COMMENT
Profiting From Spin-Offs

It should not come as any great surprise that GUS (LSE: GUS) may split its two key businesses. After all, a plan to separate GUS's retail arm Argos Retail Group from its credit checking business Experian has been talked about for a couple of years at least.

Spin-offs and demergers can often prove beneficial to shareholders. That's because they can free up surplus funds that can be returned to shareholders. But investors hoping to cash in on GUS's demerger now may be disappointed because the split has been well factored into the share price already. Currently, Argos Retail is estimated to be worth around £3.6bn, Experian is valued at about £6.4b, and the whole company is valued at £10.6bn. So, the sum of the two parts is already roughly equal to the whole.

However, investors keen on spotting other likely spin-offs may care to cast their eyes over Associated British Foods (LSE: ABF). Best known for groceries such Twinings teas and Kingsmill bread the company also owns Primark, which is one of the UK's leading discount clothing retailer. Through a combination of organic growth and acquisitions Primark has expanded to account for some 17% of group sales and almost a quarter of group profits. Interestingly, AB Foods is currently valued at 15 times earnings. But this seems to undervalue Primark, which should deserve a higher rating given that profits increased 30% last year.

Whitbread (LSE: WTB) is another company that could benefit shareholders by drastically streamlining its business. Presently, its interests span restaurants and budget hotels, to a chain of health clubs, which are run under the David Lloyd banner. However, you can't help but feel that underperformance at its restaurants and health clubs is hampering Premier Travel Inn's prospects. Last year, Whitbread reported a 48% growth in sales and profits at Premier Travel Inn, yet the entire company is only valued at 17 times earnings.

Finally, what can more incongruous than the Financial Times and Penguin books, which are both owned by Pearson (LSE: PSON). The company used to own Madame Tussaud's too, but it was sold to private equity firm Charterhouse Development Capital in 1998. In my view, FT Group, which also includes Les Echos and a 50% stake in the Economist, can almost certainly exist as a stand-alone business. The division, which accounts for a fifth of group profits, reported a 37% jump in annual profits to £101m. And in my opinion, valuing this part of the businesses at over 20 times earnings does not seem too unreasonable.

However, investors should not buy shares solely in the hope of benefiting from spin-offs. Remember, it can be difficult for a company to divest one of its divisions, especially if it has become a significant part of the entire business. That said, there has been a noticeable shift towards streamlining companies to allow executives to manage their own resources and pursue strategies appropriate to their markets. So let's hope the bosses at AB Foods, Whitbread and Pearson can learn from recent spin-off successes that include Mitchells & Butlers (LSE: MAB), Filtrona (LSE: FLTR) and Burberry (LSE: BRBY).