Double-Jointed Deals

Private Equity Winces as Companies Do the Splits

Buyout firms may struggle to land assets from Akzo and SCA.
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Spin or sell? It's usually a phantom choice for companies looking to jettison assets as they break themselves up. They almost always plump for the sale. But high stock-market valuations are making spin-offs more feasible. That's helpful to Swedish tissue-maker Svenska Cellulosa AB and Dutch chemicals group Akzo Nobel NV as they grapple with changes to their structure.

Disposing of unwanted assets to industrial rivals or private equity firms gives the vendor a clean break and raises capital for reinvestment. A parallel process to give the asset a stock-market listing, via an initial public offering or demerger, is usually pursued half-heartedly only to keep bidders honest.

When SCA announced in August the separation of its core hygiene business from its original, but smaller, forestry assets, it went straight to a demerger. It didn't need capital and there has been no parallel sale process for either unit. says a person familiar with the situation. Yet that hasn't deterred bidders -- private equity firms among them -- from considering offers for SCA's constituent pieces, including a possible $22 billion bid for the hygiene company, Dagens Nyheter newspaper reported on April 12.

Paper Gains

SCA stock has outperformed as investors have egged on a likely demerger

Source: Bloomberg

Size is probably no obstacle to a deal: buyout firms are flush with cash. SCA's products have predictable and increasing cash flows, making it easy to fund any acquisition with cheap debt. Its net debt is 1.7 times trailing Ebitda, while a leveraged buyout would nudge that multiple to the mid-single digits. With group Ebitda forecast to expand at a compound 8 percent over the coming two years, bidders may find easy returns from gearing up that growth.

The difficulty is justifying a bid on valuation grounds. SCA, up 5 percent on the deal report, is trading on a near record 19.5 times forward earnings. The market cheered the initial break-up announcement, suggesting the individual pieces would find decent market valuations.

Similar dynamics may apply to Akzo, which said it was reviewing its specialty chemicals business in the wake of takeover interest from PPG Industries Inc. The asset should also be tempting to private equity. But, as analysts at Bernstein note, a demerger is probably more attractive to Akzo. True, a split would cost fees and the expense of a new head office, but it would be a fast way of removing Akzo's conglomerate discount -- as SCA has found. A rushed sale in the midst of a bid battle might not get the best price.

Unloved assets in big corporations are typically top of private equity's hit list. They offer decent-sized deals for reasonably stable businesses with some scope for a bit of restructuring. Yet the Dutch and Swedish stock markets are valued at close to their post-crisis highs. If stock-market investors are willing to applaud the splits, private equity is going to have to work harder to hoover up big company cast-offs.

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

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