Macquarie Group, which sold Dyno to Incitec in 2008 and is now advising the spin-off alongside UBS, could be the big winner on this particular occasion.
Australian corporate history is rich in highly heralded mergers which of course end in splits, with Wesfarmers and Coles, and Fosters and Southcorp (which became Treasury Wine Estates) being prominent examples.
Ironically, Incitec Pivot announced its split on the same day as Spin-off by Tabcorp of its lottery and betting businesses became official – less than five years after the agreement was reached between Tabcorp and Tatts Group. UBS acted as lead advisor on both transactions.
There are a few other fascinating points of similarity between Incitec Pivot and Tabcorp, including the role that Perpetual’s equity team played behind the scenes in prompting the two boards to consider a split.
And while we like to poke fun a little at investment bankers and dealmakers, it’s worth pointing out that the strategic rationale for the original Incitec Pivot and Tabcorp deals and subsequent spinoffs was, and is, solid.
When Incitec bought Dyno Nobel and Tabcorp took over Tatts Group’s lottery business, the companies were acquiring businesses that would become their crown jewels.
For Incitec, Dyno brought resilience to what had been a notoriously cyclical fertilizer stock. For Tabcorp, the lottery business brought monopoly power that helped offset a betting business’ deteriorating performance under intense competitive pressure.
Splits also make sense. In a particularly prescient article published last month that argued in favor of splitting Incitec, Perpetual said there were two main reasons why splits are good for shareholders.
First, splitting a business into two smaller pieces increases the chances that one of the two businesses will be acquired. (Of 28 Perpetual splits analyzed, one of the two companies created was acquired in a few years on 18 occasions.)
Second, defused entities receive more love once they are defused.
Both factors apply to the split of Incitec. As pure-players, the two companies will be more attractive to potential buyers, and both companies will be able to meet the increasingly specific needs of their customers.
As the fertilizer industry enjoys a moment in the sun amid a global fertilizer shortage, chief executive Jeanne Johns insists high commodity prices are not behind the deal .
On the contrary, she argues that investments over the past three years – when a split was last considered – have helped make the fertilizer business more resilient. At the same time, Incitec’s balance sheet strength has improved to the point where the fertilizer business can be spun off without debt.
Perhaps most importantly, separating Dyno Nobel’s fertilizer cycle business will allow it to shine.
Perpetual portfolio manager Anthony Aboud points out that Incitec Pivot is trading at a price-earnings multiple of just six times 2022 earnings, while Dyno Nobel’s biggest competitor, Orica, is trading at 23 times.
To be clear, he says there are logical reasons for the disparity, particularly the cyclical nature of the fertilizer industry, whose noisy results can tend to beat Dyno Nobel’s numbers. Turning Dyno into a pure play explosives company should lead to revaluation over time.
This is a similar driver to the Tabcorp split, where the infrastructural qualities of the lottery industry have arguably been hidden by the struggles of the betting industry.
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