spin offs sg
TRANSCRIPT
Macro Commodities Forex Rates Equity Credit Derivatives
0SRI angle0SRI angle
May 2010
Equity
Special report
www.sgresearch.com
Corporate spin-offs and demergers Best-case scenario for developed economies
Our watchlist
Alcatel-Lucent Commerzbank AG. Ericsson Metro AG Repsol YPF S.A. ThyssenKrupp AG
ArcelorMittal SA Deutsche Telekom AG Finmeccanica S.p.A. Motorola Inc. Royal Bank of Scot.Group Plc Vivendi S.A.
BASF S.E. EADS Henkel Munchen Ruck Saint-Gobain S.A
Bayer AG E. ON AG Hochtief AG Philips Siemens AG
Carrefour S.A Enel S.p.A. ING Groep N.V. PPR S.A. Statoil
Source: SG Cross Asset Research
Head of Long-Term Sustainable Research Senior SRI analyst Daniel Fermon Yannick Ouaknine And SG’s equity analysts (33) 1 42 13 58 81 (33) 1 58 98 23 50
Please see important disclaimer and disclosures at the end of the document
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Corporate spin-offs and demergers
May 2010 2
Corporate spin-offs and demergers
May 2010 3
Contents
4 Has the time come to spin off or demerge?
6 Salutary spin-offs
6 Merger and spin-off cycles
9 Mergers & spin-offs: different situations, different economies
11 Spin-off: the changing face of M&A in developed countries
14 Corporate spin-offs: best-case scenario 14 Three reasons to have a spin-off cycle
17 SG Cross Asset Research spin-off screening tool
17 Sector analysis
18 Results
19 Conclusion - back to focusing on the core
20 Sector review
21 Aerospace & Defence - Only few spin-offs expected
23 Air transport - Ripe for takeovers rather than spin-offs
25 Automobiles - Emerging players are changing the game
27 Banks - Focusing on their core business
30 Capital goods - Focus on core business is the key
34 Construction, Motorways & Building Materials - Companies already focused on sub segments
36 Food products - No spin-offs on the agenda
38 Food & Staples Retailing - Expand in emerging markets or spin off unprofitable assets?
40 General Retailing - Difficult to survive
42 Hotels, Restaurants & Leisure - Still fragmented
44 Household & Personal Care - More consolidation than spin-off
46 Insurance - Changing regulatory rules
48 Luxury goods - No spin-offs to expect
50 Media - Already well split between sub-sectors
52 Metals & Mining - Trend moving from consolidation to spin-off
54 Oil & Gas - Oil leaders ready to spin off non-core assets
56 Pharmaceuticals - Big is beautiful but for how long?
58 Real Estate - Spin-off of industrial groups would be beneficial
60 Software & IT Services - Offshore factor dominates IT services
62 Telecom Equipment - Many spin-off options
64 Telecom Services - Spin off foreign businesses?
66 Utilities - Many assets for sale
Report completed on 5 May 2010
Thanks to Nicolas Harari for his assistance in preparing this report.
Corporate spin-offs and demergers
May 2010 4
Has the time come to spin off or demerge?
Following our October 2009 �Worst Case Debt Scenario� report that analysed the risk related
to the public debt explosion, we are now focusing on potential positive factors for developed
economies worldwide. As we are coming out of the recession, potential M&A moves may be
coming to the forefront and the idea of spinning off non-core assets looks increasingly
appealing. Companies are seeking opportunities, waiting for recovery signs while benefiting
from low rates and healthy balance sheets. Therefore, we expect a 32% rise in M&A deals in
2010 (see Marc Teyssier�s SG Cross Asset Quant Research report Training your computer to find potential M&A candidates published 2 March 2010). But, with anaemic western
economies, companies in these regions are also looking for acquisitions specifically in
emerging markets where, they believe, future growth could be generated.
Finding growth in emerging markets
Japan
Eurozone
US
UK
Russia
Brazil
China India
Profitability
Low growth
Low profitability
High growth
High profitability
Western companies are looking to
expand in growth areas
GD
P G
row
th
Source: SG Cross Asset Research
To finance part of their acquisitions with debt, companies will face competition from sovereign
debt. Therefore, one of the solutions would be to divest part of their non-core assets through
spin-offs to fund future growth. For some sectors, this should be fairly easy to do, whereas in
other sectors, there is nothing to sell and competition from emerging companies will also have
to be tackled. In the chart below we show our view of sector spin-off potential.
Sector view of spin-off potential
Air Transport
Household & Personal CareLuxury Goods
Aerospace
Pharmaceuticals
Oil & GasFood products
Telecom ServicesFood & Staples Retailing
Hotels, Restaurants & LeisureTelecom EquipmentConstruction,
Motorways &
Building Materials
Software & IT ServicesMedia
Real Estate General Retailing Utilities
ChemicalsInsurance
BanksCapitals goods
33%
43%
53%
63%
73%
83%
93%
Low Diversification High
Co
nso
lidat
ion
Automobilles & Components
Emerging markets
development: growth
and competition
Metals & Mining
Sectors
where we see
potential spin-offs
Source: SG Cross Asset Research / Datastream
Corporate spin-offs and demergers
May 2010 5
In company terms, we have highlighted 27 companies which could at some stage decide to
spin off certain businesses. Among the names mentioned, a portion has already announced
that they are thinking of spin-offs, whereas others could be forced to do so by their
shareholders if their stock performance starts to disappoint.
Our 27 stock selection
Company name Sector Country Reco Currency Target Price
(loc cur)
Price (loc cur) 4/05/10
Sales (lc m) 2010e
Market Cap (lc m)
P/E 10e
Return on Equity 10e
EPS Growth 09-10e
EADS Capital Goods France Sell EUR 12 13.85 42584.5 11303.1 17.1 6.1 271.8
Finmeccanica Capital Goods Italy Hold EUR 10 9.6 18662.7 5547.3 9.8 8.6 -7.5
Hochtief Capital Goods Germany Hold EUR 61 62.27 17972.7 4358.9 22.8 8 12
Philips Capital Goods Netherlands Buy EUR 30 25.48 25640.2 25125.3 14.7 7.8 141.6
Saint-Gobain Capital Goods France Buy EUR 47 37.26 38615.1 19114.4 15.4 8.3 85.7
Siemens Capital Goods Germany Buy EUR 92 73.09 73752.1 66819.1 12.8 15.9 9.5
PPR Consumer Durables & Apparel France Buy EUR 121 102.75 16930.3 13006 13.8 7.7 19.4
Repsol-YPF Energy Spain Hold EUR 18 17.71 898.785* 21621.5 9.9 10.7 68.2
Statoil Energy Norway Buy NOK 165 143.6 1760* 457889.7 9.1 23.5 30.5
Carrefour Food & Staples Retailing France Buy EUR 45 36.88 91836.4 25993.3 13.6 15.4 -26.3
Metro Food & Staples Retailing Germany Hold EUR 43 46.76 68161.9 15153.8 15.6 16.5 43
Henkel Household & Personal Prod. Germany Buy EUR 43 40.07 14039.7 7139 16.8 14.2 43.2
ArcelorMittal Materials France Buy EUR 37 29.57 90745.9 46156.3 10.6 8.9 92.1
BASF SE Materials Germany Buy EUR 54 44.6 57800 40959.6 10.2 18.8 46
ThyssenKrupp Materials Germany Hold EUR 26 24.76 45212.1 12738.7 43.7 4 144.7
Vivendi Media France Buy EUR 22 19.93 27588.2 24499.7 8.9 10.3 4.4
Bayer AG Pharmaceuticals & Biotech Germany Hold EUR 52 47.17 32015.2 39007.1 13.7 13.6 18.2
ALCATEL Technology Hardware & Equ. France Hold EUR 2.2 2.39 15233.4 5540.2 58.9 -2.9 117.3
Ericsson Technology Hardware & Equ. Sweden Buy SEK 100 84.2 207654.6 253576.4 13.2 12.2 88.5
Motorola Inc Technology Hardware & Equ. US Hold USD 6.5 7.1 22134.2 16421.4 29.2 5.5 nm
Deutsche Telekom Telecommunication Services Germany Buy EUR 10.8 9.88 64048.9 43081.1 12 9.8 5.2
E.ON Utilities Germany Hold EUR 29 28.19 77523.3 56408.2 8.5 15.3 6
Enel Utilities Italy Buy EUR 5.1 3.96 58594 37237.3 7.2 15.4 19.1
Commerzbank Banks Germany Sell EUR 3.6 5.99 12039.6** 7072.8 nm -5.4 79.4
Royal Bank of Scot. Banks UK Hold GBP 0.55 0.54 22484.8** 31505.5 nm 0.2 33.9
ING Group Insurance Netherlands Buy EUR 9 6.88 50160*** 26361.1 7.4 na 289.1
Munich RE Insurance Germany Buy EUR 125 107.2 4213.9*** 21161.5 9.1 na -3.1
* Production ** Total income *** Operating income Source: SG Cross Asset Research
Corporate spin-offs and demergers
May 2010 6
Salutary spin-offs
The recent economic crisis has undermined the concept of consolidation, as huge losses from
over-expensive acquisitions have revealed the risks facing large corporations implicated in
M&A deals. As we exit the recession, there is once again a growing buzz around potential
M&As and increasing interest for spin-offs. Companies are seeking opportunities, waiting for
signs of recovery while also benefiting from low interest rates and healthy balance sheets (see
Marc Teyssier�s SG Cross Asset Quant Research report Training your computer to find
potential M&A candidates published 2 March 2010).
And, with anaemic western economies, these companies may now be looking for acquisitions
opportunities specifically in emerging markets where they believe future growth lies. But, what
can be learned from history?
Merger and spin-off cycles Spin-off potential reflects industry maturity Companies are created, expand and gain market share through innovation, and eventually can
become sector leaders, before smaller, innovative entities catch up. This is how we could
summarise the lifecycle of a company.
Business lifecycle
Spinoffs and
Demergers
Maturingvia restructruring
Expansion via externalgrowth to acquire leadership
Growth via Internationalization
Start-up phase:Industry's birth in a country
Source: SG Cross Asset Research
A solution to tackle this situation could be to become even larger via acquisitions, although in
some cases, this could create monopolistic situations. But, most of the time, a company with
numerous activities sends a blurred image to external financial analysts and its own
shareholders. Indeed, it is particularly complex to value a company with varied core
businesses. An activity requiring heavy investments with growth rates near to zero mixed with
an activity generating strong growth but overdrawn will inevitably make company strategy
more opaque.
A spin-off involves the creation of an independent company from an existing part of another
company through a divestiture, such as a sale or distribution of new shares. Spin-offs (which
represented only 16% of M&A deals in 2007/2008) clearly equate to strategy which pushes
companies to concentrate their financial resources on the core business. History tells us that
this option is the best way to create shareholder value.
Corporate spin-offs and demergers
May 2010 7
Legislation favoured spin-offs and demergers in the past If we analyse US stock market history starting from the end of the 19th century, we can
identify four major M&A waves. They last on average nine years and, so far, two of them were
followed by spin-off phases.
Annual number of US mergers and acquisitions
0
200
400
600
800
1000
1200
1400
1600
1800
2000
0
2000
4000
6000
8000
10000
12000
14000
1896 1916 1936 1956 1976 1996
Number of M&As Real S&P 500 Stock Price Index
Source: Nelson series, Thorpe series, FTC “Broad” series, M&A “Domestic” series and from 1984 Thomson Financial, Real S&P 500 Stock Price Index compiled by Schiller
When mergers create a monopolistic situation, the legislator can become less supportive (as
was the case with the Sherman Act, followed by the Clayton Anti-trust Act in 1914 and the Tax
Reform Act in 1969). In 2010, we could see a similar situation arise in the financial sector as
we believe the US administration could decide to downsize banks.
We could also see countries specifically aiming to protect their industries and their national
champions. The recent proposals from Lord Mandelson, the UK�s business secretary, to
review UK takeover laws following the bid from Kraft on Cadbury is a good example of this.
Indeed, political impetus could adjust regulations with the intention of putting a halt to
excessive consolidation. Moreover, the recent warning from Warren Buffet following Kraft�s
bid for Cadbury reminds predators that shareholder interests should come first. Overpaying
for major acquisitions is no longer acceptable. Logically, this would suggest that we have
entered the spin-off phase.
Low volatility is key for spin-offs As we exit the recession, we should now get an idea of those who learnt from the past and
those, owing to ignorance of previous cycles, who have not. Those who disregarded history
are likely to suffer. They applied the old M&A model, continuously expanding as they tried to
gain more and more market share by increasing size/scale and diversifying.
But, those who we believe have learned from past experience and acknowledge that M&A
transactions at the peak of an economic cycle are likely to achieve little, are instead more
likely to favour using cash saved during the peak to find opportunities when the cycle touches
bottom. In other words, they would adopt an expansion strategy through focused M&As, often
when the business cycle has returned to lows.
Spin-off
BankruptciesSpin-off
Fourth wave
Third wave
Second wave First M&A wave
Spin-off?
Corporate spin-offs and demergers
May 2010 8
Four M&A cycles and valuation
22
11
28
7
20
13
26
12
20
48
30
19
0
10
20
30
40
50
60
0
2000
4000
6000
8000
10000
12000
14000
1896 1916 1936 1956 1976 1996
Number of M&As P/E
Source: SG Cross Asset Research
On a complementary side with no clear market trend, a spin-off is a way for companies to
differentiate, to push valuations higher than their direct competitors, as fund managers tend to
favour focused companies with clear strategies.
Logically, a spin-off enables a better valuation of a company thanks to clearer visibility on
accounts. Ideally, each spun-off entity would obtain an optimum valuation and, therefore the
valuation of the whole is greater than the sum of its parts. While synergies could be expressed
as 1 + 1 = 3 (a very simplified expression of the reason behind M&A transactions), a spin-off
could, similarly, be expressed as 2 = 1 + 1 (+ 1) (with (+1) reflecting the premium that could be
gained from better legibility/transparency of company accounts).
In summary, after a market crash, companies tend to focus on value creation and profitability.
As a result, we generally see more spin-offs at that time. But, this requires a certain amount of
market stability. It seems that 2010 could see a strong spin-off phase. Already several deals
have been announced not only in the US but also in Europe (see part 2).
Volatility trend of the S&P (VIx)
0
20
40
60
80
100
1928 1938 1948 1958 1968 1978 1988 1998 2008
Source: SG Cross Asset Research
Spin-off wave
Spike in volatility => No more M&As
Spin off?
End of M&A wave followed by dropping P/E
Reagan reduces
income and capital gains marginal tax
rates
Corporate spin-offs and demergers
May 2010 9
Mergers & spin-offs: different situations, different economies A new model, but for whom? The last M&A cycle proved to be slightly different as it was longer, with two waves (1997-2001
and 2004-2007) and involved an overall shift from the US to Europe and also very significant
repositioning in favour of emerging markets and Asia. As a matter of fact, for the first time
ever, we saw simultaneous worldwide development of global companies in many sectors
(pharmaceuticals, telecoms, technology, banks, etc.).
The trend towards globalisation in the last decade has led to a race to gain competitive
advantage, and emerging markets have taken advantage of this. Globalisation, deregulation,
privatisation, reform and restructuring have all spurred an extraordinary increase in cross-
border M&A.
Geographical split of M&As activity
0%
20%
40%
60%
80%
100%
1982 1985 1988 1991 1994 1997 2000 2003 2006 2009
US Europe Asia + Emerging
Source: Thomson One Banker
Thus, during the Asian financial crisis over a decade ago, unaffected European and American
multi-national companies seized the opportunity of devalued Asian currencies and low
valuations to expand through M&A deals. Now, a role reversal is taking place as the healthy
balance sheets of Asian firms are bringing about a number or cross-border M&A deals in
Europe and the US. In the early 2000s and up until recently, we saw strong signs of expansion
in the eurozone and in eastern European economies. For Q1 10, Europe remained weak in
terms of M&A activity.
M&A volume in the European Union
2500
3000
3500
4000
4500
0
200
400
600
800
1Q 2007
2Q '07 3Q '07 4Q '07 1Q '08 2Q '08 3Q '08 4Q '08 1Q '09 2Q '09 3Q '09 4Q '09 1Q '10
Value of deals in bn$ Number of deals
Source: Dealogic, Bloomberg, SG Cross Asset Research
Corporate spin-offs and demergers
May 2010 10
Growth in Emerging Markets relative to advanced economies has created a very long M&A
cycle. This new trend, pushed forward by strong international competition, is noticeable in the
M&A world. Some important deals are now taking place in emerging countries and particularly
in Asia which is seen as the growth market of the next decade. Hence we just saw Prudential
bidding for the Asian insurance operations of AIG, the troubled insurance company.
The role of emerging markets in mergers If we take the different criteria needed to spark a new M&A cycle, we realised that these
criteria are fulfilled mainly in emerging countries.
M&A criteria
USA Europe Emerging markets
1996-2000 2004-2007 2010-2013 1996-2000 2004-2007 2010-2013 1996-2000 2004-2007 2010-2013
Low rates XX XXX XXX XX XXX XXX X XXX XXX
Low Gearing + high Cash flow XXX XXX XXX XXX XXX XXX X XX XXX
Low level of consolidation XX XX X XXX XX X XXX XXX XXX
Bullish GDP growth forecast XXX XXX X XXX XXX X X XXX XXX
Possibility of restructuring XX XXX X XX XX X XX XXX XXX Scale from x to xxx, Source: SG Cross Asset Research
Recently, we have also seen interest from companies in emerging countries to develop in
more mature markets. This is clearly linked to the new economic cycle which reflects the rapid
development of emerging companies and their valuation premiums compared to western
companies.
Previous and current business cycle
Current economic cycle
Government debt
increasing
Capex M&A
Emerging Markets IPOs
4 2012-2013e
Economies slow
1 2007- 2009
Crisis in developed economies
Interest rate cuts + fiscal
stimulus
2 2009- 2010e
Recovery in emerging markets and rise in commodity prices
3 2011-2012e
Rise in consumption and investment
Improving consumer confidence
Inflation/ Interest rate hikes
Market stress
Yuan revaluation?
Previous economic cycle
1 2001-2003
US Economic Slowdown
2 2003-…….2004
Start of recovery 3 2004-2006
Recovery and Growth
4 2006-2007
Growth stabilising
Corporatedebt
reduction
Market Stress
Capex
LBO and M&A
Interest rate drop
Low interest rates: consumer borrows
Interest rates rising
High consumer spending and rising inflation
Spin-off
Current economic cycle
Government debt
increasing
Capex M&A
Emerging Markets IPOs
4 2012-2013e
Economies slow
1 2007- 2009
Crisis in developed economies
Interest rate cuts + fiscal
stimulus
2 2009- 2010e
Recovery in emerging markets and rise in commodity prices
3 2011-2012e
Rise in consumption and investment
Improving consumer confidence
Inflation/ Interest rate hikes
Market stress
Yuan revaluation?
Previous economic cycle
1 2001-2003
US Economic Slowdown
2 2003-…….2004
Start of recovery 3 2004-2006
Recovery and Growth
4 2006-2007
Growth stabilising
Corporatedebt
reduction
Market Stress
Capex
LBO and M&A
Interest rate drop
Low interest rates: consumer borrows
Interest rates rising
High consumer spending and rising inflation
Current economic cycle
Government debt
increasing
Capex M&A
Emerging Markets IPOs
4 2012-2013e
Economies slow
1 2007- 2009
Crisis in developed economies
Interest rate cuts + fiscal
stimulus
2 2009- 2010e
Recovery in emerging markets and rise in commodity prices
3 2011-2012e
Rise in consumption and investment
Improving consumer confidence
Inflation/ Interest rate hikes
Market stress
Yuan revaluation?
Previous economic cycle
1 2001-2003
US Economic Slowdown
2 2003-…….2004
Start of recovery 3 2004-2006
Recovery and Growth
4 2006-2007
Growth stabilising
Corporatedebt
reduction
Market Stress
Capex
LBO and M&A
Interest rate drop
Low interest rates: consumer borrows
Interest rates rising
High consumer spending and rising inflation
Spin-off
Source: SG Cross Asset Research
For example, China�s outbound foreign direct investment has been facilitated lately by
Chinese policy measures. The government is publicly boosting Chinese international
investment appetite by easing and decentralising regulatory procedures but also by
broadening firms� foreign investment financial channels. Further motivation lies in the growth
Corporate spin-offs and demergers
May 2010 11
drivers needed at home. China has high demand for resources such as iron, oil, cement,
timber for infrastructure projects, and housing as well as production for domestic and foreign
consumption.
