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Orica – Chemical Spill

Explosives expert Orica has decided that a demerger of its chemicals business is a good idea. Having tried this trick once before with DuluxGroup in 2010, the strategy is to allow the chemicals group to stand and grow on its own while it clearly hasn’t been able to do so under Orica’s stewardship.

The DuluxGroup demerger was clearly successful as the 120% price appreciation since listing attests. That performance does include the almost $200m acquisition of Alesco Group in 2012.

Now Orica is contemplating a similar exercise with its chemicals group which has stumbled along producing mediocre operating earnings amidst the generally slower industrial market.

The press is suggesting the business could be worth up to $1 billion but that may be stretching things a bit considering the recent performance.

What is also clear is that the DuluxGroup demerger did nothing for the core Orica group which has gone backwards since that time to the tune of 17% while the ASX200 index has risen 22%.

The management of the chemicals business perhaps could be forgiven for being optimistic about escaping the orbit of its parent. The underlying business appears to be OK with good market positions in its various segments so there seems no reason why it shouldn’t thrive on its own.

Orica hints at receiving third party approaches for the business but as no trade sale has been announced, perhaps the mooted price has been below what Orica thinks the market will pay.

Amcor successfully demerged its Australian packaging and Pacific distribution business, Orora, earlier this year which is now up 12% since floating.

Brambles hit the eject button on its Recall business which is also up 17% since listing in December last year.

But buyers should be careful about what they pay for Orica’s chemical business. Amidst a heavy year for IPOs and demergers, there have been some good and some not so good stories.

Ian Smith’s tenure at Orica hasn’t been stellar so far so we would also be cautious about owning the Orica story itself. The mining services industry has been hit hard by the end of the resources capex boom and the coal industry particularly has been very tough. Orica has a big exposure here.

The Minova business has also struggled to achieve its potential although it does look to be a very good business.

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