When Jim Flavin moved 30 years ago to float DCC, then an investment company with stakes in companies from Flogas to tech distributor Sharptext and coffee-to-health foods group Wardell Roberts, he had company.
The firm, which was set up by the one-time banker in 1976, was among a host of industrial holding companies on the Irish stock market at the time, including IWP International, James Crean and Fitzwilton.
While the others would disappear over the next decade or so through break-ups and take-private deals — DCC would drop its Irish listing in 2013 for a sole quotation in London — the group has long stood out as an anomaly among Irish plcs, decades after global investors had tired of multi-industry groups and started to apply the dreaded “conglomerate discount”.
Tommy Breen, who succeeded Flavin, set out a decade ago to simplify the investment case around DCC. He sold its food and beverage assets, including the Robert Roberts tea and coffee and Kelkin health foods brands, as well as a frozen and chilled foods logistics business in 2014, and its environmental unit, covering recycling and waste management, three years later.
But now Breen’s successor, Donal Murphy, has decided to finish the job, announcing plans on Tuesday to exit two of DCC’s remaining businesses — healthcare and technology — to double down on energy.
The board has hired investment bankers in JP Morgan to sell DCC Healthcare, which is made up of two businesses: DCC Vital, which sells medical products and devices to doctors and hospitals, and DCC Health & Beauty Solutions which focuses on developing and manufacturing nutritional supplements such as vitamin gummies and beauty products for brand owners.
DCC has encountered challenges expanding the healthcare businesses in recent times through acquisition, coming up against private equity bidders willing to pay way more for deals. Murphy has concluded that if you can’t beat them, you might as well sell to them.
Analysts estimate the health unit could fetch as much as £1.5bn, and the technology business, subject to Murphy hitting his maximum profit-boost target, up to a further £1.6bn
The group has also called time on DCC Technology, which sells everything from audiovisual equipment for events companies to consumer electronics. However, Murphy reckons he can secure “a substantial prize” of as much as £30 million (€36 million) in additional profits in this unit over the next 12 to 18 months through an operational improvement programme — before hoisting the “for sale” sign.
Analysts estimate the health unit could fetch as much as £1.5 billion, and the technology business, subject to Murphy hitting his maximum profit-boost target, up to a further £1.6 billion. He has pledged to return surplus cash to shareholders.
DCC’s share price market spiked by more than 17 per cent on Tuesday to a six-month high of over £58 to give the company a market value of £5.8 billion. It has held on to most of those gains.
Analysts have cheered the development, with Deutsche Bank’s David Broxton saying it was a “bold decision” that should push the stock higher as its complexity is reduced and investors remove a conglomerate discount — a tendency to value a diversified group of business below the sum of its parts.
Jefferies number cruncher Ryan Flight described it as the “hard catalyst we have been waiting for” to unlock value in the company.
It’s a decision that hasn’t been taken lightly. DCC had long resisted pressure to simplify its story, arguing that being in multiple sectors reduced overall earnings volatility. It’s served the group well as it has delivered an average of 14 per cent compound growth in operating profits since it floated 30 years ago.
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Still, the energy unit had been the standout success over the past decade, with compound average profit growth of 16.4 per cent. It now accounts for almost three-quarters of group earnings.
Most of its profits have been coming from the sale of fossil fuels, including oil and gas for household heating and fuel pumped through its 1,175 petrol stations across Scandinavia, France, Britain and Ireland.
However, stock market investors have been unwilling to buy into the green future that DCC Energy has been pushing in recent years. The complex structure of the group hasn’t helped. Something had to give.
DCC also plans to accelerate acquisitions in the market for liquid gas, which is seen as a transition fuel in the global trudge to net zero carbon emissions
Aside from building out an offering of low-carbon renewable diesel and expanding its network of electric vehicle charge points, the company has also been actively acquiring solar panel and heat pump installation businesses. Murphy told analysts on Tuesday it aims to become a “pan-European leader in solar solutions” for households and businesses.
“The new strategy will simplify the business and allow it to focus its annual M&A [merger and acquisition] spending of £300 million to £400 million into the energy segment,” according to Fitch, the credit ratings agency.
DCC also plans to accelerate acquisitions in the market for liquid gas, which is seen as a transition fuel in the global trudge to net zero carbon emissions. He highlighted the US profane market, where DCC only has a 1.5 per cent market share, as an obvious target.
All told, its so-called green transition services, renewables and other businesses accounted for 35 per cent of DCC Energy’s earnings last year, up from 22 per cent two years earlier. A further 42 per cent came from liquid gas. Goodbody Stockbrokers said DCC is now firmly in the “cleantech wheelhouse”.
But with analysts pencilling in an average price target of close to £70 for the stock — about 30 per cent above where it is trading — Murphy still has some convincing to do.
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