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.

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Spinoffs Library Archives

Re-opening will spur this IPO

TOAST INC. makes point-of-sale software and hardware for restaurants. The company’s system makes it easier for restaurants to accept online orders and payments. Clients can also use this customer data to improve their loyalty and marketing programs. About 48,000 restaurants currently use this platform, processing… Read More

Let our stock updates help direct you

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Recent dip adds to Zimmer’s appeal

On February 5, 2021, Zimmer Biomet announced it would spin off its Spine and Dental businesses as a publicly traded company. The news helped push the stock up to $180 in April, but it is now down 19% from that peak. That’s due to concerns… Read More

KAR purchase has tax benefits

KAR AUCTION SERVICES INC. $16 is a buy. The company (New York symbol KAR; Manufacturing & Industry sector; Shares outstanding: 119.2 million; Market cap: $1.9 billion; No dividends paid; Takeover Target Rating: Medium; www.karauctionservices.com) sells used and salvaged vehicles at physical auction sites in the… Read More

Beware: spinoffs can mask flaws

As we’ve said many times before, spinoffs are the closest thing you can find to a sure thing. Studies show that both the parent and the spinoff ultimately do better than comparable companies for a number of years, if not decades. However, investors should avoid… Read More

Activist opposes this takeover

BLUE PRISM GROUP PLC $16 is a hold for aggressive investors. Based in the U.K., the company (Nasdaq symbol BPRMF; Manufacturing & Industry sector; Shares outstanding: 96.6 million; Market cap: $1.5 billion; No dividend paid; Takeover Target Rating: Medium; www.blueprism.com) makes cloud-based software that helps… Read More

Their activist attention benefits you

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We see both spinoff and parent as buys

On August 3, 2021, L Brands (old New York symbol LB) broke itself up into two separate, publicly traded companies: Victoria’s Secret stores (which sell lingerie); and Bath & Body Works outlets (personal-care products, including soaps and shampoos).
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Spinoff Spotlight: Teck Resources Ltd.

TECK RESOURCES LTD. $34 is a buy. The company (Toronto symbol TECK.B; Resources sector; Shares o/s: 532.5 million; Market cap: $18.1 billion; Dividend yield: 0.6%; Takeover Target Rating: Lowest; www.teck.com) is reportedly planning the sale or spin-off of its metallurgical coal business. Metallurgical coal, a.. Read More

We like these new pure-play stocks

As we often remind our readers, spinoffs are a great way for out-of-favour companies to boost shareholder value.
International Paper is key example. While the shutdown of schools due to COVID-19 hurt demand for writing and printing paper, the pandemic also increased demand for its cardboard… Read More

Adagio enters a crowded field

ADAGIO THERAPEUTICS INC. $27 is a hold. The company (Nasdaq symbol ADGI; Manufacturing sector; Shares outstanding: 108.5 million; Market cap: $2.9 billion; No dividend paid; Takeover Target Rating: Lowest; www.adagiotx.com) is developing drugs that aim to treat and prevent illness caused by COVID-19 and its… Read More

Let our stock updates help direct you

PEPSICO INC. $156 is a hold. The soft drink maker (Nasdaq symbol PEP; Consumer sector; Shares outstanding: 1.4 billion; Market cap: $218.4 billion; Dividend yield: 2.8%; Takeover Target Rating: Medium; www.pepsico.com) has agreed to sell a 61% controlling stake in its Tropicana juice business to… Read More

The sale still benefits Perrigo investors

Generic drugmaker Perrigo recent sold its topical treatments business instead of spinning it off as originally planned. We feel the transaction will ultimately pay off for investors, as the cash from the sale will let the company make acquisitions to fuel its long-term growth.
PERRIGO… Read More

Junior golds take different paths

GOLD RESOURCE CORP. $1.65 is a hold. The company (New York symbol GORO; Resources sector; Shares outstanding: 74.5 million; Market cap: $122.9 million; Dividend yield: 2.4%; Takeover Target Rating: Medium; www.goldresourcecorp.com) owns six gold properties, two of which are operating, in the southern state of… Read More

This spinoff is just getting started

On December 1, 2020, the old Aaron’s Inc.—a seller of furniture and electronics—set up its financing division as a separate firm called PROG Holdings. So far, the new retail company’s share price has risen 27%, while the finance business is down 19%. Despite the mixed… Read More

Short seller questions Oatly outlook

OATLY GROUP AB (ADSs), $15 is still a hold. This Swedish company (Nasdaq symbol OTLY; Consumer sector; ADSs outstanding: 591.8 million; Market cap: $8.9 billion; No dividend paid; Takeover Target Rating: Lowest; www.oatly.com) is the world’s largest producer of oat milk. It also produces frozen… Read More

Activists come in several varieties

While activist investors continue to target underperforming companies like Comtech, some are going after firms like GM over their environmental record. In the case of Comtech and GM, we feel activist involvement could improve shareholder value. Still, we’re not ready to recommend either stock for… Read More

Buy Post ahead of the BellRing spinoff

In October 2019, foodmaker Post Holdings sold shares of its BellRing Brands business to the public through an IPO. BellRing makes protein bars, shakes and nutritional supplements.
Post now plans to distribute its remaining BellRing shares to its own investors, probably in the first half of… Read More

Spinoff Spotlight: Veoneer Inc.

VEONEER INC. $36.57 is now a hold. The company (New York symbol VNE; Manufacturing & Industry sector; Shares outstanding: 112.0 million; Market cap: $4.1 billion; No dividend paid; Takeover Target Rating: Highest; www.veoneer.com) makes automotive radar, cameras with driver-assist systems, night-vision equipment, and brake controls.
On… Read More

Two quality spinoffs from Danaher

One of our long-time favourite stocks, Danaher Corp. spun off its industrial testing equipment business as Fortive in 2016. That new firm then spun off its own automotive-related businesses in 2020 as Vontier.
As we often point out, new spinoff firms tend to move sideways for… Read More