Phone giants do double

THE market may have recently been denied high-profile new arrivals New Look, ­Travelport and Merlin Entertainments as fund ­managers lose their appetite for private equity ­flotations but two household names will have investors seeing double as they prepare to split their businesses by the end of this month.

Carphone Warehouse and Cable & Wireless are following the likes of BT, Kingfisher, National Power, GUS and British Gas down the demerger route in the hope of rewarding shareholders with “two-for-the-price-of-one” deals.

C&W investors will receive one share in its UK business Cable & Wireless Worldwide and one in Cable & Wireless Communications, which operates mainly in the Caribbean. ­Analysts say they have effectively been run as separate businesses within the group for nearly four years.

Carphone will form two holding companies, both chaired by the company’s founder Charles Dunstone, the broadband business TalkTalk and New Carphone Warehouse, the assets of which include 50 per cent of the Best Buy Europe retail business.

As well as the potential for stirring ­takeover interest from predators who might otherwise have been put off by the scale or complexity of a bid, demergers are pursued to enable businesses with, as C&W chairman Sir ­Richard Lapthorne (soon to be the group’s Worldwide chairman) said, “clear and ­distinctive strategies” to flourish.

This must be weighed against the cost-­savings advantages of belonging to a larger corporation, while some analysts have warned that a C&W split would dilute earnings.

For Carphone, whose TalkTalk business could attract bid interest from Sky as well as UK mobile operators, a split frees it from potential conflicts of interest.

As UBS analyst Nick Lyall noted: “As a result of the demerger the retail business can be seen to be fully independent of TalkTalk and, if it so wishes, sell all the main ­broadband packages.” Broker Galvan said some ­companies just become too unwieldy to be managed in a consistent fashion.

It added: “Perhaps the major reason for demerging over the past couple of years has been the parlous state of the stock market, with caution over the credit crunch and lowly valuations ensuring that investors are simply not prepared to give businesses any kind of premium rating or any benefit of the doubt in regard to future prospects.”

Research from accountants Deloitte found that in the first three months after demerger, on average, the parent company’s shares rise 1 per cent, while the child loses 2 per cent of its market value.

But one year after an IPO, the parent’s shares are up 12 per cent while the child posts a 15 per cent premium. Performance is improved the longer a company plans for demerger but the economic climate in the region where a company operates has no impact.

According to Galvan, maximum value for investors tends to arrive within two to three years of demerger.

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