Pirelli Confirms Real Estate Spin Off
The board of Pirelli & C. has confirmed what the market has been predicting for some time – the company has “resolved upon a plan for separation of Pirelli Real Estate” from the rest of the tyre dominated business. According to the company, such a separation will occur through the assignment of nearly all Pirelli RE shares held by Pirelli & C. to ordinary and savings shareholders of Pirelli & C., and, therefore, via voluntary reduction of the corporate capital of Pirelli & C. for “an amount equal to the value of the Pirelli RE stake being assigned.” Now shareholders have to approve the transaction by July in order for the actual separation, planned for the end of 2010, to take place.
Reuters reported that investors welcomed Pirelli & C SpA’s decision with the company’s stock reportedly strongly outperforming on the day the decision as made (Wednesday 5 May). UBS and Morgan Stanley analysts reported that Pirelli is valued below its peers, including a 27 to 35 per cent discount to French tyre maker Michelin based on sales/EBITDA multiples.
A company statement detail the background to the move explained it this way: “The separation of Pirelli RE, occurring in the context of the operating rationalization and optimization plan begun in 2008, which continued in 2009, aims to focus the company on its core industrial activities in the tyre industry as delineated in the strategies of the 2009-2011 industrial plan. The transaction will improve the equity and financial structure of the Pirelli Group, will simplify the corporate structure of Pirelli & C., and will allow for a more immediate reading of the industrial strategy and the economic and financial data of the Pirelli Group by the market, with potentially positive returns in terms of further reduction of the holding company discount.”
One immediate effect is that, thanks to the transaction, Pirelli RE will have a wider shareholder base, which could make it more appealing to possible takeover bids.
Analysts: RE spin-off could change group earnings predictions
Writing prior to the company’s confirmation of the spin off plans, Morgan Stanley analysts decreased the bank’s 2010/2011 Pirelli earnings per share estimates by 20 – 25 euro cents, following the company’s fourth quarter results. This means the analysts reduced their estimates from 3.39 euros to 3.18 euros and 4.53 euros to 4.28 euros for 2010 and 2011 respectively. They also commented that bank’s tyre EBIT estimates are now in line with the market consensus.
However, while the latest investors note (published on 16 March) was direct in its assessment that earnings would be reduced, the analysts also said: “We applaud the efforts Pirelli is taking to focus on the core tyre business and believe the market will continue to reward the company for this, as it has done in the months.” Their belief was that this approach would significant enhance the company’s focus and, crucially, earnings potential.