One of the ways a company can try to unlock its own hidden value is by creating a separate company out of a corporate subsidiary. The parent company can either sell stock in the new company to the public, or spin it off—hand the stock out to its own investors.
Often, the parent company starts by selling a portion of the new company to the public, to establish a market and a following among investors. That way, by the time of the spin-off, stock in the new company may be liquid enough to be sold relatively easily, or retained with some confidence as a worthwhile investment.
In our experience, and in most academic studies of the subject, this helps the parent and its corporate spinoff. Both generally do better than comparable companies for at least several years after the spinoff takes place.
When a company carries out a spinoff, it sets up one of its subsidiaries or divisions as a separate company, then hands out shares in the new company to its own shareholders. It may hand out the shares as a special dividend, or give its shareholders an opportunity to swap shares of the parent company for the shares of the newly established spinoff.
Study after study has shown that after an initial adjustment period of a few months, stock spinoffs tend to outperform groups of comparable stocks for several years. (For that matter, the parent companies also tend to outperform comparable firms for several years after a spinoff.) The above-average performance of spinoffs makes sense for a couple of reasons.
First, company managers naturally prefer to acquire or expand their assets, not get rid of them. Getting rid of assets reduces a company’s total potential profit. The management of a parent company will only hand out a subsidiary to its own investors if it’s nearly certain that the subsidiary, and the parent, will be better off after the spinoff than before.
Second, spinoffs involve a lot of work and legal fees. Companies only have an incentive to do spinoffs under two sets of favourable conditions: When they feel it isn’t a good time to sell (which often means it’s a good time to buy); or, when they feel the assets they plan to spin off will be worth substantially more in the future, possibly within a few years.
Quite often, a big company will spin off a small subsidiary because it feels the subsidiary is a tiny gem, but that it’s too small to make an impact on the much larger financial statements and market capitalization of the parent.
At TSI Network we’ve had great success with a number of spun off stocks over the years. That’s especially true of the many spinoffs we have recommended that have gone up after they began trading, and have later attracted a takeover bid at a substantial premium over the market price.
Needless to say, things don’t always work out this well. Spinoffs and their parents do sometimes run into unforeseeable woes. But on the whole, in investing, spinoffs are the closest thing you can find to a sure thing.
WANDA SPORTS GROUP CO. LTD. $4.44 (Nasdaq symbol WSG) sold 23.8 million American Depositary Shares (two ADSs represent three of its class A ordinary shares) on July 29, 2019 at $8.00 each for a total of $190.4 million.
Based in China, Wanda operates various mass-participation sporting… Read More
KONTOOR BRANDS INC. $34 (New York symbol KTB; Consumer sector; Shares outstanding: 56.9 million; Market cap: $1.9 billion; Dividend yield: 6.6%; Takeover Target Rating: Medium; www.kontoorbrands.com) makes denim apparel under several brands, including Lee, Wrangler and Rock & Republic. It also operates retail outlets.
UNITED TECHNOLOGIES CORP. $127 (New York symbol UTX; Manufacturing & Industry Sector; Shares outstanding: 862.8 million; Market cap: $109.6 billion; Dividend yield: 2.3%; Takeover Target Rating: Low; www.utc.com) has four main divisions: Pratt & Whitney manufactures aircraft engines (29% of 2018 revenue, 14% of earnings);… Read More
LAMB WESTON HOLDINGS INC. $68 (New York symbol LW; Consumer sector; Shares outstanding: 146.1 million; Market cap: $9.9 billion; Takeover Target Rating: Highest; Dividend yield: 1.2%; www.lambweston.com) is a leading producer of frozen french fries, potatoes and other packaged vegetables.
NUANCE COMMUNICATIONS INC. $17 (Nasdaq symbol NUAN; Manufacturing & Industry sector; Shares outstanding: 285.6 million; Market cap: $4.9 billion; No dividends paid; Takeover Target Rating: Medium; www.nucance.com) specializes in speech and imaging technology. Its systems enable voice-activated services over the telephone by transforming speech into… Read More
ASHLAND GLOBAL HOLDINGS INC. $73 (New York symbol ASH; Manufacturing & Industry sector; Shares outstanding: 60.5 million; Market cap: $4.4 billion; Dividend yield: 1.2%; Takeover Target Rating: Medium; www.ashland.com) makes a variety of specialty chemicals.
