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.

See how you can make the most of these special investment opportunities by reading our special free report Spinoff Stock Investigator: All You Need to Know about Reaping the Rewards of Spinoffs.

Read More

Spinoffs Library Archives

IPO: Mohawk Group

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

Updating Symantec Corp., Mattel Inc. and Corteva Inc.

SYMANTEC CORP. $20 (Nasdaq symbol SYMC; Manufacturing & Industry sector; Shares outstanding: 618.2 million; Market cap: $13.6 billion; Dividend yield: 1.6%; Takeover Target Rating: Medium; www.symantec.com) sells computer-security technology, including antivirus and email-filtering software, to businesses and consumers.
The stock is down 19.3% from its recent peak of $24.77… Read More

Spinoff prepares Gap for future markets

GAP INC. $18 (New York symbol GPS; Consumer sector; Shares outstanding: 378.0 million; Market cap: $6.8 billion; Dividend yield: 5.4%; Takeover Target Rating: Medium; www.gap.com) is a multi-brand apparel retailer based in San Francisco. It operates 3,335 stores under the following banners: The Gap (1,234), Old Navy (1,160… Read More

Valvoline builds on its operations

VALVOLINE INC. $19 (New York symbol VVV; Manufacturing & Industry sector; Shares outstanding: 188.2 million; Market cap: $3.6 billion; Dividend yield: 2.2%; Takeover Target Rating: Medium; www.valvoline.com) is a leading maker of motor oil, lubricants and other automotive chemicals such as antifreeze. The company also operates 1,300 Quick… Read More

Pharma parent and spinoff are buys

ELI LILLY & CO. $115 (New York symbol LLY; Manufacturing & Industry sector; Shares outstanding: 920.8 million; Market cap: $105.9 billion; Dividend yield: 2.2%; Takeover Target Rating: Low; www.lilly.com) is a leading developer of prescription drugs. Its top-selling products include Humalog (diabetes), Alimta (lung cancer) and Cialis (erectile… Read More

Conagra enjoys activist support

CONAGRA BRANDS INC. $29 (New York symbol CAG; Consumer sector; Shares outstanding: 485.9 million; Market cap: $14.1 billion; Dividend yield: 2.9%; Takeover Target Rating: Medium; www.conagra.com) makes packaged foods, including Chef Boyardee canned pasta, Hunt’s tomato sauce, Peter Pan peanut butter, Orville Redenbacher popcorn and Reddi-wip whipped cream.
Activist… Read More

Activists attention bolsters these stocks

CAMPBELL SOUP CO. $41 (New York symbol CPB; Consumer sector; Shares outstanding: 301.2 million; Market cap: $12.3 billion; Dividend yield: 3.4%; Takeover Target Rating: Medium; www.campbellsoupcompany.com) recently completed a strategic review of its operations. That was partly in response to pressure from activist investor Daniel Loeb, and his… Read More

Perrigo set to become pure-play leader

PERRIGO CO. PLC $44 (New York symbol PRGO, Manufacturing sector; Shares outstanding: 136.0 million; Market cap: $7.0 billion; Dividend yield: 1.0%; Takeover Target Rating: Medium; www.perrigo.com) took its current form in June 2013 when it merged with Irish-based drug maker Elan Corporation, plc. The combined firm is now… Read More

Takeover Spotlight

HUDSON’S BAY CO. $9.85 (Toronto symbol HBC; Consumer sector; Shares outstanding: 184.1 million; Market cap: $1.8 billion; Takeover Target Rating: Highest; Dividend yield: 0.4%; www.hbc.com) operates Canadian retail chains Hudson’s Bay and Home Outfitters; HBC Europe; Lord & Taylor; Saks Fifth Avenue and Saks Fifth Avenue Off 5th.
On… Read More

Hilton spinoffs just getting started

Hilton Worldwide’s spinoff of two of its businesses in January 2017 let the parent focus on franchising its high-quality hotel brands and managing those operations for a fee. Income from those fees, which vary with the opening of new rooms and occupancy rates, now supplies… Read More

SNC ponders spinoffs to cut debt burden

SNC-LAVALIN GROUP INC. $27 (Toronto symbol SNC; Manufacturing & Industry sector; Shares o/s: 175.6 million; Market cap: $4.7 billion; Dividend yield: 1.5%; Takeover Target Rating: Medium; www.snclavalin.com) is a leading Canadian engineering and construction company that specializes in large-scale infrastructure projects such as roads, bridges, transit systems and… Read More

Departure should lift Papa John’s

PAPA JOHN’S INTERNATIONAL INC. $47 (New York symbol PZZA; Consumer sector; Shares outstanding: 31.8 million; Market cap: $1.5 billion; Dividend yield: 1.8%; Takeover Target Rating: Highest; www.papajohns.com) is the world’s third-largest pizza delivery company behind Domino’s Pizza (New York symbol DPZ) and Pizza Hut, part of Yum Brands… Read More

Masco weighs possible second spinoff

MASCO CORP. $38 (New York symbol MAS; Manufacturing & Industry sector; Shares outstanding: 293.5 million; Market cap: $11.2 billion; Dividend yield: 1.3%; Takeover Target Rating: Medium; www.masco.com) is a leading manufacturer and distributor of home improvement and building products. Based in Michigan, its brands include Behr (paint),… Read More

IPO: Fiverr International

FIVERR INTERNATIONAL LTD. (New York symbol FVRR; Manufacturing & Industry sector; www.fiverr.com) operates an online marketplace that connects businesses with individuals offering freelance digital services such as video editing and blog writing. Since it began operating in 2010, Israel-based Fiverr has facilitated over 50 million transactions between… Read More

A TiVo split may not be enough

TIVO INC. $7.04 (Nasdaq symbol TIVO; Manufacturing sector; Shares outstanding: 124.9 million; Market cap: $879.3 million; Dividend yield 4.5%; Takeover Target Rating: Highest; www.tivo.com) makes software for digital video recorders (DVRs) that lets cable and satellite TV subscribers record programs for future viewing. The company’s products also help… Read More

We see one of these as a spinoff buy

MADISON SQUARE GARDEN CO. $302 (New York symbol MSG; Shares outstanding: 23.7 million; Market cap: $7.2 billion; No dividend paid; Takeover Target Rating: Lowest; www.msg.com) is a sports and entertainment company that owns the New York Rangers hockey team, the NBA’s New York Knicks and several other sports… Read More

Activists help reshape their plans

METHANEX CORP. $63 (Toronto symbol MX; Manufacturing & Industry sector; Shares outstanding: 77.0 million; Market cap: $4.9 billion; Dividend yield: 2.6%; Takeover Target Rating: Medium; www.methanex.com) is the world’s leading supplier and distributor of methanol. Manufacturers use that substance in a wide range of products such as adhesives,… Read More

Spinoff Spotlight

VF CORP. $90 (New York symbol VF; Consumer sector; Shares outstanding: 395.6 million; Market cap: $35.6 billion; Dividend yield: 2.3%; Takeover Target Rating: Medium; www.vfc.com) has completed the spinoff of Kontoor Brands Inc. (New York symbol KTB). Kontoor makes blue jeans under several popular brands, including Wrangler, Lee… Read More

Split could boost shareholder value

The ongoing trade war between the U.S. and China—with its tariffs and retaliatory tariffs—has hurt Chinese demand for U.S. ethanol, a corn-based fuel additive.
However, the Trump administration is also making it easier for U.S. refineries to add higher levels of ethanol to U.S. gasoline. That… Read More