Insurer Esure (ESUR) completes the spin-off of GoCompare (GOCO) today leaving shareholders with one share in each company but no better off.
Investors may be wary of the demerger after management in October backed off confirming a £5om profit target for the now independent GoCompare comparison website.
Spin-off transactions, where a company lists one of its divisions separately on the stock market, are followed closely by investors because of the potential for short and longer term improvements in shareholder value.
Sometimes these transactions even deliver immediate gains to shareholders.
ESURE, GOCO SHARES FIZZLE
That is not the case today, with Esure and GoCompare trading flat compared to Esure’s closing price last night at 268p a share.
Today, investors own one share of Esure worth 195p and one share in GoCompare worth 76p for a total of 271p - an overnight gain of 3p, or 1.1%.
While that represents a gain for investors, it’s not much different from gains elsewhere at Esure’s UK-listed rivals Direct Line (DLG) and Admiral (ADM) on the market today.
GoCompare’s market capitalisation after the demerger is £317m while Esure is worth around £832m at current prices.
Esure’s share price drifted downwards in the month before the spin-off alongside other UK property-casualty insurers.
PROFIT TARGET SCRAPPED
It’s also possible investor appetite for the Esure demerger waned when a prospectus published 11 October showed management backed off from including a formal profit target for the comparison website unit.
Previously, Esure’s management said they expected GoCompare to deliver £50m in earnings before interest, tax, depreciation and amortisation (EBITDA) by 2019.
‘In this context, the directors have considered it appropriate to apply a range of downside scenarios to the guidance which they did not previously consider appropriate given the lesser materiality of the subsidiary within the overall Esure Group result,’ says chairman Peter Wood on page 12 of the prospectus.
Longer term, spin-off stocks such as GoCompare have historically delivered strong returns on stock markets according to research by Shares though past performance is no guide to future returns.
