By Esha Vaish and Johannes Hellstrom
STOCKHOLM (Reuters) - Electrolux shares hit an eight-month high on Friday after the home appliances maker announced plans to spin off its most profitable business to shareholders and beat earnings forecasts.
A spin-off of Professional Products unit, whose commercial kitchen and laundry equipment is used by over half of Europe's Michelin-star restaurants, follows Electrolux's previous carve outs of lawnmower maker Husqvarna and seatbelts maker Autoliv.
Both stocks have risen since their market debuts as standalones and Electrolux's largest investor, AB, said it supported its latest move, announced after markets closed on Thursday.
CEO Jonas Samuelson said the move would allow Professional to accelerate organic growth and access capital to chase high-value mergers and acquisitions, which so far it had not been able to do given higher multiples in its niche sector versus the parent consumer unit.
"Given the significantly higher valuation multiple in the professional space we've really struggled to be able to see a high enough return," he said on a call with analysts. "But as a standalone entity with a higher multiple, that M&A growth will be able to create a lot more value going forward."
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Samuelson said Professional could seek targets in areas where it had a smaller footprint like North America and quick service restaurants and those that would accelerate its business in growing emerging markets.
Electrolux shares were up almost 10 percent at 234.8 Swedish crowns by 1055 GMT, their highest since May last year.
"We see this as a positive step that creates value for shareholders as Professional is viewed as a higher quality business whose attractive features have historically not been fully valued as part of the low margin consumer appliance business," JP Morgan said in a research note.
Professional is the most profitable part of Electrolux and reported 2018 operating profit of 1.1 billion Swedish crowns ($121.54 million) and a margin of 13.1 percent, well above the group's adjusted operating margin of 5.4 percent.
After the listing, Electrolux said its consumer unit was expected to achieve a group target of at least 6 percent margin.
TARIFF TROUBLES
Samuelson has boosted Electrolux's profitability in recent years through increased efficiency and by cutting lower-margin products, but a U.S.-China trade war has inflated raw material costs, forcing Electrolux and rival Whirlpool to increase prices.
This move has caused a dip in overall market demand in North America and Whirlpool this week forecast that rising costs would see its 2019 adjusted profit and revenue undershoot consensus.
Electrolux said on Friday that price increases had allowed it to partly mitigate the impact seen in North America from higher raw material costs and tariffs, and lower private label volumes after its biggest regional customer Sears filed for bankruptcy.
That and more sales of its high margin products helped the maker of the Electrolux, Frigidaire, AEG and Anova brands report an operating profit of 1.96 billion crowns, above the 1.85 billion expected by analysts in a Reuters poll.
It estimated the negative impact from raw materials, tariffs and currency at 2.0-2.4 billion crowns in 2019 versus its October estimate of around 3 billion.
The company said on Thursday it would close a U.S. plant, which builds Frigidaire and Electrolux ovens and employs 530 people, by 2020 following Sears' bankruptcy and would book an about 1 billion crown charge in the current quarter.
It also plans to upgrade its North American factories, a decision it had put on hold after the first tariffs last year, and Samuelson said on Friday the upgrades would allow it to quickly ramp up or cut output.
($1 = 9.0502 Swedish crowns)
(Reporting by Esha Vaish in Stockholm; additional reporting by Johannes Hellstrom; editing by Niklas Pollard/Jason Neely and Emelia Sithole-Matarise)