Forget empires: Australia's company giants plan to shrink to greatness
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Forget empires: Australia's company giants plan to shrink to greatness

Empire-building is so yesterday.

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

CBA plans to get rid off its scandal-ridden wealth-management arm, valued at as much as $10 billion.

CBA plans to get rid off its scandal-ridden wealth-management arm, valued at as much as $10 billion.Credit:Glenn Hunt

After lifetimes spent scaling up, these mainstays of the market are slimming down in a bet that getting rid of problem businesses and having 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 US, stock gains by spun-off businesses this decade are more than double those of the S&P 500 Index.

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. "Suddenly, the management teams care more and they're valued differently."

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

Telstra, Wesfarmers

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

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

Australia's heavyweights have ramped up their spin-off plans.

Australia's heavyweights have ramped up their spin-off plans.Credit:Bloomberg

Fairfax Media - the publisher of the Sydney Morning Herald and Melbourne's The Age - last year spun off its real estate platform Domain. Though with media companies largely seeking to scale up to better compete against global online rivals, its board last month agreed to a $4.2 billion tie-up with free-to-air TV broadcaster Nine Entertainment Co.

Huge pipeline

The conglomerate model has long been under attack on Wall Street from activist investors such as Carl Icahn. He helped push US spinoffs to a peak of $US200 billion ($275 billion) in 2014, when he pressured EBay to hive off PayPal. Shares of PayPal have more than doubled since then. The same year, Hewlett-Packard, as it was then called, said it would split in two.

Spin-offs in the US have paid off for investors.

Spin-offs in the US have paid off for investors.Credit:Bloomberg

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

The huge pipeline here is partly a function of the local sharemarket'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 businesses at current valuations, according to Mr Dive at Atlas Funds.

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

Unlocking value

Wesfarmers investors are already benefiting from the company's narrower footprint, even before Coles officially departs. The stock has soared 30 per cent from its February low after the company ended its disastrous Bunnings foray in the UK, 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.

Investors are pushing for simpler and more transparent companies, said Brian Han, an analyst at Morningstar in Sydney. Pay TV monopoly Foxtel could be among the next candidates in a potential spin-off from Rupert Murdochs's News Corp, 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."

Bloomberg