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Fixer-upper

3 September 2019 By Christopher Thompson

Nelson Peltz has scored an early victory in his Brexit repair job. UK-listed Ferguson, a purveyor of building supplies, has announced plans to spin off its British unit and focus on the United States, as suggested by the activist whose Trian Fund Management unveiled a 6% interest in Ferguson in June. Trading more in line with U.S. peers should boost the 14 billion pound group’s shares. But plans to refurbish the company with a New York listing could be a tougher project.

Ferguson said on Tuesday it would demerge Wolseley UK, subject to shareholder approval. That makes sense given the division’s gloomy outlook, limited transatlantic synergies, and the fact it contributes only around 5% of Ferguson’s earnings before interest, tax, depreciation and amortisation. Moreover, announcing a spinoff essentially puts the unit up for sale.

Hiving off Brexit Britain allows Ferguson to concentrate on its expanding North American business, the vast majority of which is in the United States. That may explain the departure of Chief Executive John Martin, set for November, and his replacement by U.S. operations boss Kevin Murphy.

Given Ferguson’s stateside pivot, a London listing will increasingly look like an anomaly. The company says it will review its options in that regard. But moving outright to New York may prove difficult given 75% shareholder approval would be needed and a significant number of its UK institutional investors can only hold domestic shares.

Peltz is right that the shift in focus – and perhaps ideally listing – should boost Ferguson’s valuation. If the new company were valued at 13.5 times estimated 2019 EBITDA, around the average multiple of U.S. rivals Home Depot and Lowe’s according to Refinitiv data, then Ferguson’s equity could be valued at around $22 billion, an uplift of more than 25% from Monday’s market capitalisation of $17 billion.

A dual London-New York listing could be one compromise to unlock at least part of that value. As of Monday’s close, Peltz had already enjoyed a 16% share price increase since the day before he revealed his stake. Ferguson’s sprucing up might have some way to run.

 

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