Sei sulla pagina 1di 72

May 2010

Equity
Special report
www.sgresearch.com

SRI an0 gle

Corporate spin-offs and demergers


Best-case scenario for developed economies

Our watchlist
Alcatel-Lucent ArcelorMittal SA BASF S.E. Bayer AG Carrefour S.A Commerzbank AG. Deutsche Telekom AG EADS E. ON AG Enel S.p.A. Ericsson Finmeccanica S.p.A. Henkel Hochtief AG ING Groep N.V. Metro AG Motorola Inc. Munchen Ruck Philips PPR S.A. Repsol YPF S.A. Royal Bank of Scot.Group Plc Saint-Gobain S.A Siemens AG Statoil ThyssenKrupp AG Vivendi S.A.

Source: SG Cross Asset Research

Head of Long-Term Sustainable Research Daniel Fermon (33) 1 42 13 58 81


daniel.fermon@sgcib.com

Senior SRI analyst Yannick Ouaknine (33) 1 58 98 23 50


yannick.ouaknine@sgcib.com

And SGs equity analysts

Please see important disclaimer and disclosures at the end of the document

Macro

Commodities

Forex

Rates

Equity

Credit

Derivatives

Source : www.loicharari.com

Corporate spin-offs and demergers

May 2010

Corporate spin-offs and demergers

Contents
4 6 6 9 Has the time come to spin off or demerge? Salutary spin-offs Merger and spin-off cycles Mergers & spin-offs: different situations, different economies

11 Spin-off: the changing face of M&A in developed countries 14 Corporate spin-offs: best-case scenario 14 Three reasons to have a spin-off cycle 17 SG Cross Asset Research spin-off screening tool 17 Sector analysis 18 Results 19 Conclusion - back to focusing on the core 20 Sector review 21 Aerospace & Defence - Only few spin-offs expected 23 Air transport - Ripe for takeovers rather than spin-offs 25 Automobiles - Emerging players are changing the game 27 Banks - Focusing on their core business 30 Capital goods - Focus on core business is the key 34 Construction, Motorways & Building Materials - Companies already focused on sub segments 36 Food products - No spin-offs on the agenda 38 Food & Staples Retailing - Expand in emerging markets or spin off unprofitable assets? 40 General Retailing - Difficult to survive 42 Hotels, Restaurants & Leisure - Still fragmented 44 Household & Personal Care - More consolidation than spin-off 46 Insurance - Changing regulatory rules 48 Luxury goods - No spin-offs to expect 50 Media - Already well split between sub-sectors 52 Metals & Mining - Trend moving from consolidation to spin-off 54 Oil & Gas - Oil leaders ready to spin off non-core assets 56 Pharmaceuticals - Big is beautiful but for how long? 58 Real Estate - Spin-off of industrial groups would be beneficial 60 Software & IT Services - Offshore factor dominates IT services 62 Telecom Equipment - Many spin-off options 64 Telecom Services - Spin off foreign businesses? 66 Utilities - Many assets for sale
Report completed on 5 May 2010 Thanks to Nicolas Harari for his assistance in preparing this report.

May 2010

Corporate spin-offs and demergers

Has the time come to spin off or demerge?


Following our October 2009 Worst Case Debt Scenario report that analysed the risk related to the public debt explosion, we are now focusing on potential positive factors for developed economies worldwide. As we are coming out of the recession, potential M&A moves may be coming to the forefront and the idea of spinning off non-core assets looks increasingly appealing. Companies are seeking opportunities, waiting for recovery signs while benefiting from low rates and healthy balance sheets. Therefore, we expect a 32% rise in M&A deals in 2010 (see Marc Teyssiers SG Cross Asset Quant Research report Training your computer to find potential M&A candidates published 2 March 2010). But, with anaemic western economies, companies in these regions are also looking for acquisitions specifically in emerging markets where, they believe, future growth could be generated.
Finding growth in emerging markets
GDP Growth

China
g k in lo o s re a s a are h nie pa rowt com in g ern and st p We ex to

India

High growth High profitability Brazil

Low growth Low profitability US

Russia UK

Japan Eurozone

Profitability
Source: SG Cross Asset Research

To finance part of their acquisitions with debt, companies will face competition from sovereign debt. Therefore, one of the solutions would be to divest part of their non-core assets through spin-offs to fund future growth. For some sectors, this should be fairly easy to do, whereas in other sectors, there is nothing to sell and competition from emerging companies will also have to be tackled. In the chart below we show our view of sector spin-off potential.
Sector view of spin-off potential
Emerging markets development: growth Air Transport 93% Household & Personal Care Luxury Goods 83% Consolidation Aerospace Automobilles & Pharmaceuticals 73% Components Food & Staples Retailing Food products Telecom Services 63% Hotels, Restaurants & Leisure Software & IT Services Media 53% Real Estate General Insurance Retailing 43% and competition

Oil & Gas Telecom Metals & Construction, Equipment Mining Motorways & Building Materials Banks

Sectors where we see potential spin-offs

Utilities Chemicals Capitals goods High

33%

Low

Diversification

Source: SG Cross Asset Research / Datastream

May 2010

Corporate spin-offs and demergers

In company terms, we have highlighted 27 companies which could at some stage decide to spin off certain businesses. Among the names mentioned, a portion has already announced that they are thinking of spin-offs, whereas others could be forced to do so by their shareholders if their stock performance starts to disappoint.
Our 27 stock selection
Company name Sector Country Reco Currency Target Price (loc cur) Price (loc cur) 4/05/10 Sales Market Cap (lc m) (lc m) 2010e P/E Return on EPS Growth 10e Equity 10e 09-10e

EADS Finmeccanica Hochtief Philips Saint-Gobain Siemens PPR Repsol-YPF Statoil Carrefour Metro Henkel ArcelorMittal BASF SE ThyssenKrupp Vivendi Bayer AG ALCATEL Ericsson Motorola Inc Deutsche Telekom E.ON Enel Commerzbank Royal Bank of Scot. ING Group Munich RE

Capital Goods Capital Goods Capital Goods Capital Goods Capital Goods Capital Goods Consumer Durables & Apparel Energy Energy Food & Staples Retailing Food & Staples Retailing Household & Personal Prod. Materials Materials Materials Media Pharmaceuticals & Biotech Technology Hardware & Equ. Technology Hardware & Equ. Technology Hardware & Equ. Telecommunication Services Utilities Utilities Banks Banks Insurance Insurance

France Italy Germany Netherlands France Germany France Spain Norway France Germany Germany France Germany Germany France Germany France Sweden US Germany Germany Italy Germany UK Netherlands Germany

Sell Hold Hold Buy Buy Buy Buy Hold Buy Buy Hold Buy Buy Buy Hold Buy Hold Hold Buy Hold Buy Hold Buy Sell Hold Buy Buy

EUR EUR EUR EUR EUR EUR EUR EUR NOK EUR EUR EUR EUR EUR EUR EUR EUR EUR SEK USD EUR EUR EUR EUR GBP EUR EUR

12 10 61 30 47 92 121 18 165 45 43 43 37 54 26 22 52 2.2 100 6.5 10.8 29 5.1 3.6 0.55 9 125

13.85 9.6 62.27 25.48 37.26 73.09 102.75 143.6 36.88 46.76 40.07 29.57 44.6 24.76 19.93 47.17 2.39 7.1 9.88 28.19 3.96

42584.5 18662.7 17972.7 25640.2 38615.1 73752.1 16930.3

11303.1 5547.3 4358.9 25125.3 19114.4 66819.1 13006 21621.5 25993.3 15153.8 7139 46156.3 40959.6 12738.7 24499.7 39007.1 5540.2 16421.4 43081.1 56408.2 37237.3 7072.8 31505.5 26361.1 21161.5

17.1 9.8 22.8 14.7 15.4 12.8 13.8 9.9 9.1 13.6 15.6 16.8 10.6 10.2 43.7 8.9 13.7 58.9 13.2 29.2 12 8.5 7.2 nm nm 7.4 9.1

6.1 8.6 8 7.8 8.3 15.9 7.7 10.7 23.5 15.4 16.5 14.2 8.9 18.8 4 10.3 13.6 -2.9 12.2 5.5 9.8 15.3 15.4 -5.4 0.2 na na

271.8 -7.5 12 141.6 85.7 9.5 19.4 68.2 30.5 -26.3 43 43.2 92.1 46 144.7 4.4 18.2 117.3 88.5 nm 5.2 6 19.1 79.4 33.9 289.1 -3.1

17.71 898.785* 91836.4 68161.9 14039.7 90745.9 57800 45212.1 27588.2 32015.2 15233.4 22134.2 64048.9 77523.3 58594

1760* 457889.7

84.2 207654.6 253576.4

5.99 12039.6** 0.54 22484.8** 6.88 50160*** 107.2 4213.9***

* Production ** Total income *** Operating income Source: SG Cross Asset Research

May 2010

Corporate spin-offs and demergers

Salutary spin-offs
The recent economic crisis has undermined the concept of consolidation, as huge losses from over-expensive acquisitions have revealed the risks facing large corporations implicated in M&A deals. As we exit the recession, there is once again a growing buzz around potential M&As and increasing interest for spin-offs. Companies are seeking opportunities, waiting for signs of recovery while also benefiting from low interest rates and healthy balance sheets (see Marc Teyssiers SG Cross Asset Quant Research report Training your computer to find potential M&A candidates published 2 March 2010). And, with anaemic western economies, these companies may now be looking for acquisitions opportunities specifically in emerging markets where they believe future growth lies. But, what can be learned from history?

Merger and spin-off cycles


Spin-off potential reflects industry maturity
Companies are created, expand and gain market share through innovation, and eventually can become sector leaders, before smaller, innovative entities catch up. This is how we could summarise the lifecycle of a company.
Business lifecycle

Spin offs and Demergers Maturing via restructruring Expansion via external growth to acquire leadership Growth via Internationalization Start-up phase:

Industry's birthinacountry
Source: SG Cross Asset Research

A solution to tackle this situation could be to become even larger via acquisitions, although in some cases, this could create monopolistic situations. But, most of the time, a company with numerous activities sends a blurred image to external financial analysts and its own shareholders. Indeed, it is particularly complex to value a company with varied core businesses. An activity requiring heavy investments with growth rates near to zero mixed with an activity generating strong growth but overdrawn will inevitably make company strategy more opaque. A spin-off involves the creation of an independent company from an existing part of another company through a divestiture, such as a sale or distribution of new shares. Spin-offs (which represented only 16% of M&A deals in 2007/2008) clearly equate to strategy which pushes companies to concentrate their financial resources on the core business. History tells us that this option is the best way to create shareholder value.

May 2010

Corporate spin-offs and demergers

Legislation favoured spin-offs and demergers in the past


If we analyse US stock market history starting from the end of the 19th century, we can identify four major M&A waves. They last on average nine years and, so far, two of them were followed by spin-off phases.
Annual number of US mergers and acquisitions
14000
Fourth wave

2000 1800 1600 Spin1400 off? 1200 1000 800


Spin-off Spin-off Bankruptcies

12000 10000
Third wave

8000
First M&A wave Second wave

6000 4000 2000 0 1896 1916 1936 1956 1976 1996

600 400 200 0

Number of M&As

Real S&P 500 Stock Price Index

Source: Nelson series, Thorpe series, FTC Broad series, M&A Domestic series and from 1984 Thomson Financial, Real S&P 500 Stock Price Index compiled by Schiller

When mergers create a monopolistic situation, the legislator can become less supportive (as was the case with the Sherman Act, followed by the Clayton Anti-trust Act in 1914 and the Tax Reform Act in 1969). In 2010, we could see a similar situation arise in the financial sector as we believe the US administration could decide to downsize banks. We could also see countries specifically aiming to protect their industries and their national champions. The recent proposals from Lord Mandelson, the UKs business secretary, to review UK takeover laws following the bid from Kraft on Cadbury is a good example of this. Indeed, political impetus could adjust regulations with the intention of putting a halt to excessive consolidation. Moreover, the recent warning from Warren Buffet following Krafts bid for Cadbury reminds predators that shareholder interests should come first. Overpaying for major acquisitions is no longer acceptable. Logically, this would suggest that we have entered the spin-off phase.

Low volatility is key for spin-offs


As we exit the recession, we should now get an idea of those who learnt from the past and those, owing to ignorance of previous cycles, who have not. Those who disregarded history are likely to suffer. They applied the old M&A model, continuously expanding as they tried to gain more and more market share by increasing size/scale and diversifying. But, those who we believe have learned from past experience and acknowledge that M&A transactions at the peak of an economic cycle are likely to achieve little, are instead more likely to favour using cash saved during the peak to find opportunities when the cycle touches bottom. In other words, they would adopt an expansion strategy through focused M&As, often when the business cycle has returned to lows.

May 2010

Corporate spin-offs and demergers

Four M&A cycles and valuation


14000 60

End of M&A wave followed by dropping P/E


12000
48

50

10000 40 8000
28

6000 4000 2000 0 1896 1916 1936 Number of M&As


Source: SG Cross Asset Research

26 20

22

Reagan reduces income and capital gains marginal tax rates


12

30

30

20

19

20

11 7

13

10

0 1956 1976 P/E 1996

On a complementary side with no clear market trend, a spin-off is a way for companies to differentiate, to push valuations higher than their direct competitors, as fund managers tend to favour focused companies with clear strategies. Logically, a spin-off enables a better valuation of a company thanks to clearer visibility on accounts. Ideally, each spun-off entity would obtain an optimum valuation and, therefore the valuation of the whole is greater than the sum of its parts. While synergies could be expressed as 1 + 1 = 3 (a very simplified expression of the reason behind M&A transactions), a spin-off could, similarly, be expressed as 2 = 1 + 1 (+ 1) (with (+1) reflecting the premium that could be gained from better legibility/transparency of company accounts). In summary, after a market crash, companies tend to focus on value creation and profitability. As a result, we generally see more spin-offs at that time. But, this requires a certain amount of market stability. It seems that 2010 could see a strong spin-off phase. Already several deals have been announced not only in the US but also in Europe (see part 2).
Volatility trend of the S&P (VIx)
100

Spike in volatility => No more M&As

80

60

Spin off?

40

20

Spin-off wave

0 1928 1938 1948 1958 1968 1978 1988 1998 2008

Source: SG Cross Asset Research

May 2010

Corporate spin-offs and demergers

Mergers & spin-offs: different situations, different economies


A new model, but for whom?
The last M&A cycle proved to be slightly different as it was longer, with two waves (1997-2001 and 2004-2007) and involved an overall shift from the US to Europe and also very significant repositioning in favour of emerging markets and Asia. As a matter of fact, for the first time ever, we saw simultaneous worldwide development of global companies in many sectors (pharmaceuticals, telecoms, technology, banks, etc.). The trend towards globalisation in the last decade has led to a race to gain competitive advantage, and emerging markets have taken advantage of this. Globalisation, deregulation, privatisation, reform and restructuring have all spurred an extraordinary increase in crossborder M&A.
Geographical split of M&As activity
100% US 80% Europe Asia + Emerging

60%

40%

20%

0% 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009

Source: Thomson One Banker

Thus, during the Asian financial crisis over a decade ago, unaffected European and American multi-national companies seized the opportunity of devalued Asian currencies and low valuations to expand through M&A deals. Now, a role reversal is taking place as the healthy balance sheets of Asian firms are bringing about a number or cross-border M&A deals in Europe and the US. In the early 2000s and up until recently, we saw strong signs of expansion in the eurozone and in eastern European economies. For Q1 10, Europe remained weak in terms of M&A activity.
M&A volume in the European Union
800 Value of deals in bn$ 600 Number of deals 4000 4500

400

3500

200

3000

0 1Q 2007 2Q '07 3Q '07 4Q '07 1Q '08 2Q '08 3Q '08 4Q '08 1Q '09 2Q '09 3Q '09 4Q '09 1Q '10

2500

Source: Dealogic, Bloomberg, SG Cross Asset Research

May 2010

Corporate spin-offs and demergers

Growth in Emerging Markets relative to advanced economies has created a very long M&A cycle. This new trend, pushed forward by strong international competition, is noticeable in the M&A world. Some important deals are now taking place in emerging countries and particularly in Asia which is seen as the growth market of the next decade. Hence we just saw Prudential bidding for the Asian insurance operations of AIG, the troubled insurance company.

The role of emerging markets in mergers


If we take the different criteria needed to spark a new M&A cycle, we realised that these criteria are fulfilled mainly in emerging countries.
M&A criteria
USA 1996-2000 2004-2007 2010-2013 1996-2000 Europe 2004-2007 2010-2013 Emerging markets 1996-2000 2004-2007 2010-2013

Low rates Low Gearing + high Cash flow Low level of consolidation Bullish GDP growth forecast Possibility of restructuring

XX XXX XX XXX XX

XXX XXX XX XXX XXX

XXX XXX X X X

XX XXX XXX XXX XX

XXX XXX XX XXX XX

XXX XXX X X X

X X XXX X XX

XXX XX XXX XXX XXX

XXX XXX XXX XXX XXX

Scale from x to xxx, Source: SG Cross Asset Research

Recently, we have also seen interest from companies in emerging countries to develop in more mature markets. This is clearly linked to the new economic cycle which reflects the rapid development of emerging companies and their valuation premiums compared to western companies.
Previous and current business cycle
Previous economic cycle
Interest rates rising

Current economic cycle

1 2001-2003 US Economic Slowdown

4 2012-2013e Economies slow

1 2007- 2009 Crisis in developed economies

4 2006-2007 Growth stabilising

Yuan revaluation?

High consumer spending and rising inflation

LBO and M&A

Market Stress

Interest rate drop

Emerging Markets IPOs


Inflation/ Interest rate hikes

Market stress
Interest rate cuts + fiscal stimulus

Capex

Corporate debt reduction


2 2003.2004 Start of recovery

Capex M&A Spin-off

Government debt increasing

2004-2006 Low interest rates: consumer borrows

3 2011-2012e Rise in consumption and investment Improving consumer confidence

2 2009- 2010e Recovery in emerging markets and rise in commodity prices

Recovery and Growth

Source: SG Cross Asset Research

For example, Chinas outbound foreign direct investment has been facilitated lately by Chinese policy measures. The government is publicly boosting Chinese international investment appetite by easing and decentralising regulatory procedures but also by broadening firms foreign investment financial channels. Further motivation lies in the growth
10 May 2010

Corporate spin-offs and demergers

drivers needed at home. China has high demand for resources such as iron, oil, cement, timber for infrastructure projects, and housing as well as production for domestic and foreign consumption. Since the start of the economic crisis, Chinese firms have acquired significant positions within the worlds largest companies. China has 47 companies listed in the FTs 2009 global 500 list, and Chinese cross-border investment amounted to of $170 billion in 2008. This is a tremendous amount of money for a country supposedly lagging in foreign investment terms, and media coverage has created concerns that Chinese firms may be attempting to buy up the whole world! Thus, in 2009, Chinese purchases of US businesses jumped 300%, reaching $3.9bn. China is rebalancing its growth model, as the country is shifting from an economic model with growth that had been sustained for 30 years by producing goods for export, to a model that is gaining increased significance beyond domestic borders. This new model is driven by attractive valuations abroad, but also because the Chinese know that they can no longer rely on expanding economies of scale. This could come to a halt however, due to recent tension between the Peoples Republic of China and western corporations.