Since the start of the economic crisis, Chinese firms have acquired significant positions within
the world�s largest companies. China has 47 companies listed in the FT�s 2009 global 500 list,
and Chinese cross-border investment amounted to of $170 billion in 2008. This is a
tremendous amount of money for a country supposedly lagging in foreign investment terms,
and media coverage has created concerns that Chinese firms may be attempting to buy up
the whole world!
Thus, in 2009, Chinese purchases of US businesses jumped 300%, reaching $3.9bn. China is
rebalancing its growth model, as the country is shifting from an economic model with growth
that had been sustained for 30 years by producing goods for export, to a model that is gaining
increased significance beyond domestic borders. This new model is driven by attractive
valuations abroad, but also because the Chinese know that they can no longer rely on
expanding economies of scale. This could come to a halt however, due to recent tension
between the People�s Republic of China and western corporations.
Emerging market oriented European groups In our emerging markets report Beyond the cycle World consumption: emerging countries
definitively taking the lead published last year, we highlighted 30 European groups which have
a strong focus on emerging markets in their business model. We split this group into three
categories: consumers, industrials and financials.
The 2009 SG EEEM basket
Consumers Capital goods /Industry Financials
Anheuser-Busch InBev ABB BBVA
Beiersdorf Atlas Copco Erste Bank
Carrefour BHP Billiton HSBC
Diageo Lafarge Prudential
Ericsson Holcim Santander
Inditex Saipem Standard Chartered
LVMH Schneider
Nestlé Siemens
Nokia Technip
Renault Veolia Environnement
Telenor Xstrata
Unilever
Volkswagen Source: SG Cross Asset Research
Spin-off: the changing face of M&A in developed countries Spin-offs vs. diversification Firms increasing their focus through the divestment of non-core assets present significantly
positive long-term performance potential. Going forward, we believe that the most successful
firms will be those concentrating on their core businesses. This is in line with our expectations
mentioned above, that large and diversified businesses have managerial constraints, which
render the overall entity less efficient. As the business model shifts from diversification to
focus-driven M&A, the number of spin-offs should create a market for acquisitions of smaller
firms. At present, we observe that the framework is currently favourable for the development
of spin-offs in developed countries.
Corporate spin-offs and demergers
May 2010 12
Spin-off criteria
USA Europe Emerging Comments
Diversification XX XX XX Diversified companies in Europe and US will favour spin-offs
Weak value creation XXX XXX X Weak performance in the US and Europe favours spin-offs
Weak ROE XXX XXX X Need for value creation
Scale from x to xxx, Source: SG Cross Asset Research
Pay attention to credit ratings A firm�s overall credit rating reflects an agency�s opinion of an entity�s ability to repay debt and
its capacity to comply with its financial obligations. Credit agencies are concerned with
corporate governance and any weakness can impair a firm�s financial position.
As credit ratings dictate the yields on corporate bonds, there is a huge cost differential
between speculative grade debt and high-yield debt.
The requirement coming out of such a deep crisis is that a company have a sound balance
sheet with a longstanding credit history. Ratings are therefore likely to become ever-more
important, as investors and corporates alike adopt stricter views on capital adequacy. This
new approach to M&As should lead groups to continue their focus on core businesses,
shifting away from diversification, where large losses had been incurred in many cases.
The focus on value creation Focusing time and energy on not missing the new M&A wave has made investors forget the
importance of long-term value creation. As, most of the time, merger strategies prove to be
unsuccessful in the long run, downsizing and spin-offs could be better solutions for improving
profitability and attracting new shareholders.
Investors are also likely to insist that companies adopt a cautious approach to expansion,
considering that these companies are still recovering from losses and the pain suffered during
the recession. The only M&A deals likely to be rewarded by investors will be the �safer� kind,
that is to say deals in line with core businesses and objectives, carried out at attractive
valuations and that are at least partly paid for in cash.
Shift in M&A patterns
Source: SG Cross Asset Research
Size
Leadership
Cost synergies
Diversification with
new growing
markets
Efficiency
Value creation
Focus driven
Opportunism with
divestment of non-
core businesses
More Mergers than Spin-offs More Spin offs than Mergers
Corporate spin-offs and demergers
May 2010 13
Corporate spin-offs: best-case scenario
Three reasons to have a spin-off cycle 1) Spin-offs create value The last two M&A waves failed to create value for shareholders as, most of the time,
performances of major companies post acquisitions disappointed. However, below we
highlight spin-offs which chalked up impressive stock market performances as well as
creating value for shareholders.
Recent examples (Time Warner/AOL, Banco Santander and its Brazilian subsidiary, PPR with
CFAO, etc.) illustrate that this kind of transaction allows the parent company to focus capital
and energy on a core business with higher operating margins. When a CEO looks for
alternative strategies to boost ROE, a spin-off could be at the top of the list as it makes sense
to separate non-core business to create new leaders.
The two charts below represent the performance of two different spin-off samples. It is
important to note that the curves represent average performance. To highlight best
performers, a more fundamental approach is required to assess if the parent company
divested underperforming assets or if a growing company was hived off.
1996-2007 performance of major US spin-offs vs S&P 500 (%) 2008 performance of major spin-offs vs respective sector (%)
90
95
100
105
110
115
120
125
0 100 200 300 400 500
Duration (days)
80
90
100
110
120
130
0 50 100 150 200 250
Duration (days)
Source: SG Cross Asset Research
On the left graph, we present the performance of newly-traded spin-offs in the US from 1996
to 2007. Most US-domiciled spin-offs file a Form 10-12B with the SEC. Therefore, we used
the SEC website to constitute our sample. Then, we compared the relative performance of the
different spin-offs to obtain the average spin-off price trend throughout its lifecycle. We then
compared each value with the S&P500 performance over the same period and compiled the
results to obtain this curve. On the right graph, we picked 2008 spin-offs with market
capitalisation greater than USD 1 bn and studied their performance over 250 trading days. We
used the same method to compile this chart but, our sample being smaller, we compared
each stock to its respective sector: an example being Suez Environment relative to the MSCI
World Utilities.
Corporate spin-offs and demergers
May 2010 14
2) Spin-offs lead to job creations
Spin-offs could help to tackle the issue of unemployment. In the US, we have observed that, in
the past 15 years, spin-off companies have created employment independently of the
business cycle. Most of the new jobs were created during the first four years after the de-
mergers. The same analysis of the parent company is a much more complex exercise owing
to scale, but it is clear that management is likely to be more efficient in focusing its energies
on one core business rather than on a broad range of different types of business lines.
Evolution of spin-off workforce through time Spin-offs create jobs 60 to 70% of the time
0%
5%
10%
15%
20%
25%
30%
35%
1 3 5 7 9 11 13
Average
Median
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1 2 3 4 5 6 7 8 9
% Job-creating companies
% Job-destroying companies
Source: SG Cross Asset Research Source: SG Cross Asset Research
In developed economies, spin-offs are favoured when restructuring and lay-offs are difficult to
justify. When unemployment is high, it is difficult to justify an acquisition, particularly as it may
prove to be more difficult to achieve efficient restructuring. As we are still forecasting a high
level of unemployment in the next two years in developed countries (with a peak at the end of
2010), M&A activities with cost synergies will likely be difficult to achieve. On the contrary, a
spin-off tends to create jobs and value for shareholders.
The point is that the level of employment was exceptionally high during the last M&A cycle at
that time and allowed companies to restructure. But since then, the increase in the
unemployment rate has made restructuring more difficult than ever.
As an example, in Japan, although interest rates have been very low for a number of years,
and companies have been generating high levels of cash flow, we did not see the
development of a major M&A cycle as it has always been difficult to restructure in this country,
particularly with the ever-present issue of steadily increasing unemployment.
Employment/Population ratio (bureau of labor statistics)
50
52
54
56
58
60
62
64
66
0
2000
4000
6000
8000
10000
12000
14000
1948 1958 1968 1978 1988 1998 2008
Number of M&As Employment / population ratio
50
52
54
56
58
60
62
64
66
0
2000
4000
6000
8000
10000
12000
14000
1948 1958 1968 1978 1988 1998 2008
Number of M&As Employment / population ratio
Source: SG Cross Asset Research
Corporate spin-offs and demergers
May 2010 15
3) Spin-offs could be good for economic growth The correlation between GDP growth and M&A activity is high and, as we expect weak
economic growth in developed countries, corporates are likely to favour spin-offs. A spin-off
of an activity is a very different choice for management as it allows a company to concentrate
on its core businesses and it is a clear way to stand out from competitors. When GDP growth
is weak, management has no visibility on future industry prospects and therefore does not
wish to embark on risky mergers.
GDP growth and M&A movements – following the same growth path
-0.7
-0.2
0.3
0.8
1.3
-2
0
2
4
6
8
1982 1987 1992 1997 2002 2007
Gdp Growth M&A Value, YoY Growth
Source: SG Cross Asset Research - GDP yoy
If we consider the figures overall, we can see that, in developed countries, there is a high level
of concentration in most industries.
Concentration
Top 5 Top 10 Top 5 Top 10 by sales by market capitalisation
Household & Personal Care 64% 88% 73% 90%
Aerospace 49% 77% 53% 76%
Pharmaceuticals 43% 72% 48% 75%
Food products 48% 68% 59% 75%
Food & Staples Retailing 48% 67% 52% 71%
Automobiles & Components 44% 67% 47% 71%
Software & IT Services 41% 59% 56% 69%
Telecom Equipment 40% 60% 52% 67%
Telecom Services 45% 67% 43% 64%
Oil & Gas 52% 74% 41% 59% Source: SG Cross Asset Research
Following the last wave of mergers and depending on the sector, we estimate that there are
5% to 30% of company assets to divest or spin off.
The high level of concentration and the lack of restructuring possibilities owing to high
unemployment prompts us to think that spin-offs will make a strong contribution to economic
growth thanks to the two factors mentioned above.
Corporate spin-offs and demergers
May 2010 16
SG Cross Asset Research spin-off screening tool
Sector analysis Our sector analysis shows that the so called diversified sectors should see a wave of spin-offs
(in green) whereas on the left of the graph, the potential for spin-offs is limited given the low
degree of diversification of the companies shown there. On top of that, those sectors may
face competition from emerging market companies which want to expand internationally. In
some cases, the emergence of new leaders from emerging markets is also a threat to future
profitability.
Sector spin-off and demerger potential
Air Transport
Household & Personal CareLuxury Goods
Aerospace
Pharmaceuticals
Oil & GasFood products
Telecom ServicesFood & Staples Retailing
Hotels, Restaurants & LeisureTelecom EquipmentConstruction,
Motorways &
Building Materials
Software & IT ServicesMedia
Real Estate General Retailing Utilities
ChemicalsInsurance
BanksCapitals goods
33%
43%
53%
63%
73%
83%
93%
Low Diversification High
Co
ns
olid
ati
on
Automobilles & Components
Emerging markets
development: growth
and competition
Metals & Mining
Sectors
where we see
potential spin-offs
Air Transport
Household & Personal CareLuxury Goods
Aerospace
Pharmaceuticals
Oil & GasFood products
Telecom ServicesFood & Staples Retailing
Hotels, Restaurants & LeisureTelecom EquipmentConstruction,
Motorways &
Building Materials
Software & IT ServicesMedia
Real Estate General Retailing Utilities
ChemicalsInsurance
BanksCapitals goods
33%
43%
53%
63%
73%
83%
93%
Low Diversification High
Co
ns
olid
ati
on
Automobilles & Components
Emerging markets
development: growth
and competition
Metals & Mining
Sectors
where we see
potential spin-offs
Source: SG Cross Asset Research / Datastream
Methodology: four criteria to identify potential spin-offs
The aim of our screening system is to determine who could decide to spin off non-core
assets. Having tested a range of criteria, we have opted for the three below which we believe
are the most relevant.
Diversification measured by an efficiency ratio (sales/market cap.). We look at below-average
ratios compared to the sector and the size of the company. For the second part of the
document, we have crossed these two criteria on the main companies of each sector, in order
to have a broad view of the results. However, in the list provided in the table overleaf, we
focused only on companies followed by our analysts.
Profitability measured by below-average Return on Equity ratio compared to the sector.
Three-year underperformance versus peers. Behavioural finance shows that market reaction
to news is at times excessive, creating high volatility as markets are pushed above or below
fundamentals before reverting. The psychology behind the overreaction to unexpected or
dramatic news based on empirical evidence reflects inefficiencies. Based on these
inefficiencies we can conclude that the market reaction tends to overweight recent news and
events. Therefore, we will focus on a three-year timeframe and concentrate on companies
Corporate spin-offs and demergers
May 2010 17
which could spin off activities which are then likely to generate higher-than-average returns
after being hived off.
Testing these three criteria suggests that the first is the most important, so we focus on these
in our quantitative screening for the sector-by-sector review. But, to determine the final list
from the companies followed by our analysts, if the criteria match, we consider the company
to offer the potential for a spin-off. Logically, we have eliminated stocks where there are no
non-core assets to divest.
Results The table below gives a list of 27 companies highlighted by our screening that are covered by
SG analysts and could be considered as having potential spin-off candidates. Note that, in
some cases, our sector analysts do not believe the companies flagged are in the mood to
consider spin-off possibilities in the short term.
Our 27 stock selection
Company name Sector Country Reco Currency Target Price
(loc cur)
Price (loc cur) 4/05/10
Sales (lc m) 2010e
Market Cap (lc m)
P/E 10e
Return on Equity 10e
EPS Growth 09-10e
EADS Capital Goods France Sell EUR 12 13.85 42584.5 11303.1 17.1 6.1 271.8
Finmeccanica Capital Goods Italy Hold EUR 10 9.6 18662.7 5547.3 9.8 8.6 -7.5
Hochtief Capital Goods Germany Hold EUR 61 62.27 17972.7 4358.9 22.8 8 12
Philips Capital Goods Netherlands Buy EUR 30 25.48 25640.2 25125.3 14.7 7.8 141.6
Saint-Gobain Capital Goods France Buy EUR 47 37.26 38615.1 19114.4 15.4 8.3 85.7
Siemens Capital Goods Germany Buy EUR 92 73.09 73752.1 66819.1 12.8 15.9 9.5
PPR Consumer Durables & Apparel France Buy EUR 121 102.75 16930.3 13006 13.8 7.7 19.4
Repsol-YPF Energy Spain Hold EUR 18 17.71 898.785* 21621.5 9.9 10.7 68.2
Statoil Energy Norway Buy NOK 165 143.6 1760* 457889.7 9.1 23.5 30.5
Carrefour Food & Staples Retailing France Buy EUR 45 36.88 91836.4 25993.3 13.6 15.4 -26.3
Metro Food & Staples Retailing Germany Hold EUR 43 46.76 68161.9 15153.8 15.6 16.5 43
Henkel Household & Personal Prod. Germany Buy EUR 43 40.07 14039.7 7139 16.8 14.2 43.2
ArcelorMittal Materials France Buy EUR 37 29.57 90745.9 46156.3 10.6 8.9 92.1
BASF SE Materials Germany Buy EUR 54 44.6 57800 40959.6 10.2 18.8 46
ThyssenKrupp Materials Germany Hold EUR 26 24.76 45212.1 12738.7 43.7 4 144.7
Vivendi Media France Buy EUR 22 19.93 27588.2 24499.7 8.9 10.3 4.4
Bayer AG Pharmaceuticals & Biotech Germany Hold EUR 52 47.17 32015.2 39007.1 13.7 13.6 18.2
ALCATEL Technology Hardware & Equ. France Hold EUR 2.2 2.39 15233.4 5540.2 58.9 -2.9 117.3
Ericsson Technology Hardware & Equ. Sweden Buy SEK 100 84.2 207654.6 253576.4 13.2 12.2 88.5
Motorola Inc Technology Hardware & Equ. US Hold USD 6.5 7.1 22134.2 16421.4 29.2 5.5 nm
Deutsche Telekom Telecommunication Services Germany Buy EUR 10.8 9.88 64048.9 43081.1 12 9.8 5.2
E.ON Utilities Germany Hold EUR 29 28.19 77523.3 56408.2 8.5 15.3 6
Enel Utilities Italy Buy EUR 5.1 3.96 58594 37237.3 7.2 15.4 19.1
Commerzbank Banks Germany Sell EUR 3.6 5.99 12039.6** 7072.8 nm -5.4 79.4
Royal Bank of Scot. Banks UK Hold GBP 0.55 0.54 22484.8** 31505.5 nm 0.2 33.9
ING Group Insurance Netherlands Buy EUR 9 6.88 50160*** 26361.1 7.4 na 289.1
Munich RE Insurance Germany Buy EUR 125 107.2 4213.9*** 21161.5 9.1 na -3.1
* Production ** Total income *** Operating income Source: SG Cross Asset Research
Corporate spin-offs and demergers
May 2010 18
Conclusion - back to focusing on the core We expect to see fewer major M&A deals than in 2007, especially in mature markets, however
we will most probably see an increase in small- and medium-sized M&A transactions, one
major contribution being large groups spinning-off some of their assets. Furthermore, renewed
activity is likely to come from foreign bidders, as cross-border M&A is continuing on a strong
expansionary trend, in line with the fast-growing contribution to global GDP from emerging
markets. Regulatory change and policy choices could play a role in how far China is able to
extend its expansion, and one could certainly envisage large cross-border deals in the near
future as economic uncertainty fades.
But, as we can see from recent history, the future of non-focused companies is never bright.
While one could be fooled into thinking that diversified companies offer a well-balanced
portfolio of assets, suggesting that they are low-risk companies, it should be borne in mind
that these companies often suffer from an inability to generate strong growth in all businesses.
Furthermore, management could miss a problem in a non-core asset. Therefore, we believe
that the time is right to spin-off non core assets. We anticipate a strong spin-off cycle in 2010-
2012 and expect industries such as capital goods, utilities, banks, chemicals and building
materials to hive off non-core assets.
Corporate spin-offs and demergers
May 2010 19
Sector review
Below, we present a series of two-page sector analyses of spin-off possibilities.
In each case, the first page contains:
A sector data/valuation table and a chart showing sector performance.
A brief overview of industry trends.
A chart showing the top ten companies ranked by market capitalisation.
The second page contains:
Our sector map, using just two of the three spin-off criteria: sales/market cap and sales:
In the top right-hand section of the map are located many companies that have historically
been active in M&A deals and probably now have assets to sell. Basically the theory is that
when sales are substantial and the sales/market cap ratio is high, the sales are not fully valued
and the company probably has assets to spin off. In this area, we find many conglomerates
and/or groups which made major acquisitions in the past, thus inheriting non core assets.
The top left-hand section shows industry leaders with generally solid positions in their core
business and few non-core assets.
The bottom left-hand section shows growth companies � generally medium-sized
companies with low market cap in relation to their sales.
On the bottom right, we present what we call doldrum companies which generally have a
high market caps but relatively low levels of sales.
After this map, we have our analysts� fundamental view on the prospects of spin-offs in their
sector and we conclude with a list of the key potential spin-off candidates in the sector, based
on their coverage, when there is one.
We used MSCI World indexes to constitute our samples.
In the Sector Valuation table, the �Median� and the �Total� lines are calculated from the entire
sample and include companies from geographical areas which are not displayed in the table.
Corporate spin-offs and demergers
May 2010 20
Aerospace & Defence Only few spin-offs expected
Sector valuation Sector performance Sector
Market. Cap ($m)
P/E 10e P/BV 09
Dividend Yield 09
LT Interest rates
US 342,837 14.6 2.95 2.06 3.77
Eurozone 40,109 16.4 1.27 2.28 3.08**
UK 39,244 13.4 2.87 2.27 3.99
Japan NA NA NA NA 1.29
Median* 12,962 15.0 2.62 2.20 NA
Total* 429,093
50
80
110
140
170
2005 2006 2007 2008 2009 2010
MSCI World Aerospace & Defence MSCI World
* “Median” and “Total” are calculated from the entire MSCI World Sector Index, ** German Long-Term Interest Rate, Source: SG Cross Asset Research Data as of 4 May 2010
Industry trend: new entrants from emerging markets We believe that in the next five years, the most important factors affecting aerospace and
defence sector performance will relate to: 1) European market consolidation, and 2) new
market entrants.
