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.

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Spinoffs Library Archives

Investors like this possible takeover

CARBONITE INC., $16, is okay to hold given the strong possibility of a profitable takeover offer for investors. The company (Nasdaq symbol CARB; Manufacturing & Industry sector; Shares outstanding: 34.7 million; Market cap: $555.2 million; No dividend paid; Takeover Target Rating: Highest; www.carbonite.com) provides computer… Read More

IPO Watch: Youdao Inc. ADRs

YOUDAO INC. ADRs is the education unit of Chinese videogame maker NetEase (Nasdaq symbol NTES). It provides online courses for pre-school, K-12 and college students in China to over 100 million active users per month. The company also has dictionary, translation and writing tool websites.
Youdao… Read More

Updating CBS Corp. and CenturyLink Inc.

CBS CORP. (New York symbols CBS.A $42 [class A: one vote per share] and CBS $38 [class B: non-voting]; Consumer Sector; Shares outstanding: 374.7 million; Market cap: $14.2 billion; Dividend yield: 1.9%; Takeover Target Rating: Lowest; www.cbscorporation.com) has agreed to re-merge with VIACOM INC. (Nasdaq… Read More

It’s a good time for you to pick up more

Arconic has handed investors a 48% gain since the November 1, 2016, spin-off of its bulk aluminum business (Alcoa Corp). At the time, each investor was gifted with one Alcoa share for every three Arconic shares they owned.
While Alcoa is down 32% since the split,… Read More

You need to take the long view

When a spinoff begins trading, it stands to reason that investors will put a low price on it. After all, the spinoff hits the market with a large number of neutral, if not reluctant shareholders who have limited expectations for it.
Most are willing to sell… Read More

This carveout will benefit Post investors

After several years of expanding by acquisition, food maker Post Holdings is going on a diet and stripping down to its core business. As a result, it will spin off its health food unit. That should help the company capitalize on growing consumer interest in… Read More

One of these could lead you to big gains

BLOOMIN’ BRANDS INC., $18, is worth holding given the possibility of a lucrative takeover bid. The company (Nasdaq symbol BLMN; Consumer Sector; Shares outstanding: 91.3 million; Market cap: $1.6 billion; Dividend yield 2.2%; Takeover Target Rating: Highest; www.bloominbrands.com) owns and franchises more than 1,450 restaurants… Read More

You should get in now ahead of the split

This oil industry giant—with refineries, pipelines and gas stations—must soon decide if it will spin off key assets to unlock value for its investors. But even if it decides against a split, Marathon’s earnings are set to keep rising on the strength of its cost-cutting… Read More

Spinoff Spotlight: Lamb Weston Holdings Inc.

LAMB WESTON HOLDINGS INC., $76, is still our #1 spinoff buy for 2019. The company (New York symbol LW; Consumer sector; Shares outstanding: 146.1 million; Market cap: $11.1 billion; Takeover Target Rating: Highest; Dividend yield: 1.1%; www.lambweston.com) is a leading producer of frozen french fries,… Read More

New spinoff offers you more gains

We recommended investors buy Danaher in our very first issue (October 2017). At that time, this industry leader has just spun off its Fortive unit. Those who followed our advice have seen a market-beating gain of 57% in two years. The stock remains a buy… Read More

Madison Square Garden split is still on

MADISON SQUARE GARDEN CO. $268 (New York symbol MSG; Shares outstanding: 23.8 million; Market cap: $6.4 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

Carveouts also benefit investors

Stock carveouts can be thought of as split-off IPOs or partial spinoffs. They’re a type of reorganization where a firm sets up one of its businesses as a separate company and uses an initial public offering to sell partial or minority interest in the new… Read More

Carveout produces 1 buy and 1 hold

SERVICEMASTER GLOBAL HOLDINGS INC. $56 (New York symbol SERV; Manufacturing sector; Shares outstanding: 135.9 million; Market cap: $7.6 billion; No dividends paid; Takeover Target Rating: Medium; www.servicemaster.com) has two main businesses.
Terminix (contributing 87% of its 2018 revenue, 79% of its earnings) sells termite and pest control services to… Read More

TV stations hang onto their value

TEGNA INC. $15 (New York symbol TGNA; Consumer sector; Shares outstanding: 215.8 million; Market cap: $3.2 billion; Dividend yield: 1.8%; Takeover Target Rating: Medium; www.tegna.com) owns 49 TV and two radio stations in 41 markets. It also offers online advertising and marketing services.
The company recently received a merger… Read More

Activists like what they see in these two

BOX INC. $17 (New York symbol BOX; Manufacturing & Industry sector; Shares outstanding: 147.8 million; Market cap: $2.5 billion; No dividend paid; Takeover Target Rating: Medium; www.box.com) sells cloud-based storage services to over 95,000 businesses. That gives them online access to software and data files they store on… Read More

Deal benefits both EchoStar and DISH

ECHOSTAR CORP. $40 (Nasdaq symbol SATS; Manufacturing & Industry Sector; Shares outstanding: 97.4 million; Market cap: $4.0 billion; No dividend paid; Takeover Target Rating: Lowest; www.echostar.com) sells satellite-based high-speed Internet access through its Hughes business to over 1.5 million consumers and businesses in the U.S. and other countries.
EchoStar’s… Read More

Takeover Spotlight: Gannett Co. Inc.

GANNETT CO. INC. $10.56 (New York symbol GCI; Consumer sector; Shares outstanding: 114.6 million; Market cap: $1.2 billion; Dividend yield: 6.0%; Takeover Target Rating: Highest; www.gannett.com) publishes its flagship newspaper, USAToday, along with smaller dailies, in over 100 U.S. markets. It also has papers in the U.K., and over… Read More

IAC sets the stage for more spinoffs

IAC/InterActive Corp. began its operations in the late 1980s as the owner of the cable channel Home Shopping Network and several TV stations focused on local markets.
Media mogul Barry Diller moved that focus away from TV to the Internet in the 1990s after acquiring control… Read More

IPO Watch: McAfee LLC

MCAFEE LLC makes cybersecurity software that protects mobile devices and the cloud-based networks from online intruders. In 2016, Intel Corp. (Nasdaq symbol INTC) sold 51% of McAfee to private equity firm TPG Capital. Private equity firm Thoma Bravo later acquired a minority stake.
Those investors now plan… Read More