Emerging market oriented European groups


In our emerging markets report Beyond the cycle World consumption: emerging countries definitively taking the lead published last year, we highlighted 30 European groups which have a strong focus on emerging markets in their business model. We split this group into three categories: consumers, industrials and financials.
The 2009 SG EEEM basket
Consumers Capital goods /Industry Financials

Anheuser-Busch InBev Beiersdorf Carrefour Diageo Ericsson Inditex LVMH Nestl Nokia Renault Telenor Unilever Volkswagen
Source: SG Cross Asset Research

ABB Atlas Copco BHP Billiton Lafarge Holcim Saipem Schneider Siemens Technip Veolia Environnement Xstrata

BBVA Erste Bank HSBC Prudential Santander Standard Chartered

Spin-off: the changing face of M&A in developed countries


Spin-offs vs. diversification
Firms increasing their focus through the divestment of non-core assets present significantly positive long-term performance potential. Going forward, we believe that the most successful firms will be those concentrating on their core businesses. This is in line with our expectations mentioned above, that large and diversified businesses have managerial constraints, which render the overall entity less efficient. As the business model shifts from diversification to focus-driven M&A, the number of spin-offs should create a market for acquisitions of smaller firms. At present, we observe that the framework is currently favourable for the development of spin-offs in developed countries.
May 2010 11

Corporate spin-offs and demergers

Spin-off criteria
USA Europe Emerging Comments

Diversification Weak value creation Weak ROE

XX XXX XXX

XX XXX XXX

XX X X

Diversified companies in Europe and US will favour spin-offs Weak performance in the US and Europe favours spin-offs Need for value creation

Scale from x to xxx, Source: SG Cross Asset Research

Pay attention to credit ratings


A firms overall credit rating reflects an agencys opinion of an entitys ability to repay debt and its capacity to comply with its financial obligations. Credit agencies are concerned with corporate governance and any weakness can impair a firms financial position. As credit ratings dictate the yields on corporate bonds, there is a huge cost differential between speculative grade debt and high-yield debt. The requirement coming out of such a deep crisis is that a company have a sound balance sheet with a longstanding credit history. Ratings are therefore likely to become ever-more important, as investors and corporates alike adopt stricter views on capital adequacy. This new approach to M&As should lead groups to continue their focus on core businesses, shifting away from diversification, where large losses had been incurred in many cases.

The focus on value creation


Focusing time and energy on not missing the new M&A wave has made investors forget the importance of long-term value creation. As, most of the time, merger strategies prove to be unsuccessful in the long run, downsizing and spin-offs could be better solutions for improving profitability and attracting new shareholders.
Shift in M&A patterns

More Mergers than Spin-offs


Size Leadership

More Spin offs than Mergers


Efficiency Value creation

Cost synergies Diversification with new growing markets


Source: SG Cross Asset Research

Focus driven Opportunism with divestment of noncore businesses

Investors are also likely to insist that companies adopt a cautious approach to expansion, considering that these companies are still recovering from losses and the pain suffered during the recession. The only M&A deals likely to be rewarded by investors will be the safer kind, that is to say deals in line with core businesses and objectives, carried out at attractive valuations and that are at least partly paid for in cash.

12

May 2010

Corporate spin-offs and demergers

Corporate spin-offs: best-case scenario


Three reasons to have a spin-off cycle
1) Spin-offs create value
The last two M&A waves failed to create value for shareholders as, most of the time, performances of major companies post acquisitions disappointed. However, below we highlight spin-offs which chalked up impressive stock market performances as well as creating value for shareholders. Recent examples (Time Warner/AOL, Banco Santander and its Brazilian subsidiary, PPR with CFAO, etc.) illustrate that this kind of transaction allows the parent company to focus capital and energy on a core business with higher operating margins. When a CEO looks for alternative strategies to boost ROE, a spin-off could be at the top of the list as it makes sense to separate non-core business to create new leaders. The two charts below represent the performance of two different spin-off samples. It is important to note that the curves represent average performance. To highlight best performers, a more fundamental approach is required to assess if the parent company divested underperforming assets or if a growing company was hived off.
1996-2007 performance of major US spin-offs vs S&P 500 (%)
125 120 115
110

2008 performance of major spin-offs vs respective sector (%)


130

120

110 105 100 95 90 0 100 Duration (days) 200 300 400 500
80 0 50 Duration (days) 100 150 200 250 100

90

Source: SG Cross Asset Research

On the left graph, we present the performance of newly-traded spin-offs in the US from 1996 to 2007. Most US-domiciled spin-offs file a Form 10-12B with the SEC. Therefore, we used the SEC website to constitute our sample. Then, we compared the relative performance of the different spin-offs to obtain the average spin-off price trend throughout its lifecycle. We then compared each value with the S&P500 performance over the same period and compiled the results to obtain this curve. On the right graph, we picked 2008 spin-offs with market capitalisation greater than USD 1 bn and studied their performance over 250 trading days. We used the same method to compile this chart but, our sample being smaller, we compared each stock to its respective sector: an example being Suez Environment relative to the MSCI World Utilities.

May 2010

13

Corporate spin-offs and demergers

2) Spin-offs lead to job creations


Spin-offs could help to tackle the issue of unemployment. In the US, we have observed that, in

the past 15 years, spin-off companies have created employment independently of the business cycle. Most of the new jobs were created during the first four years after the demergers. The same analysis of the parent company is a much more complex exercise owing to scale, but it is clear that management is likely to be more efficient in focusing its energies on one core business rather than on a broad range of different types of business lines.
Evolution of spin-off workforce through time
35% 30% 25% 20% 15% 10% Average 5% 0% 1 3 5 7 9 11 13 Median

Spin-offs create jobs 60 to 70% of the time


100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1 2 3 4 5 6 7 8 9

% Job-destroying companies

% Job-creating companies

Source: SG Cross Asset Research

Source: SG Cross Asset Research

In developed economies, spin-offs are favoured when restructuring and lay-offs are difficult to justify. When unemployment is high, it is difficult to justify an acquisition, particularly as it may prove to be more difficult to achieve efficient restructuring. As we are still forecasting a high level of unemployment in the next two years in developed countries (with a peak at the end of 2010), M&A activities with cost synergies will likely be difficult to achieve. On the contrary, a spin-off tends to create jobs and value for shareholders. The point is that the level of employment was exceptionally high during the last M&A cycle at that time and allowed companies to restructure. But since then, the increase in the unemployment rate has made restructuring more difficult than ever. As an example, in Japan, although interest rates have been very low for a number of years, and companies have been generating high levels of cash flow, we did not see the development of a major M&A cycle as it has always been difficult to restructure in this country, particularly with the ever-present issue of steadily increasing unemployment.
Employment/Population ratio (bureau of labor statistics)
14000 12000 10000 8000 6000 4000 2000 0 1948 1958 1968 1978 1988 1998 2008 Number of M&As Employment / population ratio 66 64 62 60 58 56 54 52 50

Source: SG Cross Asset Research

14

May 2010

Corporate spin-offs and demergers

3) Spin-offs could be good for economic growth


The correlation between GDP growth and M&A activity is high and, as we expect weak economic growth in developed countries, corporates are likely to favour spin-offs. A spin-off of an activity is a very different choice for management as it allows a company to concentrate on its core businesses and it is a clear way to stand out from competitors. When GDP growth is weak, management has no visibility on future industry prospects and therefore does not wish to embark on risky mergers.
GDP growth and M&A movements following the same growth path
8 1.3 6 0.8 4 0.3

-0.2

-2 1982 1987 Gdp Growth


Source: SG Cross Asset Research - GDP yoy

-0.7 1992 1997 2002 M&A Value, Y oY Growth 2007

If we consider the figures overall, we can see that, in developed countries, there is a high level of concentration in most industries.
Concentration
Top 5 by sales Household & Personal Care Aerospace Pharmaceuticals Food products Food & Staples Retailing Automobiles & Components Software & IT Services Telecom Equipment Telecom Services Oil & Gas
Source: SG Cross Asset Research

Top 10 88% 77% 72% 68% 67% 67% 59% 60% 67% 74%

Top 5 Top 10 by market capitalisation 73% 53% 48% 59% 52% 47% 56% 52% 43% 41% 90% 76% 75% 75% 71% 71% 69% 67% 64% 59%

64% 49% 43% 48% 48% 44% 41% 40% 45% 52%

Following the last wave of mergers and depending on the sector, we estimate that there are 5% to 30% of company assets to divest or spin off. The high level of concentration and the lack of restructuring possibilities owing to high unemployment prompts us to think that spin-offs will make a strong contribution to economic growth thanks to the two factors mentioned above.

May 2010

15

Corporate spin-offs and demergers

SG Cross Asset Research spin-off screening tool


Sector analysis
Our sector analysis shows that the so called diversified sectors should see a wave of spin-offs (in green) whereas on the left of the graph, the potential for spin-offs is limited given the low degree of diversification of the companies shown there. On top of that, those sectors may face competition from emerging market companies which want to expand internationally. In some cases, the emergence of new leaders from emerging markets is also a threat to future profitability.
Sector spin-off and demerger potential
Emerging markets development: growth Air Transport 93% Household & Personal Care Luxury Goods 83% Consolidation Aerospace Automobilles & Pharmaceuticals 73% Components Food & Staples Retailing Food products Telecom Services 63% Hotels, Restaurants & Leisure Software & IT Services Media 53% Real Estate General Insurance Retailing 43% and competition

Oil & Gas Telecom Metals & Construction, Equipment Mining Motorways & Building Materials Banks

Sectors where we see potential spin-offs

Utilities Chemicals Capitals goods High

33%

Low

Diversification

Source: SG Cross Asset Research / Datastream

Methodology: four criteria to identify potential spin-offs


The aim of our screening system is to determine who could decide to spin off non-core assets. Having tested a range of criteria, we have opted for the three below which we believe are the most relevant.

Diversification measured by an efficiency ratio (sales/market cap.). We look at below-average ratios compared to the sector and the size of the company. For the second part of the document, we have crossed these two criteria on the main companies of each sector, in order to have a broad view of the results. However, in the list provided in the table overleaf, we focused only on companies followed by our analysts. Profitability measured by below-average Return on Equity ratio compared to the sector.

Three-year underperformance versus peers. Behavioural finance shows that market reaction to news is at times excessive, creating high volatility as markets are pushed above or below fundamentals before reverting. The psychology behind the overreaction to unexpected or dramatic news based on empirical evidence reflects inefficiencies. Based on these inefficiencies we can conclude that the market reaction tends to overweight recent news and events. Therefore, we will focus on a three-year timeframe and concentrate on companies

16

May 2010

Corporate spin-offs and demergers

which could spin off activities which are then likely to generate higher-than-average returns after being hived off. Testing these three criteria suggests that the first is the most important, so we focus on these in our quantitative screening for the sector-by-sector review. But, to determine the final list from the companies followed by our analysts, if the criteria match, we consider the company to offer the potential for a spin-off. Logically, we have eliminated stocks where there are no non-core assets to divest.

Results
The table below gives a list of 27 companies highlighted by our screening that are covered by SG analysts and could be considered as having potential spin-off candidates. Note that, in some cases, our sector analysts do not believe the companies flagged are in the mood to consider spin-off possibilities in the short term.
Our 27 stock selection
Company name Sector Country Reco Currency Target Price (loc cur) Price (loc cur) 4/05/10 Sales Market Cap (lc m) (lc m) 2010e P/E Return on EPS Growth 10e Equity 10e 09-10e

EADS Finmeccanica Hochtief Philips Saint-Gobain Siemens PPR Repsol-YPF Statoil Carrefour Metro Henkel ArcelorMittal BASF SE ThyssenKrupp Vivendi Bayer AG ALCATEL Ericsson Motorola Inc Deutsche Telekom E.ON Enel Commerzbank Royal Bank of Scot. ING Group Munich RE

Capital Goods Capital Goods Capital Goods Capital Goods Capital Goods Capital Goods Consumer Durables & Apparel Energy Energy Food & Staples Retailing Food & Staples Retailing Household & Personal Prod. Materials Materials Materials Media Pharmaceuticals & Biotech Technology Hardware & Equ. Technology Hardware & Equ. Technology Hardware & Equ. Telecommunication Services Utilities Utilities Banks Banks Insurance Insurance

France Italy Germany Netherlands France Germany France Spain Norway France Germany Germany France Germany Germany France Germany France Sweden US Germany Germany Italy Germany UK Netherlands Germany

Sell Hold Hold Buy Buy Buy Buy Hold Buy Buy Hold Buy Buy Buy Hold Buy Hold Hold Buy Hold Buy Hold Buy Sell Hold Buy Buy

EUR EUR EUR EUR EUR EUR EUR EUR NOK EUR EUR EUR EUR EUR EUR EUR EUR EUR SEK USD EUR EUR EUR EUR GBP EUR EUR

12 10 61 30 47 92 121 18 165 45 43 43 37 54 26 22 52 2.2 100 6.5 10.8 29 5.1 3.6 0.55 9 125

13.85 9.6 62.27 25.48 37.26 73.09 102.75 143.6 36.88 46.76 40.07 29.57 44.6 24.76 19.93 47.17 2.39 7.1 9.88 28.19 3.96

42584.5 18662.7 17972.7 25640.2 38615.1 73752.1 16930.3

11303.1 5547.3 4358.9 25125.3 19114.4 66819.1 13006 21621.5 25993.3 15153.8 7139 46156.3 40959.6 12738.7 24499.7 39007.1 5540.2 16421.4 43081.1 56408.2 37237.3 7072.8 31505.5 26361.1 21161.5

17.1 9.8 22.8 14.7 15.4 12.8 13.8 9.9 9.1 13.6 15.6 16.8 10.6 10.2 43.7 8.9 13.7 58.9 13.2 29.2 12 8.5 7.2 nm nm 7.4 9.1

6.1 8.6 8 7.8 8.3 15.9 7.7 10.7 23.5 15.4 16.5 14.2 8.9 18.8 4 10.3 13.6 -2.9 12.2 5.5 9.8 15.3 15.4 -5.4 0.2 na na

271.8 -7.5 12 141.6 85.7 9.5 19.4 68.2 30.5 -26.3 43 43.2 92.1 46 144.7 4.4 18.2 117.3 88.5 nm 5.2 6 19.1 79.4 33.9 289.1 -3.1

17.71 898.785* 91836.4 68161.9 14039.7 90745.9 57800 45212.1 27588.2 32015.2 15233.4 22134.2 64048.9 77523.3 58594

1760* 457889.7

84.2 207654.6 253576.4

5.99 12039.6** 0.54 22484.8** 6.88 50160*** 107.2 4213.9***

* Production ** Total income *** Operating income Source: SG Cross Asset Research

May 2010

17

Corporate spin-offs and demergers

Conclusion - back to focusing on the core


We expect to see fewer major M&A deals than in 2007, especially in mature markets, however we will most probably see an increase in small- and medium-sized M&A transactions, one major contribution being large groups spinning-off some of their assets. Furthermore, renewed activity is likely to come from foreign bidders, as cross-border M&A is continuing on a strong expansionary trend, in line with the fast-growing contribution to global GDP from emerging markets. Regulatory change and policy choices could play a role in how far China is able to extend its expansion, and one could certainly envisage large cross-border deals in the near future as economic uncertainty fades. But, as we can see from recent history, the future of non-focused companies is never bright. While one could be fooled into thinking that diversified companies offer a well-balanced portfolio of assets, suggesting that they are low-risk companies, it should be borne in mind that these companies often suffer from an inability to generate strong growth in all businesses. Furthermore, management could miss a problem in a non-core asset. Therefore, we believe that the time is right to spin-off non core assets. We anticipate a strong spin-off cycle in 20102012 and expect industries such as capital goods, utilities, banks, chemicals and building materials to hive off non-core assets.

18

May 2010

Corporate spin-offs and demergers

Sector review
Below, we present a series of two-page sector analyses of spin-off possibilities. In each case, the first page contains:

A sector data/valuation table and a chart showing sector performance. A brief overview of industry trends. A chart showing the top ten companies ranked by market capitalisation.

The second page contains: Our sector map, using just two of the three spin-off criteria: sales/market cap and sales:
In the top right-hand section of the map are located many companies that have historically been active in M&A deals and probably now have assets to sell. Basically the theory is that when sales are substantial and the sales/market cap ratio is high, the sales are not fully valued and the company probably has assets to spin off. In this area, we find many conglomerates and/or groups which made major acquisitions in the past, thus inheriting non core assets. The top left-hand section shows industry leaders with generally solid positions in their core business and few non-core assets.

The bottom left-hand section shows growth companies generally medium-sized companies with low market cap in relation to their sales.

On the bottom right, we present what we call doldrum companies which generally have a high market caps but relatively low levels of sales.

After this map, we have our analysts fundamental view on the prospects of spin-offs in their sector and we conclude with a list of the key potential spin-off candidates in the sector, based on their coverage, when there is one. We used MSCI World indexes to constitute our samples. In the Sector Valuation table, the Median and the Total lines are calculated from the entire sample and include companies from geographical areas which are not displayed in the table.

May 2010

19

Corporate spin-offs and demergers

Aerospace & Defence Only few spin-offs expected


Sector valuation
Sector Market. Cap ($m) P/E 10e P/BV 09 Dividend Yield 09 LT Interest rates
170

Sector performance
MSCI World Aerospace & Defence MSCI World

US Eurozone UK Japan Median* Total*

342,837 40,109 39,244 NA 12,962 429,093

14.6 16.4 13.4 NA 15.0

2.95 1.27 2.87 NA 2.62

2.06 2.28 2.27 NA 2.20

3.77 3.08** 3.99 1.29 NA


80 140

110

50 2005 2006 2007 2008 2009 2010

* Median and Total are calculated from the entire MSCI World Sector Index, ** German LongTerm Interest Rate, Source: SG Cross Asset Research Data as of 4 May 2010

Industry trend: new entrants from emerging markets


We believe that in the next five years, the most important factors affecting aerospace and defence sector performance will relate to: 1) European market consolidation, and 2) new market entrants. The European aerospace and defence industry saw a major wave of consolidation six to eight years ago. We note that in defence, in particular, Europe has a large number of prime contractors relative to the size of the European defence market. By comparison, the US has five main contractors, only two of which attempt to maintain full combat aircraft manufacturing capability (Boeing and Lockheed Martin). The US defence procurement budget is considerably larger than the combined EU defence procurement budget, making the European manufacturer base appear overcrowded. However, we believe this is largely due to each country wishing to maintain a defence capability.
Top ten companies (by market cap)
UNITED TECHNOLOGIES BOEING HONEYWELL INTL. LOCKHEED MARTIN GENERAL DYNAMICS RAYTHEON 'B' NORTHROP GRUMMAN PREC.CASTPARTS BAE SYSTEMS ROLLS-ROYCE GROUP 0
Source: SG Cross Asset Research
in $bn

10

20

30

40

50

60

70

80

20

May 2010

Corporate spin-offs and demergers

SG view
Sector map
Industry Leaders
Sales BOEING EADS (PAR) UNITED TECHNOLOGIES LOCKHEED MARTIN NORTHROP GRUMMAN GENERAL DYNAMICS HONEYWELL INTL. BAE SYSTEMS RAYTHEON 'B' FINMECCANICA BOMBARDIER 'B' S/M* THALES ROLLS-ROYCE GROUP L3 COMMUNICATIONS SAFRAN ITT GOODRICH PREC.CASTPARTS ROCKWELL COLLINS SINGAPORE TECHS.ENGR. COBHAM Growth CAE

Larger than necessary?

companies

Doldrums

*S/M: Sales / Market capitalisation; Source: SG Cross Asset Research

In recent years (2006-2008), the focus for European companies was on expansion into the US market, not only because of its size, but also as a hedge against the eight-year depreciation of the US dollar. Given the state of the M&A market, transactions are likely to be confined to smaller bolt-on acquisitions. Aerospace companies have tended to acquire small businesses over the past few years, and this should continue. In shareholding structures where the state has true power as a shareholder and/or client, spinoffs may end up being a political decision. However, overall many groups appear to have a fairly low efficiency ratio as shown in our map above. Among the groups followed by SG analysts, we believe that spin-offs could be a solution for companies like Finmeccanica or EADS which failed to deliver performance and are not focused enough.
Finmeccanica: The group has identified the Transport and Energy activities as non-core. Transport

has been subject to an IPO with the retention of a 40% stake. Energy is poised either for an IPO or for a stake to be sold to an industrial partner in the medium term.
EADS: The Airbus and non-Airbus businesses are run as distinct entities but a recent initiative has

been to integrate the support functions. The group is dominated by Airbus which perhaps leaves the non-Airbus activities undervalued in the depressed valuation of the overall group. A partial IPO of either the Airbus or non-Airbus activities would give a better valuation for each part.
Stocks to watch
Company Country Reco Target Price (loc cur) Price loc cur) 04/05/10 09 Sales (m) Market Cap (m) P/E 10e Return on Equity 10e EPS Growth 09-10e