The company has three main businesses: Specialty Ingredients (roughly 65% of… Read More
TENET HEALTHCARE CORP. $21 (New York symbol THC; Consumer Sector; Shares outstanding: 103.4 million; Market cap: $2.2 billion; No dividend paid; Takeover Target Rating: Highest; www.tenethealth.com) is one of the largest for-profit hospital chains in the U.S. It operates 65 hospitals and 500 other health-care… Read More
Yum Brands is a powerful example of why we strongly believe in the potential of spinoffs. In November 2016, the company spun off its Chinese operations as Yum China. Investors then received one share of the new firm for each Yum Brands share they held.
SUNDIAL GROWERS INC. (www.sundialcannabis.com) is an Alberta-based producer of cannabis for medical and recreational uses. It has five facilities: two in Alberta, and three in the U.K. Sundial is also building a sixth facility in B.C.
The company plans to go public in the next few weeks, and… Read More
DUPONT DE NEMOURS, INC. $71 (New York symbol DD; Manufacturing & Industry sector; Shares outstanding: 747.5 million; Market cap: $53.1 billion; Dividend yield: 1.7%; Takeover Target Rating: Lowest; www.dupont.com), formerly known as DowDuPont, took its current form on June 1, 2019, when it set up Corteva (its… Read More
KAR AUCTION SERVICES INC. $25 (New York symbol KAR; Manufacturing & Industry sector; Shares outstanding: 133.4 million; Market cap: $3.3 billion; Dividend yield: 5.6%; Takeover Target Rating: Medium; www.karauctionservices.com) sells used and salvaged vehicles at 250 physical auction sites in North America and over the Internet. The company… Read More
ENSIGN GROUP INC. $58 (Nasdaq symbol ENSG; Consumer sector; Shares outstanding: 53.5 million; Market cap: $3.1 billion; Dividend yield: 0.3%; Takeover Target Rating: Medium; www.ensigngroup.net) provides skilled nursing and senior living services, physical, occupational, and speech therapies, along with home health and hospice services. It operates through 253… Read More
POST HOLDINGS INC. $107 (New York symbol POST; Consumer sector; Shares outstanding: 73.3 million; Market cap: $7.8 billion; No dividends paid; Takeover Target Rating: Medium; www.postholdings.com) is a leading maker of packaged foods. Its main brands include Honey Bunches of Oats, Pebbles, Post Selects, Great Grains, Shredded Wheat,… Read More
QEP RESOURCES INC. $6.32 (New York symbol QEP; Resources sector; Shares outstanding: 238.0 million; Market cap: $1.5 billion; No dividend paid; Takeover Target Rating: Highest; www.qepres.com) produces oil and natural gas from properties in both the Permian (Texas) and Williston basins (North Dakota).
In February 2019, QEP began a.. Read More
Demand for chemicals follows the ups and downs of the industrial sector—in other words, it’s cyclical. With the recent slowdown in the global economy, shares of Huntsman and its former subsidiary Venator are also down in the last year. Still, both are leaders in their… Read More
MACK-CALI REALTY CORP. $23 (New York symbol CLI; Manufacturing & Industry sector; Shares outstanding: 90.3 million; Market cap: $2.1 billion; Dividend yield: 3.4%; Takeover Target Rating: Highest; www.mack-cali.com) is a New Jersey-based real estate investment trust that owns, manages and develops 74 properties in the Northeastern U.S. This… Read More
GENESEE & WYOMING INC. $110 (New York symbol GWR; Manufacturing sector; Shares outstanding: 56.5 million; Market cap: $6.2 billion; Takeover Target Rating: Highest; No dividend paid; www.gwrr.com) owns and operates 120 railroads across North America, Australia, and Europe. It is now the subject of a takeover bid that… Read More
AltaGas is now focused on high-growth U.S. opportunities. That follows the company’s move to set up its Canadian businesses as AltaGas Canada and sell shares in the new firm to the public. The proceeds helped AltaGas pay for a big U.S. utility to spur its… Read More
MOHAWK GROUP HOLDINGS INC. $6.50 (Nasdaq symbol MWK; Manufacturing & Industry sector; Shares outstanding: 17.5 million; Market cap: $113.8 million; No dividend paid; Takeover Target Rating: Medium; www.mohawkgp.com) makes a variety of consumer appliances, including home ice makers, dehumidifiers, air conditioners, and beauty-related products.
The company has developed an… Read More
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