The demerger, which still needs shareholder approval, is expected to happen in the first half of 2020.
“Pursuing a demerger of Smiths Medical will lead to two stronger companies each focusing on accelerating the execution of their plans and maximising the opportunities in their respective markets,” said chief executive Andy Reynolds Smith.
The medical business is the largest part of Smiths, representing about a third of revenues last year. But speculation has been rife that it was on the chopping block, given its struggles in recent years.
Sales fell another 7% in 2018 to £885mln (2017: £951mln) following the loss of two big contracts in the US, while upcoming changes to European regulations are expected to knock performance going forward.
Spin-off flagged in November
CEO Reynolds Smith and his team rejected a £2.8bn approach for the business from US medical devices maker ICU last September after months of talks between the pair.
Shortly after, the company confirmed that it was looking into a “planned separation” of the division.
Smiths also operates four other businesses, including its security detection arm, which supplies the scanners used at Heathrow airport.
City analysts have often claimed that a break-up would unlock some of the value bound up in the FTSE 100 group’s conglomerate structure.
The possibility of an activist investor coming on board to quicken any break-up had also been mooted by some in the Square Mile.
Medical profits plunge
News of the spin-off came as Smiths posted an 8% fall in pre-tax profit to £487mln in the 12 months ended 31 December (2017: £528mln).
Much of that decline was down to the medical business, where operating profits plunged by 26% to £156mln (2017: £209mln).
Revenue also fell by 2% to £3.21bn (2017: £3.28bn), although they were up 2% on an underlying basis, which strips out the impact of sold-off businesses and foreign exchange movements.
Growth in John Crane, Flex-Tek and Smiths Detection was partially offset by the performance in Smiths Medical and Smiths Interconnect.
“With the exception of Smiths Medical, where the second half was disappointing, we delivered a good performance,” said chief executive Andy Reynolds Smith.
“In 2019 we anticipate at least sustaining the rate of underlying revenue growth. As in previous years, group performance in 2019 is expected to be weighted towards the second half. Foreign exchange will provide a tailwind to reported revenue and operating profit if current rates prevail.”
Demerger always seemed "most likely outcome"
In afternoon trading, shares in Smiths Group were 0.5% higher at 1,452p, easing back from an earlier session peak at 1,502p.
In a note to clients, analysts at Liberum Capital reiterated a ‘hold’ rating and 1,700p target price on Smiths Group shares, pointing out that a demerger of the Medical business “always seemed the most likely outcome after the breakdown in talks with ICU Medical last year.”
They said: “We have previously valued Smiths Medical at £2.8bn, which is around the price Smiths is believed to have rejected from ICU last year; given the continued weak performance in Medical we believe that Smiths will now struggle to achieve such a valuation, let alone exceed it through a demerger.”
-- Adds analyst comment, updates share price --