EADS Finmeccanica

France Italy

Sell Hold

EUR EUR

12 10

13.85 9.6

42584.5 18662.7

11303.1 5547.3

17.1 9.8

6.1 8.6

271.8 -7.5

Source: SG Cross Asset Research

May 2010

21

Corporate spin-offs and demergers

Air transport Ripe for takeovers rather than spin-offs


Sector valuation
Sector Market. Cap lc m P/E 10e P/BV 09 Dividend Yield 09 LT Interest rates

Sector performance
MSCI World Airlines 170 MSCI World

US Eurozone UK Japan Median* Total*

19,911 22,776 4,011 7,961 7,632 82,163

13.5 NA NA NA 20.7

NA 1.22 1.60 1.75 1.51

0.13 NA NA NA NA

3.77 3.08** 3.99 1.29 NA

140

110

80

50 2005 2006 2007 2008 2009 2010

* Median and Total are calculated from the entire MSCI World Sector Index, ** German LongTerm Interest Rate, Source: SG Cross Asset Research Data as of 4 May 2010

Industry trend: looking for a new development model


The rate of global fleet growth fell in 2009 and should flatten out in 2010 and 2011. This should remain below the historical average rate of 4.7% until 2015. The low cost carrier segment has increased its share of intra-European traffic primarily through organic growth, although there have been some notable acquisitions, most recently Easyjets acquisition of GB Airways in 2008. Their share of intra-European seats was around 35% in 2008, up from 9% in 2000. Biggest among the low cost carriers are Ryanair (8%) and Easyjet (6%). We expect low cost carriers to continue to grow their share, albeit at a slower rate. In order to boost consolidation between European airlines and those of other regions, governments will need to agree to regulatory changes to lower the barriers to foreign ownership. Talks between the EU and the US include an intention to lower barriers to ownership, but we believe that it may be unrealistic to expect foreign ownership limits to exceed 49% (currently 25% in the US, but 49% in the EU) in the near to medium term.
Top ten companies (by market cap)
SINGAPORE AIRLINES SOUTHWEST AIRLINES DELTA AIR LINES CATHAY PACIFIC AIRWAYS ALL NIPPON AIRWAYS DEUTSCHE LUFTHANSA (XET) RYANAIR HOLDINGS QANTAS AIRWAYS AIR FRANCE-KLM BRITISH AIRWAYS 0 2 4 6 8 10 12 14
in $bn

Source: SG Cross Asset Research

22

May 2010

Corporate spin-offs and demergers

SG view
Sector map
Industry Leaders
Sales

Larger than necessary?


DEUTSCHE LUFTHANSA (XET) DELTA AIR LINES AIR FRANCE-KLM BRITISH AIRWAYS

ALL NIPPON AIRWAYS QANTAS AIRWAYS SOUTHWEST AIRLINES SINGAPORE AIRLINES CATHAY PACIFIC AIRWAYS IBERIA

S/M*

Growth companies
RYANAIR HOLDINGS

Doldrums

*S/M: Sales / Market capitalisation; Source: SG Cross Asset Research

There have been some significant steps in the consolidation of the European airline sector in recent years, including Air Frances acquisition of KLM in 2004 and Lufthansas acquisition of SWISS (consolidated in 2007). Lufthansa now has a number of pending acquisitions: Brussels Airlines, Austrian Airlines and BMI. Merger talks are also ongoing between British Airways and Iberia. If all these deals go through, the top three players will control 72% of the traffic of the Association of European Airlines (compared with 48% in 2000). This sector was identified last month as the most likely to consolidate. Our efficiency map shows that European leaders are not well valued, but spin-offs could be difficult as Airlines is a global business and companies are already focusing on their core business. Consequently, we do not see any potential spin-offs in this sector. However, we believe that in relative terms, Lufthansa and Air France are the two companies which should restructure their business.

May 2010

23

Corporate spin-offs and demergers

Automobiles Emerging players are changing the game


Sector valuation
Sector Market. Cap lc m P/E 10eDATE P/BV 09 Dividend Yield 09 LT Interest rates

Sector performance
MSCI World Automobiles & Components 170 MSCI World

US Eurozone UK Japan Median* Total*

91,922 268,646 NA 360,948 7,863 721,516

22.1 19.0 NA 23.3 21.1

2.40 1.01 NA 1.29 1.24

NA 1.25 NA 0.82 0.79

3.77
140

3.08** 3.99 1.29 NA


50 2005 2006 2007 2008 2009 2010 110

80

* Median and Total are calculated from the entire MSCI World Sector Index, ** German LongTerm Interest Rate, Source: SG Cross Asset Research Data as of 4 May 2010

Industry trend: emergence of new players


Recent shifts in the sector reflect the difficulties at US players. Confronted with a depressed domestic market, they may have to sell or withdraw brands such as Hummer, Saturn and Saab in the case of GM and Volvo at Ford, or to find partners to shore up their finances (e.g. GMs Opel subsidiary, if it survives). With an average 70/30 variable/fixed cost breakdown, operating leverage should be extremely unfavourable and is likely to result in losses for many manufacturers. Even historically solid Japanese groups are suffering from the collapse in US sales. The recent crisis, which has exceeded all forecasts, is forcing the sector into effective restructuring. Some players look set to downsize significantly and there may be opportunities for car manufacturers with the best financial positions to grow more rapidly or strengthen existing businesses. Some more recent, highly ambitious carmakers are emerging, such as Hyundai (ranked No. 5 worldwide) and SAIC (Shangai Automotive Industry Corp.). Chinas SAIC is now producing about 1.7m units annually, thanks to a successful JV with VW and GM in China, and is looking to grow very rapidly. It recently merged with another Chinese carmaker, Nanjing, the owner of MG Rover operations in Europe. Asia (excl. Japan) is clearly driving growth. Between 2004 and 2008, worldwide sales increased by only 8% while sales in Asia (excl. Japan) increased by 30%, and China became the biggest Auto market in 2009.
Top ten companies (by market cap)
TOYOTA MOTOR HONDA MOTOR DAIMLER (XET) FORD MOTOR NISSAN MOTOR BMW (XET) VOLKSWAGEN (XET) DENSO JOHNSON CONTROLS FIAT 0
Source: SG Cross Asset Research
in $bn

20

40

60

80

100

120

140

160

24

May 2010

Corporate spin-offs and demergers

SG view
Sector map
Industry Leaders
Sales TOYOTA MOTOR HONDA MOTOR DAIMLER (XET) NISSAN MOTOR BMW (XET) DENSO JOHNSON CONTROLS RENAULT BRIDGESTONE SUZUKI MOTOR MICHELIN AISIN SEIKI MAZDA MOTOR S/M* FORD MOTOR PORSCHE AML.HLDG. (XET) PREF. FIAT PEUGEOT

Larger than necessary?


VOLKSWAGEN (XET)

MAGNA INTL.'A' DAIHATSU MOTOR GOODYEAR TIRE & RUB. FUJI HEAVY INDS.

Growth companies
HARLEY-DAVIDSON TOYODA GOSEI BORGWARNER NGK SPARK PLUG STANLEY ELECTRIC
*S/M: Sales / Market capitalisation; Source: SG Cross Asset Research

MITSUBISHI MOTORS ISUZU MOTORS

YAMAHA MOTOR

Doldrums

Big was beautiful for carmakers until recently when groups like General Motors understood it was no longer possible to maintain so many different brands. GM is trying very hard to slash costs and to sell non-core assets; however, this is less feasible in the current economic environment. For example, Sichuan Tengzhong was unable to complete the Hummer acquisition in February 2010. The M&A model shows that there could be a wave of sector deals in 2010 but mostly among manufacturers. For the manufacturers, we see almost no big mergers but some spin-offs may be possible. We also expect aggressive development in Asia, especially China. For example, Zhejiang Geely Holdings Group, a Chinese carmaker, is completing the Volvo acquisition. We believe two companies could spin-off some assets, Renault and Peugeot. Fiat announced on 21 April the spin-off of the groups industrial units by year-end. The new company, Fiat Industrial SpA FI - will be the majority owner of the agricultural and construction equipment manufacturer, CNH; the truck maker, Iveco, and the engine producer Fiat Powertrain Technologies FPT Industrial & Marine activities. Fiat SpA will remain the parent company of the other units, which comprise the auto activities, the components and FPT auto. Stock price jumped by 9.3% the day of this announcement. Renault: To reduce net financial debt of close to 6bn, we believe that the group will have to sell some assets, such as properties, and, in a much bigger move, its 20% stake in Volvo AB (trucks) worth around 3bn. There are no obvious links between Renault and Volvo AB, except limited partnerships in small trucks. Peugeot SA does not need to make disposals to rapidly improve its financial situation. However, our view is that a deconsolidation of Faurecia (57%-held component supplier) could take place via acquisitions made using share swaps, reducing Peugeots stake from a majority to a minority shareholding. At 1.4bn end-2009, Faurecias net debt currently represents most of Peugeot groups debt (2bn).
Stocks to watch
Company Country Reco Target Price (loc cur) Price 04/05/10 (lc) 09 Sales (m) Market Cap (m) P/E 10e Return on Equity 10e EPS Growth 09-10e

Peugeot Citroen PSA Renault

France France

Buy Buy

EUR EUR

34 43

22.63 35.58

52400 35200

5133.8 10523.3

9 15.5

5 3.6

166.3 119

Source: SG Cross Asset Research

May 2010

25

Corporate spin-offs and demergers

Banks Focusing on their core business


Sector valuation
Sector Market. Cap lc m P/E 10e P/BV 09 Dividend Yield 09 LT Interest rates

Sector performance
MSCI World Banks 140 MSCI World

US Eurozone UK Japan Median* Total*

677,306 726,494 408,911 253,540 9,579 2,481,999

14.5 12.3 14.5 18.3 13.9

1.46 0.79 0.93 0.89 1.03

2.53 2.01 0.82 1.41 1.88

3.77
110

3.08** 3.99 1.29 NA


20 2005 2006 2007 2008 2009 2010 80

50

* Median and Total are calculated from the entire MSCI World Sector Index, ** German LongTerm Interest Rate, Source: SG Cross Asset Research Data as of 4 May 2010

Industry trend: re-prioritising towards core businesses


The past investment banking cycle was dominated by the growth of the major Investment banking players in Europe and Asia, both by the US Investment banks and their major European peers. The recent crisis has concentrated market share in the hands of fewer players as some market participants have disappeared, a trend which we believe will persist given the increasing capital and regulatory hurdles facing investment banking businesses in the post-crisis environment. For Universal banks, the lending excesses in more geared consumer markets combined with mispricing and over-lending in some commercial lending businesses (e.g. commercial real estate lending) exacerbated the cyclical downturn, inhibiting the generation of capital against the backdrop of a growing need to do so, leading to potential restraints on future growth and more limited distributions to stakeholders. Banks cannot be divorced from the macro conditions in which they operate. The common trends we envision across banking markets for the next few years will be lower volumes as banks increase margins to compensate for higher funding costs, reduced revenue-generating capacity from lower levels of invested assets in a risk-averse environment and loan loss impairments, which, although they should peak in H1 10, may be sticky and are unlikely to fall back close to pre-crisis levels. Regulatory reform with increased capital demands is likely to be the primary focus for bank managements, determining both external growth development and distribution policies.
Top ten companies (by market cap)
BANK OF AMERICA HSBC HDG. (ORD $0.50) WELLS FARGO & CO JP MORGAN CHASE & CO. CITIGROUP BANCO SANTANDER ROYAL BANK CANADA COMMONWEALTH BK.OF AUS. BNP PARIBAS GOLDMAN SACHS GP. 0
Source: SG Cross Asset Research
in $bn

20

40

60

80

100

120

140

160

180

200

26

May 2010

Corporate spin-offs and demergers

Higher capital needs should result in a re-prioritising towards core businesses. The need to prioritise capital generation will have a number of consequences: 1) businesses which are lacking in scale or which have structurally low profitability will be de-emphasised; 2) with capital demands increasing under Basel 3, some banks may decide to withdraw entirely from some businesses in order to focus their capital resources on core business areas, leading to some retrenchment towards domestic/home markets vs international operations; 3) competition in many businesses will be lower, further enhancing pricing power and market share of the biggest players; and 4) the diversification profile of some banks will worsen in the near term, leaving them more exposed to the macroeconomic outlook for domestic economies.

SG view
Sector map
Industry Leaders
Sales

Larger than necessary?


BNP PARIBAS BANK OF AMERICA ROYAL BANK OF SCTL.GP. DEUTSCHE BANK (XET) MITSUBISHI UFJ FINL.GP. BARCLAYS LLOYDS BANKING GROUP ING GROEP BANCO SANTANDER

HSBC HDG. (ORD $0.50) JP MORGAN CHASE & CO. CITIGROUP

WELLS FARGO & CO UNICREDIT COMMERZBANK (XET) CREDIT SUISSE GROUP N GOLDMAN SACHS GP. MORGAN STANLEY INTESA SANPAOLO NORDEA BANK BBV.ARGENTARIA ROYAL BANK CANADA NATIONAL AUS.BANK COMMONWEALTH BK.OF AUS. TORONTO-DOMINION BANK WESTPAC BANKING BK.OF NOVA SCOTIA S/M* DEXIA

Growth companies

AUS.AND NZ.BANKING GP. STANDARD CHARTERED US BANCORP PNC FINL.SVS.GP. BANK OF NEW YORK BLACKROCK MELLON

KBC GROUP

Doldrums

AMERICAN EXPRESS FRANKLIN RESOURCES


*S/M: Sales / Market capitalisation; Source: SG Cross Asset Research

A number of asset sales are required by the EU


Some banks are already required to make asset sales, which is the price to pay governments and/or regulators for the financial support given during the crisis.
Commerzbank: The group has to sell Eurohypo by 2013, which may prove quite difficult given

the state of the Commercial Property markets. Commerzbank must pay back over 17bn of the silent stake provided by the German states Soffin fund, which supported the Dresdner acquisition and credit crisis costs. This will require a combination of capital raisings and possible further asset sales, although the scale of the task appears daunting, increasing the likelihood of some form of debt/equity swap. Dexia must sell Crediop, Dexia Sabadell and Dexia Banka Slovensko within three years.

May 2010

27

Corporate spin-offs and demergers

ING must sell its Insurance activities via a trade sale or IPO, divest ING Direct US, ING

Investment Management and Inter-Advies by the end of 2013. Given the size of the overall ING insurance operations (24.6bn embedded value), the company is likely to run a dual track, and weigh its options, either doing an IPO or selling various operations. In our opinion, the Benelux and US operations are too large to be sold to trade buyers, each with reported embedded values of 7-8bn. However, we believe there would be significant interest in the leading franchises ING operates in various emerging markets.
Royal Bank of Scotland is being forced by the EU to sell RBS Insurance, the RBS/Natwest

branches, William & Glyns, Global Merchant Services and RBS Sempra (partly complete) by 2013.

Revised business models may lead to more businesses being put up for sale
In addition to these forced sales, revised business models prompted by regulatory reform may precipitate asset sales. AIB intends to sell its Polish business, its MIT stake and its UK banking businesses in order to reach the Irish regulators demands in relation to equity Tier 1 capital even before the new Basel 3 rules are decided. Although there has been some political support in the US for the break-up of the largest financial institutions, this does not appear to have found international support. Hence, the wholesale break-up of Universal banks into their constituent Commercial banking and Investment banking parts does not seem likely at the present time. There also has been some pressure on banks to reverse some of the unbridled expansion from the pre-crisis period, e.g. Unicredit, where operations in 22 emerging European economies is seen by many as an unfocused approach which has left the group with limited distribution capacity as it seeks to rebuild its capital base.
UBS: Although UBS is now well capitalised post the difficulties it faced throughout the crisis,

should it fail to turnaround its US Wealth Management business, this could be yet another asset put up for sale. However, the bank remains focused on rebuilding its integrated Wealth Management/Investment banking Group rather than moving back to its pure Private Wealth Management roots.

There will be other banks wanting to acquire these assets


The flip side of the need for some banks to sell assets is that there will be others, e.g. HSBC, JP Morgan, Bank of America, Barclays, Goldman Sachs, Morgan Stanley and Deutsche Bank, which may see opportunities to gain market share via the acquisition of assets put up for sale by weaker banks. The lack of clarity on the future regulatory regime is a constraint for even the better capitalised banks, but we think that the process will accelerate as the regulatory fog clears. We think that the UK banking market may prove attractive for non-UK banks over the medium-term given its size and currently shifting competitive environment.

Emerging markets remain a focus, as does wealth management


Expanding emerging markets activities, particularly in Asia, remain a focus for the stronger banks, as does increasing the weight of wealth management activities, which consume little capital. The likely interest in AIBs Polish assets suggests that European banks remain interested in the long-term potential for emerging Europe banking markets. We think the most likely scenario will be for banks to exchange assets as the focus on core businesses continues. Some banks may need to raise capital in order to continue expanding, e.g. Deutsche Bank with the future acquisition of the Postbank minorities. Should the Basel 3
28 May 2010

Corporate spin-offs and demergers

proposals pass relatively intact, a number of banks with significant minority interests may need to increase these stakes to avoid being penalised from a capital perspective, and stakes in financial companies (e.g. Barclays 20% stake in Blackrock) may also need to be sold, increasing opportunities for investors to participate.
Stocks to watch
Company Country Reco Local Currency Target Price Price 04/05/10 (loc cur) (loc cur) 09 Sales (m) Market Cap P/E 10e Return on (m) Equity 10e EPS Growth 09-10e

Commerzbank Royal Bank of Scotland ING Group UBS


Source: SG Cross Asset Research

Germany United Kingdom Netherlands Switzerland

Sell Hold Buy Sell

EUR GBP EUR CHF

3.6 0.55 9 12.4

5.99 0.54 6.88 17.04

12039.6 22484.8 50160.8 32834.4

7072.8 31505.5 26361.1 65276.7

nm nm 7.4 13.1

-5.4 0.2 na 11.6

79.4 33.9 289.1 410.3

May 2010

29

Corporate spin-offs and demergers

Capital goods Focus on core business is the key


Sector valuation
Sector Market. Cap lc m P/E 10e P/BV 09 Dividend Yield 09 LT Interest rates

Sector performance
MSCI World Capital Goods 160 MSCI World

US Eurozone UK Japan Median* Total*

1,025,457 647,049 67,282 365,510 7,132 2,200,709

18.6 16.9 14.7 23.6 17.7

2.66 2.44 2.87 1.49 2.19

1.74 2.59 2.98 1.16 1.83

3.77
130

3.08** 3.99 1.29 NA


40 2005 2006 2007 2008 2009 2010 100

70

* Median and Total are calculated from the entire MSCI World Sector Index, ** German LongTerm Interest Rate, Source: SG Cross Asset Research Data as of 4 May 2010

Industry trend: emerging markets take the lead


By definition, emerging markets have a bigger appetite for capital goods than developed economies. Much of the strong investment in China and India is not cyclical. It is structural in that it is meeting the social goals of the government and is unlikely to change, regardless of what happens to the US and European consumer. Capital goods investment has been the key driver of Chinas 10%+ growth co-existing with low inflation over the past five years. Due to the rising proportion of sales in emerging markets (on average 30% of sales), capital goods companies have to continue relocating production and sourcing in these areas in the coming years. This ongoing process likely will be achieved in three ways:

Transfer of sourcing from developed economies (mainly euro-denominated) to developing

markets (primarily in dollar-pegged currencies). Schneider, for example, plans to transfer around 250m of purchases per annum to low-cost countries (LCCs).