The European aerospace and defence industry saw a major wave of consolidation six to eight
years ago. We note that in defence, in particular, Europe has a large number of prime
contractors relative to the size of the European defence market. By comparison, the US has
five main contractors, only two of which attempt to maintain full combat aircraft manufacturing
capability (Boeing and Lockheed Martin).
The US defence procurement budget is considerably larger than the combined EU defence
procurement budget, making the European manufacturer base appear overcrowded.
However, we believe this is largely due to each country wishing to maintain a defence
capability.
Top ten companies (by market cap)
0 10 20 30 40 50 60 70 80
UNITED TECHNOLOGIES
BOEING
HONEYWELL INTL.
LOCKHEED MARTIN
GENERAL DYNAMICS
RAYTHEON 'B'
NORTHROP GRUMMAN
PREC.CASTPARTS
BAE SYSTEMS
ROLLS-ROYCE GROUP
in $bn
Source: SG Cross Asset Research
Corporate spin-offs and demergers
May 2010 21
SG view
Sector map
BAE SYSTEMS
BOEING
BOMBARDIER 'B'
CAECOBHAM
EADS (PAR)
FINMECCANICA
GENERAL DYNAMICS
GOODRICH
HONEYWELL INTL.
ITT
L3 COMMUNICATIONS
LOCKHEED MARTINNORTHROP GRUMMAN
PREC.CASTPARTS
RAYTHEON 'B'
ROCKWELL COLLINS
ROLLS-ROYCE GROUP
SAFRAN
SINGAPORE TECHS.ENGR.
THALES
UNITED TECHNOLOGIES
Sales
S/M*
Industry Leaders
Larger than necessary?
Growth companies
Doldrums
*S/M: Sales / Market capitalisation; Source: SG Cross Asset Research
In recent years (2006-2008), the focus for European companies was on expansion into the US
market, not only because of its size, but also as a hedge against the eight-year depreciation of
the US dollar.
Given the state of the M&A market, transactions are likely to be confined to smaller bolt-on
acquisitions. Aerospace companies have tended to acquire small businesses over the past
few years, and this should continue.
In shareholding structures where the state has true power as a shareholder and/or client, spin-
offs may end up being a political decision. However, overall many groups appear to have a
fairly low efficiency ratio as shown in our map above.
Among the groups followed by SG analysts, we believe that spin-offs could be a solution for
companies like Finmeccanica or EADS which failed to deliver performance and are not
focused enough.
Finmeccanica: The group has identified the Transport and Energy activities as non-core. Transport
has been subject to an IPO with the retention of a 40% stake. Energy is poised either for an IPO or
for a stake to be sold to an industrial partner in the medium term.
EADS: The Airbus and non-Airbus businesses are run as distinct entities but a recent initiative has
been to integrate the support functions. The group is dominated by Airbus which perhaps leaves
the non-Airbus activities undervalued in the depressed valuation of the overall group. A partial IPO
of either the Airbus or non-Airbus activities would give a better valuation for each part.
Stocks to watch
Company Country Reco Target Price (loc cur)
Price loc cur) 04/05/10
’09 Sales (€m)
Market Cap (€m) P/E 10e Return on Equity 10e EPS Growth 09-10e
EADS France Sell EUR 12 13.85 42584.5 11303.1 17.1 6.1 271.8
Finmeccanica Italy Hold EUR 10 9.6 18662.7 5547.3 9.8 8.6 -7.5
Source: SG Cross Asset Research
Corporate spin-offs and demergers
May 2010 22
Air transport Ripe for takeovers rather than spin-offs
Sector valuation Sector performance
Sector
Market. Cap lc m
P/E 10e P/BV 09
Dividend Yield 09
LT Interest rates
US 19,911 13.5 NA 0.13 3.77
Eurozone 22,776 NA 1.22 NA 3.08**
UK 4,011 NA 1.60 NA 3.99
Japan 7,961 NA 1.75 NA 1.29
Median* 7,632 20.7 1.51 NA NA
Total* 82,163
50
80
110
140
170
2005 2006 2007 2008 2009 2010
MSCI World Airlines MSCI World
* “Median” and “Total” are calculated from the entire MSCI World Sector Index, ** German Long-Term Interest Rate, Source: SG Cross Asset Research Data as of 4 May 2010
Industry trend: looking for a new development model The rate of global fleet growth fell in 2009 and should flatten out in 2010 and 2011. This
should remain below the historical average rate of 4.7% until 2015. The low cost carrier
segment has increased its share of intra-European traffic primarily through organic growth,
although there have been some notable acquisitions, most recently Easyjet�s acquisition of GB
Airways in 2008. Their share of intra-European seats was around 35% in 2008, up from 9% in
2000. Biggest among the low cost carriers are Ryanair (8%) and Easyjet (6%). We expect low
cost carriers to continue to grow their share, albeit at a slower rate.
In order to boost consolidation between European airlines and those of other regions,
governments will need to agree to regulatory changes to lower the barriers to foreign
ownership. Talks between the EU and the US include an intention to lower barriers to
ownership, but we believe that it may be unrealistic to expect foreign ownership limits to
exceed 49% (currently 25% in the US, but 49% in the EU) in the near to medium term.
Top ten companies (by market cap)
0 2 4 6 8 10 12 14
SINGAPORE AIRLINES
SOUTHWEST AIRLINES
DELTA AIR LINES
CATHAY PACIFIC AIRWAYS
ALL NIPPON AIRWAYS
DEUTSCHE LUFTHANSA (XET)
RYANAIR HOLDINGS
QANTAS AIRWAYS
AIR FRANCE-KLM
BRITISH AIRWAYS
in $bn
Source: SG Cross Asset Research
Corporate spin-offs and demergers
May 2010 23
SG view
Sector map
AIR FRANCE-KLM
ALL NIPPON AIRWAYS
BRITISH AIRWAYS
CATHAY PACIFIC AIRWAYS
DELTA AIR LINES
DEUTSCHE LUFTHANSA (XET)
IBERIA
QANTAS AIRWAYS
RYANAIR HOLDINGS
SINGAPORE AIRLINES
SOUTHWEST AIRLINES
Sales
S/M*
Industry Leaders
Larger than necessary?
Growth companies Doldrums
*S/M: Sales / Market capitalisation; Source: SG Cross Asset Research
There have been some significant steps in the consolidation of the European airline sector in
recent years, including Air France�s acquisition of KLM in 2004 and Lufthansa�s acquisition of
SWISS (consolidated in 2007).
Lufthansa now has a number of pending acquisitions: Brussels Airlines, Austrian Airlines and
BMI. Merger talks are also ongoing between British Airways and Iberia. If all these deals go
through, the top three players will control 72% of the traffic of the Association of European
Airlines (compared with 48% in 2000). This sector was identified last month as the most likely
to consolidate.
Our efficiency map shows that European leaders are not well valued, but spin-offs could be
difficult as Airlines is a global business and companies are already focusing on their core
business.
Consequently, we do not see any potential spin-offs in this sector. However, we believe that in
relative terms, Lufthansa and Air France are the two companies which should restructure their
business.
Corporate spin-offs and demergers
May 2010 24
Automobiles Emerging players are changing the game
Sector valuation Sector performance
Sector
Market. Cap lc m
P/E 10eDATE
P/BV 09
Dividend Yield 09
LT Interest rates
US 91,922 22.1 2.40 NA 3.77
Eurozone 268,646 19.0 1.01 1.25 3.08**
UK NA NA NA NA 3.99
Japan 360,948 23.3 1.29 0.82 1.29
Median* 7,863 21.1 1.24 0.79 NA
Total* 721,516
50
80
110
140
170
2005 2006 2007 2008 2009 2010
MSCI World Automobiles & Components MSCI World
* “Median” and “Total” are calculated from the entire MSCI World Sector Index, ** German Long-Term Interest Rate, Source: SG Cross Asset Research Data as of 4 May 2010
Industry trend: emergence of new players Recent shifts in the sector reflect the difficulties at US players. Confronted with a depressed
domestic market, they may have to sell or withdraw brands such as Hummer, Saturn and
Saab in the case of GM and Volvo at Ford, or to find partners to shore up their finances (e.g.
GM�s Opel subsidiary, if it survives). With an average 70/30 variable/fixed cost breakdown,
operating leverage should be extremely unfavourable and is likely to result in losses for many
manufacturers. Even historically solid Japanese groups are suffering from the collapse in US
sales. The recent crisis, which has exceeded all forecasts, is forcing the sector into effective
restructuring.
Some players look set to downsize significantly and there may be opportunities for car
manufacturers with the best financial positions to grow more rapidly or strengthen existing
businesses. Some more recent, highly ambitious carmakers are emerging, such as Hyundai
(ranked No. 5 worldwide) and SAIC (Shangai Automotive Industry Corp.). China�s SAIC is now
producing about 1.7m units annually, thanks to a successful JV with VW and GM in China,
and is looking to grow very rapidly. It recently merged with another Chinese carmaker,
Nanjing, the owner of MG Rover operations in Europe. Asia (excl. Japan) is clearly driving
growth. Between 2004 and 2008, worldwide sales increased by only 8% while sales in Asia
(excl. Japan) increased by 30%, and China became the biggest Auto market in 2009.
Top ten companies (by market cap)
0 20 40 60 80 100 120 140 160
TOYOTA MOTOR
HONDA MOTOR
DAIMLER (XET)
FORD MOTOR
NISSAN MOTOR
BMW (XET)
VOLKSWAGEN (XET)
DENSO
JOHNSON CONTROLS
FIAT
in $bn
Source: SG Cross Asset Research
Corporate spin-offs and demergers
May 2010 25
SG view
Sector map
AISIN SEIKI
BMW (XET)
BORGWARNER
BRIDGESTONE
DAIHATSU MOTOR
DAIMLER (XET)
DENSO
FIAT
FORD MOTOR
FUJI HEAVY INDS.GOODYEAR TIRE & RUB.
HARLEY-DAVIDSON
HONDA MOTOR
ISUZU MOTORS
JOHNSON CONTROLS
MAGNA INTL.'A'
MAZDA MOTORMICHELIN
MITSUBISHI MOTORS
NGK SPARK PLUG
NISSAN MOTOR
PEUGEOT
PORSCHE AML.HLDG. (XET) PREF.
RENAULT
STANLEY ELECTRIC
SUZUKI MOTOR
TOYODA GOSEI
TOYOTA MOTOR VOLKSWAGEN (XET)
YAMAHA MOTOR
Sales
S/M*
Industry Leaders
Larger than necessary?
Growth companies Doldrums
*S/M: Sales / Market capitalisation; Source: SG Cross Asset Research
Big was beautiful for carmakers until recently when groups like General Motors understood it
was no longer possible to maintain so many different brands.
GM is trying very hard to slash costs and to sell non-core assets; however, this is less feasible
in the current economic environment. For example, Sichuan Tengzhong was unable to
complete the Hummer acquisition in February 2010. The M&A model shows that there could
be a wave of sector deals in 2010 but mostly among manufacturers. For the manufacturers,
we see almost no big mergers but some spin-offs may be possible.
We also expect aggressive development in Asia, especially China. For example, Zhejiang
Geely Holdings Group, a Chinese carmaker, is completing the Volvo acquisition. We believe
two companies could spin-off some assets, Renault and Peugeot.
Fiat announced on 21 April the spin-off of the group�s industrial units by year-end. The new
company, Fiat Industrial SpA � FI - will be the majority owner of the agricultural and
construction equipment manufacturer, CNH; the truck maker, Iveco, and the engine producer
Fiat Powertrain Technologies FPT Industrial & Marine activities. Fiat SpA will remain the parent
company of the other units, which comprise the auto activities, the components and FPT auto.
Stock price jumped by 9.3% the day of this announcement.
Renault: To reduce net financial debt of close to �6bn, we believe that the group will have to
sell some assets, such as properties, and, in a much bigger move, its 20% stake in Volvo AB
(trucks) worth around �3bn. There are no obvious links between Renault and Volvo AB, except
limited partnerships in small trucks.
Peugeot SA does not need to make disposals to rapidly improve its financial situation.
However, our view is that a deconsolidation of Faurecia (57%-held component supplier) could
take place via acquisitions made using share swaps, reducing Peugeot�s stake from a majority
to a minority shareholding. At �1.4bn end-2009, Faurecia�s net debt currently represents most
of Peugeot group�s debt (�2bn).
Stocks to watch
Company Country Reco Target Price (loc cur)
Price 04/05/10 (lc)
’09 Sales (€m) Market Cap (€m) P/E 10e Return on Equity 10e EPS Growth 09-10e
Peugeot Citroen PSA France Buy EUR 34 22.63 52400 5133.8 9 5 166.3
Renault France Buy EUR 43 35.58 35200 10523.3 15.5 3.6 119
Source: SG Cross Asset Research
Corporate spin-offs and demergers
May 2010 26
Banks Focusing on their core business Sector valuation Sector performance
Sector
Market. Cap lc m
P/E 10e P/BV 09
Dividend Yield 09
LT Interest rates
US 677,306 14.5 1.46 2.53 3.77
Eurozone 726,494 12.3 0.79 2.01 3.08**
UK 408,911 14.5 0.93 0.82 3.99
Japan 253,540 18.3 0.89 1.41 1.29
Median* 9,579 13.9 1.03 1.88 NA
Total* 2,481,999
20
50
80
110
140
2005 2006 2007 2008 2009 2010
MSCI World Banks MSCI World
* “Median” and “Total” are calculated from the entire MSCI World Sector Index, ** German Long-Term Interest Rate, Source: SG Cross Asset Research Data as of 4 May 2010
Industry trend: re-prioritising towards core businesses The past investment banking cycle was dominated by the growth of the major Investment
banking players in Europe and Asia, both by the US Investment banks and their major
European peers. The recent crisis has concentrated market share in the hands of fewer
players as some market participants have disappeared, a trend which we believe will persist
given the increasing capital and regulatory hurdles facing investment banking businesses in
the post-crisis environment. For Universal banks, the lending excesses in more geared
consumer markets combined with mispricing and over-lending in some commercial lending
businesses (e.g. commercial real estate lending) exacerbated the cyclical downturn, inhibiting
the generation of capital against the backdrop of a growing need to do so, leading to potential
restraints on future growth and more limited distributions to stakeholders.
Banks cannot be divorced from the macro conditions in which they operate. The common
trends we envision across banking markets for the next few years will be lower volumes as
banks increase margins to compensate for higher funding costs, reduced revenue-generating
capacity from lower levels of invested assets in a risk-averse environment and loan loss
impairments, which, although they should peak in H1 10, may be sticky and are unlikely to fall
back close to pre-crisis levels. Regulatory reform with increased capital demands is likely to
be the primary focus for bank managements, determining both external growth development
and distribution policies.
Top ten companies (by market cap)
0 20 40 60 80 100 120 140 160 180 200
BANK OF AMERICA
HSBC HDG. (ORD $0.50)
WELLS FARGO & CO
JP MORGAN CHASE & CO.
CITIGROUP
BANCO SANTANDER
ROYAL BANK CANADA
COMMONWEALTH BK.OF AUS.
BNP PARIBAS
GOLDMAN SACHS GP.
in $bn
Source: SG Cross Asset Research
Corporate spin-offs and demergers
May 2010 27
Higher capital needs should result in a re-prioritising towards core businesses. The need to prioritise
capital generation will have a number of consequences: 1) businesses which are lacking in scale
or which have structurally low profitability will be de-emphasised; 2) with capital demands
increasing under Basel 3, some banks may decide to withdraw entirely from some businesses
in order to focus their capital resources on core business areas, leading to some retrenchment
towards domestic/home markets vs international operations; 3) competition in many
businesses will be lower, further enhancing pricing power and market share of the biggest
players; and 4) the diversification profile of some banks will worsen in the near term, leaving
them more exposed to the macroeconomic outlook for domestic economies.
SG view
Sector map
AMERICAN EXPRESS
AUS.AND NZ.BANKING GP.
BANCO SANTANDER
BANK OF AMERICA
BANK OF NEW YORK MELLON
BARCLAYS
BBV.ARGENTARIA
BK.OF NOVA SCOTIA
BLACKROCK
BNP PARIBAS
CITIGROUP
COMMERZBANK (XET)
COMMONWEALTH BK.OF AUS.
CREDIT SUISSE GROUP N
DEUTSCHE BANK (XET)
DEXIA
FRANKLIN RESOURCES
GOLDMAN SACHS GP.
HSBC HDG. (ORD $0.50)
ING GROEP
INTESA SANPAOLO
JP MORGAN CHASE & CO.
KBC GROUP
LLOYDS BANKING GROUP
MITSUBISHI UFJ FINL.GP.
MORGAN STANLEY
NATIONAL AUS.BANK
NORDEA BANK
PNC FINL.SVS.GP.
ROYAL BANK CANADA
ROYAL BANK OF SCTL.GP.
STANDARD CHARTERED
TORONTO-DOMINION BANK
UNICREDIT
US BANCORP
WELLS FARGO & CO
WESTPAC BANKING
Sales
S/M*
Industry Leaders
Larger than necessary?
Growth companies Doldrums
*S/M: Sales / Market capitalisation; Source: SG Cross Asset Research
A number of asset sales are required by the EU Some banks are already required to make asset sales, which is the price to pay governments
and/or regulators for the financial support given during the crisis.
Commerzbank: The group has to sell Eurohypo by 2013, which may prove quite difficult given
the state of the Commercial Property markets. Commerzbank must pay back over �17bn of
the �silent stake� provided by the German state�s �Soffin� fund, which supported the Dresdner
acquisition and credit crisis costs. This will require a combination of capital raisings and
possible further asset sales, although the scale of the task appears daunting, increasing the
likelihood of some form of debt/equity swap. Dexia must sell Crediop, Dexia Sabadell and
Dexia Banka Slovensko within three years.
Corporate spin-offs and demergers
May 2010 28
ING must sell its Insurance activities via a trade sale or IPO, divest ING Direct US, ING
Investment Management and Inter-Advies by the end of 2013. Given the size of the overall
ING insurance operations (�24.6bn embedded value), the company is likely to run a dual track,
and weigh its options, either doing an IPO or selling various operations. In our opinion, the
Benelux and US operations are too large to be sold to trade buyers, each with reported
embedded values of �7-8bn. However, we believe there would be significant interest in the
leading franchises ING operates in various emerging markets.
Royal Bank of Scotland is being forced by the EU to sell RBS Insurance, the RBS/Natwest
branches, William & Glyns, Global Merchant Services and RBS Sempra (partly complete) by
2013.
Revised business models may lead to more businesses being put up for sale In addition to these forced sales, revised business models prompted by regulatory reform may
precipitate asset sales. AIB intends to sell its Polish business, its MIT stake and its UK banking
businesses in order to reach the Irish regulator�s demands in relation to equity Tier 1 capital
even before the new Basel 3 rules are decided. Although there has been some political
support in the US for the break-up of the largest financial institutions, this does not appear to
have found international support. Hence, the wholesale break-up of Universal banks into their
constituent Commercial banking and Investment banking parts does not seem likely at the
present time. There also has been some pressure on banks to reverse some of the unbridled
expansion from the pre-crisis period, e.g. Unicredit, where operations in 22 emerging
European economies is seen by many as an unfocused approach which has left the group
with limited distribution capacity as it seeks to rebuild its capital base.
UBS: Although UBS is now well capitalised post the difficulties it faced throughout the crisis,
should it fail to turnaround its US Wealth Management business, this could be yet another
asset put up for sale. However, the bank remains focused on rebuilding its integrated Wealth
Management/Investment banking Group rather than moving back to its pure Private Wealth
Management roots.
There will be other banks wanting to acquire these assets The flip side of the need for some banks to sell assets is that there will be others, e.g. HSBC,
JP Morgan, Bank of America, Barclays, Goldman Sachs, Morgan Stanley and Deutsche Bank,
which may see opportunities to gain market share via the acquisition of assets put up for sale
by weaker banks. The lack of clarity on the future regulatory regime is a constraint for even the
better capitalised banks, but we think that the process will accelerate as the regulatory fog
clears. We think that the UK banking market may prove attractive for non-UK banks over the
medium-term given its size and currently shifting competitive environment.
