Australia's Giants Plan to Get Richer by Shrinking Fast

(Bloomberg) -- In Australia, empire-building is so yesterday.

Defying a global spike in acquisitions, some of Australia’s biggest and oldest companies are trying to shrink to greatness. Commonwealth Bank of Australia, Wesfarmers Ltd. and Telstra Corp. are potentially spinning off assets collectively valued at A$59.5 billion ($43 billion) in as little as three years -- more than the tally for the whole of the past decade.

After lifetimes spent scaling up, these mainstays of the market are slimming down in a bet that simpler and more focused operations can deliver out-sized returns. That’s handing choice, and potentially wealth, to investors as parent companies splinter into separate entities. In the U.S., stock gains by spun-off businesses this decade are more than double those of the S&P 500 Index.

Australia's Giants Plan to Get Richer by Shrinking Fast

After being “starved of capital and love” by their former parents, carved out businesses often get a new lease of life, said Hugh Dive, chief investment officer at Atlas Funds Management in Sydney. “Suddenly, the management teams care more and they’re valued differently.”

Commonwealth Bank will next year spin off its wealth-management business, valued at as much as A$10 billion, and National Australia Bank Ltd. has said it may do the same as the lenders exit a sector infected by scandal.

Telstra, the former phone monopoly under assault by younger mobile-phone operators, has created a standalone infrastructure business, valued by UBS Group AG at A$31.5 billion, that it may hive off in coming years.

Meanwhile, Wesfarmers plans in November to spin off supermarket chain Coles, with an estimated market value of A$18 billion, in a deal that unwinds Australia’s last big conglomerate.

U.S. Precedent

That conglomerate model has long been under attack in America from activist investors such as Carl Icahn. He helped push U.S. spinoffs to a peak of $200 billion in 2014, when he pressured EBay Inc. to hive off PayPal. Shares of PayPal Holdings Inc. have more than doubled since listing. The same year, Hewlett-Packard Co., as it was then called, said it would split in two.

In contrast to Australia, total spinoffs in the U.S. are set for a fourth consecutive year of declines in 2018.

Australia's Giants Plan to Get Richer by Shrinking Fast

The huge pipeline in Australia is partly a function of the market’s size. Wesfarmers and Commonwealth Bank have little choice but to spin off supermarkets and wealth management businesses to their own shareholders because there’s probably no willing suitor big enough to buy the units at current valuations, according to Dive at Atlas Funds.

Either way, the asset carve-up is handing a largely risk-free bounty to advisers including Goldman Sachs Group Inc., Macquarie Group Ltd. and Gresham Partners Ltd. Some of them also cashed in by working on the original acquisitions years earlier.

Wesfarmers investors are already benefiting from the Perth-based company’s narrower footprint, even before Coles officially departs. The stock has soared 30 percent from a February low after the company quit home-improvements in the U.K., exited coal and auto repairs, and announced the Coles spinoff.

“This has unlocked that value,” said Daniel Mueller, a fund manager at Vertium Asset Management in Sydney.

Investors are pushing for simpler and more transparent companies, said Brian Han, an analyst at Morningstar Inc. in Sydney. News Corp.’s Foxtel, Australia’s largest pay-television provider, could be among the next spin-off candidates, he said.

“You go through these periods where companies are urged to get bigger and accumulate things,” Han said. “And then you reach the other end of the cycle where investors and directors start thinking it’s more efficient to spin them off.”

©2018 Bloomberg L.P.