Relocation of production and R&D centres to regions outside Europe, primarily to LCCs. Closing and relocating plants to developing countries, which is a costly process. On the

whole, although the expansion of emerging markets should boost sector growth in the medium term, European companies could find their margins squeezed. New rivals of global scale are set to emerge.
Top ten companies (by market cap)
GENERAL ELECTRIC SIEMENS (XET) 3M ABB 'R' CATERPILLAR EMERSON ELECTRIC MITSUBISHI PHILIPS ELTN.KONINKLIJKE SCHNEIDER ELECTRIC HUTCHISON WHAMPOA 0
Source: SG Cross Asset Research
in $bn

50

100

150

200

250

30

May 2010

Corporate spin-offs and demergers

SG view
Sector map
Industry Leaders
Sales GENERAL ELECTRIC

Larger than necessary?


SIEMENS (XET) MITSUBISHI

MITSUI

CATERPILLAR ABB 'R'

ITOCHU

PHILIPS ELTN.KONINKLIJKE HUTCHISON WHAMPOA SUMITOMO VOLVO 'B' ALSTOM

3M SCHNEIDER ELECTRIC EMERSON ELECTRIC ILLINOIS TOOL WORKS KOMATSU

DEERE TYCO INTERNATIONAL S/M* MAN (XET)

Growth companies

DANAHER SANDVIK PACCAR

EATON CUMMINS VESTAS WINDSYSTEMS

INGERSOLL-RAND

Doldrums

FIRST SOLAR FANUC

ATLAS COPCO 'A'

*S/M: Sales / Market capitalisation; Source: SG Cross Asset Research

Sector consolidation could mark time in several regions, as new emerging market rivals arrive on the scene and become more aggressive in international markets, putting additional pressure on prices. We have identified three main potential spin-offs in this environment: General Electric, Philips, and Siemens, which are all diversified. However, their sound balance sheets mean they do not have to make this tough decision. Most of them will probably prefer to remain diversified and make acquisitions in non-euro countries. Thus, leaders, such as Siemens and ABB, are likely to continue external growth in emerging markets.
Siemens: The groups strategy is to focus on its three core sectors (Industry, Energy and

Healthcare). As a result, two of its current divisions could be put up for sale in the medium term: 1) SIS (4,686m sales, 90m in earnings in 2009): SIS is a provider of IT services which generates one-third of its sales internally. SIS will also be carved out (put into a separate legal entity), which makes possible an exit (via sale or IPO) in the medium term. 2) Hearing aids (sales of 700m): The business has a significant break-up value (probably worth >2bn). A disposal would highlight management's willingness to continue to streamline the portfolio and dispose of non-core businesses. But given the business is highly profitable (margins of around 20%), this would have a slightly dilutive impact on margins (-10bp) and EPS (-0.7%). Finally Siemens could also exit from its Mobility business. The transport business is isolated within Siemens and holds back the overall margin and growth profile of the group.
Philips: The group has had a very active portfolio streamlining strategy over the past 10 years. We

believe that the sale of the Television business (2009 sales 3.1bn, EBIT losses -180m) is the last necessary step in the groups strategic repositioning. Fixing the Television business is difficult given structural pricing pressure and rising competition. As a result, this business is holding back the companys growth profile, depresses group margins and, in our view, explains the stocks below average earnings rating (10% discount to the European Capital Goods sector on 2010e EV/EBITA).
Stocks to watch
Company Country Reco Target Price (loc cur) Price 04/05/10 (loc cur) 09 Sales (m) Market Cap (m) P/E 10e Return on Equity 10e EPS Growth 09-10e

Philips

Netherlands

Buy EUR Buy EUR

30 92

25.48 73.09

25640.2 73752.1

25125.3 66819.1

14.7 12.8

7.8 15.9

141.6 9.5

Siemens Germany

Source: SG Cross Asset Research

May 2010

31

Corporate spin-offs and demergers

Chemicals Spin-offs should take off


Sector valuation
Sector Market. Cap lc m P/E 10e P/BV 09 Dividend Yield 09 LT Interest rates
170

Sector performance
MSCI World Chemicals MSCI World

US Eurozone UK Japan Median* Total*

280,758 207,897 5,698 114,254 7,055 624,381

16.8 16.8 20.1 21.5 18.0

3.42 2.34 3.18 1.34 2.08

1.47 2.21 2.37 1.40 1.66

3.77 3.08** 3.99 1.29


80 140

110

NA
50 2005 2006 2007 2008 2009 2010

* Median and Total are calculated from the entire MSCI World Sector Index, ** German LongTerm Interest Rate, Source: SG Cross Asset Research Data as of 4 May 2010

Industry trend: focus when possible


The current environment means that even financially strong listed companies are typically avoiding all but the smallest bolt-on deals for now. Some planned M&A has been derailed. This includes, for example, Akzo Nobels plan to sell the former ICI speciality starches business, and Dows failed $9bn joint venture deal with Petrochemicals Industries Company of Kuwait in commodity petrochemicals and plastics operations. This deal was intended to partly finance the now renegotiated US$19bn Rohm & Haas specialty chemicals acquisition. This situation is made more likely by the precarious financial position of an increasing number of companies, which need to refinance debt and are seeing their credit ratings come under pressure. This includes several leading players, notably the private groups built on debt (LyondellBasells US operations are now in Chapter 11), and the need for companies involved in recent M&A to strengthen their balance sheets. This is already resulting in M&A activity.
Top ten companies (by market cap)
BASF (XET) E I DU PONT DE NEMOURS DOW CHEMICAL MONSANTO POTASH CORPORATION OF SASKATCHEWAN AIR LIQUIDE PRAXAIR SHIN-ETSU CHEMICAL SYNGENTA MOSAIC 0
Source: SG Cross Asset Research
in $bn

10

20

30

40

50

60

32

May 2010

Corporate spin-offs and demergers

SG view
Sector map
Industry Leaders
Sales

Larger than necessary?


BASF (XET) DOW CHEMICAL E I DU PONT DE NEMOURS MITSUBISHI CHM.HDG. AKZO NOBEL

AIR LIQUIDE LINDE (XET) SUMITOMO CHEMICAL ASAHI KASEI TORAY INDS. PPG INDUSTRIES MONSANTO SYNGENTA DSM KONINKLIJKE AGRIUM YARA INTERNATIONAL PRAXAIR SHIN-ETSU CHEMICAL AIR PRDS.& CHEMS. SOLVAY ORICA MOSAIC ECOLAB POTASH CORPORATION OF SASKATCHEWAN Growth NITTO DENKO WACKER CHEMIE (XET) K + S (XET) GIVAUDAN 'N' SIGMA ALDRICH NOVOZYMES
*S/M: Sales / Market capitalisation; Source: SG Cross Asset Research

S/M*

companies

Doldrums

Over the past three years, chemicals companies have started refocusing on their core business, for instance divesting plastics (see Dows last deal) or selling pharma (see Solvay), in order to improve efficiency. The best example comes from the gas business where the refocus is almost complete. On the other hand, this is not the case for the other businesses. Of the top 10 leading chemical companies by sales, only three BASF, Dow, and Du Pont are listed standalones, while five are the chemicals operations of oil majors and two, LyondellBasell and Ineos, are privately-held. In this industry, some deals are already taking place, e.g. Air Products for Airgas and CF for Terra (Yara made an attempt).
BASF has said it will look to sell Styrenics again; however, apart from this, it is hard to imagine

big disposals at the moment.


Akzo is a buyer not a seller, outside of Specialty Starches, or of a company that could again catch the eye of private equity. Stocks to watch
Company Country Reco Target Price (loc cur) Price 04/05/10 (loc cur) 09 Sales (m) Market Cap (m) P/E 10e Return on Equity 10e EPS Growth 09-10e

BASF SE

Germany Buy EUR

54

44.6

57800

40959.6

10.2

18.8

46

Source: SG Cross Asset Research

May 2010

33

Corporate spin-offs and demergers

Construction, Motorways & Building Materials Companies already focused on sub segments
Sector valuation
Sector Market. Cap lc m P/E 10e P/BV 09 Dividend Yield 09 LT Interest rates
200

Sector performance
MSCI World Construction & Engeneering MSCI World

US Eurozone UK Japan Median* Total*

39,181 96,891 2,892 20,850 4,381 169,931

18.0 14.7 8.4 17.4 16.4

2.32 1.76 1.93 1.00 1.61

0.92 4.73 5.09 1.86 2.46

3.77 3.08**

170

140

3.99
110

1.29 NA
80

50 2005 2006 2007 2008 2009 2010

* Median and Total are calculated from the entire MSCI World Sector Index, ** German LongTerm Interest Rate, Source: SG Cross Asset Research Data as of 4 May 2010

Industry trend: no clear trend


In the construction sector, we expect companies desire to expand in concessions to continue to drive consolidation. The combination of steady revenue streams and tighter risk control offered by the concessions model provides construction sector majors with a means of stabilising their earnings base. Market leadership looks more like a key strategic objective than in the past. Overall, we believe there is still scope for consolidation in more traditional construction activities in Spain, unlike in France, where the substantial market share already held by the three main players restricts the potential for major deals. In the building materials sector, with market leadership a real advantage, the race for strategic

positions looks set to continue. Potential opportunities are becoming scarcer and the gap between the majors and non-majors is widening. However, the current crisis has prompted several cement majors to put some assets up for sale, which could provide opportunities for medium-sized players to catch up. In the cement segment, the focus is likely to be on emerging markets, primarily India, China and Africa. In aggregates, opportunities are mainly to be found in the developed world: the value of a quarry depends on its rarity and there is very little environmental pressure in emerging markets.
Top ten companies (by market cap)
VINCI (EX SGE) SAINT GOBAIN HOLCIM 'R' LAFARGE CRH BOUYGUES ACS ACTIV.CONSTR.Y SERV. ASAHI GLASS HEIDELBERGCEMENT (XET) DAIKIN INDUSTRIES 0 5 10 15 20 25 30 35
in $bn

Source: SG Cross Asset Research

34

May 2010

Corporate spin-offs and demergers

SG view
Sector map
Industry Leaders
Sales VINCI (EX SGE) BOUYGUES HOCHTIEF (XET) CRH LAFARGE HOLCIM 'R' FLUOR ACS ACTIV.CONSTR.Y SERV.

Larger than necessary?


SAINT GOBAIN

SKANSKA 'B' EIFFAGE FERROVIAL

HEIDELBERGCEMENT (XET) LEIGHTON HOLDINGS ASAHI GLASS DAIKIN INDUSTRIES JS GROUP JACOBS ENGR. URS MASCO SNC-LAVALIN GP. ASSA ABLOY 'B'

S/M*

Growth companies
VULCAN MATERIALS

QUANTA SERVICES

IMERYS

JGC

Doldrums

GEBERIT 'R'

BOSKALIS WESTMINSTER CIMENTOS DE PORTL.SGPS MARTIN MRTA.MATS.

*S/M: Sales / Market capitalization; Source: SG Cross Asset Research

The rationale for consolidation in the construction and building materials sectors varies greatly depending on the segment and the specific features of the trade concerned. As a result, the degree of domination must be assessed based on geographic criteria. The worldwide consolidation process is more advanced in building materials than in construction and this is likely to remain the case in the coming years. Based on our screening, some companies expanded outside their core business during the last M&A cycle and could now be tempted to refocus. The economic crisis had a strong and direct effect on companies making them more vulnerable. This situation could push diversified groups like Saint-Gobain, or Hochtief to refocus on their core business.
Hochtief: At the end of 2009, Hochtief had planned to launch an IPO of its concessions business which is mainly minority stakes in several airports. The IPO was cancelled as market conditions were not good enough for the company to obtain a price attractive enough. Hochtief could at some point try to get some value out of its concession business. Saint-Gobain announced the disposal of its Glass packaging unit in 2007. The economic crisis

delayed the sale as the business is generating large cash flows and the company does not want to sell it cheap. Nevertheless, we expect the disposal to take place this year or next.
Stocks to watch
Company Country Reco Target Price (loc cur) Price 04/05/10 (loc cur) 09 Sales (m) Market Cap (m) P/E 10e Return on Equity 10e EPS Growth 09-10e

Saint-Gobain Hochtief

France Germany

Buy

EUR

47 61

37.26 62.27

38615.1 17972.7

19114.4 4358.9

15.4 22.8

8.3 8

85.7 12

Hold EUR

Source: SG Cross Asset Research

May 2010

35

Corporate spin-offs and demergers

Food products No spin-offs on the agenda


Sector valuation
Sector Market. Cap lc m P/E 10e P/BV 09 Dividend Yield 09 LT Interest rates

Sector performance
MSCI World Food Beverage & Tobacco MSCI World

US Eurozone UK Japan Median* Total*

680,241 488,233 283,168 94,552 8,683 1,602,759

14.5 15.3 15.4 21.5 15.5

3.01 2.86 4.18 1.36 2.49

2.74 1.83 3.65 1.71 2.28

3.77 3.08** 3.99 1.29 NA

140

110

80

50 2005 2006 2007 2008 2009 2010

* Median and Total are calculated from the entire MSCI World Sector Index, ** German LongTerm Interest Rate, Source: SG Cross Asset Research Data as of 4 May 2010

Industry trend: a multiple sub segment to spin off


There may be more M&A activity in the US, where the sector has struggled more than in Europe. Under pressure from retailers (which are highly concentrated and often discount), European food products companies have constantly restructured to improve efficiency in order to be able to pay their customers various types of off-invoice margins (including wedding presents for a merger). In the US, retailers have not yet focused their strength enough to get to this point. In the past, European food producers have often looked for targets in the US because of this lessened competition. The food products sector is mature in developed markets. Growth is found more easily on emerging markets, which is where consumption increases year after year. We have seen little change in leadership among the sectors top international companies. Nestl remains the world leader by a wide margin both in terms of market capitalisation and sales. Based on our two main criteria, Nestl scores more than twice as high as its closest competitor.
Top ten companies (by market cap)
NESTLE 'R' COCA COLA PEPSICO PHILIP MORRIS INTL. ANHEUSER-BUSCH INBEV BRITISH AMERICAN TOBACCO KRAFT FOODS SABMILLER UNILEVER CERTS. ALTRIA GROUP 0
Source: SG Cross Asset Research
Mv in dollars

20

40

60

80

100

120

140

160

180

200

36

May 2010

Corporate spin-offs and demergers

SG view
Sector map
Industry Leaders
Sales NESTLE 'R' JAPAN TOBACCO ARCHER-DANLS.-MIDL. UNILEVER CERTS. PEPSICO KRAFT FOODS PHILIP MORRIS INTL. ANHEUSER-BUSCH INBEV COCA COLA WILMAR INTL. KIRIN HOLDINGS BRITISH AMERICAN TOBACCO ALTRIA GROUP GENERAL MILLS DIAGEO SABMILLER KELLOGG CONAGRA FOODS SARA LEE HJ HEINZ PERNOD-RICARD REYNOLDS AMERICAN CAMPBELL SOUP MEAD JOHNSON NUTRITION LORILLARD FOSTER'S GROUP ASSOCIATED BRIT.FOODS IMPERIAL TOBACCO GP. DANONE HEINEKEN S/M*

Larger than necessary?

Growth companies

Doldrums

*S/M: Sales / Market capitalisation; Source: SG Cross Asset Research

The top 10 ranking shows that there are already significant sector leaders, and the sector includes a multitude of sub-segments. It does not make sense for groups to merge if they do not share common interests. Conversely, spin-offs could be seen as a solution to focus solely on core assets. Unsurprisingly, Unilever would appear to be a good candidate for a spin-off given its wide range of businesses. However, the company has decided to do otherwise. Over the past three years, it has implemented a program called One Unilever, for which the main goal is to locally merge the three operational management teams in Food, Personal Care and Household Care. That way every country has only one management and one headquarter for all the groups activities. This strategy has proven to be efficient so far, hence a split would not make sense. Other diversified groups like ABF are well placed on our Sector Map, but not many diversified groups are part of the Food products sector.

May 2010

37

Corporate spin-offs and demergers

Food & Staples Retailing Expand in emerging markets or spin off unprofitable assets?
Sector valuation
Sector Market. Cap lc m P/E 10e P/BV 09 Dividend Yield 09 LT Interest rates

Sector performance
MSCI World Food & Staples Retailing 140 MSCI World

US Eurozone UK Japan Median* Total*

406,221 106,862 74,272 41,772 9,715 727,931

13.5 15.9 13.3 20.5 15.7

2.15 2.36 1.69 1.22 2.09

1.67 2.55 3.33 2.22 2.24

3.77 3.08** 3.99 1.29 NA


50 2005 2006 2007 2008 2009 2010 80 110

* Median and Total are calculated from the entire MSCI World Sector Index, ** German LongTerm Interest Rate, Source: SG Cross Asset Research Data as of 4 May 2010

Industry trend: saturated market


The larger European markets no longer lend themselves to a growth strategy based solely on opening new stores. One reason is restrictive legislation. Most European countries, Germany and France especially, are already saturated with retail facilities. The likelihood for consolidation is also somewhat diminished by Wal-Mart's faltering expansion ambitions in Europe, following the companys withdrawal from Germany in 2006. Legislative uncertainties in France largely have been resolved, allowing more scope for domestic consolidation; however, this is likely to be a mid-term trend as the market is dominated by independent players. The US market remains highly fragmented and offers some interesting consolidation possibilities. It is difficult to talk of a worldwide food retailing sector when even the biggest player, Wal-Mart ($375bn in sales in 2007), operates in only ten countries. In Europe, Wal-Mart operates just in the UK, where it is number two by sales, but has no presence in France, the continent's second-largest market, or Germany. Across Europe, the market fragmentation picture is much the same. Carrefour, the largest European retailer by sales and No. 2 worldwide, has only a 10.5% share of the European market. In second place is Tesco, with just 5.3%.
Top ten companies (by market cap)
WAL MART STORES TESCO CVS CAREMARK WALGREEN CARREFOUR WOOLWORTHS WESFARMERS COSTCO WHOLESALE SEVEN & I HDG. METRO (XET) 0
Source: SG Cross Asset Research
in $bn

50

100

150

200

250

38

May 2010

Corporate spin-offs and demergers

SG view
Sector map
Industry Leaders
TESCO Sales WAL MART STORES CVS CAREMARK COSTCO WHOLESALE SEVEN & I HDG.

Larger than necessary?


