When One Becomes Two - The Cookson Demerger

There aren't many conglomerates around these days - certainly not many quoted companies - where shareholders are effectively investing in a portfolio of distinct businesses. And one of the last remaining quoted UK conglomerates - Cookson Group - has decided to split itself in two in order to achieve more shareholder value.

This article in the Telegraph explains how Cookson Group plc is to "demerge" by splitting its ceramics division from its performance materials unit. Existing shareholders in Cookson Group will get one share in each of the two new businesses, both of which will become quoted companies on the London Stock Exchange.

The performance materials division, which supplies parts for tablet computers and smartphones including Apple’s iPhone 5, will form a new chemicals specialist called Alent.

The remainder of Cookson will be renamed Vesuvius and comprise its engineered ceramics division, manufacturing the pipes and valves used to control the flow of molten metal in steel mills.

What have management said about the strategic rationale for the move. Take a look at these quotes from Nick Salmon, Cookson Group's CEO (who will step down following the demerger):

“Cookson is something of a conglomerate, historically, and the two businesses have no overlap”

“We believe that they will benefit from having dedicated management focused solely on those businesses. It will also be easier for shareholders to understand the businesses.”

Salmon refers above to a common criticism of conglomerates. When two or more separate businesses are grouped together, it is argued that most shareholders struggle to assess the true value of each. By definition, businesses grouped in a conglomerate are less likely to enjoy too many synergies (cost and revenue) from being part of the same group. So the argument runs that conglomerates are better split up and the individual businesses allowed to flourish on their own.

Another example of a recent demerger with the same rationale is the decision in 2011 by Kraft Foods to split into an international snack business, including Cadbury, and a North American grocery division