Emerging markets remain a focus, as does wealth management Expanding emerging markets activities, particularly in Asia, remain a focus for the stronger
banks, as does increasing the weight of wealth management activities, which consume little
capital. The likely interest in AIB�s Polish assets suggests that European banks remain
interested in the long-term potential for emerging Europe banking markets.
We think the most likely scenario will be for banks to exchange assets as the focus on core
businesses continues. Some banks may need to raise capital in order to continue expanding,
e.g. Deutsche Bank with the future acquisition of the Postbank minorities. Should the Basel 3
Corporate spin-offs and demergers
May 2010 29
proposals pass relatively intact, a number of banks with significant minority interests may
need to increase these stakes to avoid being penalised from a capital perspective, and stakes
in financial companies (e.g. Barclays� 20% stake in Blackrock) may also need to be sold,
increasing opportunities for investors to participate.
Stocks to watch
Company Country Reco Local Currency
Target Price (loc cur)
Price 04/05/10 (loc cur)
’09 Sales (€m)
Market Cap (€m)
P/E 10e Return on Equity 10e
EPS Growth 09-10e
Commerzbank Germany Sell EUR 3.6 5.99 12039.6 7072.8 nm -5.4 79.4
Royal Bank of Scotland United Kingdom Hold GBP 0.55 0.54 22484.8 31505.5 nm 0.2 33.9
ING Group Netherlands Buy EUR 9 6.88 50160.8 26361.1 7.4 na 289.1
UBS Switzerland Sell CHF 12.4 17.04 32834.4 65276.7 13.1 11.6 410.3
Source: SG Cross Asset Research
Corporate spin-offs and demergers
May 2010 30
Capital goods Focus on core business is the key
Sector valuation Sector performance
Sector
Market. Cap lc m
P/E 10e P/BV 09
Dividend Yield 09
LT Interest rates
US 1,025,457 18.6 2.66 1.74 3.77
Eurozone 647,049 16.9 2.44 2.59 3.08**
UK 67,282 14.7 2.87 2.98 3.99
Japan 365,510 23.6 1.49 1.16 1.29
Median* 7,132 17.7 2.19 1.83 NA
Total* 2,200,709
40
70
100
130
160
2005 2006 2007 2008 2009 2010
MSCI World Capital Goods MSCI World
* “Median” and “Total” are calculated from the entire MSCI World Sector Index, ** German Long-Term Interest Rate, Source: SG Cross Asset Research Data as of 4 May 2010
Industry trend: emerging markets take the lead By definition, emerging markets have a bigger appetite for capital goods than developed
economies. Much of the strong investment in China and India is not cyclical. It is structural in
that it is meeting the social goals of the government and is unlikely to change, regardless of
what happens to the US and European consumer. Capital goods investment has been the key
driver of China�s 10%+ growth co-existing with low inflation over the past five years. Due to
the rising proportion of sales in emerging markets (on average 30% of sales), capital goods
companies have to continue relocating production and sourcing in these areas in the coming
years. This ongoing process likely will be achieved in three ways:
Transfer of sourcing from developed economies (mainly euro-denominated) to developing
markets (primarily in dollar-pegged currencies). Schneider, for example, plans to transfer
around �250m of purchases per annum to low-cost countries (LCCs).
Relocation of production and R&D centres to regions outside Europe, primarily to LCCs.
Closing and relocating plants to developing countries, which is a costly process. On the
whole, although the expansion of emerging markets should boost sector growth in the
medium term, European companies could find their margins squeezed. New rivals of global
scale are set to emerge.
Top ten companies (by market cap)
0 50 100 150 200 250
GENERAL ELECTRIC
SIEMENS (XET)
3M
ABB 'R'
CATERPILLAR
EMERSON ELECTRIC
MITSUBISHI
PHILIPS ELTN.KONINKLIJKE
SCHNEIDER ELECTRIC
HUTCHISON WHAMPOA
in $bn
Source: SG Cross Asset Research
Corporate spin-offs and demergers
May 2010 31
SG view
Sector map
3M
ABB 'R'
ALSTOM
ATLAS COPCO 'A'
CATERPILLAR
CUMMINSDANAHER
DEERE
EATON
EMERSON ELECTRIC
FANUC
FIRST SOLAR
GENERAL ELECTRIC
HUTCHISON WHAMPOA
ILLINOIS TOOL WORKSINGERSOLL-RAND
ITOCHU
KOMATSUMAN (XET)
MITSUBISHIMITSUI
PACCAR
PHILIPS ELTN.KONINKLIJKE
SANDVIK
SCHNEIDER ELECTRIC
SIEMENS (XET)
SUMITOMO
TYCO INTERNATIONAL
VESTAS WINDSYSTEMS
VOLVO 'B'
Sales
S/M*
Industry Leaders
Larger than necessary?
Growth companies Doldrums
*S/M: Sales / Market capitalisation; Source: SG Cross Asset Research
Sector consolidation could mark time in several regions, as new emerging market rivals arrive on
the scene and become more aggressive in international markets, putting additional pressure on
prices. We have identified three main potential spin-offs in this environment: General Electric,
Philips, and Siemens, which are all diversified. However, their sound balance sheets mean they do
not have to make this tough decision. Most of them will probably prefer to remain diversified and
make acquisitions in non-euro countries. Thus, leaders, such as Siemens and ABB, are likely to
continue external growth in emerging markets.
Siemens: The group�s strategy is to focus on its three core sectors (Industry, Energy and
Healthcare). As a result, two of its current divisions could be put up for sale in the medium term:
1) SIS (�4,686m sales, �90m in earnings in 2009): SIS is a provider of IT services which generates
one-third of its sales internally. SIS will also be carved out (put into a separate legal entity), which
makes possible an exit (via sale or IPO) in the medium term. 2) Hearing aids (sales of �700m): The
business has a significant break-up value (probably worth >�2bn). A disposal would highlight
management's willingness to continue to streamline the portfolio and dispose of non-core
businesses. But given the business is highly profitable (margins of around 20%), this would have a
slightly dilutive impact on margins (-10bp) and EPS (-0.7%). Finally Siemens could also exit from its
Mobility business. The transport business is isolated within Siemens and holds back the overall
margin and growth profile of the group.
Philips: The group has had a very active portfolio streamlining strategy over the past 10 years. We
believe that the sale of the Television business (2009 sales �3.1bn, EBIT losses -�180m) is the last
necessary step in the group�s strategic repositioning. Fixing the Television business is difficult given
structural pricing pressure and rising competition. As a result, this business is holding back the
company�s growth profile, depresses group margins and, in our view, explains the stock�s below
average earnings rating (10% discount to the European Capital Goods sector on 2010e EV/EBITA).
Stocks to watch
Company Country Reco Target Price (loc cur) Price 04/05/10 (loc cur) ’09 Sales (€m) Market Cap (€m) P/E 10e Return on Equity 10e EPS Growth 09-10e
Philips Netherlands Buy EUR 30 25.48 25640.2 25125.3 14.7 7.8 141.6
Siemens Germany Buy EUR 92 73.09 73752.1 66819.1 12.8 15.9 9.5
Source: SG Cross Asset Research
Corporate spin-offs and demergers
May 2010 32
Chemicals Spin-offs should take off
Sector valuation Sector performance
Sector
Market. Cap lc m
P/E 10e P/BV 09
Dividend Yield 09
LT Interest rates
US 280,758 16.8 3.42 1.47 3.77
Eurozone 207,897 16.8 2.34 2.21 3.08**
UK 5,698 20.1 3.18 2.37 3.99
Japan 114,254 21.5 1.34 1.40 1.29
Median* 7,055 18.0 2.08 1.66 NA
Total* 624,381
50
80
110
140
170
2005 2006 2007 2008 2009 2010
MSCI World Chemicals MSCI World
* “Median” and “Total” are calculated from the entire MSCI World Sector Index, ** German Long-Term Interest Rate, Source: SG Cross Asset Research Data as of 4 May 2010
Industry trend: focus when possible The current environment means that even financially strong listed companies are typically
avoiding all but the smallest bolt-on deals for now. Some planned M&A has been derailed.
This includes, for example, Akzo Nobel�s plan to sell the former ICI speciality starches
business, and Dow�s failed $9bn joint venture deal with Petrochemicals Industries Company of
Kuwait in commodity petrochemicals and plastics operations. This deal was intended to partly
finance the now renegotiated US$19bn Rohm & Haas specialty chemicals acquisition.
This situation is made more likely by the precarious financial position of an increasing number
of companies, which need to refinance debt and are seeing their credit ratings come under
pressure. This includes several leading players, notably the private groups built on debt
(LyondellBasell�s US operations are now in Chapter 11), and the need for companies involved
in recent M&A to strengthen their balance sheets. This is already resulting in M&A activity.
Top ten companies (by market cap)
0 10 20 30 40 50 60
BASF (XET)
E I DU PONT DE NEMOURS
DOW CHEMICAL
MONSANTO
POTASH CORPORATION OF SASKATCHEWAN
AIR LIQUIDE
PRAXAIR
SHIN-ETSU CHEMICAL
SYNGENTA
MOSAIC
in $bn
Source: SG Cross Asset Research
Corporate spin-offs and demergers
May 2010 33
SG view
Sector map
AGRIUM
AIR LIQUIDE
AIR PRDS.& CHEMS.
AKZO NOBEL
ASAHI KASEI
BASF (XET)DOW CHEMICAL
DSM KONINKLIJKE
E I DU PONT DE NEMOURS
ECOLAB
GIVAUDAN 'N'K + S (XET)
LINDE (XET)
MITSUBISHI CHM.HDG.
MONSANTO
MOSAIC
NITTO DENKO
NOVOZYMES
ORICA
POTASH CORPORATION OF SASKATCHEWAN
PPG INDUSTRIES
PRAXAIRSHIN-ETSU CHEMICAL
SIGMA ALDRICH
SOLVAY
SUMITOMO CHEMICAL
SYNGENTA
TORAY INDS.
WACKER CHEMIE (XET)
YARA INTERNATIONAL
Sales
S/M*
Industry Leaders
Larger than necessary?
Growth companies Doldrums
*S/M: Sales / Market capitalisation; Source: SG Cross Asset Research
Over the past three years, chemicals companies have started refocusing on their core
business, for instance divesting plastics (see Dow�s last deal) or selling pharma (see Solvay), in
order to improve efficiency. The best example comes from the gas business where the refocus
is almost complete. On the other hand, this is not the case for the other businesses.
Of the top 10 leading chemical companies by sales, only three � BASF, Dow, and Du Pont �
are listed �standalones�, while five are the chemicals operations of oil majors and two,
LyondellBasell and Ineos, are privately-held.
In this industry, some deals are already taking place, e.g. Air Products for Airgas and CF for
Terra (Yara made an attempt).
BASF has said it will look to sell Styrenics again; however, apart from this, it is hard to imagine
big disposals at the moment.
Akzo is a buyer not a seller, outside of Specialty Starches, or of a company that could again
catch the eye of private equity.
Stocks to watch
Company Country Reco Target Price (loc cur) Price 04/05/10 (loc cur) ’09 Sales (€m) Market Cap (€m) P/E 10e Return on Equity 10e EPS Growth 09-10e
BASF SE Germany Buy EUR 54 44.6 57800 40959.6 10.2 18.8 46
Source: SG Cross Asset Research
Corporate spin-offs and demergers
May 2010 34
Construction, Motorways & Building Materials Companies already focused on sub segments
Sector valuation Sector performance
Sector
Market. Cap lc m
P/E 10e P/BV 09
Dividend Yield 09
LT Interest rates
US 39,181 18.0 2.32 0.92 3.77
Eurozone 96,891 14.7 1.76 4.73 3.08**
UK 2,892 8.4 1.93 5.09 3.99
Japan 20,850 17.4 1.00 1.86 1.29
Median* 4,381 16.4 1.61 2.46 NA
Total* 169,931
50
80
110
140
170
200
2005 2006 2007 2008 2009 2010
MSCI World Construction & Engeneering MSCI World
* “Median” and “Total” are calculated from the entire MSCI World Sector Index, ** German Long-Term Interest Rate, Source: SG Cross Asset Research Data as of 4 May 2010
Industry trend: no clear trend In the construction sector, we expect companies� desire to expand in concessions to continue to
drive consolidation. The combination of steady revenue streams and tighter risk control offered by
the concessions model provides construction sector majors with a means of stabilising their
earnings base. Market leadership looks more like a key strategic objective than in the past. Overall,
we believe there is still scope for consolidation in more traditional construction activities in
Spain, unlike in France, where the substantial market share already held by the three main
players restricts the potential for major deals.
In the building materials sector, with market leadership a real advantage, the race for strategic
positions looks set to continue. Potential opportunities are becoming scarcer and the gap
between the majors and non-majors is widening. However, the current crisis has prompted
several cement majors to put some assets up for sale, which could provide opportunities for
medium-sized players to catch up. In the cement segment, the focus is likely to be on
emerging markets, primarily India, China and Africa. In aggregates, opportunities are mainly to
be found in the developed world: the value of a quarry depends on its rarity and there is very
little environmental pressure in emerging markets.
Top ten companies (by market cap)
0 5 10 15 20 25 30 35
VINCI (EX SGE)
SAINT GOBAIN
HOLCIM 'R'
LAFARGE
CRH
BOUYGUES
ACS ACTIV.CONSTR.Y SERV.
ASAHI GLASS
HEIDELBERGCEMENT (XET)
DAIKIN INDUSTRIES
in $bn
Source: SG Cross Asset Research
Corporate spin-offs and demergers
May 2010 35
SG view
Sector map
ACS ACTIV.CONSTR.Y SERV.
ASAHI GLASS
ASSA ABLOY 'B'
BOSKALIS WESTMINSTER
BOUYGUES
CIMENTOS DE PORTL.SGPS
CRH
DAIKIN INDUSTRIES
EIFFAGEFERROVIAL
FLUOR
GEBERIT 'R'
HEIDELBERGCEMENT (XET)
HOCHTIEF (XET)
HOLCIM 'R'
IMERYS
JACOBS ENGR.
JGC
JS GROUP
LAFARGE
LEIGHTON HOLDINGS
MARTIN MRTA.MATS.
MASCO
QUANTA SERVICES
SAINT GOBAIN
SKANSKA 'B'
SNC-LAVALIN GP.
URS
VINCI (EX SGE)
VULCAN MATERIALS
Sales
S/M*
Industry Leaders
Larger than necessary?
Growth companies Doldrums
*S/M: Sales / Market capitalization; Source: SG Cross Asset Research
The rationale for consolidation in the construction and building materials sectors varies greatly
depending on the segment and the specific features of the trade concerned. As a result, the
degree of domination must be assessed based on geographic criteria.
The worldwide consolidation process is more advanced in building materials than in
construction and this is likely to remain the case in the coming years.
Based on our screening, some companies expanded outside their core business during the
last M&A cycle and could now be tempted to refocus.
The economic crisis had a strong and direct effect on companies making them more
vulnerable. This situation could push diversified groups like Saint-Gobain, or Hochtief to
refocus on their core business.
Hochtief: At the end of 2009, Hochtief had planned to launch an IPO of its concessions
business which is mainly minority stakes in several airports. The IPO was cancelled as market
conditions were not good enough for the company to obtain a price attractive enough.
Hochtief could at some point try to get some value out of its concession business.
Saint-Gobain announced the disposal of its Glass packaging unit in 2007. The economic crisis
delayed the sale as the business is generating large cash flows and the company does not
want to sell it cheap. Nevertheless, we expect the disposal to take place this year or next.
Stocks to watch
Company Country Reco Target Price (loc cur)
Price 04/05/10 (loc cur) ’09 Sales (€m) Market Cap (€m) P/E 10e Return on Equity 10e EPS Growth 09-10e
Saint-Gobain France Buy EUR 47 37.26 38615.1 19114.4 15.4 8.3 85.7
Hochtief Germany Hold EUR 61 62.27 17972.7 4358.9 22.8 8 12
Source: SG Cross Asset Research
Corporate spin-offs and demergers
May 2010 36
Food products No spin-offs on the agenda
Sector valuation Sector performance
Sector
Market. Cap lc m
P/E 10e P/BV 09
Dividend Yield 09
LT Interest rates
US 680,241 14.5 3.01 2.74 3.77
Eurozone 488,233 15.3 2.86 1.83 3.08**
UK 283,168 15.4 4.18 3.65 3.99
Japan 94,552 21.5 1.36 1.71 1.29
Median* 8,683 15.5 2.49 2.28 NA
Total* 1,602,759
50
80
110
140
2005 2006 2007 2008 2009 2010
MSCI World Food Beverage & Tobacco MSCI World
* “Median” and “Total” are calculated from the entire MSCI World Sector Index, ** German Long-Term Interest Rate, Source: SG Cross Asset Research Data as of 4 May 2010
Industry trend: a multiple sub segment to spin off There may be more M&A activity in the US, where the sector has struggled more than in
Europe. Under pressure from retailers (which are highly concentrated and often discount),
European food products companies have constantly restructured to improve efficiency in
order to be able to pay their customers various types of off-invoice margins (including
�wedding presents� for a merger). In the US, retailers have not yet focused their strength
enough to get to this point. In the past, European food producers have often looked for
targets in the US because of this lessened competition.
The food products sector is mature in developed markets. Growth is found more easily on
emerging markets, which is where consumption increases year after year.
We have seen little change in leadership among the sector�s top international companies.
Nestlé remains the world leader by a wide margin both in terms of market capitalisation and
sales. Based on our two main criteria, Nestlé scores more than twice as high as its closest
competitor.
Top ten companies (by market cap)
0 20 40 60 80 100 120 140 160 180 200
NESTLE 'R'
COCA COLA
PEPSICO
PHILIP MORRIS INTL.
ANHEUSER-BUSCH INBEV
BRITISH AMERICAN TOBACCO
KRAFT FOODS
SABMILLER
UNILEVER CERTS.
ALTRIA GROUP
Mv in dollars
Source: SG Cross Asset Research
Corporate spin-offs and demergers
May 2010 37
SG view
Sector map
ALTRIA GROUP
ANHEUSER-BUSCH INBEV
ARCHER-DANLS.-MIDL.
ASSOCIATED BRIT.FOODS
BRITISH AMERICAN TOBACCO
CAMPBELL SOUP
COCA COLA
CONAGRA FOODS
DANONE
DIAGEO
FOSTER'S GROUP
GENERAL MILLS
HEINEKEN
HJ HEINZ
IMPERIAL TOBACCO GP.
JAPAN TOBACCO
KELLOGG
KIRIN HOLDINGS
KRAFT FOODS
LORILLARDMEAD JOHNSON
NUTRITION
NESTLE 'R'
PEPSICO
PERNOD-RICARD
PHILIP MORRIS INTL.
REYNOLDS AMERICAN
SABMILLER
SARA LEE
UNILEVER CERTS.
WILMAR INTL.
Sales
S/M*
Industry Leaders
Larger than necessary?
Growth companies Doldrums
*S/M: Sales / Market capitalisation; Source: SG Cross Asset Research
The top 10 ranking shows that there are already significant sector leaders, and the sector
includes a multitude of sub-segments. It does not make sense for groups to merge if they do
not share common interests. Conversely, spin-offs could be seen as a solution to focus solely
on core assets.
Unsurprisingly, Unilever would appear to be a good candidate for a spin-off given its wide
range of businesses. However, the company has decided to do otherwise. Over the past three
years, it has implemented a program called �One Unilever�, for which the main goal is to
locally merge the three operational management teams in Food, Personal Care and Household
Care. That way every country has only one management and one headquarter for all the
group�s activities. This strategy has proven to be efficient so far, hence a split would not make
sense.
Other diversified groups like ABF are well placed on our Sector Map, but not many diversified
groups are part of the Food products sector.
Corporate spin-offs and demergers
May 2010 38
Food & Staples Retailing Expand in emerging markets or spin off unprofitable assets?
Sector valuation Sector performance
Sector
Market. Cap lc m
P/E 10e P/BV 09
Dividend Yield 09
LT Interest rates
US 406,221 13.5 2.15 1.67 3.77
Eurozone 106,862 15.9 2.36 2.55 3.08**
UK 74,272 13.3 1.69 3.33 3.99
Japan 41,772 20.5 1.22 2.22 1.29
Median* 9,715 15.7 2.09 2.24 NA
Total* 727,931
50
80
110
140
2005 2006 2007 2008 2009 2010
MSCI World Food & Staples Retailing MSCI World
* “Median” and “Total” are calculated from the entire MSCI World Sector Index, ** German Long-Term Interest Rate, Source: SG Cross Asset Research Data as of 4 May 2010
Industry trend: saturated market The larger European markets no longer lend themselves to a growth strategy based solely on
opening new stores. One reason is restrictive legislation. Most European countries, Germany
and France especially, are already saturated with retail facilities.