CARREFOUR METRO (XET) KROGER AEON SAFEWAY SUPERVALU S/M*

WALGREEN WESFARMERS WOOLWORTHS SYSCO

AHOLD KON. LOBLAW

Growth companies
COLRUYT

SHOPPERS DRUG MART JERONIMO MARTINS WHOLE FOODS MARKET

CASINO GUICHARD-P WESTON GEORGE SAINSBURY (J) DELHAIZE GROUP MORRISON(WM)SPMKTS. METCASH

Doldrums

LAWSON FAMILYMART
*S/M: Sales / Market capitalisation; Source: SG Cross Asset Research

OLAM INTERNATIONAL

A key focus for development has been eastern Europe where Metro is a clear pioneer and leader and Asia, with China still considered to be the Holy Grail. The market potential of these regions and the investments that European retailers have already made in these countries stand to make them long-term sources of growth. The majority of Europe's food retailers are still heavily exposed to western Europe, and the US retailers to North America; however, Tesco, Carrefour and Metro buck this trend with extensive overseas business. The model has been for profitable domestic markets to finance emerging markets expansion. We saw Casino spin off its real estate portfolio two years ago. Now, we consider whether a geographical spin-off would be possible for a company like Carrefour. For its part, Metro has many assets to sell.
Carrefour (Buy, TP 45). We have believed for some time that Carrefour will be the most successful turnaround in the sector after the 3.1bn of cost savings are delivered in 2012e. In the event of failure, Carrefours main shareholder, Blue Capital (50/50 Bernard Arnault and Colony Capital) would push for a partial break-up (sale of non-G4 operations), in our view. Our conservative sumof-the-parts valuation gives 50, i.e. 43% upside from the current level. Metro (Hold, TP 43). Metros management has made no mystery about several potential

disposals: 1) Kaufhof (German Department stores) is considered non core, i.e. on sale. Recently, the Metro CEO was cited in the Financial Times (30/03/10) as saying that the assumption of Kaufhof being sold to a private equity company in 2010 could be realistic. The value of this asset is based on its 50% store ownership. 2) IPO of Consumer Electronics: Metro is the European leader in Consumer Electronics delivering the Best in Class top line and margin. It clearly announced that going public is a mid-term goal. 3) REAL (Food Retail): although less likely today, as Metro recently published encouraging top-line and margin improvements for the division, management has made clear that if REAL was not back at a 2-3% EBIT margin in 2012, the asset would be sold.
Stocks to watch
Company Country Reco Target price (loc cur) Price 04/05/10 (loc cur) 09 Sales (m) Market Cap (m) P/E 10e Return on Equity 10e EPS Growth 09-10e

Carrefour Metro

France Buy EUR Germany Hold EUR

45 43

36.88 46.76

91836.4 68161.9

25993.3 15153.8

13.6 15.6

15.4 16.5

-26.3 43

Source: SG Cross Asset Research

May 2010

39

Corporate spin-offs and demergers

General Retailing Difficult to survive


Sector valuation
Sector Market. Cap lc m P/E 10e P/BV 09 Dividend Yield 09 LT Interest rates

Sector performance
MSCI World Retailing MSCI World

US Eurozone UK Japan Median* Total*

489,828 110,350 28,055 66,471 7,043 736,540

16.6 19.3 12.3 20.7 16.6

3.14 NA 2.01 1.96 2.78

1.50 4.08 3.88 1.14 1.56

3.77 3.08** 3.99 1.29 NA

130

100

70

40 2005 2006 2007 2008 2009 2010

* Median and Total are calculated from the entire MSCI World Sector Index, ** German LongTerm Interest Rate, Source: SG Cross Asset Research Data as of 4 May 2010

Industry trend: profitable groups are highly focused


The tough retail environment has prompted numerous high profile exits from the industry, offering market share opportunities to the larger listed retailers that survive. In addition, beneath the radar of the larger, listed private chains, rising corporate bankruptcy figures in the UK point to large numbers of casualties among independent retailers. Clothing retailers are finding it easier to survive than those in the hardline sector, particularly in big-ticket or home-related areas. This is not surprising, as the clothing market has been more resilient than other parts of non-food retail. Moreover, clothing retailers also produce higher gross and EBIT margins, as well as healthier returns on capital, than hardline retailers. The clothing market looks set to remain very fragmented and competitive, while the alreadyconsolidated home improvement market should become increasingly focused. The electricals market is also likely to become more consolidated, with some smaller chains and independents continuing to drop out.
Top ten companies (by market cap)
AMAZON.COM HOME DEPOT HENNES & MAURITZ 'B' TARGET LOWE'S COMPANIES INDITEX BEST BUY TJX COS. LI & FUNG KOHL'S 0
Source: SG Cross Asset Research
in $bn

10

20

30

40

50

60

70

40

May 2010

Corporate spin-offs and demergers

SG view
Sector map
Industry Leaders
Sales HOME DEPOT TARGET BEST BUY LOWE'S COMPANIES SEARS HOLDINGS AMAZON.COM STAPLES MACY'S PPR YAMADA DENKI TJX COS. PENNEY JC KOHL'S KINGFISHER INDITEX GAP HENNES & MAURITZ 'B' LI & FUNG LIMITED BRANDS NORDSTROM MARKS & SPENCER GROUP JARDINE CYC.& CARR. S/M*

Larger than necessary?

Growth companies

FAST RETAILING LIBERTY MDA.INTACT.'A' BED BATH & BEYOND SHERWIN-WILLIAMS AUTOZONE ESPRIT HOLDINGS RAKUTEN

Doldrums

PRICELINE.COM
*S/M: Sales / Market capitalisation; Source: SG Cross Asset Research

UK companies, which are not a homogenous group, have seen some spin-offs in the past (Kesa Electricals). Administrators were appointed at many retailers from 2008 onwards including Woolworths, MFI, Zavvi, Land of Leather and Sofa Workshop. Some of the brands were sold, either to management or a third party, which usually involved closing part of the store portfolio. As such they should continue to exist, even if only online (e.g. Zavvi and Woolworths). Nevertheless, some capacity has disappeared. The trend to specialise itself will probably continue as retailers seek to improve profitability following the competition of distribution through internet. PPR is probably the most complex stock to analyse in the retail sector. Management has developed several business areas (retail luxury, lifestyle), and the group now resembles a conglomerate. This aspect should lessen in the future as the group focuses on personal equipment by selling all retail banners in 3-5 years. However, for the time being, investors may have difficulty seeing which areas of value creation should yield the best returns and the best upside potential for the shares. We believe there are two: the repositioning of the Gucci brand (+20/share) and the value created by future acquisitions. In our SOP we estimate the value of retail assets at 3.7bn.
Stocks to watch
Company Country Reco Target Price (loc cur) Price 04/05/10 (loc cur) 09 Sales (m) Market Cap (m) P/E 10e Return on Equity 10e EPS Growth 09-10e

PPR

France

Buy EUR

121

102.75

16930.3

13006

13.8

7.7

19.4

Source: SG Cross Asset Research

May 2010

41

Corporate spin-offs and demergers

Hotels, Restaurants & Leisure Still fragmented


Sector valuation
Sector Market. Cap lc m P/E 10e P/BV 09 Dividend Yield 09 LT Interest rates

Sector performance
MSCI World Hotels Restaurants & Leisure 140 MSCI World

US Eurozone UK Japan Median* Total*

262,058 34,856 68,016 14,043 6,407 422,282

17.6 19.5 15.8 27.6 18.1

NA 3.26 1.88 1.79 3.19

1.12 3.64 2.70 1.51 1.76

3.77 3.08** 3.99 1.29 NA


50 2005 2006 2007 2008 2009 2010 80 110

* Median and Total are calculated from the entire MSCI World Sector Index, ** German LongTerm Interest Rate, Source: SG Cross Asset Research Data as of 4 May 2010

Industry trend: a change in the business model


Most of the largest hotel companies have deeply changed their business models, switching from asset-driven to asset-light structures, implying less capital expenditure and higher margins, linked to management or franchise contracts. However, the ongoing deep downturn demonstrates that cyclicality remains strong in the industry despite those changes. In the US, the hotel industry was primarily built in the 20th century, along with hotel chains and the franchise system. In Europe, the current trend is to replace or integrate independent hotels, which is why the penetration rate for hotel chains is continuously rising and the race for market share continues. The ten largest hotel groups account for just 20% of hotel rooms worldwide, of which there are close to an estimated 18 million, including 6.0 million in Europe and 4.8 million in the US. The restaurant market is still highly fragmented despite a wave of consolidation in the late 1990s. The three leading restaurant groups account for under 15% of the global catering market (company and school canteens, offshore oil rigs, army bases, etc.).
Top ten companies (by market cap)
MCDONALDS CARNIVAL STARBUCKS YUM! BRANDS LAS VEGAS SANDS COMPASS GROUP MARRIOTT INTL.'A' SANDS CHINA ACCOR WYNN RESORTS 0
Source: SG Cross Asset Research
in $bn

10

20

30

40

50

60

70

80

90

42

May 2010

Corporate spin-offs and demergers

SG view
Sector map
Industry Leaders
Sales MCDONALDS

Larger than necessary?


TUI TRAVEL COMPASS GROUP

CARNIVAL STARBUCKS YUM! BRANDS

SODEXO MARRIOTT INTL.'A' DARDEN RESTAURANTS OPAP

ACCOR ROYAL CARIBBEAN CRUISES

LAS VEGAS SANDS

STARWOOD HTLS.& RSTS. WORLDWIDE APOLLO GP.'A' H&R BLOCK ORIENTAL LAND

MGM MIRAGE BENESSE HOLDINGS TABCORP HOLDINGS S/M*

SANDS CHINA WYNN RESORTS

Growth companies
ICTL.HTLS.GP. SHANGRI-LA ASIA GENTING SINGAPORE

TIM HORTONS

CROWN INTL.GAME TECH. DEVRY

WHITBREAD

Doldrums

*S/M: Sales / Market capitalisation; Source: SG Cross Asset Research

It has become increasingly difficult to expand organically in Europe because of regulations and high real estate prices, making acquisitions a prized source of growth. The main hotel groups have therefore made many acquisitions (Accor with Dorint in Germany, Hilton with Stakis and Scandic, etc.), as this is a rapid way of rounding out regional coverage and facilitating brand development. The recent emergence of specialised investment funds could kick-start hotel development, but barriers to entry remain strong, and financing is currently extremely rare in the sector. The long-term potential in Europe and other regions looks high however.
Accor: Accor, one of the main hotel groups, has decided to spin off its non-hotel operations in order to focus on the hotel market, and reveal additional value as Vouchers are expected to trade at a clear premium to Hotels (our DCF valuation for vouchers gives a prospective EBITDA of 13.2x).

We think that: 1) The two future stocks combined offer considerable upside over the next 12 months (29.5 for hotels and 22.5 for the prepaid services division based on the net debt split announced by the group on 24 February 2010); and 2) Meanwhile, Accor could announce favourable news, including perhaps further asset disposals in line with its asset-right strategy which is at the root of the operating issues facing the hotel entity. Also, Accor is likely to IPO its share in Casino group Lucien Barrire (49% of shares) in H2 10e, which could be worth between 400m and 500m, plus a 220m debt impact.
Stocks to watch
Company Country Reco Target Price (loc cur) Price 04/05/10 (loc cur) 09 Sales(m) Market Cap (m) P/E 10e Return on Equity 10e EPS Growth 09-10e

Accor

France

Buy EUR

53

43.32

7296.6

9766.8

28.1

9.2

10.7

Source: SG Cross Asset Research

May 2010

43

Corporate spin-offs and demergers

Household & Personal Care More consolidation than spin-off


Sector valuation
Sector Market. Cap lc m P/E 10e P/BV 09 Dividend Yield 09 LT Interest rates

Sector performance
MSCI World Household & Personal Products 140 MSCI World

US Eurozone UK Japan Median* Total*

292,263 118,024 37,560 28,367 13,947 476,214

15.4 20.5 16.8 23.3 17.3

3.89 3.02 NA 2.34 3.21

2.76 1.63 3.26 2.52 2.53

3.77 3.08** 3.99 1.29 NA


50 2005 2006 2007 2008 2009 2010 80 110

* Median and Total are calculated from the entire MSCI World Sector Index, ** German LongTerm Interest Rate, Source: SG Cross Asset Research Data as of 4 May 2010

Industry trend: consolidation is likely


Barriers to entry are high depending on the distribution channel and the product category, as establishing a global brand takes time. Acquisitions help round out a brand portfolio, strengthen category diversification or improve geographical coverage. The personal, household and healthcare industries are still fragmented, although a closer analysis by product category or distribution channel highlights contrasting situations.

Scale issues are striking for A&P spending on media agencies (the biggest cost line in personal care) and for raw materials purchases from suppliers (the biggest cost for household care).

Critical mass is needed and constantly growing due to retailers current scale in addition to a continued shift towards more local concentration and geographical diversification.
Top ten companies (by market cap)
PROCTER & GAMBLE L'OREAL COLGATE-PALM. RECKITT BENCKISER GROUP KIMBERLY-CLARK BEIERSDORF (XET) AVON PRODUCTS KAO HENKEL (XET) CLOROX 0
Source: SG Cross Asset Research
in $bn

20

40

60

80

100

120

140

160

180

200

44

May 2010

Corporate spin-offs and demergers

SG view
Sector map
Industry Leaders
L'OREAL KIMBERLY-CLARK HENKEL (XET) COLGATE-PALM. KAO RECKITT BENCKISER GROUP AVON PRODUCTS ESTEE LAUDER COS.'A' BEIERSDORF (XET) SHISEIDO S/M* Sales PROCTER & GAMBLE

Larger than necessary?

Growth companies

CLOROX

Doldrums
ENERGIZER HDG.

UNI CHARM CHURCH & DWIGHT CO.


*S/M: Sales / Market capitalisation; Source: SG Cross Asset Research

Sector consolidation remains on the agenda for both the personal care and the household sub-sectors, but now there are fewer listed targets (after the takeover of the The Body Shop and the minority buyout of Clarins), particularly when it comes to targets free of a controlled shareholding structure. The primary hurdle to consolidation in the HPC industry is the scarcity of decent-sized companies. That said, the deteriorating environment creates more opportunities but not necessarily at more affordable prices. In this environment, Henkel appears to be one of the few diversified companies in this sector. However, at the moment, management does not seem keen to divest unless it finds an acquisition in its own area of expertise. We believe the main players will wait for big conglomerates to refocus on fewer core businesses and dispose of appealing assets or brands (as was the case with LOral, when it acquired YSL Beauty from PPR, or Reckitt Benckiser, when it acquired BHI from Boots the Chemist). For several conglomerates, personal, household or healthcare businesses are small relative to their own size, and as such are often considered to be non-core. However, these businesses would offer an attractive fit and strengthen the portfolio of focused HPC groups.
Henkel announced in 2009 the sale of some of its business including the do-it-yourself (DIY) line of adhesives, office and houseware products, including Duck brand products. If Henkel follows this trend, in order to continue to focus on its core activity, a major spin-off is conceivable by splitting one of its three main businesses: Adhesive Technologies, Laundry & Home Care and Cosmetics. Stocks to watch
Company Country Reco Target Price (loc cur) Price 04/05/10 (loc cur) 09 Sales m) Market Cap (m) P/E 10e Return on Equity 10e EPS Growth 09-10e

Henkel

Germany

Buy EUR

43

40.07

14039.7

7139

16.8

14.2

43.2

Source: SG Cross Asset Research

May 2010

45

Corporate spin-offs and demergers

Insurance Changing regulatory rules


Sector valuation
Sector Market. Cap lc m P/E 10e P/BV 09 Dividend Yield 09 LT Interest rates

Sector performance
MSCI World Insurance 150 MSCI World

US Eurozone UK Japan Median* Total*

682,657 300,278 75,525 87,727 8,866 1,209,933

10.7 9.3 8.9 23.3 11.0

1.09 1.06 1.23 1.97 1.15

2.39 4.70 4.56 1.77 2.81

3.77 3.08** 3.99 1.29 NA

120

90

60

30 2005 2006 2007 2008 2009 2010

* Median and Total are calculated from the entire MSCI World Sector Index, ** German LongTerm Interest Rate, Source: SG Cross Asset Research Data as of 4 May 2010

Industry trend: solvency 2 process on its way


The sector has suffered a clear de-rating in recent years, despite constantly improving operating margins and business rationalisation. Insurance companies have already largely rationalised their asset bases. Minority interests have mostly been bought back and we would expect only cosmetic rationalisation measures (AXA APH deal for example).

Balance sheets have recovered quickly from low levels seen early in 2009 as the entire business is under mark to market.

While the European Commission will be the final decision-maker in the solvency II process, Thomas Steffen, who heads the German insurance industry supervisory authority, has stated that he would not object to delaying the introduction of Solvency 2 to 2013 from 2012. He points to the challenges for small- and medium-sized players, which might come under severe pressure. We have probably heard the worst about the potential impact of Solvency 2 on the industry (300bn in capital requirements for the industry, of which roughly 80bn for UK, or 50bn for Germany or France). The first signs of regulatory easing are appearing: grandfathering, review of the liquidity premium, ongoing discussion on intangibles.
Top ten companies (by market cap)
BERKSHIRE HATHAWAY 'B' ALLIANZ (XET) AXA METLIFE GENERALI ZURICH FINANCIAL SVS. MANULIFE FINANCIAL PRUDENTIAL FINL. MUENCHENER RUCK. (XET) GREAT WEST LIFECO 0
Source: SG Cross Asset Research
in $bn

10

20

30

40

50

60

70

46

May 2010

Corporate spin-offs and demergers

SG view
Sector map
Industry Leaders
Sales

Larger than necessary?


AXA ALLIANZ (XET) GENERALI BERKSHIRE HATHAWAY 'B' MUENCHENER RUCK. (XET) PRUDENTIAL ZURICH FINANCIAL SVS. AVIVA

METLIFE

DAI-ICHI LIFE INSURANCE CNP ASSURANCES

MANULIFE FINANCIAL TOKIO MARINE HOLDINGS PRUDENTIAL FINL. ALLSTATE GREAT WEST LIFECO SWISS RE 'R' POWER FINL. HARTFORD FINL.SVS.GP. TRAVELERS COS. SUN LIFE FINL.

S/M*

Growth companies
CHUBB

AFLAC LOEWS ACE

MS&AD INSURANCE GP.HDG. PROGRESSIVE OHIO

Doldrums

QBE INSURANCE GROUP MARSH & MCLENNAN SAMPO 'A'


*S/M: Sales / Market capitalisation; Source: SG Cross Asset Research

The global insurance industry landscape has been radically modified as a result of the financial crisis. The biggest change concerns AIG, the worlds largest insurance company by premiums, which is now no bigger than a mid cap. AIGs collapse is a unique opportunity for the strongest players to pick and choose assets. The largest assets have now been sold (ALICO and AIA) but smaller pieces are still for sale. The insurance assets of ING (see Banks) are also on the table. We are confident we will see dynamic M&A in the medium term following the AIG deals. Insurance companies will emerge from the crisis either weaker or stronger. The stronger ones, i.e. those who did not need to call on the market during the crisis, should be best-placed to take advantage of M&A opportunities over the next 2-3 years. The biggest players are probably the best placed to consolidate the market and therefore take advantage of the current M&A environment via financial flexibility. The impact of Basel 2 and 3 on banks also may trigger a good pipeline for Bankinsurance assets to be sold (see ING).
Muenchenen Ruck: The insurer long has been saying that splitting insurance activities from reinsurance activities would create more value for shareholders. We doubt that management will finally decide to go through with this, although a spin-off of Ergo, the primary business, would not be irrational in this period. Stocks to watch
Company Country Reco FV (loc cur) Price 04/05/10 (l c) 09 Sales (m) Market Cap (m) P/E 10e Return on Equity 10e EPS Growth 09-10e

Munich RE

Germany

Buy

EUR

125

107.2

4213.9

21161.5

9.1

na

-3.1

Source: SG Cross Asset Research

May 2010

47

Corporate spin-offs and demergers

Luxury goods No spin-offs to expect


Sector valuation
Sector Market. Cap lc m P/E 10e P/BV 09 Dividend Yield 09 LT Interest rates

Sector performance
MSCI World Textiles Apparel & Luxury Goods 170 MSCI World

US Eurozone UK Japan Median* Total*

73,536 173,610 4,461 3,810 12,459 263,982

20.2 20.0 19.8 NA 20.0

3.70 3.00 NA 1.48 3.00

1.05 1.39 2.00 1.36 1.55

3.77 3.08** 3.99 1.29 NA

140

110

80

50 2005 2006 2007 2008 2009 2010

* Median and Total are calculated from the entire MSCI World Sector Index, ** German LongTerm Interest Rate, Source: SG Cross Asset Research Data as of 4 May 2010

Industry trend: focused on development in Asia


The top 10 companies represent 45% of the world luxury goods market, which remains very fragmented. Some large markets have reached maturity, due in part to their demographic profile (Japan, Europe). The price structure might have to be adjusted on some product categories in order to stimulate demand. Markets with a lot of potential (China, Russia) are likely to experience slower returns on investment than mature markets. Companies have not yet begun the necessary streamlining of their brand portfolio or their distribution networks. As Asia currently provides 100% of sector growth, sector investment should continue to focus on this region (at present, it is estimated that two-thirds of store opening investments are made in Asia, especially China). Sales generated by Chinese customers are currently estimated at 10-15% of the world luxury goods market, with an estimated 9% generated by other Asian consumers (excluding Japan). However, it remains to be seen whether they will be able to offset the weak growth from Japanese (34% of market) and European customers (30% of market) which reflects the demographic profile of these markets. Finally it remains to be seen whether growth in Asia will continue to be strong in 2009.
Top ten companies (by market cap)
LVMH NIKE 'B' CHRISTIAN DIOR RICHEMONT HERMES INTL. COACH LUXOTTICA ADIDAS (XET) VF THE SWATCH GROUP 'B' 0
Source: SG Cross Asset Research
in $bn

10

20

30

40

50

60

48

May 2010

Corporate spin-offs and demergers

SG view
Sector map
Industry Leaders
LVMH NIKE 'B' ADIDAS (XET) VF RICHEMONT LUXOTTICA YUE YUEN INDL.HDG. POLO RALPH LAUREN 'A' THE SWATCH GROUP 'B' COACH PUMA RUDOLF DASSLER(XET) SOT. HERMES INTL. NISSHINBO HOLDINGS ASICS BURBERRY GROUP BILLABONG INTERNATIONAL GILDAN ACTIVEWEAR S/M* Sales

Larger than necessary?


