There's a growing speculation that underperforming Tabcorp Holdings Limited (ASX: TAH) could be next to spin-off part of its operations to turn around its fortunes.
Management is unlikely to contemplate such a move as it would be an embarrassing admission that it's $11 billion merger with Tatts Group less than two years ago was a failure, although the company may not have a choice if the stock falls below $4 a share, according to the Australian Financial Review.
The Tabcorp share price isn't too far off the mark. The stock fell 2.5% to $4.31 in after lunch trade – taking its one-year loss to around 7% when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index is up by 6%.
Why breaking up Tabcorp makes sense
A drop under $4 is likely to pile the pressure on the board to separate its valuable lottery business with its struggling wagering arm, which is facing competitive pressure from the many online rivals.
On the other hand, the lottery business is regarded as an "infrastructure like" investment with monopolistic characteristics and stable cash flows that is relatively unaffected by economic cycles – and we all know how desirable such businesses are given the volatile macro environment and record low interest rates.
Tabcorp's 12.4% stake in online lottery group Jumbo Interactive Ltd (ASX: JIN) is a case in point. The JIN share price has surged more than four-fold in the last year as TAH's share price struggled.
Divesting to outperform
What's more, divestments are all the rage in this market. There are a number of high-profile recent spin-offs that includes Wesfarmers Ltd (ASX: WES) and Coles Group Ltd (ASX: COL), Woolworths Group Ltd (ASX: WOW) and its $10 billion hotels and liquor business, and Commonwealth Bank of Australia (ASX: CBA) and Colonial First State Global Asset Management that was sold for $4.2 billion.
It's not just Australia where divestments are in vogue. The AFR reported that there was $US98.3 billion worth of demergers announced around the world in the first half of calendar 2019 – and that's the third highest on record.
History has shown that divestments have a more consistent track record in generating shareholder value than mergers and acquisitions (M&As). The irony is that it's often the unwanted entity that outperforms, more so than the parent.
This will no doubt motivate Tabcorp's shareholders to push for a break-up at some point in the not too distant future, particularly if the company disappoints at its full year results next Wednesday.
Shareholders aren't in the mood to be disappointed and a few institutional fund managers quoted in the AFR are already suggesting that they would be in favour of the move.
Watch this space, fellow Fools!
