Spinoffs

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

Cimarex’s assets add to its appeal

CIMAREX ENERGY CO. $34 is a buy. The company (New York symbol XEC; Resources sector; Shares outstanding: 102.0 million; Market cap: $3.5 billion; Dividend yield: 2.5%; Takeover Target Rating: Medium; www.cimarex.com) produces and explores for natural gas and oil. Gas makes up 43% of the… Read More

These stock updates will help direct you

TOURMALINE OIL CORP. $18 is a hold. The company (Toronto symbol TOU; Resources sector; Shares outstanding: 272.3 million; Market cap: $4.9 billion; Dividend yield: 3.1%; Takeover Target Rating: Medium; www.tourmalineoil.com) is a Canadian oil and natural gas exploration, development and production company. Its properties are… Read More

Buy these two for post-COVID-19 gains

On May 22, 2019, apparel maker VF Corp. spun off its Lee and Wrangler jeans business into a separately traded public company called Kontoor Brands. Investors received one share in Kontoor for every seven VF shares they held.
Both VF and its spinoff have bounced back… Read More

Aphria broadens value for investors

APHRIA INC. $8.31 is a hold. The company (Toronto symbol APHA; Manufacturing & Industry sector; Shares outstanding: 289.3 million; Market cap: $2.4 billion; No dividend paid; Takeover Target Rating: Medium; www.aphrirainc.com) is a leading Canadian producer of medical and recreational marijuana.
Aphria will now buy… Read More

Anti-trust concerns threaten these deals

Takeovers are a great way for companies to enter new markets and add value. We like Visa’s takeover of a small fintech company, but anti-trust regulators could kill the deal. Another deal to acquire railroad operator Kansas City Southern would also likely face regulatory hurdles.
VISA… Read More

Huntsman sells the rest of Venator

HUNTSMAN CORP. $25 is a buy. The company (New York symbol HUN; Manufacturing & Industry sector; Shares outstanding: 220.8 million; Market cap: $5.5 billion; Dividend yield: 2.6%; Takeover Target Rating: Lowest; www.huntsman.com) is a leading producer of specialty chemicals for makers of adhesives, textiles, construction… Read More

Pfizer’s post-spinoff outlook is brighter

Study after study has shown that after an initial adjustment period of a few months, spinoffs tend to outperform groups of comparable stocks for several years. Still, in looking at two recent spinoff deals, we feel the spinoff of Pfizer’s generic drug business is more… Read More

Merger drives down production costs

The price for West Texas Intermediate crude oil fell to a negative $37 U.S. a barrel in April 2020 as the COVID-19 pandemic, combined with a lack of storage space, triggered a massive sell-off of oil futures contracts. Prices have since recovered to around $42… Read More

This spinoff is just getting started

Eli Lilly has gained over 25% since it spun off its Elanco animal health business two years ago. The split lets the company concentrate on its main pharmaceutical business. In addition to its impressive portfolio of current products and those in its pipeline, Eli Lilly’s… Read More

Asset-light model suits investors

HILTON WORLDWIDE HOLDINGS INC. $89 (New York symbol HLT; Consumer Sector; Shares outstanding: 277.3 million; Market cap: $24.7 billion; Dividend suspended; Takeover Target Rating: Lowest; www.hiltonworldwide.com) is a hold. The company owns, manages and franchises hotels under 18 brands, including Hilton, Waldorf Astoria, Doubletree and… Read More

Let our stock updates help direct you

EMERSON ELECTRIC CO. $69 (New York symbol EMR; Manufacturing & Industry sector; Shares o/s: 609.2 million; Market cap: $42.0 billion; Divd. yield: 2.9%; Takeover Target Rating: Medium; www.emerson.com) is a hold. The industrial equipment maker is buying Open Systems International for $1.6 billion. That firm… Read More

130% gain shows the power of spinoffs

A key benefit of spinoffs is that they create “pure play” companies that focus on a single business. That makes them easier for investors to value.
A good example is cardboard maker WestRock, which spun off its Ingevity chemical business in 2016 to create two pure-play… Read More

U.S. election could trigger spinoff

EXELON CORP. $42 (New York symbol EXC; Utilities sector; Shares outstanding: 974.5 million; Market cap: $40.9 billion; Dividend yield: 3.6%; Takeover Target Rating: Medium; www.exeloncorp.com) is a hold. The company operates several regulated power and natural gas utilities, including Commonwealth Edison in Illinois and PECO… Read More

Their new strategies are paying off

These two firms have rebounded strongly from their March 2020 lows, as investors react favourably to their new plans to fuel growth. We like both, and see Veoneer, in particular, as a buy for right now.
TERMINIX GLOBAL HOLDINGS INC. $47 (New York symbol TMX; Manufacturing… Read More

Disney shifts focus to streaming

WALT DISNEY CO. $127 (New York symbol DIS; Consumer sector; Shares outstanding: 1.8 billion; Market cap: $228.6 billion; Takeover Target Rating: Lowest; Dividend suspended in May 2020; www.disney.com) is still a buy.
Due to the COVID-19-related shutdowns of its theme parks and cruise lines, Disney… Read More

We agree with activists on one of these

Activist investment firm Starboard Value LP recently announced that it now holds unspecified stakes in Corteva and ON Semiconductors. The activist feels each of those companies could boost its share price with asset sales and cost costs. Still, we feel Corteva is in a better… Read More

In this case, the spinoff is the better buy

KAR Auction Services and its former subsidiary IAA continue to shift their operations online, which should work to limit COVID-19 disruptions. We, therefore, like their long-term outlook. Still, for your new buying, we prefer IAA given the growing number of insurance companies opting to sell… Read More

Beware market lore

Here’s an Excerpt from a recent issue of Advice for Inner Circle Pro Members:
“Market lore can make interesting and worthwhile reading. It won’t bring you any direct or immediate financial benefit, but it can expand your investor knowledge. One of the key things you’ll learn… Read More

Profit from IBM’s next transformation

IBM has a long history of transforming its business in response to new computing technologies. For instance, as demand for its mainframe computers slowed in the 1990s, the company shifted its focus to services such as designing and maintaining computer systems for its customers. IBM… Read More

We prefer Texas Instruments

ANALOG DEVICES INC. $116 is a sell. The analog chipmaker (New York symbol ADI; Manufacturing sector; Shares outstanding: 369.2 million; Market cap: $42.8 billion; Dividend yield: 2.1%; Takeover Target Rating: Medium; www.analog.com) recently agreed to acquire Maxim Integrated Products (Nasdaq symbol MXIM) in an all-stock transaction that will see… Read More