CHRISTIAN DIOR

Growth companies

Doldrums

*S/M: Sales / Market capitalisation; Source: SG Cross Asset Research

Sector consolidation remains on the agenda for the luxury goods sector given that: 1) entry barriers are high, as establishing a global brand takes time; 2) acquisitions help round out a product portfolio or improve geographical coverage; and 3) this industry is still relatively fragmented, although a closer analysis by product or distribution segment highlights contrasting situations. The luxury goods sector can already be considered a global market given the balanced breakdown of its sales. However, this is somewhat misleading as an analysis by customer nationality appears more meaningful in order to get past the problem of tourist flows.

May 2010

49

Corporate spin-offs and demergers

Media Already well split between sub-sectors


Sector valuation
Sector Market. Cap lc m P/E 10e P/BV 09 Dividend Yield 09 LT Interest rates

Sector performance
MSCI World Media MSCI World

US Eurozone UK Japan Median* Total*

555,172 120,476 60,939 23,866 8,268 770,912

16.8 15.4 14.4 27.2 16.5

1.92 2.35 1.72 1.42 2.02

1.84 4.33 3.51 1.04 2.78

3.77 3.08** 3.99 1.29 NA

130

100

70

40 2005 2006 2007 2008 2009 2010

* Median and Total are calculated from the entire MSCI World Sector Index, ** German LongTerm Interest Rate, Source: SG Cross Asset Research Data as of 4 May 2010

Industry trend: segmented sector


Other drivers should prove more significant in the short/medium term:

Client needs. The ability to service clients on a global basis has gradually become critical in

some sub-sectors. The consolidation process seen over the last two decades in the advertising agencies sector (and potential Aegis/Havas tie-up) is, therefore, likely to be replicated in some marketing services activities. In particular, market research should see steady consolidation (started with TNS/WPP), driven by the main agencies or marketing services groups.

Sub-sector maturity. In markets that are already very segmented, such as magazine

publishing, acquisitions are the main way of gaining additional penetration, either in the Consumer or B2B fields. Given the highly diverse nature of the Media sector, we have used a market capitalisation ranking (30 March 2009). On this basis, the top 10 global Media & Entertainment companies are clearly dominated by US groups.
Top ten companies (by market cap)
WALT DISNEY COMCAST 'A' TIME WARNER DIRECTV 'A' VIVENDI THOMSON REUTERS NEWS CORP.'A' VIACOM 'B' BRITISH SKY BCAST.GROUP OMNICOM GP. 0
Source: SG Cross Asset Research
in $bn

10

20

30

40

50

60

70

80

50

May 2010

Corporate spin-offs and demergers

SG view
Sector map
Industry Leaders
Sales WALT DISNEY COMCAST 'A' VIVENDI TIME WARNER DIRECTV 'A' DENTSU THOMSON REUTERS VIACOM 'B' WPP OMNICOM GP. BRITISH SKY BCAST.GROUP PEARSON MCGRAW-HILL PUBLICIS GROUPE VIRGIN MEDIA MEDIASET WOLTERS KLUWER JUPITER TELECOM. SHAW COMMS.'B' DISCOVERY COMMS.'A' JCDECAUX SCRIPPS NETWORKS INTACT. 'A' CBS 'B' DISH NETWORK 'A' LAGARDERE GROUPE S/M* CABLEVISION SYS. NEWS CORP.'A'

Larger than necessary?

Growth companies
SES FDR (PAR) EUTELSAT COMMUNICATIONS

Doldrums

SINGAPORE PRESS HDG.


*S/M: Sales / Market capitalisation; Source: SG Cross Asset Research

The main "traditional" consolidation driver (i.e. the search for cost savings) has limited crossborder relevance in the Media sector, mostly due to local cost dynamics. For commercial TV, there are strong potential cost-savings synergies from merger operations on the domestic market, but margins depend on the local context (multichannel players vs single channel players, cost inflation etc). As the degree of consolidation is high, we do not see any major move and the same applies for spin-offs. Following the Time Warner spin-off of AOL, only Vivendi now appears to be a good candidate for spinning off the telecom business. The spin-off process has already begun with the disposal of Universal which should be complete by H2 10. This is clearly a favourable asset reshuffle and there may be more ahead. However, while the group's structure lends itself very well to potential spin-offs (discount to SOP, diversified portfolio, no tax liabilities), its effective strategy focuses on gaining fuller control of its main activities, except when local specifics favour continuing a market listing (Maroc Telecom, Activision Blizzard). The SG Media team therefore deems the odds of a spinoff as rather low.
Stocks to watch
Company Country Reco Target price (loc cur) Price 04/05/10 (loc cur) 09 Sales (m) Market Cap (m) P/E 10e Return on Equity 10e EPS Growth 09-10e

Vivendi

France

Buy EUR

22

19.93

27588.2

24499.7

8.9

10.3

4.4

Source: SG Cross Asset Research

May 2010

51

Corporate spin-offs and demergers

Metals & Mining Trend moving from consolidation to spin-off


Sector valuation
Sector Market. Cap lc m P/E 10e P/BV 09 Dividend Yield 09 LT Interest rates

Sector performance
MSCI World Metals & Mining 290 MSCI World

US Eurozone UK Japan Median* Total*

286,412 130,602 495,813 96,226 7,782 1,366,547

20.3 23.0 12.2 17.5 19.2

2.25 1.33 3.06 1.34 1.65

0.66 1.69 0.82 0.74 0.80

3.77 3.08**

230

170

3.99 1.29 NA
50 2005 2006 2007 2008 2009 2010 110

* Median and Total are calculated from the entire MSCI World Sector Index, ** German LongTerm Interest Rate, Source: SG Cross Asset Research Data as of 4 May 2010

Industry trend: super cycle theory still alive


World-class assets are scarce: Most companies are facing mine depletion, lower head grade and difficulty finding new mines in investment-friendly areas. The scarcity of world-class assets makes it difficult for mining super majors to find new projects to develop. For the sake of consistency with the super-cycle theory endorsed by all players, it is also fair to ask whether the currently strong cash flows should primarily fuel organic growth, capital management and balance sheet flexibility or serve a more acquisitive growth strategy.

The top 10 companies represented 30% of world steel production in 2008. The market is still fragmented, with the top 20 steel producers representing 45% of total production. ArcelorMittal clearly dominates the steel industry and is four times bigger than its closest competitor. The top 10 mining companies are clearly diversified. Industry fragmentation varies depending on the business segment: in iron ore, the top 10 companies represent 97% of world production vs 71% for coking coal, 54% for copper, and 49% for aluminium.

Top ten companies (by market cap)


BHP BILLITON RIO TINTO ARCELORMITTAL ANGLO AMERICAN XSTRATA BARRICK GOLD FREEPORT-MCMOR.CPR.& GD. GOLDCORP NEWMONT MINING NIPPON STEEL 0 20 40 60 80 100 120 140
in $bn

Source: SG Cross Asset Research

52

May 2010

Corporate spin-offs and demergers

SG view
Sector map
Industry Leaders
Sales BHP BILLITON RIO TINTO XSTRATA ANGLO AMERICAN

Larger than necessary?


ARCELORMITTAL THYSSENKRUPP (XET) NIPPON STEEL JFE HOLDINGS FREEPORT-MCMOR. ALCOA CPR.& GD. SUMITOMO METAL INDS. NUCOR NORSK HYDRO VEDANTA RESOURCES S/M*

BARRICK GOLD NEWMONT MINING TECK RESOURCES 'B' EURASIAN NATRES.CORP. GOLDCORP ERAMET

Growth companies
AGNICO-EAGLEFRESNILLO MINES ELDORADO GOLD

ANTOFAGASTA KINROSS GOLD KAZAKHMYS CLIFFS NATURAL FORTESCUE METALS GP.RESOURCES NEWCREST MINING YAMANA GOLD

Doldrums

*S/M: Sales / Market capitalisation; Source: SG Cross Asset Research

Contrary to spin-off activity, there may be ongoing consolidation in the sector. Greater industry consolidation (especially vertical integration) is becoming increasingly important and may receive growing attention as corporate activity continues. As some markets become oligopolies, many producers seek the benefits from concentrations critical influence on price.
Synergies albeit at a limited level: in our view, M&A-linked synergies in the mining industry are

usually modest, as they are limited to cuts in E&P and capex spending through project prioritisation within expanded exploration portfolios (historically -20%). However, we question consolidators leeway to trim development costs against the current backdrop of expansion cost overruns and delays. Indeed, the mining industrys ability to reduce cost bases through mergers is generally limited, as such reductions imply geographical/portfolio overlaps that conflict with the search for risk diversification.
BHP Billiton: In 2004, BHP Billitons former CEO Chip Goodyear was quoted as saying that

more had to be done to convince investors of the value of the oil & gas division. He stressed that if this failed, management would come up with an alternative. We believe BHP Billiton remains committed to high returns and its differentiating petroleum unit, and that a spin-off may no longer be on the horizon.
ThyssenKrupp announced the reorganisation of its operating segments into two divisions in

order to: 1) adapt to further deteriorating economic conditions, 2) increase the groups efficiency, and 3) increase flexibility for M&A measures (disposals, restructuring, JVs). We are of the view that TK is unlikely to spin off its steel divisions as it considered doing in FY00.
ArcelorMittal is likely to maintain its iron ore and coking coal activities within the group to fully

capture the benefit of vertical integration.


Stocks to watch
Company Country Reco Target Price (loc cur) Price 04/05/10 (l c) 09 Sales (m) Market Cap (m) P/E 10e Return on Equity 10e EPS Growth 09-10e

ArcelorMittal ThyssenKrupp

France Buy EUR Germany Hold EUR

37 23.5 26

29.57 20.26 24.76

90745.9 54479.7 45212.1

46156.3 44702.9 12738.7

10.6 13.4 43.7

8.9 29.4 4

92.1 6.2 144.7

BHP Billiton plc United Kingdom Hold GBP


Source: SG Cross Asset Research

May 2010

53

Corporate spin-offs and demergers

Oil & Gas Oil leaders ready to spin off non-core assets
Sector valuation
Sector Market. Cap lc m P/E 10e P/BV 09 Dividend Yield 09 LT Interest rates
170

Sector performance
MSCI World Oil & Gas MSCI World

US Eurozone UK Japan Median* Total*

1,411,952 353,983 627,656 46,351 11,614 2,510,835

19.2 10.3 12.6 20.2 18.3

2.14 1.41 1.47 0.89 1.95

1.29 3.64 3.21 2.37 1.92

3.77 3.08** 3.99 1.29


80 140

110

NA
50 2005 2006 2007 2008 2009 2010

* Median and Total are calculated from the entire MSCI World Sector Index, ** German LongTerm Interest Rate, Source: SG Cross Asset Research Data as of 4 May 2010

Industry trend: many spin-off options


FY09 results publications impacted by rising oil prices have drawn attention to growth. The oil price has picked up (prices have moved in a $70-85 band over the past three months) and is expected to increase further, or to stabilise at a high level, which has put the spotlight on growth prospects for 2010 and 2011. Hence, markets reacted relatively negatively when BP guided for a decline and BG for slower growth in production for 2010. Conversely, Totals results were positively welcomed, particularly the return to growth expected for 2010. Oil companies which reported strong growth in production volumes in 2009 (notably BP and Chevron) clearly will have more difficulty doing so in 2010. On the other hand, companies that disappointed relative to peers in 2009 many with project start-ups scheduled for end 2009 or early 2010 stand to benefit. If we add to this the strong European gas positions for RD Shell, ExxonMobil and Total (affected by lower demand and relatively mild weather in Q4), there is every reason to believe that in 2010 oil groups should benefit from the improving economy and the cold spell in Q1 10.
Top ten companies (by market cap) cf RDSA
EXXON MOBIL ROYAL DUTCH SHELL CHEVRON BP TOTAL CONOCOPHILLIPS ENI STATOIL OCCIDENTAL PTL. BG GROUP 0 50 100 150 200 250 300 350
in $bn

Source: SG Cross Asset Research

54

May 2010

Corporate spin-offs and demergers

SG view
Sector map
Industry Leaders
Sales

Larger than necessary?


EXXON MOBIL ROYAL DUTCH SHELL BP CHEVRON CONOCOPHILLIPS TOTAL ENI STATOIL REPSOL YPF MARATHON OIL

SUNCOR ENERGY IMPERIAL OIL OCCIDENTAL PTL. HUSKY EN. BG GROUP ENBRIDGE CENOVUS ENERGY CANADIAN NATURAL RES. APACHE ENCANA

HESS

S/M*

TRANSCANADA

Growth companies
XTO EN. WOODSIDE PETROLEUM EOG RES.

ANADARKO PETROLEUM DEVON ENERGY

INPEX CHESAPEAKE ENERGY

Doldrums

TALISMAN EN.

*S/M: Sales / Market capitalisation; Source: SG Cross Asset Research

The sector is already very concentrated. There was a big consolidation wave when oil prices plummeted in 1998-99. Majors are so big now that we believe consolidation would create companies that would be too big and make it difficult to sustain growth. Many oil companies are looking to improve shareholder value via divestment of non-core assets:
Statoil: The Board of Directors unanimously agreed in February to consider a new ownership

structure for the energy and retail business (E&R), with a stock-exchange listing currently viewed as the most likely solution in the fourth quarter of 2010 at the earliest.
Repsol-YPF issued a press release with and without Gas Natural, signalling a possible medium-term withdrawal from its c.30%-owned subsidiary. Thus, Repsol-YPFs debt which currently stands at 10,928m (14,654m including preferential shares) could be reduced to 4,905m (or 8,453m including the preferential shares) if Gas Natural is excluded. Repsol-YPF is a diversified oil company with upstream, downstream LNG and Gas Natural businesses. Total also could potentially spin off its specialty chemical division, which would resemble the

groups strategy when it successfully spun off Arkema four years ago.
ConocoPhillips has announced it will cut its stake in Lukoil by half. It currently owns 20% of

Lukoil, a stake worth $9.4bn, which means that it may be selling c.$4.7bn in shares.
Stocks to watch
Company Country Reco Target Price (loc cur) Price 04/05/10 (loc cur) 09 Sales (m) Market Cap (m) P/E 10e Return on Equity 10e EPS Growth 09-10e

Repsol-YPF Statoil ConocoPhillips Total

Spain Norway

Hold Buy

EUR NOK USD EUR

18 165 58 49

17.71 143.6 59.7 41.16

898.785 1760 2188.292 2355

21621.5 457889.7 91155.9 96661.1

9.9 9.1 9.4 8.5

10.7 23.5 14.3 19.5

68.2 30.5 71.7 38.7

United States Hold France Buy

Source: SG Cross Asset Research

May 2010

55

Corporate spin-offs and demergers

Pharmaceuticals Big is beautiful but for how long?


Sector valuation
Sector Market. Cap lc m P/E 10e P/BV 09 Dividend Yield 09 LT Interest rates

Sector performance
MSCI World Pharmaceuticals 140 MSCI World

US Eurozone UK Japan Median* Total*

644,744 497,697 171,748 124,786 10,091 1,438,975

12.2 12.1 10.0 16.4 13.5

2.89 2.09 NA 1.55 2.09

3.46 3.28 5.60 2.28 3.28

3.77 3.08** 3.99 1.29 NA


50 2005 2006 2007 2008 2009 2010 80 110

* Median and Total are calculated from the entire MSCI World Sector Index, ** German LongTerm Interest Rate, Source: SG Cross Asset Research Data as of 4 May 2010

Industry trend: sector highly concentrated


There are three key positive long-term trends for the pharmaceutical sector: an ageing population in the developed world, rising economic standards in the developing world (primarily BRICs), and new drug therapies with identifiable clinical benefits. At the same time, pharma is responding to shifting industry dynamics including health reform in the United States. The sector is increasingly competitive for a myriad of reasons and that has caused a gradual rerating over time. Still, there are opportunities to be found. Bids by Big Pharma for established local players in emerging markets look set to feature prominently among pharmaceutical transactions as the majors seek to position themselves for long-term growth in these high potential markets. A more common route explored by Big Pharma is the acquisition of smaller biotech companies with innovative compounds or platform technologies. Most Big Pharma mergers could result in estimated savings amounting to a high single-digit percentage of the combined cost base. Globally, we expect markets outside of North America and Europe to account for more than 40% of world pharmaceutical sales by 2012, up from 23% in 2007, on the back of rising GDP and the associated increase in healthcare spending.
Top ten companies (by market cap)
JOHNSON & JOHNSON PFIZER NOVARTIS 'R' MERCK & CO. ROCHE HOLDING GLAXOSMITHKLINE SANOFI-AVENTIS ABBOTT LABORATORIES ASTRAZENECA BAYER (XET) 0
Source: SG Cross Asset Research
in $bn

20

40

60

80

100

120

140

160

180

200

56

May 2010

Corporate spin-offs and demergers

SG view
Sector map
Industry Leaders
JOHNSON & JOHNSON PFIZER NOVARTIS 'R' ROCHE HOLDING SANOFI-AVENTIS MERCK & CO. ABBOTT LABORATORIES GLAXOSMITHKLINE ASTRAZENECA ELI LILLY ASTELLAS PHARMA DAIICHI SANKYO MITSUBISHI TANABE PHARMA FOREST LABS. SHIRE PERRIGO SHIONOGI UCB MYLAN S/M* EISAI BAYER (XET) Sales

Larger than necessary?

BRISTOL MYERS SQUIBB TAKEDA PHARM. NOVO NORDISK 'B' ALLERGAN CHUGAI PHARM.

KYOWA HAKKO KIRIN

Growth companies

Doldrums

WATSON PHARMS. TAISHO PHARM.

