Should Grab spin off its financial services?

Grab has spoken to banks and insurance companies about taking stakes in its payments and financial services businesses, a source close to the matter confirmed to Tech in Asia.

The Financial Times reported last week that Grab is considering a spin-off Grab Financial, which includes its digital wallet GrabPay as well as the company’s insurance and lending services. Sources told the Times that Grab might raise capital for GrabPay and the rest of Grab Financial separately to spin off one, or both, of them at a later date.

This followed a TechCrunch report from back in March which suggested that China’s Ant Financial and the US’s PayPal were in secret talks to acquire stakes in Grab Financial after it had been divided from parent Grab.

The Tech in Asia source said that conjecture about such a separation is premature.

However, analysts told Tech in Asia that the company’s talks with prospective investors could potentially result in the units being hived off in advance of tougher regulations.

Alternatively, securing outside investment for its financial services businesses may be a strategic move with a view to a future IPO, they said.

Better off apart?

Spin-offs can make sense. If a non-core unit becomes a significant business that’s fundamentally different from the core unit, spinning it off as a separate company lets it do what’s best for itself, and leaves it free to develop its own growth strategies. Decisions can be made more quickly and independently as reporting layers are reduced.

Spin-offs counter what’s called a conglomerate discount, where the collective value of business units are worth more separate than together. By dividing the business units, investors are emboldened to put money into the unit they believe in without worrying about the unit they don’t. To use an analogy, why force people to buy both an apple and a pear if they just like the apple?

One example is PayPal itself, which was spun-out of parent Ebay in 2015 after pressure from activist investors including Carl Icahn and Elon Musk. PayPal accounted for over a third of Ebay’s profits by the time it relaunched as a separate company, and the spin-out was seen as a way for it to focus on growth opportunities in digital payments without being held back by its ties to the auction site.

But would a spin-off be in Grab’s best interests? The company isn’t close to turning a profit in any of its segments, as far as we know. And cutting loose a high-volume part of its business like payments, where it has made heavy investments and which it sees as critical to its “superapp” ambitions, might seem like a strange move.

The integrated nature of the business makes a full spin-out less likely, at least at this stage. Instead, any funding deal with Grab’s financial services could resemble Central Group’s US$200 million strategic investment in Grab Thailand earlier this year. That transaction saw a specific Grab business unit, rather than the overarching corporate entity, get funding in return for giving up a non-controlling stake.

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