In the last few weeks, Thomas Langer and myself have been talking about structural separation via spin-off at length, and interestingly yesterday’s news gave us an illustration of what it might look like. I’ll let Thomas describe this to you in his own words:
Yesterday, one of Europe´s largest utilities, German e.on announced its plans to split into two publicly listed companies via a spin-off. This approach nicely corroborates our views of how fixed access spin offs could add value to the incumbent sector. Admittedly, market dynamics in the energy and communications markets are not comparable. Without going into the details of the motivation for the decision (excess capacity in the power generation market, repercussions of the decision by the German government to wind down nuclear power), a number of details of the proposed transaction highlight some of the aspects we discussed in our „Structural Separation“ study:
1. Even large European companies are considering spin-offs to release value for shareholders. The presentation to analysts mentions strategic, operational as well as financial benefits. These range from the creation of „more focused companies“, less complexity of organisational structures and a „better alignment between rewards and results“. Last , but not least the transaction „provides tow different and compelling investment opportunities.“
2. Interestingly, the spin-off will lead to structural separation between traditional power generation on the one side and green power and services on the other. Clearly this suggests that a shift in technology and a focus on service orientation both played a role.
3. The initial spin-off will take place in 2016, in less than two years. This illustrates that large organisations can execute a reorg. within a short time frame. Skeptics that look at structural separation in communications markets as too complicated should analyse this deal. It´s doable.
4. One slide of the presentation deck is entitled „Safguarding emloyees interests“. This corresponds ideally to our standpoint that a spin off must not be seen as a means for job cuts and larger downsizing. This would risk losing both internal support and consent of labour unions.
Ah yes: The e.on share was up by more than 4% by midday yesterday while the German Dax was slightly down.
So, not a telecoms sector example and not perfectly mappable, but interesting to examine. And remember, the best example out there is New Zealand, and we’ve described it at length in one of our reports entitled Can the New Zealand NGA Model be Replicated?