WARNER CHILCOTT CL.A

*S/M: Sales / Market capitalisation; Source: SG Cross Asset Research

We see the diversification approach of the industry falling into three main categories: 1) Big Pharma diversifying into new businesses and geographies; 2) Big Pharma shedding non-core businesses and focusing on fewer geographic regions; and 3) Specialty care companies expanding globally. We have seen an increase in M&A activity as some majors have been unable to replace blockbusters and grow new business lines and markets quickly enough. We note that for most recent deals in Europe, the market did not appear to penalise the acquirer for significant premiums, provided the deals were accretive. This could make the trend a net positive for investors. We see the Big Pharma model continuing for some time, although in an adapted form. The industry has been focusing on improved R&D productivity, restructuring to drive operatingmargin improvements and searching for growth opportunities via new blockbusters, diversification and emerging markets, with M&A a theme throughout.
Bayer: Management staying the conglomerate course, but nothing can be ruled out over a

longer time period. Our quantitative model shows Bayer as a leading candidate for spin-off deal. This comes as no surprise as the groups presence in healthcare, chemicals and crop science has often given rise to speculation about a break up. Indeed, pharma peers Sanofi-Aventis, Novartis and AstraZeneca have all spun off their non-core businesses in the past. However, current Bayer CEO Werner Wenning has been a staunch defender of the current model, and CEO designate Dr. Marijn E. Dekkers has publicly committed to stick to the conglomerate path. It would likely be much easier for Bayer to divest units than to invest the proceeds from such a deal into new businesses. Hence, a spin-off transaction does not appear imminent, but cannot be ruled out over a longer time period.
Stocks to watch
Company Country Reco Target Price (loc cur) Price 04/05/10 (loc cur) 09 Sales (m) Market Cap (m) P/E 10e Return on Equity 10e EPS Growth 09-10e

Bayer AG

Germany Hold EUR

52

47.17

32015.2

39007.1

13.7

13.6

18.2

Source: SG Cross Asset Research

May 2010

57

Corporate spin-offs and demergers

Real Estate Spin-off of industrial groups would be beneficial


Sector valuation
Sector Market. Cap lc m P/E 10e P/BV 09 Dividend Yield 09 LT Interest rates
160

Sector performance
MSCI World Real Estate MSCI World

US Eurozone UK Japan Median* Total*

231,882 49,601 26,083 92,760 6,209 688,467

37.5 14.8 19.1 25.6 18.0

2.20 1.13 1.03 1.10 1.25

3.99 6.63 4.72 1.73 3.77

3.77 3.08** 3.99 1.29


70 130

100

NA
40 2005 2006 2007 2008 2009 2010

* Median and Total are calculated from the entire MSCI World Sector Index, ** German LongTerm Interest Rate, Source: SG Cross Asset Research Data as of 4 May 2010

Industry trend: a new status for the sector


The move towards tax-transparent vehicles should continue in the Netherlands, Belgium, France, the UK, Germany and Italy. Some improvements are expected in Italy. A special status could be created for listed real estate companies in Spain. The new status should enhance sector transparency and attract new investors. Industrial and services groups should continue to outsource their real estate holdings. The situation should eventually mirror that in the US, where real estate is predominantly outsourced. We therefore expect an increase in the number and market capitalisation of sector players in line with the US experience.
Top ten companies (by market cap)
SUN HUNG KAI PROPERTIES CHEUNG KONG HOLDINGS WESTFIELD GROUP SIMON PR.GP. MITSUBISHI ESTATE UNIBAIL-RODAMCO PUBLIC STORAGE MITSUI FUDOSAN VORNADO REALTY TST. HANG LUNG PROPERTIES 0
Source: SG Cross Asset Research
in $bn

10

15

20

25

30

35

40

58

May 2010

Corporate spin-offs and demergers

SG view
Sector map
Industry Leaders
Sales

Larger than necessary?


MITSUI FUDOSAN BROOKFIELD AM MITSUBISHI ESTATE SUMITOMO REAL.&DEV. HOST HOTELS & RESORTS

SUN HUNG KAI PROPERTIES SIMON PR.GP. WESTFIELD GROUP

SWIRE PACIFIC 'A' CHEUNG KONG HOLDINGS NEW WORLD DEV. ANNALY CAPITAL MAN. HENDERSON LD.DEV. VORNADO REALTY TST. CITY DEVELOPMENTS CAPITALAND S/M* WHARF HOLDINGS EQUITY RESD.TST.PROPS. SHBI KERRY PROPERTIES

UNIBAIL-RODAMCO PUBLIC STORAGE HANG LUNG PROPERTIES

Growth companies

BOSTON PROPERTIES HCP PLUM CREEK TIMBER STOCKLAND SINO LAND VENTAS

Doldrums

AVALONBAY COMMNS. LAND SECURITIES GROUP


*S/M: Sales / Market capitalisation; Source: SG Cross Asset Research

This map shows property developers (high sales, low capital intensity) and pure rental businesses (low rent, high capital intensity). Real estate sectors could benefit from the determination of certain industrial groups to refocus on their core business and therefore we could have more spin-offs such as Mercialys which was previously part of the Casino group. The sectors renewed appeal should last over the next few years.
The development of funded pension schemes should benefit long-term investment vehicles that offer good visibility on cash flow and underlying asset values. Even in the event of a real estate crisis, investors can reasonably expect property values to rise over the long term in line with local economic growth.

Institutional investors are likely to switch increasingly to real estate assets in the wake of the

general disenchantment with equities. Listed real estate companies, which represent more liquid investments than direct real estate holdings, stand to benefit from this trend. The sectors renewed appeal should lead to an increase in the number of players. The introduction of new investment vehicles could help to match demand for real estate equities. Although we do not expect any major move in the industry, demerging is a possibility even for the Small & Mid Caps. A few weeks ago Liberty International announced it was demerging its portfolio of central London properties from its regional shopping centres, as the company reported a narrowing in pre-tax losses in 2009. It has planned to complete the demerger by May. Liberty International will then be renamed Capital Shopping Centres.

May 2010

59

Corporate spin-offs and demergers

Software & IT Services Offshore factor dominates IT services


Sector valuation
Sector Market. Cap lc m P/E 10e P/BV 09 Dividend Yield 09 LT Interest rates

Sector performance
MSCI World Software & Services MSCI World

US Eurozone UK Japan Median* Total*

1,042,451 84,100 11,527 108,047 7,610 1,252,225

16.1 15.8 18.1 18.2 17.5

3.92 3.57 3.13 2.08 3.44

0.86 1.58 1.69 2.16 1.74

3.77 3.08** 3.99 1.29 NA

140

110

80

50 2005 2006 2007 2008 2009 2010

* Median and Total are calculated from the entire MSCI World Sector Index, ** German LongTerm Interest Rate, Source: SG Cross Asset Research Data as of 4 May 2010

Industry trend: small players fight to survive


Recent growth in IT Services mainly has been driven by the rise of the Indian players. The sector as a whole has yet to recover the 2000 peak. In the software sector, traditional large firms are likely to get even larger thanks to their strong balance sheets. Smaller players are likely to find it more difficult to survive due to market and/or financing issues. We believe that software consolidation will focus on filling the technology gap and winning market share.

Convergence and offering suites: the major subjects in Software


Instead of diversification, we expect a convergence trend in the software sector. Acquisitions would be the easiest and fastest way for companies to achieve convergence, we estimate. Leading players such as Microsoft could also diversify into other sectors to enhance their technology leadership in the software industry and diversify their sources of revenue into growing segments. Given Microsofts unsuccessful bid for Yahoo, we do not rule out the possibility of Internet companies being acquired by software makers, or vice versa.
Top ten companies (by market cap)
MICROSOFT ORACLE GOOGLE 'A' SAP (XET) NINTENDO VISA 'A' EBAY ACCENTURE MASTERCARD YAHOO 0
Source: SG Cross Asset Research
in $bn

50

100

150

200

250

300

60

May 2010

Corporate spin-offs and demergers

SG view
Sector map
Industry Leaders
ORACLE SAP (XET) EBAY VISA 'A' MASTERCARD CA YAHOO NINTENDO Sales MICROSOFT

Larger than necessary?


ACCENTURE COMPUTER SCIS. NTT DATA CAP GEMINI

GOOGLE 'A'

AUTOMATIC DATA PROC. SYMANTEC WESTERN UNION

S/M*

ACTIVISION BLIZZARD ADOBE SYSTEMS PAYCHEX AUTODESK CITRIX SYS. COGNIZANT TECH.SLTN.'A' INTUIT BMC SOFTWARE

FIDELITY NAT.INFO.SVS. FISERV

Growth companies

Doldrums

SALESFORCE.COM AKAMAI TECHS.

DASSAULT SYSTEMES

*S/M: Sales / Market capitalisation; Source: SG Cross Asset Research

Software companies and IT Services companies are priced differently by the market. Hence, the main Software companies are located on the left side of our Map, as they are better priced, and the main IT Services companies are on the right. In our view, M&A activity is also likely to continue in the IT services sector, with larger players taking advantage of low valuations. The main motivations are to increase the client base, acquire operational capacity such as low cost resources, and gain business expertise. We believe the consolidation trend will continue to focus on offshore. However, following the HP-EDS merger, we cannot rule out the possibility of another mega consolidation in the sector driven by market-share dynamics. IT Services goal to become one-stop shops could continue to push major vendors to acquire small companies. Furthermore, we believe that cross-border consolidation will increase as offshore vendors, such as Indian companies, focus on acquiring business. As these companies already have strong positions in the US, we believe their next targets likely will be European. Given the emergence of cloud computing, the major technology shift in the industry for the next ten years, we believe the industry could move back to a semi-integrated model, providing customers with an all-in-one offering, including hardware, software and services. In our view, companies would better protect their profitability in the IT industry by adopting this approach and partially lock in their customers. Against this backdrop, hardware companies actively would continue to acquire software companies, e.g. IBM, Cisco and HP's strategy over the past few years, while software vendors would acquire hardware companies, e.g. Oracle's acquisition of Sun Microsystems. In the Services sector, some companies such as Indra or Sopra have a hybrid model, offering both proprietary software solutions and traditional services activities. For example, Sopra, a mid-cap French company, will spin off its software division Axway in Q3 10.

May 2010

61

Corporate spin-offs and demergers

Telecom Equipment Many spin-off options


Sector valuation
Sector Market. Cap lc m P/E 10e P/BV 09 Dividend Yield 09 LT Interest rates

Sector performance
MSCI World Technology Hardware & Equipment MSCI World

US Eurozone UK Japan Median* Total*

1,058,697 95,727 NA 293,361 9,566 1,454,144

13.7 15.6 NA 23.9 20.5

3.57 2.59 NA 1.52 2.05

0.81 2.38 NA 0.99 0.99

3.77 3.08** 3.99 1.29 NA

140

110

80

50 2005 2006 2007 2008 2009 2010

* Median and Total are calculated from the entire MSCI World Sector Index, ** German LongTerm Interest Rate, Source: SG Cross Asset Research Data as of 4 May 2010

Industry trend: convergence


The telecom equipment sector is already highly concentrated and, although there are still calls for further consolidation, we believe major acquisitions are unlikely in the near term. Part of the problem is the currency with which to make acquisitions. Share prices are down substantially and companies are generally hoarding cash. Therefore, even if consolidation were a favoured tactic, we believe that it is a difficult time to employ it. Furthermore, our review of the telecom equipment markets indicates that individual markets are already showing a form of consolidation. However, this is more through companies exiting or being forced out of certain businesses than consolidation specifically. Recent examples of this include Nortel (its bankruptcy should effectively mean its withdrawal from a number of telecom equipment markets) and Motorola (where its weakness in handsets has changed the company from a major competitor to a small, regional player).
Top ten companies (by market cap)
APPLE INTERNATIONAL BUS.MCHS. CISCO SYSTEMS HEWLETT-PACKARD QUALCOMM CANON NOKIA EMC RESEARCH IN MOTION ERICSSON 'B' 0
Source: SG Cross Asset Research
in $bn

50

100

150

200

250

300

62

May 2010

Corporate spin-offs and demergers

SG view
Sector map
Industry Leaders
Sales INTERNATIONAL BUS.MCHS. APPLE CISCO SYSTEMS HEWLETT-PACKARD NOKIA TOSHIBA DELL FUJITSU NEC

Larger than necessary?


HITACHI

CANON

ERICSSON 'B'

FUJIFILM HDG. MOTOROLA RICOH XEROX SEAGATE TECH. ALCATEL-LUCENT S/M*

EMC QUALCOMM CORNING

RESEARCH IN MOTION TYCO ELECTRONICS KYOCERA

Growth companies

KEYENCE

TDK NIDEC MURATA MANUFACTURING HARRIS AGILENT TECHS. HOYA SANDISK NETAPP JUNIPER NETWORKS NIPPON ELEC.GLASS AMPHENOL 'A'

WESTERN DIGITAL

Doldrums

*S/M: Sales / Market capitalisation; Source: SG Cross Asset Research

In a depressed sector, some leaders are looking for a new strategy. Motorola is already thinking of a full spin-off after several quarters of losses from its handset business unit, whereas groups like Alcatel-Lucent and Ericsson are fighting to keep a leading position in their business. We believe that any further consolidation is likely to continue to be driven by companies exiting certain markets and/or regions. In addition, larger manufacturers may still acquire smaller manufacturers to gain access to specific technologies and/or customer lists. We do not anticipate any major acquisitions or mergers between larger companies.
Alcatel-Lucent The company has been through a huge reorganisation which has included a

large number of asset sales. However, we believe that there is now little to sell and that the company will be forced to focus on its existing businesses rather than acquisition or selling further assets. There has been speculation about a potential merger of Alcatel-Lucents mobile business with that of Nokia Siemens, but we believe that an American/Finnish/French/German group would be too complex to even contemplate.
Ericsson After a flurry of purchases in the fixed line business a few years ago, Ericsson has not

made any recent acquisitions recently. We believe that the company has little intention of acquiring large new companies but is interested in bolt-on acquisitions. Given its very large cash pile, further small acquisitions could well be on the horizon.
Motorola The company has announced its intention to split the business, and keep the handset

business with the other businesses spun off. However, we believe that the handset business still has major hurdles to overcome and so this spin-off still represents a difficult challenge for the company, particularly as it is struggling to make a credible comeback in the market.
Stocks to watch
Company Country Reco Target Price (loc cur) Price 04/05/10 (loc cur) 09 Sales (m) Market Cap (m) P/E 10e Return on Equity 10e EPS Growth 09-10e

Alcatel Ericsson Motorola Inc

France Sweden United States

Hold EUR Buy SEK Hold USD

2.2 100 6.5

2.39 84.2 7.1

15233.4 207654.6 22134.2

5540.2 253576.4 16421.4

58.9 13.2 29.2

-2.9 12.2 5.5

117.3 88.5 nm

Source: SG Cross Asset Research

May 2010

63

Corporate spin-offs and demergers

Telecom Services Spin off foreign businesses?


Sector valuation
Sector Market. Cap lc m P/E 10e P/BV 09 Dividend Yield 09 LT Interest rates

Sector performance
MSCI World Telecommunication Services 140 MSCI World

US Eurozone UK Japan Median* Total*

393,921 424,438 140,274 177,323 11,716 1,215,573

13.3 11.8 10.6 11.6 12.2

1.66 2.77 NA 1.26 2.18

6.03 5.96 2.98 3.00 5.66

3.77 3.08** 3.99 1.29 NA


50 2005 2006 2007 2008 2009 2010 80 110

* Median and Total are calculated from the entire MSCI World Sector Index, ** German LongTerm Interest Rate, Source: SG Cross Asset Research Data as of 4 May 2010

Industry trend: after consolidation, spin-off


Global business models are not applicable given the low level of synergies derived from international diversification and the capital intensity of the current activities. Although deregulation and competition were introduced more than a decade ago, incumbent operators still dominate their domestic markets as the industrys high capital intensity makes it difficult to even out market shares.

Acceleration in consolidation remains unlikely


We believe that the M&A flow will remain light in continental Europe.

Mergers between incumbents appear difficult to achieve due to political roadblocks and the lack of obvious synergies between what essentially remain local businesses.

In-market consolidation faces regulatory hurdles. The local dominant players will not be in a position to make acquisitions due to anti-trust concerns. Moreover given the increasing risk aversion towards emerging markets, European operators are unlikely to use their balance sheets to expand their footprint. Given the country-based nature of the industry, it is not surprising that large GDP countries are overrepresented. Most of the companies in the table below have been in the top 10 throughout the last decade as consolidation has enabled them either to reinforce their domestic presence or to expand internationally.
Top ten companies (by market cap)
AT&T VODAFONE GROUP TELEFONICA VERIZON COMMUNICATIONS NTT DOCOMO INC NIPPON TELG. & TEL. FRANCE TELECOM DEUTSCHE TELEKOM (XET) TELSTRA SINGAPORE TELECOM 0
Source: SG Cross Asset Research
in $bn

20

40

60

80

100

120

140

160

180

64

May 2010

Corporate spin-offs and demergers

SG view
Sector map
Industry Leaders
Sales AT&T

Larger than necessary?


VERIZON COMMUNICATIONS NIPPON TELG. & TEL. DEUTSCHE TELEKOM (XET) FRANCE TELECOM

TELEFONICA VODAFONE GROUP NTT DOCOMO INC

KDDI TELECOM ITALIA SPRINT NEXTEL BT GROUP SOFTBANK TELSTRA KPN KON BCE TELENOR TELIASONERA QWEST COMMS.INTL. ROGERS COMMS.'B' SINGAPORE TELECOM SWISSCOM 'R' TELUS PORTUGAL TELECOM SGPS TELE2 'B' CENTURYTEL NII HDG. CROWN CASTLE INTL. AMERICAN TOWER 'A'
*S/M: Sales / Market capitalisation; Source: SG Cross Asset Research

S/M*

Growth companies

BELGACOM

Doldrums

We have seen many changes in this sector in the past 10 years with many mergers in Europe, but also some spin-offs, for example O2 bought by Telefonica. Vodafone changed its strategy following Chris Gents departure in mid-2005, divesting noncore assets. Now it appears that Deutsche Telecom is considering listing its US subsidiary.
Deutsche Telekom's (Buy, TP 10.8) US mobile operation T-Mobile US is currently experiencing operational difficulties (revenue decline driven by market share losses at the high end to competitors AT&T and Verizon). While management is committed to turning around this situation in 2010, we believe there are realistic scenarios for the medium to long term where the company could consider a partial sell-off in the form of a partial IPO or a trade sale of a stake to an industrial partner. One scenario, against our own expectations, is that management is unable to turn around the asset in 2010. We believe the likelihood of a strategic solution would rise significantly in this case in early 2011. However, even if operating trends stabilise, there is a question mark over the return on capital achievable by T-Mobile US during the inevitable longer-term move to a next-generation (4G) network. While this is more a 2012-13 story for T-Mobile US, a partnership with (selling a stake to) an industrial company, preferably one with access to the required radio spectrum, would make sense. Stocks to watch
Company Country Reco Target Price (loc cur) Price 04/05/10 (loc cur) 09 Sales (m) Market Cap (m) P/E 10e Return on Equity 10e EPS Growth 09-10e

Deutsche Telekom

Germany Buy EUR

10.8

9.88

64048.9

43081.1

12

9.8

5.2

Source: SG Cross Asset Research

May 2010

65

Corporate spin-offs and demergers

Utilities Many assets for sale


Sector valuation
Sector Market. Cap lc m P/E 10e P/BV 09 Dividend Yield 09 LT Interest rates

Sector performance
MSCI World Utilities 170 MSCI World

US Eurozone UK Japan Median* Total*

413,119 605,081 81,430 140,797 8,096 1,305,626

13.5 12.9 11.0 21.4 13.8

1.39 1.35 3.35 1.14 1.38

4.31 5.52 6.19 2.57 4.33

3.77
140

3.08** 3.99 1.29 NA


50 2005 2006 2007 2008 2009 2010 110

80

* Median and Total are calculated from the entire MSCI World Sector Index, ** German LongTerm Interest Rate, Source: SG Cross Asset Research Data as of 4 May 2010

Industry trend: big is no longer beautiful


The process of consolidation in individual countries is well advanced in the utilities sector. Liberalisation has rapidly shown that a lack of integration represents a risk, resulting in efforts to match downstream assets with upstream assets, and to back up trading activities with physical assets. In electricity, an oligopoly has emerged: EDF, E.ON, etc. Differences between electricity and gas have become blurred as the activities have increasingly converged. In view of the current financial climate, companies will no longer be able to continue the race for size that began in 2005. We believe the last phase of M&A activity (around $200bn over 2005-2008) needs to be digested before companies again turn to growth through acquisitions. While some transactions may take place in the near term, they should not be anything like the scale of past deals in the sector and instead are more likely to be tuck-in acquisitions. One area in which oil companies are competing with utilities head-on is the purchase of oil and gas reserves, reflecting the push to secure medium-term energy supply sources.
Top ten companies (by market cap)
EDF GDF SUEZ E ON (XET) ENEL RWE (XET) IBERDROLA TOKYO ELECTRIC POWER EXELON SOUTHERN DOMINION RES. 0 20 40 60 80 100 120
in $bn

Source: SG Cross Asset Research

66

May 2010

Corporate spin-offs and demergers

SG view
Sector map
Industry Leaders
Sales EDF

Larger than necessary?


