The Corporate Split

Corporate spin-offs are fashionable, but they can be as hard to get right as mergers.
Tony McAuleyNovember 15, 2006

If most mergers fail, as the academic literature tells it, then most demergers should add value for shareholders, right? Certainly, Hakan Winberg, CFO of Securitas, a €7 billion Stockholmlisted security services company, thinks so. Over the past year, he has been engineering a radical four-way split of the company with the hope of breathing new life into each business segment and getting a significantly better stockmarket valuation for the sum of its parts. How can he know whether it’s worked? It’s as complicated a question for a demerger as it is for a merger and it takes just as long to get an answer.

On September 29th, Winberg completed the first stage of a mind-numbingly complicated year-long process, as two new companies were hived off from the old Securitas and began trading as separate companies: Securitas Direct and Securitas Systems. A fourth company will be floated early next year.

The process began in late 2005 when Winberg and other top Securitas managers, having spent the previous two decades piecing the company together, decided that it had become unwieldy. “There is an evolution in every industry,” Winberg says. “A lot of our growth has come from buying companies from big conglomerates and sometimes from private equity who’ve failed to understand how this business works.”

Different Cultures

However, when you grow to the size of Securitas, “you can find that you’re becoming a service conglomerate and in terms of management culture, different parts of the business can drift apart,” he says. “Then their competition looks different, development prospects look different and, therefore, funding opportunities look different.”

Securitas grew steadily through the 1980s and most of the 1990s, then exploded from 1997 through 2001 when it tripled both sales and market capitalisation to around SKr65 billion (€7 billion). (It was back to those levels last year after a couple of years in the doldrums).

This was achieved by focusing on an ever-narrower range of security-related services—ending up with guarding, alarms and cash handling—and by leading consolidation of those parts of the industry in Europe and the US. In following this strategy, Securitas has kept pace with arch-rival Group4Securicor, based in the UK. However, with the decision to break the company into four separate companies, it is departing from this line.

So one measure of success will be the relative performance over the next couple of years of Group4Securicor’s multifaceted approach versus the new independent and focused Securitas companies. “Previously, Securitas talked of the importance of having guarding and systems in-house and cross-selling the divisions,” says Jesper Wilgodt, a research analyst at Oslo-based investment bank ABG Sundal Collier. “Now, they’re splitting this up while Group4Securicor is keeping them together. It’ll be interesting to see which is right.”

The strategic departure was a major element in the Securitas management’s thinking and was informed by a similar past decision. In 1994, they also made a volte-face when they decided that they didn’t want to be in the locks business they’d acquired six years previously and spun off this division, creating Assa Abloy. That proved to be the correct course of action, as a focused Assa Abloy has seen sales rise ninefold since then, to more than SKr27 billion last year, and became one of the world’s largest makers of locks and related products in the process. Winberg reckons that wouldn’t have happened had it stayed within the group.

What remains to be seen is whether the latest Securitas split is, as McKinsey & Company partner Patricia Anslinger calls it, “a healthy separation.” As she points out, “Separating a business from its parent can create a strategic conundrum, so it is advisable for a subsidiary to define its strategic focus before a restructuring…. The parent and the new entity alike must establish fresh relationships, both between themselves and with their employees and the stockmarket.”

Clean Break

This is an area that Winberg, as the demerger project manager, put considerable time and effort into. “I was co-ordinating between the CEOs, the shareholders and a lot of other people. It was interesting,” he says, making clear that it’s not the kind of “interesting” he would like to repeat anytime soon.

There was, of course, a huge amount of process involved to prepare three new companies to be listed on the Stockholm Exchange’s “O-list” (for junior companies), with the added complication of having to keep the A and B class share structure for all the companies. What had been put in shared service centres, such as IT, had to be separated; debt distribution had to be negotiated and allocated; and funding and capital allocation issues dealt with. Also, new financial reporting methods were needed, as the new businesses had different segments from the old Securitas. Apart from that, there was the co-ordination of all of the external advisers and their issues, such as road shows, the extraordinary general meeting for approval of the demerger, new auditor and legal relationships and so on.

But as Winberg says, “the interesting piece was working through a multiple focus to see how you can improve the valuation”—in other words, figuring out how to avoid the “strategic conundrum” that McKinsey’s Anslinger refers to and establish strategic visions for the new firms.

To achieve this, Winberg had to spell out the five-year financial goals for each of the four business segments, which also formed the core of the “separation story” that he sold to investors over the summer.

The “rump” guarding business, Securitas Services, is to concentrate on providing “security solutions” for large business clients. Winberg forecasts sales up from pro-forma SKr46 billion last year to SKr69 billion by 2010—though with perhaps one strategic acquisition the increase could be double—together with a moderately improved operating margin.

The most ambitious targets have been set for Securitas Systems, which sells alarms to big businesses. He expects it to lead an industry consolidation and to double sales in five years to SKr12 billion, also improving operating margin by 20% year-on-year. Securitas Direct, which sells alarms to households and small businesses, has similarly demanding targets through organic growth: sales to more than double to SKr7 billion and margins to grow by 10% a year. With sales CAGR of 30% since 1997, mostly organic, this looks achievable.

Finally, the cash handling business—named Loomis—is slated to grow by 4% organically and do some acquisitions, with small margin improvements.

The first test of confidence in the strategy came from the market where, after the demerger announcement in February, the shares increased 20% to a high of SKr160. (See top chart on this page.) But scepticism eroded the gains. Andrew Grobler, a Goldman Sachs analyst, reckons the European guarding business is under pressure and the initial failure to sell Loomis, the cash handing business, put a dampener on the demerger. Group4Securicor has better growth potential by comparison and its shares are cheaper.

The London analysts were generally not convinced, while the Scandinavians were more positive. Stefan Andersson, an analyst at Enskilda Securities, says the market is undervaluing Securitas because of doubts about the sale of Loomis—but he says Securitas turned down a SKr12 billion offer for the cash handling business from a private equity buyer in the summer and he reckons it will be viewed more favourably when new CEO, Anders Ericsson, who arrived in September, has time to hone the new strategy.

Winberg is well aware that “that process goes on well after the initial splitting.” As he says, “The first clean year [for financial results of the constituent parts] will be 2008. Then, when you evaluate, you’ll be able to ask if clients followed the change, if we spurred entrepreneurship and did we realise the financial plan or not?” He’ll be viewing it from the sidelines—as he’s announced he’ll leave next July—but as an interested party since he remains a shareholder in all the Securitas companies.

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