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.
Our Takeover Target Rating considers a range of factors to determine the chances of a spinoff company attracting takeover interest in the short to medium term:
We look for a profitable spinoff with low debt and with hidden assets. As well, spinoffs with no major shareholder… Read More
As a general rule, if a company’s two classes of shares trade for roughly the same price, you’re better off buying the voting shares. That’s because they may move substantially higher than the non-voting shares if a shareholder who is trying to take control of… Read More
LAMB WESTON HOLDINGS INC. $70 (New York symbol LW; Consumer sector; Shares outstanding: 146.5 million; Market cap: $10.3 billion; Takeover Target Rating: Highest; Dividend yield: 1.1%; www.lambweston.com) was a wholly owned subsidiary of Conagra Brands until November 9, 2016. That’s when Conagra set up Lamb Weston as a.. Read More
On May 31, 2017, Tegna set up its Cars.com subsidiary as a separate firm. Investors received one share in the new company for every three Tegna shares they held.
Since the breakup, Tegna is up about 12%, and its recent acquisitions should let it profit from… Read More
NASPERS LTD. (ADR) $51 (U.S. over-the-counter bulletin board symbol NPSNY; Shares outstanding: 2.1 billion; Market cap: $107.1 billion; Dividend yield: 0.2%; Takeover Target Rating: Lowest; www.naspers.com) is a South African media and Internet firm. The stock has its main listing on the Johannesburg exchange under the symbol NPN.
The… Read More
FMC CORP. $81 (New York symbol FMC; Manufacturing sector; Shares outstanding: 131.6 million; Market cap: $10.7 billion; Dividend yield: 2.0%; Takeover Target Rating: Medium; www.fmc.com) makes crop protection chemicals, including insecticides, herbicides and fungicides.
In October 2018, FMC set up its lithium business as a separate company called LIVENT CORP… Read More
SONY CORP. ADRs $48 (New York symbol SNE; Manufacturing & Industry sector; ADRs outstanding: 1.3 billion; Market cap: $62.4 billion; Dividend yield: 0.6%; Takeover Target Rating: Lowest; www.sony.net) is a leading maker of consumer electronics such as TV sets and video game consoles (under the PlayStation brand). In… Read More
EAGLE MATERIALS INC. $87 (New York symbol EXP; Manufacturing sector; Shares outstanding: 45.9 million; Market cap: $4.0 billion; Takeover Target Rating: Medium; Dividend yield: 0.5%; www.eaglematerials.com) makes cement, gypsum wallboard, recycled paperboard, concrete and aggregates, and oil and gas proppants (man-made sand for fracking) at over 75 facilities… Read More
DOWDUPONT INC. $39 (New York symbol DWDP; Manufacturing sector; Shares outstanding: 2.3 billion; Market cap: $89.7 billion; Takeover Target Rating: Lowest; Dividend yield: 4.2%; www.dow-dupont.com) began trading on September 1, 2017, following the merger of Dow Chemical and DuPont. The combined firm then became the world’s second-largest maker… Read More
LEVI STRAUSS & CO. $24 (New York symbol LEVI; Consumer sector; Shares o/s: 392.5 million; Market cap: $9.4 billion; Dividend yield: 1.2%; Takeover Target Rating: Lowest; www.levistrauss.com) makes denim jeans and related clothing and mainly sells them through chain retailers, department stores and online sites as well as… Read More
One of the main benefits of a spinoff is that it lets both the parent and new company better focus on their core businesses. A good example is water equipment specialist Pentair, which spun off its electrical cabinet business nVent in April 2018.
Since the breakup,… Read More
LIGHTSPEED POS INC. $23 (Toronto symbol LSPD; Manufacturing & Industry sector; Shares outstanding: 81.5 million; Market cap: $1.9 billion; No dividends paid; Takeover Target Rating: Lowest; www.lightspeedhq.com) offers point-of-sale software programs to small retailers and restaurant operators. That includes inventory control, accounting and customer self-serve functions.
On March 8,… Read More
SNC-LAVALIN GROUP INC. $36 (Toronto symbol SNC; Manufacturing & Industry sector; Shares o/s: 175.6 million; Market cap: $6.3 billion; Divd yield: 1.1%; 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
Honeywell International Inc. (New York symbol HON) recently spun off two of its smaller operations—Garrett Motion and Resideo Technologies. Both stocks are down since they become independent firms. Slow starts, however, are typical for new spinoffs, and we like their prospect.
GARRETT MOTION INC. $15 (New York symbol GTX; Shares… Read More
EATON CORP. PLC $81 (New York symbol ETN; Manufacturing & Industry sector; Shares outstanding: 423.6 million; Market cap: $34.3 billion; Dividend yield: 3.5%; Takeover Target Rating: Medium; www.eaton.com), based in Ireland, makes a wide variety of electrical power products such as circuit breakers, power distribution units, panel… Read More
TENNECO INC. $33 (New York symbol TEN; Manufacturing & Industry sector; Shares outstanding: 51.4 million; Market cap: $1.7 billion; Dividend yield: 3.0%; Takeover Target Rating: Medium; www.tenneco.com) is a leading maker of auto parts. Those products include emission and exhaust systems as well as shocks and struts.
The company… Read More
STUART OLSON INC. $4.17 (Toronto symbol SOX; Resources sector; Shares outstanding: 27.8 million; Market cap: $115.9 million; Dividend yield: 5.8%; Takeover Target Rating: Highest; www.stuartolson.com) provides governments and businesses with construction, electrical contracting, earthmoving and insulation services. It mainly operates in Western Canada, but recently expanded into Ontario.
The… Read More
L BRANDS INC. $27 (New York symbol LB; Consumer sector; Shares outstanding: 275.1 million; Market cap: $7.4 billion; Dividend yield: 4.4%; Takeover Target Rating: Medium; www.lb.com) owns two main retail chains: Victoria’s Secret stores (which sell lingerie); and Bath & Body Works outlets (personal-care products, including soaps and… Read More
DANAHER CORP. $128 (New York symbol DHR; Manufacturing & Industry sector; Shares outstanding: 701.9 million; Market cap: $89.8 billion; Dividend yield: 0.5%; Takeover Target Rating: Medium; www.danaher.com) makes precision-testing equipment and tools. Its major customers include medical research labs, dentists and municipal water utilities. Its brands include Beckman… Read More
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