E ON (XET) GDF SUEZ RWE (XET) ENEL VEOLIA ENVIRONNEMENT SCOT.& SOUTHERN ENERGY CENTRICA NATIONAL GRID GAS NATURAL SDG EDP ENERGIAS DE PORTUGAL PUB.SER.ENTER.GP. S/M*

IBERDROLA EXELON SOUTHERN FPL GROUP DOMINION RES.

AMER.ELEC.PWR. CONSOLIDATED EDISON PG&E

FORTUM CLP HOLDINGS HONG KONG SNAM RETE GAS AND CHINA GAS IBERDROLA RENOVABLES HONG KONG ELECTRIC
*S/M: Sales / Market capitalisation; Source: SG Cross Asset Research

Growth companies

DUKE ENERGY ENTERGY SEMPRA EN.

FIRSTENERGY

Doldrums

Some of the large utilities have indicated they want to sell off assets. We believe the market will pay particular attention to this theme given the increasing difficulty of obtaining financing. We estimate the value of assets up for sale at around 30bn. Some assets could be listed on the stock market. The sale of assets will naturally come under close scrutiny as the programmes are carried out. We believe asset divestments could create potential for rerating depending on the price obtained.
Example of assets up for sale
Company Divestment programme Period

E.ON Enel EDF Veolia Environnement


Source: SG Equity Research

10bn 10bn 5bn 3bn

2009/2010 2009/2013 2009/2010 2008/2010

E. ON the company has already sold some assets (hydro generation to Verbund, generation

assets to EnBW, Thega). One of the remaining assets for sale is E.ONs US business, LG&E in the Midwest.
Enel the Italian company has launched the process to IPO its renewable energy arm, Enel

Green Power. We think this company (worth 10-13bn) could attract a lot of interest and help Enel to reduce its debt pile by year end.
EDF The group may sell its distribution network in the UK. The value of the regulated assets is 3.6bn with non-regulated assets valued at c.200m. We think EDF may sell these assets only if it obtains a premium. Stocks to watch
Company Country Reco Target Price (loc cur) Price 04/05/10 (loc cur) 09 Sales (m) Market Cap (m) P/E 10e Return on Equity 10e EPS Growth 09-10e

E.ON Enel EDF

Germany Hold EUR Italy France Buy EUR Buy EUR

29 5.1 55

28.19 3.96 41

77523.3 58594 72283.2

56408.2 37237.3 75803.5

8.5 7.2 21

15.3 15.4 12.1

6 19.1 -9.5

Source: SG Cross Asset Research

May 2010

67

Corporate spin-offs and demergers

68

May 2010

Corporate spin-offs and demergers

May 2010

69

Corporate spin-offs and demergers

IMPORTANT DISCLOSURES
Accor Aegis Group plc Air France-KLM Air France-KLM ALCATEL American Water Works American Water Works American Water Works Anheuser-Busch InBev Anheuser-Busch InBev Banco De Sabadell Banco De Sabadell BANK OF AMERICA Barclays Barclays Barclays BASF SE BBVA BG Group Boeing Carrefour Carrefour Casino Casino CFAO Deutsche Bank Deutsche Telekom Dexia EADS EADS EDF EDF EDF Enel Enel Enel Enel Faurecia Faurecia Faurecia Finmeccanica Finmeccanica Finmeccanica France Tlcom Gas Natural SDG Gas Natural SDG Gas Natural SDG Gas Natural SDG Gas Natural SDG ING Group Lafarge Lafarge Lafarge Lafarge LVMH Metro Nokia Novartis AG Peugeot Citroen PSA Peugeot Citroen PSA PPR PPR Prudential Repsol-YPF Saint-Gobain Saipem Sanofi-Aventis Santander Santander Schneider Schneider Socit Gnrale Sopra Group TELEFONICA SA TELEFONICA SA TELEFONICA SA SG is acting as financial advisor in its demerger project. SG acted as joint bookrunner of Aegis' convertible bond issue. SG acted as joint book runners to Air France-KLM inaugural bond issue. SG acted as joint bookrunner in the issue of senior unsecured bonds convertible into new shares and/or exchangeable for existing shares of Air France KLM (OCEANE) SG acted as joint bookrunner in the issue of bonds convertible into new shares and/or exchangeable for existing shares of Alcatel Lucent (OCEANE) SG acted as co-manager in American Water Works' equity raising. SG acted as co-manager in the secondary offering of American Water Works shares by RWE SG acted as co-manager in the secondary offering of American Water Works shares by RWE and in the capital increase of American Water Works. SG acted as co-manager of Anheuser-Bush Inbev's senior bond issue SG acted as joint bookrunner of Anheuser-Busch Inbev's bond issue (4% 26/04/18 EUR). SG acted as joint bookrunner in the Banco De Sabadell's senior bond issue. SG acted as joint bookrunner in the Banco Sabadell's covered bond issue (3.125% 20/01/14 EUR). SG acted as co-manager in Bank of America's secondary offering. SG acted as Co-manager of Barclays plc's bond issue. SG acted as co-manager in the Barclays senior bond issue. SG acted as co-manger in Barclays' senior high grade bond issue. SG acted as joint bookrunner in the BASF's senior bond issue (TAP) (5.125% 09/06/15 EUR). SG acted as joint bookrunner in BBVA's covered bond issue (3% 09/10/14 EUR). SG acted as Joint Bookrunner in the BG Group's senior bond issue (3.375% 15/07/13). SG acted as co-manager in the Boeing's senior high grade bond issue. SGSP is managing a liquidity contract on behalf of Carrefour SG is a long-standing banker of Carrefour as well as the Halley Family SG acted as bookruner in Casino's exchange offer. SG is acting as Dealer Manager for Casino's tender offer. SG acted as joint-global coordinator, joint-lead manager and joint-bookrunner in CFAO's IPO. SG acted as Joint bookrunner in the Deutsche Bank covered bond issue. SG acted as co-manager in Deutsche Telekom's high grade senior bond issue. SG acted as joint bookrunner in the Dexia's senior bonds issue (5.375% 21/07/14). SG acted as joint bookrunner in the EADS's senior bond issue (4.625 12/08/16 EUR). SG is mandated lead arranger of the loan granted to Republic of Brazil to finance the acquisition of helicopters from EADS Group. SG acted as joint bookrunner in EDF's bond issue (4.625% 26/04/30 EUR). SG acted as co lead manager in the EDF bond issue to retail customers (4.5% - 2014). SG acted as joint bookrunner in EDF's senior bond issue (4.625% 11/09/2024 EUR). SG makes a market in Enel warrants SG acted as senior co-lead manager of Enel right issue SG is participating in a medium-term bank loan to Enel Rete Gas for the operation of disposal by Enel of its majority stake. SG acted as bookrunner in Enel's senior high grade bond issue (4% 14/09/16 EUR, 5% 14/09/22 EUR, 5.625% 14/08/24 GBP, 5.75% 14/09/40 GBP). SG was sole bookrunner and sole global coordinator for the placement of Faurecia's shares. SG was acting as global coordinator, lead manager and bookrunner of the rights issue of Faurecia SG acted as global coordinator, joint bookrunner and joint lead manager in the issue of bonds convertible into new shares and/or exchangeable for existing shares of Faurecia (Oceane). SG makes a market in Finmeccanica warrants SG acted as joint bookrunner in the Finmeccanica's senior bond issue. SG acted as co-manager in the Finmeccanica's senior unsecured HG bond issue. SG acted as joint bookrunner of France Telecom's bond issue (3.875% 09/04/20 EUR). SG acted as passive bookrunner in Gas Natural's bond issue SG acted as Bookrunner and Mandated Lead Arranger in the acquisition financing of Union Fenosa by Gas Natural SG acted as financial advisor to Mitsui in the purchase from Gas Natural of natural-gas-fired power stations in Mexico SG acted as joint bookrunner in the issue of GAS NATURAL's senior bond (5.25% 09/07/14 EUR & 6.375% 09/07/19 EUR). SG acted as joint bookrunner in Gas Natural's senior bond issue (3.375% 27/01/15 EUR ; 4.125% 26/01/18 EUR ; 4.5% 27/01/20 EUR). SG acted as co-lead manager in the ING's rights issue. SG acted as joint bookrunner of the rights issue of Lafarge SG acted as joint bookrunner in Lafarge's bond issue (5.5% 16/12/19 EUR). SG acted as joint bookrunner in the Lafarge senior bond issue (7.625% 24/11/16 EUR). SG acted as joint bookrunner in the Lafarge's senior bond issue (7.625% 27/05/14 EUR). SG acted as joint bookrunner in the LVMH's senior bond issue. (4.3275% 12/05/14 EUR) SG acted as joint bookrunner in the Metro's senior bond issue. SG acted as co-Manager of in NOKIA 's senior unsecured bond issue. SG acted acting as joint bookrunner in Novartis' senior bond issue. SG was acting as global coordinator, lead manager and bookrunner of the rights issue of Faurecia SG acted as global coordinator and joint book runner in the issue of unsecured bonds convertible into new shares and/or exchangeable for existing shares of PSA Peugeot (OCEANE). SG acted as joint bookrunner of PPR's senior bond issue. SG acted as joint-global coordinator, joint-lead manager and joint-bookrunner in CFAO's IPO SG will act as Co-lead Manager in Prudential PLC announced right issue SG acted as joint dealer manager for a Repsol's bond exchange offer. SG acted as joint bookrunner in the Saint-Gobain's senior bond issue (6% 20/05/13 EUR). SG makes a market in Saipem warrants SG acted as joint bookrunner in the SANOFI-AVENTIS' senior bond issue (3.5% 17/05/13 EUR & 4.5% 18/05/16 EUR). SG acted as joint bookrunner of Santander's covered bond issue (3.625% 06/04/17 EUR). SG acted as joint bookrunner in the Santander's covered bond issue (3.875% 27/05/14 EUR). SG is acting as financial advisor to Alstom for the acquisition of Areva T&D. SG acted as sole manager in the Schneider Electric's senior bonds issue. SG issues no recommendation on Socit Gnrale's own financial instruments. SG holds between 10% and 20% of Sopra SG is acting as joint bookrunner in Telefonica's senior bond issue. SG acted as joint bookrunner in Telefonica's senior bond issue (3.406 24/03/15 EUR). SG acted as joint bookrunner in the Telefonica's senior bond issue (5.496% 01/04/16 EUR).

70

May 2010

Corporate spin-offs and demergers

Thomson Thomson Total UBS Unicredit Group Unicredit Group Unicredit Group Veolia Environnement Vivendi Vivendi Vivendi Volkswagen (Pref.)

SG is one of the banks of Thomson. SG holds between 5% and 10% of Thomson as a result of its trading activites SG acted as exclusive financial advisor to Total for a disposal project. SG acted as joint bookrunner in the UBS' covered bond issue. SG makes a market in Unicredito warrants SG acted as co-lead manager in Unicredit's rights issue. SG acted as joint bookrunner in the Unicredit's subordinated bond issue (8.125 10/12/49 EUR). SG is acting as financial advisor to CDC for the merger of Transdev with Veolia Transport. SG acted as financial advisor to Vivendi for the disposal of its stake in NBCU AG acted as joint bookrunner of Vivendi's senior bond issue (4% 31/03/17 EUR). SG acted as joint bookrunner in Vivendi's bond issue (4.25 01/12/16 EUR & 4.875 02/12/19). SG is acting as co bookrunner for Volkswagen's right issue

US THIRD PARTY FOREIGN AFFILIATE RESEARCH DISCLOSURES:


SG and its affiliates beneficially own 1% or more of any class of common equity of Accor, BBVA, Carrefour, Iberia, ING Group, Philips, Santander, Sopra Group. SG or its affiliates act as market maker or liquidity provider in the equities securities of ABB, Accor, Air France-KLM, ALCATEL, Atlas Copco, AXA, Banco De Sabadell, BBVA, Carrefour, Casino, Deutsche Bank, Deutsche Telekom, Dexia, E.ON, EADS, Enel, Ericsson, Finmeccanica, France Tlcom, Gas Natural SDG, Inditex, L'Oral, Lafarge, LVMH, Munich RE, Nestl, Nokia, Novartis AG, Peugeot Citroen PSA, PPR, Renault, Saint-Gobain, Sanofi-Aventis, Santander, Schneider, Siemens, Socit Gnrale, Technip, TELEFONICA SA, Total, UBS, Unicredit Group, Veolia Environnement, Vivendi, Volvo. SG or its affiliates expect to receive or intend to seek compensation for investment banking services in the next 3 months from Accor, Aegis Group plc, AIG, Air France-KLM, ALCATEL, Anheuser-Busch InBev, ArcelorMittal, Arkema, AXA, Banco De Sabadell, Barclays, BASF SE, BBVA, BHP Billiton plc, Boeing, Carrefour, Casino, Commerzbank, Deutsche Bank, Deutsche Telekom, Dexia, EADS, EDF, EnBW, Enel, Erste Bank, ExxonMobil, Faurecia, Finmeccanica, France Tlcom, Gas Natural SDG, Hochtief, Holcim, L'Oral, LVMH, Novartis AG, Peugeot Citroen PSA, Philips, PPR, Prudential, Renault, Repsol-YPF, Royal Bank of Scotland, Saint-Gobain, Saipem, Sanofi-Aventis, Santander, Schneider, Sopra Group, Technip, TELEFONICA SA, Total, UBS, Unicredit Group, Veolia Environnement, Vivendi, Volvo. SG or its affiliates have received compensation for investment banking services in the past 12 months from Accor, Aegis Group plc, Air France-KLM, ALCATEL, American Water Works, Anheuser-Busch InBev, Banco De Sabadell, BANK OF AMERICA, Barclays, BASF SE, BBVA, BG Group, Boeing, Carrefour, Casino, CFAO, Deutsche Bank, Deutsche Telekom, Dexia, EADS, EDF, Enel, Faurecia, Finmeccanica, France Tlcom, Gas Natural SDG, ING Group, Lafarge, LVMH, Metro, Nokia, Novartis AG, Peugeot Citroen PSA, PPR, Prudential, Repsol-YPF, Saint-Gobain, Sanofi-Aventis, Santander, Schneider, TELEFONICA SA, Thomson, Total, UBS, Unicredit Group, Veolia Environnement, Vivendi, Volkswagen (Pref.). SG or its affiliates managed or co-managed in the past 12 months a public offering of securities of Aegis Group plc, Air France-KLM, ALCATEL, American Water Works, Anheuser-Busch InBev, Banco De Sabadell, BANK OF AMERICA, Barclays, BASF SE, BBVA, BG Group, Boeing, CFAO, Deutsche Bank, Deutsche Telekom, Dexia, EADS, EDF, Enel, Faurecia, Finmeccanica, France Tlcom, Gas Natural SDG, ING Group, Lafarge, LVMH, Metro, Nokia, Novartis AG, Peugeot Citroen PSA, PPR, Prudential, RepsolYPF, Saint-Gobain, Sanofi-Aventis, Santander, Schneider, Socit Gnrale, TELEFONICA SA, UBS, Unicredit Group, Vivendi, Volkswagen (Pref.).

May 2010

71

Corporate spin-offs and demergers

The MSCI sourced information is the exclusive property of Morgan Stanley Capital International Inc. (MSCI). Without prior written permission of MSCI, this information and any other MSCI intellectual property may not be reproduced, redisseminated or used to create any financial products, including any indices. This information is provided on an as is basis. The user assumes the entire risk of any use made of this information. MSCI, its affiliates and any third party involved in, or related to, computing or compiling the information hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of this information. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in, or related to, computing or compiling the information have any liability for any damages of any kind. MSCI, Morgan Stanley Capital International and the MSCI indexes are services marks of MSCI and its affiliates.

IMPORTANT DISCLAIMER: The information herein is not intended to be an offer to buy or sell, or a solicitation of an offer to buy or sell, any securities and including any expression of opinion, has been obtained from or is based upon sources believed to be reliable but is not guaranteed as to accuracy or completeness although Socit Gnrale (SG) believe it to be clear, fair and not misleading. SG, and their affiliated companies in the SG Group, may from time to time deal in, profit from the trading of, hold or act as market-makers or act as advisers, brokers or bankers in relation to the securities, or derivatives thereof, of persons, firms or entities mentioned in this document or be represented on the board of such persons, firms or entities. SG is acting as a principal trader in debt securities that may be refered to in this report and may hold debt securities positions. Employees of SG, and their affiliated companies in the SG Group, or individuals connected to then, other than the authors of this report, may from time to time have a position in or be holding any of the investments or related investments mentioned in this document. Each author of this report is not permitted to trade in or hold any of the investments or related investments which are the subject of this document. SG and their affiliated companies in the SG Group are under no obligation to disclose or take account of this document when advising or dealing with or for their customers. The views of SG reflected in this document may change without notice. To the maximum extent possible at law, SG does not accept any liability whatsoever arising from the use of the material or information contained herein. This research document is not intended for use by or targeted at retail customers. Should a retail customer obtain a copy of this report they should not base their investment decisions solely on the basis of this document but must seek independent financial advice. Important notice: The circumstances in which materials provided by SG Fixed & Forex Research, SG Commodity Research, SG Convertible Research and SG Equity Derivatives Research have been produced are such (for example because of reporting or remuneration structures or the physical location of the author of the material) that it is not appropriate to characterise it as independent investment research as referred to in European MIF directive and that it should be treated as a marketing material even if it contains a research recommendation ( recommandation dinvestissement caractre promotionnel ). However, it must be made clear that all publications issued by SG will be clear, fair, and not misleading. Analyst Certification: Each author of this research report hereby certifies that (i) the views expressed in the research report accurately reflect his or her personal views about any and all of the subject securities or issuers and (ii) no part of his or her compensation was, is, or will be related, directly or indirectly, to the specific recommendations or views expressed in this report. Notice to French Investors: This publication is issued in France by or through Socit Gnrale ("SG") which is authorised by the CECEI and regulated by the AMF (Autorit des Marchs Financiers). Notice to UK investors: This publication is issued in the United Kingdom by or through Socit Gnrale ("SG") London Branch which is regulated by the Financial Services Authority ("FSA") for the conduct of its UK business. Notice To US Investors: This report is intended only for major US institutional investors pursuant to SEC Rule 15a-6. Any US person wishing to discuss this report or effect transactions in any security discussed herein should do so with or through SG Americas Securities, LLC (SGAS) 1221 Avenue of the Americas, New York, NY 10020. (212)-278-6000. THIS RESEARCH REPORT IS PRODUCED BY SOCIETE GENERALE AND NOT SGAS. Notice to Japanese Investors: This report is distributed in Japan by Socit Gnrale Securities (North Pacific) Ltd., Tokyo Branch, which is regulated by the Financial Services Agency of Japan. The products mentioned in this report may not be eligible for sale in Japan and they may not be suitable for all types of investors. Notice to Australian Investors: Socit Gnrale Australia Branch (ABN 71 092 516 286) (SG) takes responsibility for publishing this document. SG holds an AFSL no. 236651 issued under the Corporations Act 2001 (Cth) ("Act"). The information contained in this newsletter is only directed to recipients who are wholesale clients as defined under the Act. IMPORTANT DISCLOSURES: Please refer to our websites: http://www.sgresearch.socgen.com/compliance.rha http://www.sgcib.com. Copyright: The Socit Gnrale Group 2010. All rights reserved.

72

May 2010

Potrebbero piacerti anche