounce
SCA stock jumped by the most in more than four years on news of the de-merger
Source: Bloomberg

De-merging won't obviously enable either SCA's hygiene business -- maker of Tena incontinence pads and Velvet toilet tissue -- or the slower-growing forestry unit to perform better. Neither operation is suffering for being under a shared umbrella, even if the original synergy between them has faded over time as the hygiene business uses less wood pulp.

Paper Tiger
The tissue business accounts for the majority of SCA's revenue
Source: Bloomberg

This is really about catering to investor taste. Forests have long been attractive to pension funds seeking long-term income. But many such potential shareholders wouldn't touch SCA in its current form because 85 percent of revenue last year came from hygiene products. At the same time, the forestry business was a pain for healthcare investors to analyze so they didn't ascribe any value to it. 

Into the Forest
The forestry business's revenue growth in 2015 trailed SCA's other operations
Source: Bloomberg

There's nothing wrong in restructuring the business to recognize this market reality. The hygiene business, being a newer operation, should be easy to establish as a stock in its own right. The costs of setting up an additional listing and a beefed-up head office for the rump forestry unit won't be big. De-merging is also faster and simpler than the obvious alternative solution -- an outright sale. This would involve price negotiation and potential regulatory complications.

Small wonder, then, some investors have been pressing SCA to do this for a long time. The company moved to separate the businesses internally a year ago. Wednesday's increase took the shares to 281.90 Swedish kronor, just eclipsing July's previous all-time high and valuing the group at 199 billion kronor ($24 billion).

The true value of the forestry business should now emerge as the market sets a price. Optimists will hope it now finds a buyer, perhaps a regional pension fund or infrastructure investor, willing to pay a premium. But they should question why it hasn't done so already.

At 20.1, SCA's price-earnings ratio still leaves the company at an 11 percent discount to the average of its peer group. The alchemists have more work to do.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Chris Hughes in London at chughes89@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net