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.
In March 2019, activist investment firm Sachem Head Capital Management announced that it had acquired 8.9% of Eagle Materials. It now owns around 7% of the company.
Sachem originally pushed the company to sell its fracking sands business, which has struggled in recent years as oil… Read More
New spinoff stocks often drift sideways for a few years until building a history of earnings and attracting analysts.
As a new spinoff from Danaher, Envista is still an attractive choice for aggressive investors. However, we’re less confident about Match Group’s short-term prospects even as parent… Read More
ED ROBIN GOURMET BURGERS INC. $5.18 is a sell. The company (Nasdaq symbol RRGB; Consumer sector; Shares outstanding: 12.9 million; Market cap: $66.8 million; No dividend paid; Takeover Target Rating: Highest; www.redrobin.com) is a casual dining chain with 556 Red Robin restaurant locations in the U.S. and Canada. About… Read More
It’s a good idea for you to keep an eye on activist investors, as they often look for the same hidden assets we do. When they find those assets, activists tend to zero in on the undervalued company and pressure it to spin off or… Read More
We normally advise investors to avoid new stock issues as they typically come to market when it’s a good time for the company or its insiders to sell. That may not be a good time for you to buy. However, we’re making an exception for… Read More
In a sudden and deep stock-market drop like the one of the past few weeks, it’s all too easy to respond impulsively or go to extremes. You may feel a temptation to sell all your stocks and “wait for things to settle down” before going… Read More
MCKESSON CORP. $136 is a buy for spinoff gains. The company (New York symbol MCK; Consumer sector; Shares outstanding: 177.1 million; Market cap: $24.1 billion; Dividend yield 1.2%; Takeover Target Rating: Medium; www.mckesson.com) is the largest wholesale drug distributor in the U.S. and Canada. It also operates drugstores in… Read More
Historically, we have recommended few pharmaceutical stocks for our readers’ portfolios. That’s because those companies must continually invest large sums to develop new drugs as their older products lose their patent protection. Even then, there’s no guarantee those new drugs will repeat past successes.
However, Merck’s… Read More
BLOOMIN’ BRANDS INC. $23 is worth holding given the likelihood of a lucrative takeover bid. The company (Nasdaq symbol BLMN; Consumer Sector; Shares outstanding: 86.9 million; Market cap: $2.0 billion; Dividend yield 3.6%; Takeover Target Rating: Highest; www.bloominbrands.com) owns and franchises more than 1,470 restaurants in 48 states and… Read More
Drug wholesaler McKesson fell from its high of $241 in May 2015 to $108 in December 2018. That’s partly due to its role in the opioid crisis. However, the company has now settled many of those lawsuits, reducing risk for investors. It’s also improving the… Read More
Spinoffs are often seen as an effective way for a holding company to eliminate its “holding company discount.” That discount is usually evident in the stock price of a company that holds a variety of assets, or that invests in a number of businesses.
As well,… Read More
These two global leaders continue to shrink their operations. That’s good news for investors, as markets tend to prefer—and reward—companies with easy-to-understand businesses rather than those with complex conglomerate structures (see box below for more info).
UNILEVER PLC (ADR) $60 is a buy for aggressive investors. The… Read More
DAVE & BUSTER’S ENTERTAINMENT INC. $46 is okay to hold. The stock (Nasdaq symbol PLAY; Consumer sector; Shares outstanding: 38.6 million; Market cap: $1.8 billion; Dividend yield: 1.4%; Takeover Target Rating: Highest; www.daveandbusters.com) gives you a stake in 135 entertainment and dining venues in the U.S. and Canada. All… Read More
Generally, investors are right to welcome share buyback plans, which help to give them a bigger stake in the company, but also tend to push up the price of their shares.
However, depending on the company, there are better ways to reward shareholders. (See below for… Read More
Shipping specialist XPO Logistics has handed investors a whopping 77% gain in the past 12 months. It’s now looking to sell or spin off some of its businesses to further spur your returns. A tighter focus on its core operations would help unlock value for… Read More
As we often remind our readers, spinoffs are the closest you can get to a sure thing in investing. According to several academic studies, spinoffs benefit not only the new company but the former parent as well.
We also caution investors that these benefits don’t arrive… Read More
In August 2018, we alerted our readers to a plan by clothing giant VF Corp. to set up its Wrangler and Lee jeanswear business as a separate company (called Kontoor Brands, see page 18). The move freed both the parent and the spinoff to better… Read More
YAMANA GOLD $5.11 is a precious metal buy. The gold miner (Toronto symbol YRI; Resources Sector; Shares outstanding: 950.4 million; Market cap: $4.9 billion; Dividend yield: 1.0%; Takeover Target Rating: Highest; www.yamana.com) lets you tap six gold mines, in Canada, Brazil, Chile and Argentina. It also holds 20.5% of… Read More
TENNECO INC. $10 is a buy for aggressive investors. The stock (New York symbol TEN; Manufacturing & Industry sector; Shares outstanding: 80.9 million; Market cap: $809.0 million; Dividend yield: 9.5%; Takeover Target Rating: Medium; www.tenneco.com) lets you tap a leading maker of auto parts. Those products include emission and… Read More
We’ve long believed in the power of spinoffs to lift value for investors. Indeed, it’s why we were excited by the possibility that Archer Daniels would set up its Ethanol operations as a separate company and then hand investors shares in the new company. Now,… Read More
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