The likelihood for consolidation is also somewhat diminished by Wal-Mart's faltering
expansion ambitions in Europe, following the company�s withdrawal from Germany in 2006.
Legislative uncertainties in France largely have been resolved, allowing more scope for
domestic consolidation; however, this is likely to be a mid-term trend as the market is
dominated by independent players. The US market remains highly fragmented and offers
some interesting consolidation possibilities. It is difficult to talk of a worldwide food retailing
sector when even the biggest player, Wal-Mart ($375bn in sales in 2007), operates in only ten
countries. In Europe, Wal-Mart operates just in the UK, where it is number two by sales, but
has no presence in France, the continent's second-largest market, or Germany. Across
Europe, the market fragmentation picture is much the same. Carrefour, the largest European
retailer by sales and No. 2 worldwide, has only a 10.5% share of the European market. In
second place is Tesco, with just 5.3%.
Top ten companies (by market cap)
0 50 100 150 200 250
WAL MART STORES
TESCO
CVS CAREMARK
WALGREEN
CARREFOUR
WOOLWORTHS
WESFARMERS
COSTCO WHOLESALE
SEVEN & I HDG.
METRO (XET)
in $bn
Source: SG Cross Asset Research
Corporate spin-offs and demergers
May 2010 39
SG view
Sector map
AEON
AHOLD KON.
CARREFOUR
CASINO GUICHARD-P
COLRUYT
COSTCO WHOLESALE
CVS CAREMARK
DELHAIZE GROUP
FAMILYMART
JERONIMO MARTINS
KROGER
LAWSON
LOBLAW
METCASH
METRO (XET)
MORRISON(WM)SPMKTS.
OLAM INTERNATIONAL
SAFEWAY
SAINSBURY (J)
SEVEN & I HDG.
SHOPPERS DRUG MART
SUPERVALU
SYSCO
TESCO
WAL MART STORES
WALGREEN
WESFARMERS
WESTON GEORGE
WHOLE FOODS MARKET
WOOLWORTHS
Sales
S/M*
Industry Leaders
Larger than necessary?
Growth companies
Doldrums
*S/M: Sales / Market capitalisation; Source: SG Cross Asset Research
A key focus for development has been eastern Europe where Metro is a clear pioneer and leader
and Asia, with China still considered to be the Holy Grail. The market potential of these regions and
the investments that European retailers have already made in these countries stand to make them
long-term sources of growth.
The majority of Europe's food retailers are still heavily exposed to western Europe, and the US
retailers to North America; however, Tesco, Carrefour and Metro buck this trend with extensive
overseas business. The model has been for profitable domestic markets to finance emerging
markets expansion. We saw Casino spin off its real estate portfolio two years ago. Now, we
consider whether a geographical spin-off would be possible for a company like Carrefour. For its
part, Metro has many assets to sell.
Carrefour (Buy, TP �45). We have believed for some time that Carrefour will be the most successful
turnaround in the sector after the �3.1bn of cost savings are delivered in 2012e. In the event of
failure, Carrefour�s main shareholder, Blue Capital (50/50 Bernard Arnault and Colony Capital)
would push for a partial break-up (sale of non-G4 operations), in our view. Our conservative sum-
of-the-parts valuation gives �50, i.e. 43% upside from the current level.
Metro (Hold, TP �43). Metro�s management has made no mystery about several potential
disposals: 1) Kaufhof (German Department stores) is considered �non core�, i.e. on sale. Recently,
the Metro CEO was cited in the Financial Times (30/03/10) as saying that the assumption of
Kaufhof being sold to a private equity company in 2010 could be realistic. The value of this asset is
based on its 50% store ownership. 2) IPO of Consumer Electronics: Metro is the European leader
in Consumer Electronics delivering the Best in Class top line and margin. It clearly announced that
going public is a mid-term goal. 3) REAL (Food Retail): although less likely today, as Metro recently
published encouraging top-line and margin improvements for the division, management has made
clear that if REAL was not back at a 2-3% EBIT margin in 2012, the asset would be sold.
Stocks to watch
Company Country Reco Target price (loc cur) Price 04/05/10 (loc cur) ’09 Sales (€m) Market Cap (€m) P/E 10e Return on Equity 10e EPS Growth 09-10e
Carrefour France Buy EUR 45 36.88 91836.4 25993.3 13.6 15.4 -26.3
Metro Germany Hold EUR 43 46.76 68161.9 15153.8 15.6 16.5 43
Source: SG Cross Asset Research
Corporate spin-offs and demergers
May 2010 40
General Retailing Difficult to survive
Sector valuation Sector performance
Sector
Market. Cap lc m
P/E 10e P/BV 09
Dividend Yield 09
LT Interest rates
US 489,828 16.6 3.14 1.50 3.77
Eurozone 110,350 19.3 NA 4.08 3.08**
UK 28,055 12.3 2.01 3.88 3.99
Japan 66,471 20.7 1.96 1.14 1.29
Median* 7,043 16.6 2.78 1.56 NA
Total* 736,540
40
70
100
130
2005 2006 2007 2008 2009 2010
MSCI World Retailing MSCI World
* “Median” and “Total” are calculated from the entire MSCI World Sector Index, ** German Long-Term Interest Rate, Source: SG Cross Asset Research Data as of 4 May 2010
Industry trend: profitable groups are highly focused The tough retail environment has prompted numerous high profile exits from the industry,
offering market share opportunities to the larger listed retailers that survive.
In addition, beneath the radar of the larger, listed private chains, rising corporate bankruptcy
figures in the UK point to large numbers of casualties among independent retailers.
Clothing retailers are finding it easier to survive than those in the �hardline� sector, particularly
in big-ticket or home-related areas. This is not surprising, as the clothing market has been
more resilient than other parts of non-food retail. Moreover, clothing retailers also produce
higher gross and EBIT margins, as well as healthier returns on capital, than hardline retailers.
The clothing market looks set to remain very fragmented and competitive, while the already-
consolidated home improvement market should become increasingly focused.
The electricals market is also likely to become more consolidated, with some smaller chains
and independents continuing to drop out.
Top ten companies (by market cap)
0 10 20 30 40 50 60 70
AMAZON.COM
HOME DEPOT
HENNES & MAURITZ 'B'
TARGET
LOWE'S COMPANIES
INDITEX
BEST BUY
TJX COS.
LI & FUNG
KOHL'S
in $bn
Source: SG Cross Asset Research
Corporate spin-offs and demergers
May 2010 41
SG view
Sector map
AMAZON.COM
AUTOZONE
BED BATH & BEYOND
BEST BUY
ESPRIT HOLDINGS
FAST RETAILING
GAPHENNES & MAURITZ 'B'
HOME DEPOT
INDITEX
JARDINE CYC.& CARR.
KINGFISHERKOHL'S
LI & FUNG
LIBERTY MDA.INTACT.'A'
LIMITED BRANDS
LOWE'S COMPANIES
MACY'S
MARKS & SPENCER GROUP
NORDSTROM
PENNEY JC
PPR
PRICELINE.COM
RAKUTEN
SEARS HOLDINGS
SHERWIN-WILLIAMS
STAPLES
TARGET
TJX COS.YAMADA DENKI
Sales
S/M*
Industry Leaders
Larger than necessary?
Growth companies Doldrums
*S/M: Sales / Market capitalisation; Source: SG Cross Asset Research
UK companies, which are not a homogenous group, have seen some spin-offs in the past
(Kesa Electricals). Administrators were appointed at many retailers from 2008 onwards
including Woolworths, MFI, Zavvi, Land of Leather and Sofa Workshop. Some of the brands
were sold, either to management or a third party, which usually involved closing part of the
store portfolio. As such they should continue to exist, even if only online (e.g. Zavvi and
Woolworths). Nevertheless, some capacity has disappeared.
The trend to specialise itself will probably continue as retailers seek to improve profitability
following the competition of distribution through internet.
PPR is probably the most complex stock to analyse in the retail sector. Management has
developed several business areas (retail luxury, lifestyle), and the group now resembles a
conglomerate. This aspect should lessen in the future as the group focuses on �personal
equipment� by selling all retail banners in 3-5 years. However, for the time being, investors
may have difficulty seeing which areas of value creation should yield the best returns and the
best upside potential for the shares.
We believe there are two: the repositioning of the Gucci brand (+�20/share) and the value
created by future acquisitions. In our SOP we estimate the value of retail assets at �3.7bn.
Stocks to watch
Company Country Reco Target Price (loc cur) Price 04/05/10 (loc cur) ’09 Sales (€m) Market Cap (€m) P/E 10e Return on Equity 10e EPS Growth 09-10e
PPR France Buy EUR 121 102.75 16930.3 13006 13.8 7.7 19.4
Source: SG Cross Asset Research
Corporate spin-offs and demergers
May 2010 42
Hotels, Restaurants & Leisure Still fragmented
Sector valuation Sector performance
Sector
Market. Cap lc m
P/E 10e P/BV 09
Dividend Yield 09
LT Interest rates
US 262,058 17.6 NA 1.12 3.77
Eurozone 34,856 19.5 3.26 3.64 3.08**
UK 68,016 15.8 1.88 2.70 3.99
Japan 14,043 27.6 1.79 1.51 1.29
Median* 6,407 18.1 3.19 1.76 NA
Total* 422,282
50
80
110
140
2005 2006 2007 2008 2009 2010
MSCI World Hotels Restaurants & Leisure MSCI World
* “Median” and “Total” are calculated from the entire MSCI World Sector Index, ** German Long-Term Interest Rate, Source: SG Cross Asset Research Data as of 4 May 2010
Industry trend: a change in the business model Most of the largest hotel companies have deeply changed their business models, switching
from asset-driven to asset-light structures, implying less capital expenditure and higher
margins, linked to management or franchise contracts. However, the ongoing deep downturn
demonstrates that cyclicality remains strong in the industry despite those changes.
In the US, the hotel industry was primarily built in the 20th century, along with hotel chains and
the franchise system. In Europe, the current trend is to replace or integrate independent
hotels, which is why the penetration rate for hotel chains is continuously rising and the race for
market share continues. The ten largest hotel groups account for just 20% of hotel rooms
worldwide, of which there are close to an estimated 18 million, including 6.0 million in Europe
and 4.8 million in the US.
The restaurant market is still highly fragmented despite a wave of consolidation in the late
1990s. The three leading restaurant groups account for under 15% of the global catering
market (company and school canteens, offshore oil rigs, army bases, etc.).
Top ten companies (by market cap)
0 10 20 30 40 50 60 70 80 90
MCDONALDS
CARNIVAL
STARBUCKS
YUM! BRANDS
LAS VEGAS SANDS
COMPASS GROUP
MARRIOTT INTL.'A'
SANDS CHINA
ACCOR
WYNN RESORTS
in $bn
Source: SG Cross Asset Research
Corporate spin-offs and demergers
May 2010 43
SG view
Sector map
ACCOR
APOLLO GP.'A' BENESSE HOLDINGS
CARNIVAL
COMPASS GROUP
CROWN
DARDEN RESTAURANTS
DEVRY
GENTING SINGAPORE
H&R BLOCK
ICTL.HTLS.GP. INTL.GAME TECH.
LAS VEGAS SANDS
MARRIOTT INTL.'A'
MCDONALDS
MGM MIRAGE
OPAP
ORIENTAL LAND
ROYAL CARIBBEAN CRUISES
SANDS CHINA
SHANGRI-LA ASIA
SODEXO
STARBUCKS
STARWOOD HTLS.& RSTS. WORLDWIDE
TABCORP HOLDINGS
TIM HORTONS
TUI TRAVEL
WHITBREAD
WYNN RESORTS
YUM! BRANDS
Sales
S/M*
Industry Leaders
Larger than necessary?
Growth companies Doldrums
*S/M: Sales / Market capitalisation; Source: SG Cross Asset Research
It has become increasingly difficult to expand organically in Europe because of regulations
and high real estate prices, making acquisitions a prized source of growth. The main hotel
groups have therefore made many acquisitions (Accor with Dorint in Germany, Hilton with
Stakis and Scandic, etc.), as this is a rapid way of rounding out regional coverage and
facilitating brand development. The recent emergence of specialised investment funds could
kick-start hotel development, but barriers to entry remain strong, and financing is currently
extremely rare in the sector. The long-term potential in Europe and other regions looks high
however.
Accor: Accor, one of the main hotel groups, has decided to spin off its non-hotel operations in
order to focus on the hotel market, and reveal additional value as Vouchers are expected to
trade at a clear premium to Hotels (our DCF valuation for vouchers gives a prospective
EBITDA of 13.2x).
We think that:
1) The two future stocks combined offer considerable upside over the next 12 months (�29.5
for hotels and �22.5 for the prepaid services division based on the net debt split announced
by the group on 24 February 2010); and
2) Meanwhile, Accor could announce favourable news, including perhaps further asset
disposals in line with its asset-right strategy which is at the root of the operating issues facing
the hotel entity. Also, Accor is likely to IPO its share in Casino group Lucien Barrière (49% of
shares) in H2 10e, which could be worth between �400m and �500m, plus a �220m debt
impact.
Stocks to watch
Company Country Reco Target Price (loc cur) Price 04/05/10 (loc cur) ’09 Sales(€m) Market Cap (€m) P/E 10e Return on Equity 10e EPS Growth 09-10e
Accor France Buy EUR 53 43.32 7296.6 9766.8 28.1 9.2 10.7
Source: SG Cross Asset Research
Corporate spin-offs and demergers
May 2010 44
Household & Personal Care More consolidation than spin-off
Sector valuation Sector performance
Sector
Market. Cap lc m
P/E 10e P/BV 09
Dividend Yield 09
LT Interest rates
US 292,263 15.4 3.89 2.76 3.77
Eurozone 118,024 20.5 3.02 1.63 3.08**
UK 37,560 16.8 NA 3.26 3.99
Japan 28,367 23.3 2.34 2.52 1.29
Median* 13,947 17.3 3.21 2.53 NA
Total* 476,214
50
80
110
140
2005 2006 2007 2008 2009 2010
MSCI World Household & Personal Products MSCI World
* “Median” and “Total” are calculated from the entire MSCI World Sector Index, ** German Long-Term Interest Rate, Source: SG Cross Asset Research Data as of 4 May 2010
Industry trend: consolidation is likely Barriers to entry are high depending on the distribution channel and the product category,
as establishing a global brand takes time.
Acquisitions help round out a brand portfolio, strengthen category diversification or improve
geographical coverage.
The personal, household and healthcare industries are still fragmented, although a closer
analysis by product category or distribution channel highlights contrasting situations.
Scale issues are striking for A&P spending on media agencies (the biggest cost line in
personal care) and for raw materials purchases from suppliers (the biggest cost for household
care).
Critical mass is needed and constantly growing due to retailers� current scale in addition to a
continued shift towards more local concentration and geographical diversification.
Top ten companies (by market cap)
0 20 40 60 80 100 120 140 160 180 200
PROCTER & GAMBLE
L'OREAL
COLGATE-PALM.
RECKITT BENCKISER GROUP
KIMBERLY-CLARK
BEIERSDORF (XET)
AVON PRODUCTS
KAO
HENKEL (XET)
CLOROX
in $bn
Source: SG Cross Asset Research
Corporate spin-offs and demergers
May 2010 45
SG view
Sector map
AVON PRODUCTS
BEIERSDORF (XET)
CHURCH & DWIGHT CO.
CLOROX
COLGATE-PALM.
ENERGIZER HDG.
ESTEE LAUDER COS.'A'
HENKEL (XET)
KAO
KIMBERLY-CLARK
L'OREAL
PROCTER & GAMBLE
RECKITT BENCKISER GROUP
SHISEIDO
UNI CHARM
Sales
S/M*
Industry Leaders
Larger than necessary?
Growth companies Doldrums
*S/M: Sales / Market capitalisation; Source: SG Cross Asset Research
Sector consolidation remains on the agenda for both the personal care and the household
sub-sectors, but now there are fewer listed targets (after the takeover of the The Body Shop
and the minority buyout of Clarins), particularly when it comes to targets free of a controlled
shareholding structure. The primary hurdle to consolidation in the HPC industry is the scarcity
of decent-sized companies. That said, the deteriorating environment creates more
opportunities but not necessarily at more affordable prices.
In this environment, Henkel appears to be one of the few diversified companies in this sector.
However, at the moment, management does not seem keen to divest unless it finds an
acquisition in its own area of expertise.
We believe the main players will wait for big conglomerates to refocus on fewer core
businesses and dispose of appealing assets or brands (as was the case with L�Oréal, when it
acquired YSL Beauty from PPR, or Reckitt Benckiser, when it acquired BHI from Boots the
Chemist). For several conglomerates, personal, household or healthcare businesses are small
relative to their own size, and as such are often considered to be non-core. However, these
businesses would offer an attractive fit and strengthen the portfolio of focused HPC groups.
Henkel announced in 2009 the sale of some of its business including the do-it-yourself (DIY)
line of adhesives, office and houseware products, including Duck brand products. If Henkel
follows this trend, in order to continue to focus on its core activity, a major spin-off is
conceivable by splitting one of its three main businesses: Adhesive Technologies, Laundry &
Home Care and Cosmetics.
Stocks to watch
Company Country Reco Target Price (loc cur) Price 04/05/10 (loc cur) ’09 Sales €m) Market Cap (€m) P/E 10e Return on Equity 10e EPS Growth 09-10e
Henkel Germany Buy EUR 43 40.07 14039.7 7139 16.8 14.2 43.2
Source: SG Cross Asset Research
Corporate spin-offs and demergers
May 2010 46
Insurance Changing regulatory rules
Sector valuation Sector performance
Sector
Market. Cap lc m
P/E 10e P/BV 09
Dividend Yield 09
LT Interest rates
US 682,657 10.7 1.09 2.39 3.77
Eurozone 300,278 9.3 1.06 4.70 3.08**
UK 75,525 8.9 1.23 4.56 3.99
Japan 87,727 23.3 1.97 1.77 1.29
Median* 8,866 11.0 1.15 2.81 NA
Total* 1,209,933
30
60
90
120
150
2005 2006 2007 2008 2009 2010
MSCI World Insurance MSCI World
* “Median” and “Total” are calculated from the entire MSCI World Sector Index, ** German Long-Term Interest Rate, Source: SG Cross Asset Research Data as of 4 May 2010
Industry trend: solvency 2 process on its way The sector has suffered a clear de-rating in recent years, despite constantly improving
operating margins and business rationalisation. Insurance companies have already largely
rationalised their asset bases. Minority interests have mostly been bought back and we would
expect only cosmetic rationalisation measures (AXA APH deal for example).
Balance sheets have recovered quickly from low levels seen early in 2009 as the entire
business is under mark to market.
While the European Commission will be the final decision-maker in the solvency II process,
Thomas Steffen, who heads the German insurance industry supervisory authority, has stated
that he would not object to delaying the introduction of Solvency 2 to 2013 from 2012. He
points to the challenges for small- and medium-sized players, which �might come under
severe pressure�. We have probably heard the worst about the potential impact of Solvency 2
on the industry (�300bn in capital requirements for the industry, of which roughly �80bn for
UK, or �50bn for Germany or France). The first signs of regulatory easing are appearing:
grandfathering, review of the liquidity premium, ongoing discussion on intangibles.
Top ten companies (by market cap)
0 10 20 30 40 50 60 70
BERKSHIRE HATHAWAY 'B'
ALLIANZ (XET)
AXA
METLIFE
GENERALI
ZURICH FINANCIAL SVS.
MANULIFE FINANCIAL
PRUDENTIAL FINL.
MUENCHENER RUCK. (XET)
GREAT WEST LIFECO
in $bn
Source: SG Cross Asset Research
Corporate spin-offs and demergers
May 2010 47
SG view
Sector map
ACE
AFLAC
ALLIANZ (XET)
ALLSTATE
AVIVA
AXA
BERKSHIRE HATHAWAY 'B'
CHUBB
CNP ASSURANCES
DAI-ICHI LIFE INSURANCE
GENERALI
GREAT WEST LIFECO
HARTFORD FINL.SVS.GP.
