When in doubt, spin out

The energy transition promises to be an opportunity for businesses to create generational returns.

That opportunity isn’t exclusive to startups or private businesses - big business wants in on the action too.

In just the last 12 months, we’ve seen industrial and OEM behemoths announce they are spinning out divisions to invest fully in the energy transition.

The examples span across industries and technologies, but all with the same goal in mind: take advantage of the public market tendencies to reward focused market leaders in high-growth markets.

Auto OEMs

Last week, VW announced plans to go forward with an IPO of Porsche - offering 25% of the business with the intent of using the capital to invest in electrifying the entire Porsche fleet by 2030.

Ford announced plans to set up a standalone EV business last year and is currently in the process of making it a reality.

Of course, this all makes sense when you view it from the lens of public market valuations. Currently, Tesla trades at a price-to-earnings ratio of 107 times while Ford and GM trade at 5 and 8 times respectively.

Two other considerations make the automotive world ripe for spinouts: core competencies - EVs require enhanced software capabilities - and business model innovation - the service and spare parts margins will erode over time endangering the legacy and dealership models.

It’s better to make the change now with optionality than to do so under duress.

Infrastructure

Toshiba is currently in the process of spinning out its energy infrastructure business including nuclear, sustainable energy, and battery divisions which currently generate over $18B in revenue annually.

Among the reasons listed for the split is an ability to focus management and become more agile in product development and decision making.

The overall goal is to separate the evolving energy sector from computer devices and storage which have longer lead times and where Toshiba is no longer a market leader.

Conglomerates

Siemens spun out Siemens Energy in 2020 to “pave the way for the establishment of an independent company rigorously focused on the energy sector.”

Perhaps most famously, GE is currently in the process of breaking up into 3 distinct companies with one of them being Vernova which will be focused only on power generation.

In both cases, these conglomerates were looking to spin out already successful businesses to create an even greater focus on sustainability.

Bonus: Oil and Gas

Surprisingly, we haven’t yet seen a major oil and gas company announce the spin-out of a renewables-only division. Shell, BP, and Equinor have all made a significant investment in their energy transition assets, but have remained whole.

I expect this to remain the case moving forward for one reason: oil and gas is still a great business, and natural gas is needed for the energy transition.

All of the examples above were not only about taking advantage of a generational tailwind but also meant jettisoning businesses that are stagnant. Oil and gas doesn’t have the latter, yet.