THE FACTS:

CSR Limited is a heavyweight Australian company that produces aluminium, sugar products and construction products.

On June 16, 2009, the company announced its plan to demerge its energy and sugar businesses to make two distinct companies.

Investors responded by sending up the share value of CSR by almost nine per cent to $1.63 at midday on June 17.

CSR announced that it had been looking to divide the business for quite some time but was waiting for the correct market conditions in which to do so.

THE VIEWS:

Stephen Bartholomeusz for Businessspectator.com.au:

“It appears… that CSR believes that it can de-merge the business in some form and both create value for its shareholders and options for both the sugar entity and its remaining businesses.

If it pursues a pure demerger and simply gives the business to its existing shareholders then the issue of market timing is largely irrelevant. It might be more pertinent if CSR decides to raise some extra capital at the time of the demerger – it has yet to have a discussion with its bankers about the balance sheets that would be acceptable for both entities.

In fact, CSR believes the demerger will create value. Agribusinesses, particularly those with bio-fuel dimensions – CSR is in the process of doubling its ethanol production – trade at a significant premium to the multiples on which CSR is valued today. CSR’s co-generation capacity at its refineries adds a further renewable energy dimension to the business.”

Elizabeth Knight for The Age:

“The CSR board is taking a punt that the equity market rally that began a couple of months back is going to provide it with an opportunity to real shareholder returns.

It did this trick once before – and it worked. It demerged its US building materials businesses from its Australian operations and the sum of the parts turned out to have more sharemarket value than the whole.

But it’s a trick that only works when share markets are rising and it only works on a sustainable basis if the two daughters of the demerger are able to flourish in their own right.

Clearly there is some scepticism about this among the investment banking community.”

BREAKING IT DOWN:

A) It could go both ways for CSR, so the move is certainly a risk.

If either of the businesses is loaded with too much debt as a result of the demerger, bad times could lie ahead.

B) Investors will need to wait some time before seeing which direction the offspring companies will take.

The success or failure of the move will not be immediately apparent. Investors should approach with caution.

WHAT’S YOUR OPINION?

Is the demerger a good idea?

What kind of impact will the demerger have on the rest of the sugar industry and the rest of the construction products industry?

How will investors respond to the news?

Would you invest in either of the new companies?