LOEWS
MANULIFE FINANCIAL
MARSH & MCLENNAN
METLIFE
MS&AD INSURANCE GP.HDG.
MUENCHENER RUCK. (XET)
POWER FINL.
PROGRESSIVE OHIO
PRUDENTIAL
PRUDENTIAL FINL.
QBE INSURANCE GROUP
SAMPO 'A'
SUN LIFE FINL.
SWISS RE 'R'
TOKIO MARINE HOLDINGS
TRAVELERS COS.
ZURICH FINANCIAL SVS.
Sales
S/M*
Industry Leaders
Larger than necessary?
Growth companies Doldrums
*S/M: Sales / Market capitalisation; Source: SG Cross Asset Research
The global insurance industry landscape has been radically modified as a result of the
financial crisis. The biggest change concerns AIG, the world�s largest insurance company by
premiums, which is now no bigger than a mid cap.
AIG�s collapse is a unique opportunity for the strongest players to �pick and choose� assets.
The largest assets have now been sold (ALICO and AIA) but smaller pieces are still for sale.
The insurance assets of ING (see Banks) are also on the table.
We are confident we will see dynamic M&A in the medium term following the AIG deals.
Insurance companies will emerge from the crisis either weaker or stronger. The stronger ones,
i.e. those who did not need to call on the market during the crisis, should be best-placed to
take advantage of M&A opportunities over the next 2-3 years. The biggest players are
probably the best placed to consolidate the market and therefore take advantage of the
current M&A environment via financial flexibility. The impact of Basel 2 and 3 on banks also
may trigger a good pipeline for Bankinsurance assets to be sold (see ING).
Muenchenen Ruck: The insurer long has been saying that splitting insurance activities from
reinsurance activities would create more value for shareholders. We doubt that management
will finally decide to go through with this, although a spin-off of Ergo, the primary business,
would not be irrational in this period.
Stocks to watch
Company Country Reco FV (loc cur) Price 04/05/10 (l c) ’09 Sales (€m) Market Cap (€m) P/E 10e Return on Equity 10e EPS Growth 09-10e
Munich RE Germany Buy EUR 125 107.2 4213.9 21161.5 9.1 na -3.1
Source: SG Cross Asset Research
Corporate spin-offs and demergers
May 2010 48
Luxury goods No spin-offs to expect
Sector valuation Sector performance
Sector
Market. Cap lc m
P/E 10e P/BV 09
Dividend Yield 09
LT Interest rates
US 73,536 20.2 3.70 1.05 3.77
Eurozone 173,610 20.0 3.00 1.39 3.08**
UK 4,461 19.8 NA 2.00 3.99
Japan 3,810 NA 1.48 1.36 1.29
Median* 12,459 20.0 3.00 1.55 NA
Total* 263,982
50
80
110
140
170
2005 2006 2007 2008 2009 2010
MSCI World Textiles Apparel & Luxury Goods MSCI World
* “Median” and “Total” are calculated from the entire MSCI World Sector Index, ** German Long-Term Interest Rate, Source: SG Cross Asset Research Data as of 4 May 2010
Industry trend: focused on development in Asia The top 10 companies represent 45% of the world luxury goods market, which remains very
fragmented. Some large markets have reached maturity, due in part to their demographic
profile (Japan, Europe). The price structure might have to be adjusted on some product
categories in order to stimulate demand. Markets with a lot of potential (China, Russia) are
likely to experience slower returns on investment than mature markets. Companies have not
yet begun the necessary streamlining of their brand portfolio or their distribution networks.
As Asia currently provides 100% of sector growth, sector investment should continue to focus
on this region (at present, it is estimated that two-thirds of store opening investments are
made in Asia, especially China). Sales generated by Chinese customers are currently
estimated at 10-15% of the world luxury goods market, with an estimated 9% generated by
other Asian consumers (excluding Japan).
However, it remains to be seen whether they will be able to offset the weak growth from
Japanese (34% of market) and European customers (30% of market) which reflects the
demographic profile of these markets. Finally it remains to be seen whether growth in Asia will
continue to be strong in 2009.
Top ten companies (by market cap)
0 10 20 30 40 50 60
LVMH
NIKE 'B'
CHRISTIAN DIOR
RICHEMONT
HERMES INTL.
COACH
LUXOTTICA
ADIDAS (XET)
V F
THE SWATCH GROUP 'B'
in $bn
Source: SG Cross Asset Research
Corporate spin-offs and demergers
May 2010 49
SG view
Sector map
YUE YUEN INDL.HDG.
V F
THE SWATCH GROUP 'B'
RICHEMONT
PUMA RUDOLF DASSLER(XET) SOT.
POLO RALPH LAUREN 'A'
NISSHINBO HOLDINGS
NIKE 'B'
LVMH
LUXOTTICA
HERMES INTL.
GILDAN ACTIVEWEAR
COACH
CHRISTIAN DIOR
BURBERRY GROUPBILLABONG
INTERNATIONAL
ASICS
ADIDAS (XET)
Sales
S/M*
Industry Leaders
Larger than necessary?
Growth companies Doldrums
*S/M: Sales / Market capitalisation; Source: SG Cross Asset Research
Sector consolidation remains on the agenda for the luxury goods sector given that: 1) entry
barriers are high, as establishing a global brand takes time; 2) acquisitions help round out a
product portfolio or improve geographical coverage; and 3) this industry is still relatively
fragmented, although a closer analysis by product or distribution segment highlights
contrasting situations.
The luxury goods sector can already be considered a global market given the balanced
breakdown of its sales. However, this is somewhat misleading as an analysis by customer
nationality appears more meaningful in order to get past the problem of tourist flows.
Corporate spin-offs and demergers
May 2010 50
Media Already well split between sub-sectors
Sector valuation Sector performance
Sector
Market. Cap lc m
P/E 10e P/BV 09
Dividend Yield 09
LT Interest rates
US 555,172 16.8 1.92 1.84 3.77
Eurozone 120,476 15.4 2.35 4.33 3.08**
UK 60,939 14.4 1.72 3.51 3.99
Japan 23,866 27.2 1.42 1.04 1.29
Median* 8,268 16.5 2.02 2.78 NA
Total* 770,912
40
70
100
130
2005 2006 2007 2008 2009 2010
MSCI World Media MSCI World
* “Median” and “Total” are calculated from the entire MSCI World Sector Index, ** German Long-Term Interest Rate, Source: SG Cross Asset Research Data as of 4 May 2010
Industry trend: segmented sector Other drivers should prove more significant in the short/medium term:
Client needs. The ability to service clients on a global basis has gradually become critical in
some sub-sectors. The consolidation process seen over the last two decades in the
advertising agencies sector (and potential Aegis/Havas tie-up) is, therefore, likely to be
replicated in some marketing services activities. In particular, market research should see
steady consolidation (started with TNS/WPP), driven by the main agencies or marketing
services groups.
Sub-sector maturity. In markets that are already very segmented, such as magazine
publishing, acquisitions are the main way of gaining additional penetration, either in the
Consumer or B2B fields.
Given the highly diverse nature of the Media sector, we have used a market capitalisation
ranking (30 March 2009). On this basis, the top 10 global Media & Entertainment companies
are clearly dominated by US groups.
Top ten companies (by market cap)
0 10 20 30 40 50 60 70 80
WALT DISNEY
COMCAST 'A'
TIME WARNER
DIRECTV 'A'
VIVENDI
THOMSON REUTERS
NEWS CORP.'A'
VIACOM 'B'
BRITISH SKY BCAST.GROUP
OMNICOM GP.
in $bn
Source: SG Cross Asset Research
Corporate spin-offs and demergers
May 2010 51
SG view
Sector map
BRITISH SKY BCAST.GROUP
CABLEVISION SYS.
CBS 'B'
COMCAST 'A'
DENTSUDIRECTV 'A'
DISCOVERY COMMS.'A'
DISH NETWORK 'A'
EUTELSAT COMMUNICATIONS
JCDECAUX
JUPITER TELECOM.
LAGARDERE GROUPE
MCGRAW-HILL
MEDIASET
NEWS CORP.'A'
OMNICOM GP.
PEARSON
PUBLICIS GROUPE
SCRIPPS NETWORKS INTACT. 'A'
SES FDR (PAR) SHAW COMMS.'B'
SINGAPORE PRESS HDG.
THOMSON REUTERS
TIME WARNER
VIACOM 'B'
VIRGIN MEDIA
VIVENDI
WALT DISNEY
WOLTERS KLUWER
WPP
Sales
S/M*
Industry Leaders
Larger than necessary?
Growth companies
Doldrums
*S/M: Sales / Market capitalisation; Source: SG Cross Asset Research
The main "traditional" consolidation driver (i.e. the search for cost savings) has limited cross-
border relevance in the Media sector, mostly due to local cost dynamics.
For commercial TV, there are strong potential cost-savings synergies from merger operations
on the domestic market, but margins depend on the local context (multichannel players vs
single channel players, cost inflation etc). As the degree of consolidation is high, we do not
see any major move and the same applies for spin-offs.
Following the Time Warner spin-off of AOL, only Vivendi now appears to be a good candidate
for spinning off the telecom business. The spin-off process has already begun with the
disposal of Universal which should be complete by H2 10. This is clearly a favourable asset
reshuffle and there may be more ahead.
However, while the group's structure lends itself very well to potential spin-offs (discount to
SOP, diversified portfolio, no tax liabilities), its effective strategy focuses on gaining fuller
control of its main activities, except when local specifics favour continuing a market listing
(Maroc Telecom, Activision Blizzard). The SG Media team therefore deems the odds of a spin-
off as rather low.
Stocks to watch
Company Country Reco Target price (loc cur) Price 04/05/10 (loc cur) ’09 Sales (€m) Market Cap (€m) P/E 10e Return on Equity 10e EPS Growth 09-10e
Vivendi France Buy EUR 22 19.93 27588.2 24499.7 8.9 10.3 4.4
Source: SG Cross Asset Research
Corporate spin-offs and demergers
May 2010 52
Metals & Mining Trend moving from consolidation to spin-off
Sector valuation Sector performance
Sector
Market. Cap lc m
P/E 10e P/BV 09
Dividend Yield 09
LT Interest rates
US 286,412 20.3 2.25 0.66 3.77
Eurozone 130,602 23.0 1.33 1.69 3.08**
UK 495,813 12.2 3.06 0.82 3.99
Japan 96,226 17.5 1.34 0.74 1.29
Median* 7,782 19.2 1.65 0.80 NA
Total* 1,366,547
50
110
170
230
290
2005 2006 2007 2008 2009 2010
MSCI World Metals & Mining MSCI World
* “Median” and “Total” are calculated from the entire MSCI World Sector Index, ** German Long-Term Interest Rate, Source: SG Cross Asset Research Data as of 4 May 2010
Industry trend: super cycle theory still alive
World-class assets are scarce: Most companies are facing mine depletion, lower head grade
and difficulty finding new mines in �investment-friendly� areas. The scarcity of world-class
assets makes it difficult for mining super majors to find new projects to develop. For the sake
of consistency with the �super-cycle theory� endorsed by all players, it is also fair to ask
whether the currently strong cash flows should primarily fuel organic growth, capital
management and balance sheet flexibility or serve a more acquisitive growth strategy.
The top 10 companies represented 30% of world steel production in 2008. The market is
still fragmented, with the top 20 steel producers representing 45% of total production.
ArcelorMittal clearly dominates the steel industry and is four times bigger than its closest
competitor.
The top 10 mining companies are clearly diversified. Industry fragmentation varies depending
on the business segment: in iron ore, the top 10 companies represent 97% of world
production vs 71% for coking coal, 54% for copper, and 49% for aluminium.
Top ten companies (by market cap)
0 20 40 60 80 100 120 140
BHP BILLITON
RIO TINTO
ARCELORMITTAL
ANGLO AMERICAN
XSTRATA
BARRICK GOLD
FREEPORT-MCMOR.CPR.& GD.
GOLDCORP
NEWMONT MINING
NIPPON STEEL
in $bn
Source: SG Cross Asset Research
Corporate spin-offs and demergers
May 2010 53
SG view
Sector map
AGNICO-EAGLE MINES
ALCOAANGLO AMERICAN
ANTOFAGASTA
ARCELORMITTAL
BARRICK GOLD
BHP BILLITON
CLIFFS NATURAL RESOURCES
ELDORADO GOLD
ERAMETEURASIAN NATRES.CORP.
FORTESCUE METALS GP.
FREEPORT-MCMOR.CPR.& GD.
FRESNILLO
GOLDCORP
JFE HOLDINGS
KAZAKHMYSKINROSS GOLD
NEWCREST MINING
NEWMONT MINING
NIPPON STEEL
NORSK HYDRONUCOR
RIO TINTO
SUMITOMO METAL INDS.
TECK RESOURCES 'B'
THYSSENKRUPP (XET)
VEDANTA RESOURCES
XSTRATA
YAMANA GOLD
Sales
S/M*
Industry Leaders
Larger than necessary?
Growth companies
Doldrums
*S/M: Sales / Market capitalisation; Source: SG Cross Asset Research
Contrary to spin-off activity, there may be ongoing consolidation in the sector. Greater
industry consolidation (especially vertical integration) is becoming increasingly important and
may receive growing attention as corporate activity continues. As some markets become
oligopolies, many producers seek the benefits from concentration�s critical influence on price.
Synergies albeit at a limited level: in our view, M&A-linked synergies in the mining industry are
usually modest, as they are limited to cuts in E&P and capex spending through project
prioritisation within expanded exploration portfolios (historically -20%). However, we question
consolidators� leeway to trim development costs against the current backdrop of expansion
cost overruns and delays. Indeed, the mining industry�s ability to reduce cost bases through
mergers is generally limited, as such reductions imply geographical/portfolio overlaps that
conflict with the search for risk diversification.
BHP Billiton: In 2004, BHP Billiton�s former CEO Chip Goodyear was quoted as saying that
more had to be done to convince investors of the value of the oil & gas division. He stressed
that if this failed, management would come up with an alternative. We believe BHP Billiton
remains committed to high returns and its differentiating petroleum unit, and that a spin-off
may no longer be on the horizon.
ThyssenKrupp announced the reorganisation of its operating segments into two divisions in
order to: 1) adapt to further deteriorating economic conditions, 2) increase the group�s
efficiency, and 3) increase flexibility for M&A measures (disposals, restructuring, JV�s). We are
of the view that TK is unlikely to spin off its steel divisions as it considered doing in FY00.
ArcelorMittal is likely to maintain its iron ore and coking coal activities within the group to fully
capture the benefit of vertical integration.
Stocks to watch
Company Country Reco Target Price (loc cur) Price 04/05/10 (l c) ’09 Sales (€m) Market Cap (€m) P/E 10e Return on Equity 10e EPS Growth 09-10e
ArcelorMittal France Buy EUR 37 29.57 90745.9 46156.3 10.6 8.9 92.1
BHP Billiton plc United Kingdom Hold GBP 23.5 20.26 54479.7 44702.9 13.4 29.4 6.2
ThyssenKrupp Germany Hold EUR 26 24.76 45212.1 12738.7 43.7 4 144.7
Source: SG Cross Asset Research
Corporate spin-offs and demergers
May 2010 54
Oil & Gas Oil leaders ready to spin off non-core assets
Sector valuation Sector performance
Sector
Market. Cap lc m
P/E 10e P/BV 09
Dividend Yield 09
LT Interest rates
US 1,411,952 19.2 2.14 1.29 3.77
Eurozone 353,983 10.3 1.41 3.64 3.08**
UK 627,656 12.6 1.47 3.21 3.99
Japan 46,351 20.2 0.89 2.37 1.29
Median* 11,614 18.3 1.95 1.92 NA
Total* 2,510,835
50
80
110
140
170
2005 2006 2007 2008 2009 2010
MSCI World Oil & Gas MSCI World
* “Median” and “Total” are calculated from the entire MSCI World Sector Index, ** German Long-Term Interest Rate, Source: SG Cross Asset Research Data as of 4 May 2010
Industry trend: many spin-off options FY09 results publications impacted by rising oil prices have drawn attention to growth. The oil
price has picked up (prices have moved in a $70-85 band over the past three months) and is
expected to increase further, or to stabilise at a high level, which has put the spotlight on
growth prospects for 2010 and 2011. Hence, markets reacted relatively negatively when BP
guided for a decline and BG for slower growth in production for 2010. Conversely, Total�s
results were positively welcomed, particularly the return to growth expected for 2010. Oil
companies which reported strong growth in production volumes in 2009 (notably BP and
Chevron) clearly will have more difficulty doing so in 2010.
On the other hand, companies that disappointed relative to peers in 2009 � many with project
start-ups scheduled for end 2009 or early 2010 � stand to benefit. If we add to this the strong
European gas positions for RD Shell, ExxonMobil and Total (affected by lower demand and
relatively mild weather in Q4), there is every reason to believe that in 2010 oil groups should
benefit from the improving economy and the cold spell in Q1 10.
Top ten companies (by market cap) cf RDSA
0 50 100 150 200 250 300 350
EXXON MOBIL
ROYAL DUTCH SHELL
CHEVRON
BP
TOTAL
CONOCOPHILLIPS
ENI
STATOIL
OCCIDENTAL PTL.
BG GROUP
in $bn
Source: SG Cross Asset Research
Corporate spin-offs and demergers
May 2010 55
SG view
Sector map
ANADARKO PETROLEUM
APACHE
BG GROUP
BP
CANADIAN NATURAL RES.CENOVUS ENERGY
CHESAPEAKE ENERGY
CHEVRONCONOCOPHILLIPS
DEVON ENERGY
ENBRIDGE
ENCANA
ENI
EOG RES.
EXXON MOBIL
HESS
HUSKY EN.
IMPERIAL OIL
INPEX
MARATHON OIL
OCCIDENTAL PTL.
REPSOL YPF
ROYAL DUTCH SHELL
STATOIL
SUNCOR ENERGY
TALISMAN EN.
TOTAL
TRANSCANADA
WOODSIDE PETROLEUM
XTO EN.
Sales
S/M*
Industry Leaders
Larger than necessary?
Growth companies Doldrums
*S/M: Sales / Market capitalisation; Source: SG Cross Asset Research
The sector is already very concentrated. There was a big consolidation wave when oil prices
plummeted in 1998-99. Majors are so big now that we believe consolidation would create
companies that would be too big and make it difficult to sustain growth.
Many oil companies are looking to improve shareholder value via divestment of non-core
assets:
Statoil: The Board of Directors unanimously agreed in February to consider a new ownership
structure for the energy and retail business (E&R), with a stock-exchange listing currently
viewed as the most likely solution in the fourth quarter of 2010 at the earliest.
Repsol-YPF issued a press release with and without Gas Natural, signalling a possible
medium-term withdrawal from its c.30%-owned subsidiary. Thus, Repsol-YPF�s debt which
currently stands at �10,928m (�14,654m including preferential shares) could be reduced to
�4,905m (or �8,453m including the preferential shares) if Gas Natural is excluded. Repsol-YPF
is a diversified oil company with upstream, downstream LNG and Gas Natural businesses.
Total also could potentially spin off its specialty chemical division, which would resemble the
group�s strategy when it successfully spun off Arkema four years ago.
ConocoPhillips has announced it will cut its stake in Lukoil by half. It currently owns 20% of
Lukoil, a stake worth $9.4bn, which means that it may be selling c.$4.7bn in shares.
Stocks to watch
Company Country Reco Target Price (loc cur) Price 04/05/10 (loc cur) ’09 Sales (€m) Market Cap (€m) P/E 10e Return on Equity 10e EPS Growth 09-10e
Repsol-YPF Spain Hold EUR 18 17.71 898.785 21621.5 9.9 10.7 68.2
Statoil Norway Buy NOK 165 143.6 1760 457889.7 9.1 23.5 30.5
ConocoPhillips United States Hold USD 58 59.7 2188.292 91155.9 9.4 14.3 71.7
Total France Buy EUR 49 41.16 2355 96661.1 8.5 19.5 38.7
Source: SG Cross Asset Research
Corporate spin-offs and demergers
May 2010 56
Pharmaceuticals Big is beautiful but for how long?
