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By Antony Currie
MELBOURNE, Aug 21 (Reuters Breakingviews) - Spinoffs are supposed to appeal to shareholders. A good rule of thumb for judging that is if the parent's stock moves around 20% on the day the breakup is unveiled. That's 20% up, of course, not the almost one-fifth drop in value that Melbourne-based biotechnology firm CSL suffered after saying it would to investors. Problem is, the $68 billion plasma therapies specialist chose the new strategy at the same time as ditching a key margin target - and got a painful warning shot for its troubles.
It's not the only company bearing bad news to be thoroughly thwacked by investors Down Under this week. Dual-listed James Hardie Industries' nearly 28% in Australia on Wednesday after the building materials firm revealed a 60% annual drop in quarterly profit; its New York shares later extended the fall to 34%.
Both companies are being punished for trying shareholders' patience. James Hardie CEO Aaron Erter had already angered his investors with the $9 billion acquisition in March [https://www.breakingviews.com/considered-view/cross-border-home-renovation-deal-is-full-of-gaps/] of U.S. deckings and railings manufacturer Azek. The revenue synergies from the combination looked too punchy even then, made worse by the company securing an exemption from Australia's stock market operator that stripped shareholders of the ability to vote on the deal. A huge earnings drop so soon after made them see red.
CSL's mistake was to suddenly revoke its 2023 pledge to return the gross margin at its core blood plasma unit to its pre-COVID level of 57% in three to five years. The percentage target still stands, but the time frame has gone. Offering a spin-off and $500 million of annual cost cuts was nowhere near enough to contain the fallout.
Granted, it could be argued that the share price drops may overstate the purely financial impact of the problems at both companies. But scorned shareholders are sending a message. And it's unlikely to be the only one. They could weaponise votes on executive pay and re-election of directors at the each firm's next annual general meeting. The sagas are a reminder never to let your owners' patience wear too thin.
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CONTEXT NEWS New York-listed shares in building materials firm James Hardie Industries fell more than 34% on August 20, extending the earlier 28% fall of its Australia-listed stock. Earlier in the day the company had reported a 60% year-on-year drop in net income to $60 million for the three months to the end of June. Shares in CSL fell almost 17% on August 19 and another 2% the following day after the Australia-based biotechnology company abandoned its time frame for restoring the gross profit margin of its core blood plasma division to pre-COVID levels. CSL also announced it would spin off its flu vaccine business to shareholders. CSL and James Hardie shares have taken a beating https://www.reuters.com/graphics/BRV-BRV/znpnnnmeqpl/chart.png [https://www.reuters.com/graphics/BRV-BRV/znpnnnmeqpl/chart.png] (Editing by Robyn Mak; Production by Aditya Srivastav)
