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* Bankers, analysts see break-up; cautious on timing
* Holding discount already falling
By Nigel Tutt
MILAN, Oct 26 (Reuters) - Italian conglomerate Pirelli & C SpA PECI.MI could separate its tyre activities from its listed real estate unit, giving a fillip to the group’s value at a time the financial results of its tyre unit are looking up.
Pirelli could resuscitate its 2007 plan to spin off its tyre unit — though not this time via an initial public offering — and separate it from its listed real estate company, analysts and investment bankers said.
“We believe some recent moves at the corporate level are clear pointers that will lead to a separation of Pirelli & C Real Estate PECR.MI from the group to transform Pirelli & C from a holding company to a tyre maker,” Milan broker Equita said.
Pirelli lags tyre peers Michelin (MICP.PA) and Continental AG (CONG.DE) in terms of market cap — Pirelli’s 2 billion euros is about a quarter of Michelin’s — but is active in high margin tyre sectors and in emerging markets.
In the second quarter tyre unit earnings before interest and tax and after restructuring charges rose to 79.3 million euros from 57.5 million in the first quarter.
Expectations both of a split and improvements in tyre unit financial results pushed Pirelli & C’s stock price to a year-high earlier in October.
The share price move reflects belief among investment bankers that Pirelli will go for a full separation of the Pirelli & C holding from its 56-percent real estate unit but the deal will take time to mature.
“In the end they will do it. The two businesses (tyres and real estate) don’t go together. In a time of crisis companies focus on their core businesses,” a leading M&A adviser said.
“But I don’t believe it (a Pirelli separation) will happen this year,” he said.
Separation of activities generally takes up to a year to organise such as for debt and top management between the two, while in Pirelli’s case it may wait for real estate markets to recuperate from lows, he said.
Analysts point to Pirelli’s September reorganisation in which Pirelli Tyre unit Chief Executive Francesco Gori adds responsibility for a tyre and parts division as a start in the split-up process, they said.
Broker Equita sees a split of Pirelli’s tyre and real estate businesses as “only a question of time”.
Estimates for the holding discount on Pirelli’s net asset value are falling as the market starts to see Pirelli as a pure play on tyres activities, analysts said.
The share prices of holding or conglomerate companies traditionally bear a discount of up to 30 or 40 percent to the value of their listed or unlisted investments.
Equita said the transformation of Pirelli from holding company to an “almost pure” tyre company will end this discount and in its price target calculation cuts this to 7.5 percent, from its previous 22.5 percent.
Banca Akros is using a 15 percent discount in its share price target calculation saying this is halfway between the historical discount of Italian holding companies of 30 percent and a zero level, it said.
Any separation is seen as an all-share demerger operation between Pirelli & C and Pirelli & C Real Estate with little prospect for Pirelli & C to sell the real estate stake for cash, it said.
Pirelli could carry out “a proportional spin-off” of the real estate unit with Pirelli & C shareholders receiving shares in Pirelli & C Real Estate, Banca Akros said in a note.
Editing by Sitaraman Shankar