Sector valuation Sector performance
Sector
Market. Cap lc m
P/E 10e P/BV 09
Dividend Yield 09
LT Interest rates
US 644,744 12.2 2.89 3.46 3.77
Eurozone 497,697 12.1 2.09 3.28 3.08**
UK 171,748 10.0 NA 5.60 3.99
Japan 124,786 16.4 1.55 2.28 1.29
Median* 10,091 13.5 2.09 3.28 NA
Total* 1,438,975
50
80
110
140
2005 2006 2007 2008 2009 2010
MSCI World Pharmaceuticals MSCI World
* “Median” and “Total” are calculated from the entire MSCI World Sector Index, ** German Long-Term Interest Rate, Source: SG Cross Asset Research Data as of 4 May 2010
Industry trend: sector highly concentrated There are three key positive long-term trends for the pharmaceutical sector: an ageing
population in the developed world, rising economic standards in the developing world
(primarily BRICs), and new drug therapies with identifiable clinical benefits. At the same time,
pharma is responding to shifting industry dynamics including health reform in the United
States. The sector is increasingly competitive for a myriad of reasons and that has caused a
gradual rerating over time. Still, there are opportunities to be found.
Bids by Big Pharma for established local players in emerging markets look set to feature
prominently among pharmaceutical transactions as the majors seek to position themselves for
long-term growth in these high potential markets. A more common route explored by Big
Pharma is the acquisition of smaller biotech companies with innovative compounds or
platform technologies. Most Big Pharma mergers could result in estimated savings amounting
to a high single-digit percentage of the combined cost base.
Globally, we expect markets outside of North America and Europe to account for more than
40% of world pharmaceutical sales by 2012, up from 23% in 2007, on the back of rising GDP
and the associated increase in healthcare spending.
Top ten companies (by market cap)
0 20 40 60 80 100 120 140 160 180 200
JOHNSON & JOHNSON
PFIZER
NOVARTIS 'R'
MERCK & CO.
ROCHE HOLDING
GLAXOSMITHKLINE
SANOFI-AVENTIS
ABBOTT LABORATORIES
ASTRAZENECA
BAYER (XET)
in $bn
Source: SG Cross Asset Research
Corporate spin-offs and demergers
May 2010 57
SG view
Sector map
ABBOTT LABORATORIES
ALLERGAN
ASTELLAS PHARMA
ASTRAZENECA
BAYER (XET)
BRISTOL MYERS SQUIBB
CHUGAI PHARM.
DAIICHI SANKYO
EISAI
ELI LILLY
FOREST LABS.
GLAXOSMITHKLINE
JOHNSON & JOHNSON
KYOWA HAKKO KIRIN
MERCK & CO.
MITSUBISHI TANABE PHARMA
MYLAN
NOVARTIS 'R'
NOVO NORDISK 'B'
PERRIGO
PFIZER
ROCHE HOLDING
SANOFI-AVENTIS
SHIONOGISHIRE
TAISHO PHARM.
TAKEDA PHARM.
UCB
WARNER CHILCOTT CL.A
WATSON PHARMS.
Sales
S/M*
Industry Leaders
Larger than necessary?
Growth companies Doldrums
*S/M: Sales / Market capitalisation; Source: SG Cross Asset Research
We see the diversification approach of the industry falling into three main categories: 1) Big
Pharma diversifying into new businesses and geographies; 2) Big Pharma shedding non-core
businesses and focusing on fewer geographic regions; and 3) Specialty care companies
expanding globally.
We have seen an increase in M&A activity as some majors have been unable to replace
blockbusters and grow new business lines and markets quickly enough. We note that for most
recent deals in Europe, the market did not appear to penalise the acquirer for significant
premiums, provided the deals were accretive. This could make the trend a net positive for
investors.
We see the Big Pharma model continuing for some time, although in an adapted form. The
industry has been focusing on improved R&D productivity, restructuring to drive operating-
margin improvements and searching for growth opportunities via new blockbusters,
diversification and emerging markets, with M&A a theme throughout.
Bayer: Management staying the conglomerate course, but nothing can be ruled out over a
longer time period.
Our quantitative model shows Bayer as a leading candidate for spin-off deal. This comes as
no surprise as the group�s presence in healthcare, chemicals and crop science has often
given rise to speculation about a break up. Indeed, pharma peers Sanofi-Aventis, Novartis and
AstraZeneca have all spun off their non-core businesses in the past. However, current Bayer
CEO Werner Wenning has been a staunch defender of the current model, and CEO designate
Dr. Marijn E. Dekkers has publicly committed to stick to the conglomerate path. It would likely
be much easier for Bayer to divest units than to invest the proceeds from such a deal into new
businesses. Hence, a spin-off transaction does not appear imminent, but cannot be ruled out
over a longer time period.
Stocks to watch
Company Country Reco Target Price (loc cur) Price 04/05/10 (loc cur) ’09 Sales (€m) Market Cap (€m) P/E 10e Return on Equity 10e EPS Growth 09-10e
Bayer AG Germany Hold EUR 52 47.17 32015.2 39007.1 13.7 13.6 18.2
Source: SG Cross Asset Research
Corporate spin-offs and demergers
May 2010 58
Real Estate Spin-off of industrial groups would be beneficial
Sector valuation Sector performance
Sector
Market. Cap lc m
P/E 10e P/BV 09
Dividend Yield 09
LT Interest rates
US 231,882 37.5 2.20 3.99 3.77
Eurozone 49,601 14.8 1.13 6.63 3.08**
UK 26,083 19.1 1.03 4.72 3.99
Japan 92,760 25.6 1.10 1.73 1.29
Median* 6,209 18.0 1.25 3.77 NA
Total* 688,467
40
70
100
130
160
2005 2006 2007 2008 2009 2010
MSCI World Real Estate MSCI World
* “Median” and “Total” are calculated from the entire MSCI World Sector Index, ** German Long-Term Interest Rate, Source: SG Cross Asset Research Data as of 4 May 2010
Industry trend: a new status for the sector The move towards tax-transparent vehicles should continue in the Netherlands, Belgium,
France, the UK, Germany and Italy. Some improvements are expected in Italy. A special status
could be created for listed real estate companies in Spain. The new status should enhance
sector transparency and attract new investors.
Industrial and services groups should continue to outsource their real estate holdings. The
situation should eventually mirror that in the US, where real estate is predominantly
outsourced.
We therefore expect an increase in the number and market capitalisation of sector players in
line with the US experience.
Top ten companies (by market cap)
0 5 10 15 20 25 30 35 40
SUN HUNG KAI PROPERTIES
CHEUNG KONG HOLDINGS
WESTFIELD GROUP
SIMON PR.GP.
MITSUBISHI ESTATE
UNIBAIL-RODAMCO
PUBLIC STORAGE
MITSUI FUDOSAN
VORNADO REALTY TST.
HANG LUNG PROPERTIES
in $bn
Source: SG Cross Asset Research
Corporate spin-offs and demergers
May 2010 59
SG view
Sector map
ANNALY CAPITAL MAN.
AVALONBAY COMMNS.
BOSTON PROPERTIES
BROOKFIELD AM
CAPITALAND
CHEUNG KONG HOLDINGS
CITY DEVELOPMENTS
EQUITY RESD.TST.PROPS. SHBI
HANG LUNG PROPERTIES
HCP
HENDERSON LD.DEV.
HOST HOTELS & RESORTS
KERRY PROPERTIES
LAND SECURITIES GROUP
MITSUBISHI ESTATE
MITSUI FUDOSAN
NEW WORLD DEV.
PLUM CREEK TIMBER
PUBLIC STORAGE
SIMON PR.GP.
SINO LANDSTOCKLAND
SUMITOMO REAL.&DEV.SUN HUNG KAI PROPERTIES
SWIRE PACIFIC 'A'
UNIBAIL-RODAMCO
VENTAS
VORNADO REALTY TST.
WESTFIELD GROUP
WHARF HOLDINGS
Sales
S/M*
Industry Leaders
Larger than necessary?
Growth companies Doldrums
*S/M: Sales / Market capitalisation; Source: SG Cross Asset Research
This map shows property developers (high sales, low capital intensity) and pure rental
businesses (low rent, high capital intensity).
Real estate sectors could benefit from the determination of certain industrial groups to refocus
on their core business and therefore we could have more spin-offs such as Mercialys which
was previously part of the Casino group.
The sector�s renewed appeal should last over the next few years.
The development of funded pension schemes should benefit long-term investment vehicles
that offer good visibility on cash flow and underlying asset values. Even in the event of a real
estate crisis, investors can reasonably expect property values to rise over the long term in line
with local economic growth.
Institutional investors are likely to switch increasingly to real estate assets in the wake of the
general disenchantment with equities. Listed real estate companies, which represent more
liquid investments than direct real estate holdings, stand to benefit from this trend.
The sector�s renewed appeal should lead to an increase in the number of players. The
introduction of new investment vehicles could help to match demand for real estate equities.
Although we do not expect any major move in the industry, demerging is a possibility even for
the Small & Mid Caps. A few weeks ago Liberty International announced it was demerging its
portfolio of central London properties from its regional shopping centres, as the company
reported a narrowing in pre-tax losses in 2009. It has planned to complete the demerger by
May. Liberty International will then be renamed Capital Shopping Centres.
Corporate spin-offs and demergers
May 2010 60
Software & IT Services Offshore factor dominates IT services
Sector valuation Sector performance
Sector
Market. Cap lc m
P/E 10e P/BV 09
Dividend Yield 09
LT Interest rates
US 1,042,451 16.1 3.92 0.86 3.77
Eurozone 84,100 15.8 3.57 1.58 3.08**
UK 11,527 18.1 3.13 1.69 3.99
Japan 108,047 18.2 2.08 2.16 1.29
Median* 7,610 17.5 3.44 1.74 NA
Total* 1,252,225
50
80
110
140
2005 2006 2007 2008 2009 2010
MSCI World Software & Services MSCI World
* “Median” and “Total” are calculated from the entire MSCI World Sector Index, ** German Long-Term Interest Rate, Source: SG Cross Asset Research Data as of 4 May 2010
Industry trend: small players fight to survive Recent growth in IT Services mainly has been driven by the rise of the Indian players. The
sector as a whole has yet to recover the 2000 peak.
In the software sector, traditional large firms are likely to get even larger thanks to their strong
balance sheets. Smaller players are likely to find it more difficult to survive due to market
and/or financing issues. We believe that software consolidation will focus on filling the
technology gap and winning market share.
Convergence and offering suites: the major subjects in Software
Instead of diversification, we expect a convergence trend in the software sector. Acquisitions
would be the easiest and fastest way for companies to achieve convergence, we estimate.
Leading players such as Microsoft could also diversify into other sectors to enhance their
technology leadership in the software industry and diversify their sources of revenue into
growing segments. Given Microsoft�s unsuccessful bid for Yahoo, we do not rule out the
possibility of Internet companies being acquired by software makers, or vice versa.
Top ten companies (by market cap)
0 50 100 150 200 250 300
MICROSOFT
ORACLE
GOOGLE 'A'
SAP (XET)
NINTENDO
VISA 'A'
EBAY
ACCENTURE
MASTERCARD
YAHOO
in $bn
Source: SG Cross Asset Research
Corporate spin-offs and demergers
May 2010 61
SG view
Sector map
ACCENTURE
ACTIVISION BLIZZARD
ADOBE SYSTEMS
AKAMAI TECHS.
AUTODESK
AUTOMATIC DATA PROC.
BMC SOFTWARE
CA
CAP GEMINI
CITRIX SYS.
COGNIZANT TECH.SLTN.'A'
COMPUTER SCIS.
DASSAULT SYSTEMES
EBAY
FIDELITY NAT.INFO.SVS.
FISERV
GOOGLE 'A'
INTUIT
MASTERCARD
MICROSOFT
NINTENDO
NTT DATA
ORACLE
PAYCHEX
SALESFORCE.COM
SAP (XET)
SYMANTEC
VISA 'A'
WESTERN UNION
YAHOO
Sales
S/M*
Industry Leaders
Larger than necessary?
Growth companies Doldrums
*S/M: Sales / Market capitalisation; Source: SG Cross Asset Research
Software companies and IT Services companies are priced differently by the market. Hence,
the main Software companies are located on the left side of our Map, as they are better
priced, and the main IT Services companies are on the right.
In our view, M&A activity is also likely to continue in the IT services sector, with larger players
taking advantage of low valuations. The main motivations are to increase the client base,
acquire operational capacity such as low cost resources, and gain business expertise. We
believe the consolidation trend will continue to focus on offshore.
However, following the HP-EDS merger, we cannot rule out the possibility of another mega
consolidation in the sector driven by market-share dynamics. IT Services� goal to become
�one-stop� shops could continue to push major vendors to acquire small companies.
Furthermore, we believe that cross-border consolidation will increase as offshore vendors,
such as Indian companies, focus on acquiring business. As these companies already have
strong positions in the US, we believe their next targets likely will be European.
Given the emergence of cloud computing, the major technology shift in the industry for the
next ten years, we believe the industry could move back to a semi-integrated model, providing
customers with an all-in-one offering, including hardware, software and services. In our view,
companies would better protect their profitability in the IT industry by adopting this approach
and partially lock in their customers. Against this backdrop, hardware companies actively
would continue to acquire software companies, e.g. IBM, Cisco and HP's strategy over the
past few years, while software vendors would acquire hardware companies, e.g. Oracle's
acquisition of Sun Microsystems.
In the Services sector, some companies such as Indra or Sopra have a hybrid model, offering
both proprietary software solutions and traditional services activities. For example, Sopra, a
mid-cap French company, will spin off its software division Axway in Q3 10.
Corporate spin-offs and demergers
May 2010 62
Telecom Equipment Many spin-off options
Sector valuation Sector performance
Sector
Market. Cap lc m
P/E 10e P/BV 09
Dividend Yield 09
LT Interest rates
US 1,058,697 13.7 3.57 0.81 3.77
Eurozone 95,727 15.6 2.59 2.38 3.08**
UK NA NA NA NA 3.99
Japan 293,361 23.9 1.52 0.99 1.29
Median* 9,566 20.5 2.05 0.99 NA
Total* 1,454,144
50
80
110
140
2005 2006 2007 2008 2009 2010
MSCI World Technology Hardware & Equipment MSCI World
* “Median” and “Total” are calculated from the entire MSCI World Sector Index, ** German Long-Term Interest Rate, Source: SG Cross Asset Research Data as of 4 May 2010
Industry trend: convergence The telecom equipment sector is already highly concentrated and, although there are still calls
for further consolidation, we believe major acquisitions are unlikely in the near term. Part of the
problem is the currency with which to make acquisitions. Share prices are down substantially
and companies are generally hoarding cash. Therefore, even if consolidation were a favoured
tactic, we believe that it is a difficult time to employ it.
Furthermore, our review of the telecom equipment markets indicates that individual markets
are already showing a form of consolidation. However, this is more through companies exiting
or being forced out of certain businesses than consolidation specifically.
Recent examples of this include Nortel (its bankruptcy should effectively mean its withdrawal
from a number of telecom equipment markets) and Motorola (where its weakness in handsets
has changed the company from a major competitor to a small, regional player).
Top ten companies (by market cap)
0 50 100 150 200 250 300
APPLE
INTERNATIONAL BUS.MCHS.
CISCO SYSTEMS
HEWLETT-PACKARD
QUALCOMM
CANON
NOKIA
EMC
RESEARCH IN MOTION
ERICSSON 'B'
in $bn
Source: SG Cross Asset Research
Corporate spin-offs and demergers
May 2010 63
SG view
Sector map
AGILENT TECHS.
ALCATEL-LUCENT
AMPHENOL 'A'
APPLE
CANONCISCO SYSTEMS
CORNING
DELL
EMC
ERICSSON 'B' FUJIFILM HDG.
FUJITSU
HARRIS
HEWLETT-PACKARDHITACHI
HOYA
INTERNATIONAL BUS.MCHS.
JUNIPER NETWORKS
KEYENCE
KYOCERA
MOTOROLA
MURATA MANUFACTURING
NEC
NETAPP
NIDEC
NIPPON ELEC.GLASS
NOKIA
QUALCOMM
RESEARCH IN MOTION
RICOH
SANDISK
SEAGATE TECH.
TDK
TOSHIBA
TYCO ELECTRONICS
WESTERN DIGITAL
XEROX
Sales
S/M*
Industry Leaders
Larger than necessary?
Growth companies Doldrums
*S/M: Sales / Market capitalisation; Source: SG Cross Asset Research
In a depressed sector, some leaders are looking for a new strategy. Motorola is already thinking
of a full spin-off after several quarters of losses from its handset business unit, whereas groups
like Alcatel-Lucent and Ericsson are fighting to keep a leading position in their business. We
believe that any further consolidation is likely to continue to be driven by companies exiting
certain markets and/or regions. In addition, larger manufacturers may still acquire smaller
manufacturers to gain access to specific technologies and/or customer lists. We do not
anticipate any major acquisitions or mergers between larger companies.
Alcatel-Lucent � The company has been through a huge reorganisation which has included a
large number of asset sales. However, we believe that there is now little to sell and that the
company will be forced to focus on its existing businesses rather than acquisition or selling
further assets. There has been speculation about a potential merger of Alcatel-Lucent�s mobile
business with that of Nokia Siemens, but we believe that an American/Finnish/French/German
group would be too complex to even contemplate.
Ericsson � After a flurry of purchases in the fixed line business a few years ago, Ericsson has not
made any recent acquisitions recently. We believe that the company has little intention of
acquiring large new companies but is interested in �bolt-on� acquisitions. Given its very large
cash pile, further small acquisitions could well be on the horizon.
Motorola � The company has announced its intention to split the business, and keep the handset
business with the other businesses spun off. However, we believe that the handset business still
has major hurdles to overcome and so this spin-off still represents a difficult challenge for the
company, particularly as it is struggling to make a credible comeback in the market.
Stocks to watch
Company Country Reco Target Price (loc cur) Price 04/05/10 (loc cur) ’09 Sales (€m) Market Cap (€m) P/E 10e Return on Equity 10e EPS Growth 09-10e
Alcatel France Hold EUR 2.2 2.39 15233.4 5540.2 58.9 -2.9 117.3
Ericsson Sweden Buy SEK 100 84.2 207654.6 253576.4 13.2 12.2 88.5
Motorola Inc United States Hold USD 6.5 7.1 22134.2 16421.4 29.2 5.5 nm
Source: SG Cross Asset Research
Corporate spin-offs and demergers
May 2010 64
Telecom Services Spin off foreign businesses? Sector valuation Sector performance
Sector
Market. Cap lc m
P/E 10e P/BV 09
Dividend Yield 09
LT Interest rates
US 393,921 13.3 1.66 6.03 3.77
Eurozone 424,438 11.8 2.77 5.96 3.08**
UK 140,274 10.6 NA 2.98 3.99
Japan 177,323 11.6 1.26 3.00 1.29
Median* 11,716 12.2 2.18 5.66 NA
Total* 1,215,573
50
80
110
140
2005 2006 2007 2008 2009 2010
MSCI World Telecommunication Services MSCI World
* “Median” and “Total” are calculated from the entire MSCI World Sector Index, ** German Long-Term Interest Rate, Source: SG Cross Asset Research Data as of 4 May 2010
Industry trend: after consolidation, spin-off Global business models are not applicable given the low level of synergies derived from
international diversification and the capital intensity of the current activities. Although
deregulation and competition were introduced more than a decade ago, incumbent operators
still dominate their domestic markets as the industry�s high capital intensity makes it difficult
to even out market shares.
Acceleration in consolidation remains unlikely We believe that the M&A flow will remain light in continental Europe.
Mergers between incumbents appear difficult to achieve due to political roadblocks and the
lack of obvious synergies between what essentially remain local businesses.
In-market consolidation faces regulatory hurdles. The local dominant players will not be in a
position to make acquisitions due to anti-trust concerns.
Moreover given the increasing risk aversion towards emerging markets, European operators
are unlikely to use their balance sheets to expand their footprint.
Given the country-based nature of the industry, it is not surprising that large GDP countries
are overrepresented. Most of the companies in the table below have been in the top 10
throughout the last decade as consolidation has enabled them either to reinforce their
domestic presence or to expand internationally.
Top ten companies (by market cap)
0 20 40 60 80 100 120 140 160 180
AT&T
VODAFONE GROUP
TELEFONICA
VERIZON COMMUNICATIONS
NTT DOCOMO INC
NIPPON TELG. & TEL.
