By Dhanendra Kumar
Demergers are increasingly becoming tools for large companies to unlock shareholder value. In recent years, large Indian and global companies have used this method to separate or hive off their business units either because the sum of the part valuation is more than the prevailing one or because the individual business units no longer need the support of their parent entity.
To be sure, demergers have long been in vogue as a concept globally. For instance, the mid-90s saw the creation of Lucent Technologies through a spin-off from AT&T. Similarly, Conoco emerged after a split from chemicals major DuPont. The 2000s continued this trend with major corporate restructurings at conglomerates like Tyco and the Altria Group. In India, too, demergers have become a compelling avenue for wealth creation in the last two decades. From the various corporate actions at Reliance Industries to the recent demergers announced/ completed by Raymond, Quess Corp, and Vedanta, India Inc is increasingly embracing this mechanism. But what makes demergers so potent, and why should investors care?
At the heart of its appeal lies the ability to unlock hidden shareholder value. Conglomerates, by their nature, often trade at a “conglomerate discount” — a phenomenon where the market values the sum of a company’s parts less than their standalone potential. This discount stems from various reasons — operational aspects, divergent business cycles, and a lack of investor clarity on the conglomerate’s sprawling portfolio. A demerger strikes at the core of this discount by allowing each entity to stand on its own merits. For instance, Reliance Industries has been demerging its mature business units as they become capable of standalone performance growth. While the subsequent performance of the demerged entities may vary, the initial unbundling allows shareholders to gain direct exposure to high-growth sectors rather than a diluted stake in a sprawling empire.
More recently, Vedanta Ltd’s September 2023 announcement to demerge its aluminum, oil and gas, power, and iron and steel businesses into independent listed companies exemplifies this trend. According to the company, the move allows investors to bet on specific sectors — like aluminum and oil and gas — as per their choices. Investors and creditors have strongly supported this rationale, which is best visible in the 99%-plus approval the demerger proposal received in February. Brokerages like PhillipCapital, Emkay, Nuvama, and Equirus have also issued reports indicating a significant value unlocking in the company once the demerged entities are listed on the stock exchanges.
Beyond shedding the conglomerate discount, demergers empower companies to pursue focused growth strategies. In a conglomerate, a high-growth business can be impacted by the underperformance of other units, limiting the ability to attract capital or management attention. A demerger liberates these entities, allowing them to chase sector-specific opportunities easily. Consider Larsen & Toubro, which demerged its cement business into UltraTech Cement (later acquired by Aditya Birla Group). After the demerger, UltraTech scaled rapidly to become one of India’s largest cement producers, capitalising on the country’s infrastructure boom. Shareholders of the demerged entity benefitted as UltraTech’s market cap has soared over the years.
Another underappreciated benefit of demergers is improved operational efficiency. Standalone entities can attract specialised management teams, tailor capital allocation to their unique needs, and benefit from a sharper corporate identity. This is particularly relevant in India, where conglomerates often juggle diverse sectors — from steel to software — under one roof. For instance, in the case of Vedanta, the resulting companies which operate in diverse sectors can focus on their core business areas and allocate capital according to the business fluctuations, growth cycles, and trends. Demergers also democratise wealth creation for retail investors. When a company spins off a unit, shareholders typically receive proportional shares in the new entity at no additional cost. This “bonus” effect can compound returns over time, especially during strong economic growth and upsides in business cycles.
As India’s economy matures, demergers will likely gain more traction. Regulatory support such as fast-track demergers, simplifying regulatory processes to the extent possible, and removing redundant procedures can go a long way to support unlocking value. A lack of a supportive legal regime significantly impacts business growth, expansion plans, wealth creation, and, most importantly, job creation, which is a necessity in a fast-growing economy like India.
The message is clear for investors — demergers are more than corporate housekeeping, they are a gateway to wealth appreciation. By shedding conglomerate clutter, unlocking growth potential, and sharpening operational focus, these restructurings align the interests of companies and shareholders. It is now time for the government and other stakeholders to support this.
The writer is chairman, Competition Advisory Services India LLP.
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