G4S Announces Plans to Split Business, Analysts Approve
No-moat security giant G4S (GFS) announced yesterday that it intends to split the group in two, separating the secure solutions business, which encompasses mainly guarding activities, from the cash solutions business.
G4S is a multinational security services company and constituent of the FTSE 250 Index. The company was formed through a series of large mergers, most notably in 2004 when British Securicor and Danish Group 4 Falck merged.
G4S is now the world's largest security company and has operations in around 125 countries. With over 600,000 employees, it is also the world's third-largest private employer. The company offers a range of services, from the supply of security personnel and response units to risk consulting and prison management.
Despite showing tangible signs of improvement since the management overhaul in 2013 and a subsequent restructuring program, one-off issues have plagued results for the last 12 months, causing a loss in investor confidence and sending the share price tumbling almost 50% to its recent November lows.
Management believes that splitting the business will encourage investors to look beyond the current malaise, unlocking value in the individual business units. Given our positive stance on the prospects of both businesses and our £3.37 fair value estimate for the group, we tend to agree.
The cash business generated just 16% of group revenue in 2017 but almost 30% of profit before tax due to its higher-margin nature. Our sum-of-the-parts analysis points to a value for the secure solutions business of £2.30 per share, which means that investors who buy today get this business at a 15% discount to its intrinsic value while getting the cash solutions business, worth almost £1.10 per share, for free.
While it is unclear at this time as to what format this separation will take, given the highly consolidated nature of the cash sector and the antitrust issues that come with that dynamic, it is unlikely that G4S could find a single buyer for the business.
As such, we believe the most likely scenario is a spin-off, as this would realise management’s stated goal of unlocking shareholder value. Management has given itself 2019 to complete a review on the best method of separating the businesses, but we hope to get a more detailed update at the company’s full-year update in March.
