Metcash splitting food and grocery operations: When is it right to demerge your business?

Grocery wholesaler Metcash says it will split its food and grocery divisions, reversing a decision made less than two years ago to merge the sections.

Metcash announced yesterday the move is part of a broad strategic review, aimed at securing the future of the business.

Metcash operates the IGA grocery and liquor stores, as well as other brands such as Bottle-O and Mitre 10.

The group chief executive of Metcash, Ian Morrice, said in a statement the two new divisions will be run by individual chief executives.

“To provide a greater turnaround platform for our supermarkets business and to optimise the growth opportunities identified in the convenience channel, we have decided that the Metcash food and grocery pillar will be run in two divisions, each led by a separate CEO,” Morrice says.

“As a result of the change, the position of chief operating officer, Food and Grocery, will be de-established and Silvestro Morabito will leave the company effective 20 December 2013 to pursue other opportunities.”

The move by Metcash follows a similar decision last week by Westfield to demerge its international business from its Australian and New Zealand operations, expected to give the company stronger growth and better returns for shareholders.

Westfield Group announced the decision last week, which sees its Australian and New Zealand arms join the Westfield Retail Trust and form a new company called Scentre Group, while the international division is separated.

Metcash’s announcement of the demerger forms part of a wide-ranging company turnaround plan, expected to be detailed in March next year.

Pitcher Partners transaction services partner Michael Sonego told SmartCompany businesses often decide to demerge sections of the business to enhance shareholder value.

“There are a number of factors of a demerger which will drive the value shift – it enables management to focus attention on each of the business divisions, as there will be two CEOs. These people will have the appropriate skill set needed for each section, rather than having one person divided between the two,” he says.

“Through this separation shareholders and analysts can more clearly see the value of the business.”

Sonego says the key driver behind a business deciding to demerge is the “synergies” of the businesses no longer being present.

“If your business grows, or the mix of divisions changes, companies can find the synergies of two sections stop aligning. That’s when it’s time to demerge,” he says.

“Synergies can be out grown, or they might not be there in the first place and fail to eventuate as planned.”

Sonego says this is what occurred in 2011 between Fosters and Treasury Wine Estates when they demerged in 2011.

“The synergies never existed. At first Fosters thought there would be advantages through increased distribution networks, but it wasn’t creating additional value, so the businesses demerged.”

Sonego says demerger can also be influenced by the financial performance of the different segments of a business.

“A demerger can occur to give each business its own capital structure. Businesses need the cash resources to grow and expand,” he says.

“The other option is demergers can allow a business to make a division private. We saw this with Spotless a few years ago. The private equity owners took it private, out of the public eye while it was restructuring.”

Metcash’s decision comes as one week ago it announced a 1.9% fall in underlying net profit to $119 million for the October half.

Metcash shares fell to an 8.5 year low last week, but closed up 13 cents to $3.15 yesterday. Currently its shares are trading down 0.16% at $3.145 in early trade.