FRANCE TELECOM
DEUTSCHE TELEKOM (XET)
TELSTRA
SINGAPORE TELECOM
in $bn
Source: SG Cross Asset Research
Corporate spin-offs and demergers
May 2010 65
SG view
Sector map
AMERICAN TOWER 'A'
AT&T
BCE
BELGACOM
BT GROUP
CENTURYTEL
CROWN CASTLE INTL.
DEUTSCHE TELEKOM (XET)
FRANCE TELECOM
KDDI
KPN KON
NII HDG.
NIPPON TELG. & TEL.
NTT DOCOMO INC
PORTUGAL TELECOM SGPS
QWEST COMMS.INTL.ROGERS COMMS.'B'
SINGAPORE TELECOM
SOFTBANK
SPRINT NEXTEL
SWISSCOM 'R'
TELE2 'B'
TELECOM ITALIA
TELEFONICA
TELENORTELIASONERA
TELSTRA
TELUS
VERIZON COMMUNICATIONS
VODAFONE GROUP
Sales
S/M*
Industry Leaders
Larger than necessary?
Growth companies Doldrums
*S/M: Sales / Market capitalisation; Source: SG Cross Asset Research
We have seen many changes in this sector in the past 10 years with many mergers in Europe,
but also some spin-offs, for example O2 bought by Telefonica.
Vodafone changed its strategy following Chris Gent�s departure in mid-2005, divesting non-
core assets. Now it appears that Deutsche Telecom is considering listing its US subsidiary.
Deutsche Telekom's (Buy, TP �10.8) US mobile operation T-Mobile US is currently
experiencing operational difficulties (revenue decline driven by market share losses at the high
end to competitors AT&T and Verizon). While management is committed to turning around this
situation in 2010, we believe there are realistic scenarios for the medium to long term where
the company could consider a partial sell-off in the form of a partial IPO or a trade sale of a
stake to an industrial partner. One scenario, against our own expectations, is that
management is unable to turn around the asset in 2010. We believe the likelihood of a
strategic solution would rise significantly in this case in early 2011. However, even if operating
trends stabilise, there is a question mark over the return on capital achievable by T-Mobile US
during the inevitable longer-term move to a next-generation (4G) network. While this is more a
2012-13 story for T-Mobile US, a partnership with (selling a stake to) an industrial company,
preferably one with access to the required radio spectrum, would make sense.
Stocks to watch
Company Country Reco Target Price (loc cur) Price 04/05/10 (loc cur) ’09 Sales (€m) Market Cap (€m) P/E 10e Return on Equity 10e EPS Growth 09-10e
Deutsche Telekom Germany Buy EUR 10.8 9.88 64048.9 43081.1 12 9.8 5.2
Source: SG Cross Asset Research
Corporate spin-offs and demergers
May 2010 66
Utilities Many assets for sale
Sector valuation Sector performance
Sector
Market. Cap lc m
P/E 10e P/BV 09
Dividend Yield 09
LT Interest rates
US 413,119 13.5 1.39 4.31 3.77
Eurozone 605,081 12.9 1.35 5.52 3.08**
UK 81,430 11.0 3.35 6.19 3.99
Japan 140,797 21.4 1.14 2.57 1.29
Median* 8,096 13.8 1.38 4.33 NA
Total* 1,305,626
50
80
110
140
170
2005 2006 2007 2008 2009 2010
MSCI World Utilities MSCI World
* “Median” and “Total” are calculated from the entire MSCI World Sector Index, ** German Long-Term Interest Rate, Source: SG Cross Asset Research Data as of 4 May 2010
Industry trend: big is no longer beautiful The process of consolidation in individual countries is well advanced in the utilities sector.
Liberalisation has rapidly shown that a lack of integration represents a risk, resulting in efforts
to match downstream assets with upstream assets, and to back up trading activities with
physical assets. In electricity, an oligopoly has emerged: EDF, E.ON, etc. Differences between
electricity and gas have become blurred as the activities have increasingly converged.
In view of the current financial climate, companies will no longer be able to continue the race
for size that began in 2005.
We believe the last phase of M&A activity (around $200bn over 2005-2008) needs to be
digested before companies again turn to growth through acquisitions.
While some transactions may take place in the near term, they should not be anything like the
scale of past deals in the sector and instead are more likely to be tuck-in acquisitions.
One area in which oil companies are competing with utilities head-on is the purchase of oil
and gas reserves, reflecting the push to secure medium-term energy supply sources.
Top ten companies (by market cap)
0 20 40 60 80 100 120
EDF
GDF SUEZ
E ON (XET)
ENEL
RWE (XET)
IBERDROLA
TOKYO ELECTRIC POWER
EXELON
SOUTHERN
DOMINION RES.
in $bn
Source: SG Cross Asset Research
Corporate spin-offs and demergers
May 2010 67
SG view
Sector map
AMER.ELEC.PWR.
CENTRICA
CLP HOLDINGS
CONSOLIDATED EDISON
DOMINION RES.
DUKE ENERGY
E ON (XET)
EDF
EDP ENERGIAS DE PORTUGAL
ENEL
ENTERGY
EXELON
FIRSTENERGY
FORTUM
FPL GROUP
GAS NATURAL SDG
GDF SUEZ
HONG KONG AND CHINA GAS
HONG KONG ELECTRIC
IBERDROLA
IBERDROLA RENOVABLES
NATIONAL GRID
PG&E
PUB.SER.ENTER.GP.
RWE (XET)
SCOT.& SOUTHERN ENERGY
SEMPRA EN.
SNAM RETE GAS
SOUTHERN
VEOLIA ENVIRONNEMENT
Sales
S/M*
Industry Leaders
Larger than necessary?
Growth companies Doldrums
*S/M: Sales / Market capitalisation; Source: SG Cross Asset Research
Some of the large utilities have indicated they want to sell off assets. We believe the market
will pay particular attention to this theme given the increasing difficulty of obtaining financing.
We estimate the value of assets up for sale at around �30bn. Some assets could be listed on
the stock market. The sale of assets will naturally come under close scrutiny as the
programmes are carried out. We believe asset divestments could create potential for rerating
depending on the price obtained.
Example of assets up for sale
Company Divestment programme Period
E.ON €10bn 2009/2010
Enel €10bn 2009/2013
EDF €5bn 2009/2010
Veolia Environnement €3bn 2008/2010 Source: SG Equity Research
E. ON � the company has already sold some assets (hydro generation to Verbund, generation
assets to EnBW, Thüega). One of the remaining assets for sale is E.ON�s US business, LG&E
in the Midwest.
Enel � the Italian company has launched the process to IPO its renewable energy arm, Enel
Green Power. We think this company (worth �10-13bn) could attract a lot of interest and help
Enel to reduce its debt pile by year end.
EDF � The group may sell its distribution network in the UK. The value of the regulated assets
is £3.6bn with non-regulated assets valued at c.£200m. We think EDF may sell these assets
only if it obtains a premium.
Stocks to watch
Company Country Reco Target Price (loc cur) Price 04/05/10 (loc cur) ’09 Sales (€m) Market Cap (€m) P/E 10e Return on Equity 10e EPS Growth 09-10e
E.ON Germany Hold EUR 29 28.19 77523.3 56408.2 8.5 15.3 6
Enel Italy Buy EUR 5.1 3.96 58594 37237.3 7.2 15.4 19.1
EDF France Buy EUR 55 41 72283.2 75803.5 21 12.1 -9.5
Source: SG Cross Asset Research
Corporate spin-offs and demergers
May 2010 68
Corporate spin-offs and demergers
May 2010 69
Corporate spin-offs and demergers
May 2010 70
IMPORTANT DISCLOSURES
Accor SG is acting as financial advisor in its demerger project.
Aegis Group plc SG acted as joint bookrunner of Aegis' convertible bond issue.
Air France-KLM SG acted as joint book runners to Air France-KLM inaugural bond issue.
Air France-KLM SG acted as joint bookrunner in the issue of senior unsecured bonds convertible into new shares and/or exchangeable for existing shares of Air France
KLM (OCEANE)
ALCATEL SG acted as joint bookrunner in the issue of bonds convertible into new shares and/or exchangeable for existing shares of Alcatel Lucent (OCEANE)
American Water
Works
SG acted as co-manager in American Water Works' equity raising.
American Water
Works
SG acted as co-manager in the secondary offering of American Water Works shares by RWE
American Water
Works
SG acted as co-manager in the secondary offering of American Water Works shares by RWE and in the capital increase of American Water Works.
Anheuser-Busch
InBev
SG acted as co-manager of Anheuser-Bush Inbev's senior bond issue
Anheuser-Busch
InBev
SG acted as joint bookrunner of Anheuser-Busch Inbev's bond issue (4% 26/04/18 EUR).
Banco De
Sabadell
SG acted as joint bookrunner in the Banco De Sabadell's senior bond issue.
Banco De
Sabadell
SG acted as joint bookrunner in the Banco Sabadell's covered bond issue (3.125% 20/01/14 EUR).
BANK OF
AMERICA
SG acted as co-manager in Bank of America's secondary offering.
Barclays SG acted as Co-manager of Barclays plc's bond issue.
Barclays SG acted as co-manager in the Barclays senior bond issue.
Barclays SG acted as co-manger in Barclays' senior high grade bond issue.
BASF SE SG acted as joint bookrunner in the BASF's senior bond issue (TAP) (5.125% 09/06/15 EUR).
BBVA SG acted as joint bookrunner in BBVA's covered bond issue (3% 09/10/14 EUR).
BG Group SG acted as Joint Bookrunner in the BG Group's senior bond issue (3.375% 15/07/13).
Boeing SG acted as co-manager in the Boeing's senior high grade bond issue.
Carrefour SGSP is managing a liquidity contract on behalf of Carrefour
Carrefour SG is a long-standing banker of Carrefour as well as the Halley Family
Casino SG acted as bookruner in Casino's exchange offer.
Casino SG is acting as Dealer Manager for Casino's tender offer.
CFAO SG acted as joint-global coordinator, joint-lead manager and joint-bookrunner in CFAO's IPO.
Deutsche Bank SG acted as Joint bookrunner in the Deutsche Bank covered bond issue.
Deutsche
Telekom
SG acted as co-manager in Deutsche Telekom's high grade senior bond issue.
Dexia SG acted as joint bookrunner in the Dexia's senior bonds issue (5.375% 21/07/14).
EADS SG acted as joint bookrunner in the EADS's senior bond issue (4.625 12/08/16 EUR).
EADS SG is mandated lead arranger of the loan granted to Republic of Brazil to finance the acquisition of helicopters from EADS Group.
EDF SG acted as joint bookrunner in EDF's bond issue (4.625% 26/04/30 EUR).
EDF SG acted as co lead manager in the EDF bond issue to retail customers (4.5% - 2014).
EDF SG acted as joint bookrunner in EDF's senior bond issue (4.625% 11/09/2024 EUR).
Enel SG makes a market in Enel warrants
Enel SG acted as senior co-lead manager of Enel right issue
Enel SG is participating in a medium-term bank loan to Enel Rete Gas for the operation of disposal by Enel of its majority stake.
Enel SG acted as bookrunner in Enel's senior high grade bond issue (4% 14/09/16 EUR, 5% 14/09/22 EUR, 5.625% 14/08/24 GBP, 5.75% 14/09/40 GBP).
Faurecia SG was sole bookrunner and sole global coordinator for the placement of Faurecia's shares.
Faurecia SG was acting as global coordinator, lead manager and bookrunner of the rights issue of Faurecia
Faurecia SG acted as global coordinator, joint bookrunner and joint lead manager in the issue of bonds convertible into new shares and/or exchangeable for
existing shares of Faurecia (Oceane).
Finmeccanica SG makes a market in Finmeccanica warrants
Finmeccanica SG acted as joint bookrunner in the Finmeccanica's senior bond issue.
Finmeccanica SG acted as co-manager in the Finmeccanica's senior unsecured HG bond issue.
France Télécom SG acted as joint bookrunner of France Telecom's bond issue (3.875% 09/04/20 EUR).
Gas Natural
SDG
SG acted as passive bookrunner in Gas Natural's bond issue
Gas Natural
SDG
SG acted as Bookrunner and Mandated Lead Arranger in the acquisition financing of Union Fenosa by Gas Natural
Gas Natural
SDG
SG acted as financial advisor to Mitsui in the purchase from Gas Natural of natural-gas-fired power stations in Mexico
Gas Natural
SDG
SG acted as joint bookrunner in the issue of GAS NATURAL's senior bond (5.25% 09/07/14 EUR & 6.375% 09/07/19 EUR).
Gas Natural
SDG
SG acted as joint bookrunner in Gas Natural's senior bond issue (3.375% 27/01/15 EUR ; 4.125% 26/01/18 EUR ; 4.5% 27/01/20 EUR).
ING Group SG acted as co-lead manager in the ING's rights issue.
Lafarge SG acted as joint bookrunner of the rights issue of Lafarge
Lafarge SG acted as joint bookrunner in Lafarge's bond issue (5.5% 16/12/19 EUR).
Lafarge SG acted as joint bookrunner in the Lafarge senior bond issue (7.625% 24/11/16 EUR).
Lafarge SG acted as joint bookrunner in the Lafarge's senior bond issue (7.625% 27/05/14 EUR).
LVMH SG acted as joint bookrunner in the LVMH's senior bond issue. (4.3275% 12/05/14 EUR)
Metro SG acted as joint bookrunner in the Metro's senior bond issue.
Nokia SG acted as co-Manager of in NOKIA 's senior unsecured bond issue.
Novartis AG SG acted acting as joint bookrunner in Novartis' senior bond issue.
Peugeot Citroen
PSA
SG was acting as global coordinator, lead manager and bookrunner of the rights issue of Faurecia
Peugeot Citroen
PSA
SG acted as global coordinator and joint book runner in the issue of unsecured bonds convertible into new shares and/or exchangeable for existing shares
of PSA Peugeot (OCEANE).
PPR SG acted as joint bookrunner of PPR's senior bond issue.
PPR SG acted as joint-global coordinator, joint-lead manager and joint-bookrunner in CFAO's IPO
Prudential SG will act as Co-lead Manager in Prudential PLC announced right issue
Repsol-YPF SG acted as joint dealer manager for a Repsol's bond exchange offer.
Saint-Gobain SG acted as joint bookrunner in the Saint-Gobain's senior bond issue (6% 20/05/13 EUR).
Saipem SG makes a market in Saipem warrants
Sanofi-Aventis SG acted as joint bookrunner in the SANOFI-AVENTIS' senior bond issue (3.5% 17/05/13 EUR & 4.5% 18/05/16 EUR).
Santander SG acted as joint bookrunner of Santander's covered bond issue (3.625% 06/04/17 EUR).
Santander SG acted as joint bookrunner in the Santander's covered bond issue (3.875% 27/05/14 EUR).
Schneider SG is acting as financial advisor to Alstom for the acquisition of Areva T&D.
Schneider SG acted as sole manager in the Schneider Electric's senior bonds issue.
Société
Générale
SG issues no recommendation on Société Générale's own financial instruments.
Sopra Group SG holds between 10% and 20% of Sopra
TELEFONICA SA SG is acting as joint bookrunner in Telefonica's senior bond issue.
TELEFONICA SA SG acted as joint bookrunner in Telefonica's senior bond issue (3.406 24/03/15 EUR).
TELEFONICA SA SG acted as joint bookrunner in the Telefonica's senior bond issue (5.496% 01/04/16 EUR).
Corporate spin-offs and demergers
May 2010 71
Thomson SG is one of the banks of Thomson.
Thomson SG holds between 5% and 10% of Thomson as a result of its trading activites
Total SG acted as exclusive financial advisor to Total for a disposal project.
UBS SG acted as joint bookrunner in the UBS' covered bond issue.
Unicredit Group SG makes a market in Unicredito warrants
Unicredit Group SG acted as co-lead manager in Unicredit's rights issue.
Unicredit Group SG acted as joint bookrunner in the Unicredit's subordinated bond issue (8.125 10/12/49 EUR).
Veolia
Environnement
SG is acting as financial advisor to CDC for the merger of Transdev with Veolia Transport.
Vivendi SG acted as financial advisor to Vivendi for the disposal of its stake in NBCU
Vivendi AG acted as joint bookrunner of Vivendi's senior bond issue (4% 31/03/17 EUR).
Vivendi SG acted as joint bookrunner in Vivendi's bond issue (4.25 01/12/16 EUR & 4.875 02/12/19).
Volkswagen
(Pref.)
SG is acting as co bookrunner for Volkswagen's right issue
US THIRD PARTY FOREIGN AFFILIATE RESEARCH DISCLOSURES: SG and its affiliates beneficially own 1% or more of any class of common equity of Accor, BBVA, Carrefour, Iberia, ING Group, Philips, Santander, Sopra Group.
SG or its affiliates act as market maker or liquidity provider in the equities securities of ABB, Accor, Air France-KLM, ALCATEL, Atlas Copco, AXA, Banco De Sabadell, BBVA,
Carrefour, Casino, Deutsche Bank, Deutsche Telekom, Dexia, E.ON, EADS, Enel, Ericsson, Finmeccanica, France Télécom, Gas Natural SDG, Inditex, L'Oréal, Lafarge, LVMH,
Munich RE, Nestlé, Nokia, Novartis AG, Peugeot Citroen PSA, PPR, Renault, Saint-Gobain, Sanofi-Aventis, Santander, Schneider, Siemens, Société Générale, Technip,
TELEFONICA SA, Total, UBS, Unicredit Group, Veolia Environnement, Vivendi, Volvo.
SG or its affiliates expect to receive or intend to seek compensation for investment banking services in the next 3 months from Accor, Aegis Group plc, AIG, Air France-KLM,
ALCATEL, Anheuser-Busch InBev, ArcelorMittal, Arkema, AXA, Banco De Sabadell, Barclays, BASF SE, BBVA, BHP Billiton plc, Boeing, Carrefour, Casino, Commerzbank,
Deutsche Bank, Deutsche Telekom, Dexia, EADS, EDF, EnBW, Enel, Erste Bank, ExxonMobil, Faurecia, Finmeccanica, France Télécom, Gas Natural SDG, Hochtief, Holcim,
L'Oréal, LVMH, Novartis AG, Peugeot Citroen PSA, Philips, PPR, Prudential, Renault, Repsol-YPF, Royal Bank of Scotland, Saint-Gobain, Saipem, Sanofi-Aventis, Santander,
Schneider, Sopra Group, Technip, TELEFONICA SA, Total, UBS, Unicredit Group, Veolia Environnement, Vivendi, Volvo.
SG or its affiliates have received compensation for investment banking services in the past 12 months from Accor, Aegis Group plc, Air France-KLM, ALCATEL, American
Water Works, Anheuser-Busch InBev, Banco De Sabadell, BANK OF AMERICA, Barclays, BASF SE, BBVA, BG Group, Boeing, Carrefour, Casino, CFAO, Deutsche Bank,
Deutsche Telekom, Dexia, EADS, EDF, Enel, Faurecia, Finmeccanica, France Télécom, Gas Natural SDG, ING Group, Lafarge, LVMH, Metro, Nokia, Novartis AG, Peugeot
Citroen PSA, PPR, Prudential, Repsol-YPF, Saint-Gobain, Sanofi-Aventis, Santander, Schneider, TELEFONICA SA, Thomson, Total, UBS, Unicredit Group, Veolia
Environnement, Vivendi, Volkswagen (Pref.).
SG or its affiliates managed or co-managed in the past 12 months a public offering of securities of Aegis Group plc, Air France-KLM, ALCATEL, American Water Works,
Anheuser-Busch InBev, Banco De Sabadell, BANK OF AMERICA, Barclays, BASF SE, BBVA, BG Group, Boeing, CFAO, Deutsche Bank, Deutsche Telekom, Dexia, EADS,
EDF, Enel, Faurecia, Finmeccanica, France Télécom, Gas Natural SDG, ING Group, Lafarge, LVMH, Metro, Nokia, Novartis AG, Peugeot Citroen PSA, PPR, Prudential, Repsol-
YPF, Saint-Gobain, Sanofi-Aventis, Santander, Schneider, Société Générale, TELEFONICA SA, UBS, Unicredit Group, Vivendi, Volkswagen (Pref.).
Corporate spin-offs and demergers
May 2010 72
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