The Obvious Conglomerate Value In The UK Stock Market 1

Last week’s announcement of a split of Costa from the rest of the Whitbread business has got me thinking, there is a lot of untapped value to be found in UK stocks. Just take Whitbread for instance. The sum of parts value per share is estimated to be about £50 as seen by this FT piece (….. Yet Whitbread is still trading in the low £40s and was trading in the £30s for most of last year and the year before when I initiated my position. It was clear to see Whitbread offered much more than its share price suggested but most investors didn’t want to look past the top line. It’s shame the market waited this long to understand the business and re-rate the shares to account for it’s hidden value.

Spin-offs of businesses that do not have an underlying strategic fit to the core purpose of a business are great for investors. For an example of this, have a look at how much shareholders in Ebay have made since its spin-off of Paypal in 2015. Before the spin-off took place, the market capitalisation of Ebay was $76 billion. Looking at the market capitalisation of both companies today, it is $126 billion! I am not sure Investors would have got this extra uplift if Paypal had stayed a part of Ebays business.

There are a number of reasons for this. Firstly, Ebay was stifling Paypal’s growth as a number of merchants were reluctant to receive payment via PayPal as they knew that profits would go to their competitor, Ebay (Incidentally, this is the same reasons PepsiCo spun off Yum brands – owner fo KFC, Taco Bell, Pizza Hut – because many other restaurants and takeaways threatened to switch supplier to Coca Cola). Secondly, by being a complete separate entity, there would be more accountability and management could give time to each of Ebay and Pay Pal. Thirdly, it allowed a re-rating. While PayPal was under the Ebay umbrella, it was not rated in line with other peer companies and this made the old Ebays stock price be rated at a lower level as a result.

As can be seen, if there is no strategic fit between businesses, a spin-off or sale should occur. Too many management teams want to empire build to the detriment of shareholders. This is what happened in the case of GKN plc.

GKN plc is a British multinational automotive and aerospace components company. It’s common knowledge that there are no strategic benefits to holding the differing businesses under one conglomerate structure. Yet management remained inactive and shareholders had enough and sold out which drove the price towards £3 a share. Melrose saw there opportunity and swooped in to buy the company for £4.65 a share. GKN management were inept and were so scared for their jobs that they spent £107 million in fees to advisors on its ultimately unsuccessful takeover. And workers and campaigners were actually against this takeover. Madness! But looking at it from a pure business perspective, a bit of restructuring and streamlining of the business will see Melrose do very well from this takeover. 

There are many cases present in the UK market where the share price does not reflect the hidden value in a business. GSK seems to be the one thrown out a lot with the sum of parts valuation of its consumer products pharma and vaccines business being more than its current share price. They are others though. Sainbury’s and its £11 billion property portfolio against its £6.6 billion market cap (They could spin off their property portfolio like Sears and Seritage did but I’d prefer if they kept it) . Associated British Foods and its vastly different business ranging from clothing retail to packaged foods to sugar. Shire and its rare disease and hyperactivity medicines businesses. Imperial Brands and its cigar business. WPP and their stable of differing brands. And my personal favourite, DMGT and all the differing businesses under its corporate umbrella as I’ve written about before. And this is just the large businesses. Discrepancies of this nature are plentiful in small caps. Just look at Mollins and Aiea PLC for proof of this.

Hidden untapped value seems to be everywhere. But in order to find it you have to know where to look and be patient. You need to be able to dig into the accounts of a business to spot hidden assets and value. But more importantly, you need to be patient as it can take years fro that value to be realised.