varies across regions. While the conglomerate discounts are found to vary around 10% in North America and Western Europe, 9% in Asia excluding Japan, and 12% in CEEMA regions, the report found evidence of a premium of 12% in Latin America. This was possibly due to the low number of conglomerates in the latter area.
Historically, there are multiple evidence of successful divestments creating value for shareholders.
The forest company, Weyerhaeuser, has conducted various divestments since 2004 and has ended up producing some of the highest returns in its sector. Other examples are when General Electric successfully divested 117 business units during a period of only four years (Mankins et al., 2002)., and when Fiat Chrysler Automobiles carved-out Ferrari through an IPO in 2014, which later increased shareholder wealth (Sterling, 2016). Further, the large conglomerate of Textron also experienced the success of divestments by building up extensive divestiture expertise through the sale of 41 businesses, resulting in significant dividends to its shareholders (Mankins et al., 2008).
This was also the case, when both Yara and Hydro outperformed the market a couple of years after Yara was carved-out from Hydro in 2004, which will be discussed later in this section.
2018).
History
Yara’s history dates back more than 100 years, in a time characterized by famine and food shortages worldwide. The lack of nitrogen in the soil, a substance which is vital for plants to grow, was at that time a major global challenge (Yara, 2018c). The company was founded as Norsk Hydro in 1905 by the entrepreneur Sam Eyde and the scientist Kristian Birkeland. The same year, Birkeland invented the electro-magnetic cannon, a method for using electricity to capture nitrogen from the atmosphere, which later became the rescue of billions of people (Yara, n.d.; Hydro, 2019).
Although Yara today uses a different method for extracting nitrogen into mineral fertilizer, the business is based on the discovery by Birkeland, which is considered as one of the most disruptive technologies the world has seen (Yara, 2018).
In the first part of the 19th century, the company went through major changes and strived to diversify by developing new technologies, also for other industries. During World War II, Yara’s fertilizer production facilities in Rjukan, Norway, became a crucial source to the production of heavy water for developing nuclear bombs by the Germans. As part of the build-up after World War II, the Norwegian Government became a majority owner of Hydro (Yara, n.d.). Later, the company evolved into a post-war modern industrial conglomerate, expanding internationally with heavy investments and acquisitions in new businesses within petroleum, aluminum, plastics and light metals (Hydro, 2019). In 2004, the fertilizer and industrial business was separated from Norsk Hydro and established an independent company through an IPO on Oslo Stock Exchange named Yara (Yara, n.d). The carve-out was justified by Hydro’s desire to concentrate on its core business within Oil & Energy and Aluminum, which later resulted in strong growth and value creation for both companies.
74 % 20 %
6 %
Sales by product
Fertilizer Industrial products Ammonia trade
32 %
27 % 8 % 15 %
12 % 5 %
Revenue by region
Europe Brazil Latin America ex. Brazil Asia North America Africa
6515
6164 1487
1367 667 557
Employees by region
Europe Brazil Latin America ex. Brazil Asia North America Africa
Ownership
Historically, the Norwegian agriculture- and fertilizer industries have mainly been publicly owned, supported with subsidies to ensure a sufficient level of food production inland. Yet, with increased globalization, this is shifting as many international companies within the industry tend to be more privatized. Since the carve-out from Hydro, 42% of the shares in Yara has been state-owned (Yara, 2018), making it one of the largest listed state-owned companies in Norway measured in relative market value (Norwegian government, 2019a). Although Yara separated from Hydro to focus on the fertilizer business, Yara has experienced further growth by large acquisitions and investments globally, leading to the company growing closer towards the characteristics of a conglomerate (Yara, n.d.).
Price development
In the carve-out process, 80% of the shares were handed out proportionally to Hydro’s
shareholders and 20% were sold in the equity market (The Norwegian Government, 2007). The opening price was NOK 41 per share, and the IPO was considered successful as the price nearly doubled at the end of the year of NOK 79,75 (OSE, 2004). The graph below illustrates the
development of the indexed share price of Yara, Hydro and the benchmark index OSEBX since the IPO in 2004. Yara and Hydro combined outperformed OSEBX in the subsequent years after the carve-out until 2008. Yara, however, has significantly outperformed the market during the whole period, obtaining an arithmetic average annual return of 17,3%. This illustrates a positive effect of the carve-out.
The share price of Yara peaked in early 2008 with a price of NOK 462, most likely due to the world food price inflation, which came from bad weather conditions, increased oil price and surging demand for food, such as access of grain (FAO, 2009). This caused a boost of the fertilizer prices,
which tripled from the normal price level (Indexmundi, n.d.). Although, Yara’ stock price was hit by the financial crisis in November 2008 (Yahoo Finance, n.d.), it immediately recovered and since then, the share price has improved and increased steadily. Yet, as shown in figure 10, Yara’s share price is highly volatile, reflected by volatile fertilizer prices, which reached a bottom in 2016 (Indexmundi, n.d.). This will be illustrated in Section 4.3.2.
Strategy
In 2018, Yara renewed its strategy to become a “Crop Nutrition Company for the Future” and introduced three main strategic priorities: advance operational excellence, create scalable solutions and drive innovative growth (Yara, 2018). Yara has announced to further develop and expand its Yara Improvement Program (YIP), focusing on improving reliability, cost and operational efficiency. This program has established specific strategic initiatives, such as reaching the target of an improved EBITDA by USD 500 million from 2015 to 2020 (Yara, 2018), ensuring sustainable profitability, improving working capital- and active portfolio management. Additionally, the company has committed USD 600 million in investments for growth and improvements. Some of these initiatives have already been implemented and delivered results, such as improved EBITDA in 2018 as a result of increased production capacity from primarily two projects in Brazil (Yara, 2018).
Additionally, as part of this active portfolio management is the ongoing carve-out process of the industrial nitrogen business to improve growth and value (Yara, 2019c). This enables the remaining company to concentrate more on its core business by building a stronger and more focused crop nutrient company. The initiatives and discussed strategy, will from now be referred to as the “focused strategy”. As a result of this strategy to simplify Yara’s operating model, the
company introduced a new segment structure in 2019, which will be explained below (Yara, 2018)
Segments
The company is structured into three operating segments; Crop nutrition, Industrial and Production, which are the key components of Yara’s business. Production comprises the manufacturing plants producing ammonia, fertilizers and industrial nitrogen, that sells the products to the two other segments at market prices based on an arm-length principle. Crop nutrition consists of Yara’s worldwide marketing organization and global distribution network of fertilizer products- and solutions (Yara, n.d.c). The segment also includes small facilities upgrading the products
purchased from Production to finished products. Finally, Industrial develops and markets solutions and products for industrial applications. The segment uses industrial nitrogen purchased from Production further into its own production process. Each segment is managed and monitored as a
Recently, Yara changed its operational structure into three new segments named Sales &
Marketing, New business and Production, effective from 1st of January 2019 (Yara, 2018).
However, the valuation in this thesis is based on the old reported segment structure, to be able to build upon historical segmented figures. Therefore, the figures in 2019 will be allocated on the basis of the percentage share in 2018, which will be further discussed in Section 4.6.