spin off

Both BCE and Telus have unveiled plans to convert into income trusts, which helped spark a rise in their stock prices. Canada’s other big telecom company, Manitoba Telecom, moved up on rumors that it too would convert. The trust structure will let BCE and Telus avoid a big tax increase in the next few years as certain tax shelters expire. But investors have higher payout expectations of a trust compared with a regular company. Telecom companies must invest large sums in new equipment, or risk losing customers. These costs could hurt BCE’s and Telus’s ability to raise future cash distributions....

FREESCALE SEMICONDUCTOR INC. (New York symbols FSL $38 and FSL.B $38; Aggressive Growth Portfolio, Manufacturing & Industry sector; WSSF Rating: Extra risk) was formerly the chipmaking subsidiary of Motorola Inc. Motorola did a partial public offering of Freescale in 2004. In December of that year, Motorola handed out its remaining Freescale to its own investors as a special dividend or spinoff. The stock started out trading around $17 ($18 for the Class B multiple voting shares) at the time of the spin-off. Freescale has now accepted a $40-a-share all-cash takeover offer from a private investment group. The agreement lets Freescale entertain competing bids until November 4, 2006, but we don’t expect to see a higher bid. Investors should plan to tender to get the full value of the takeover....

AGILENT TECHNOLOGIES INC. $32 (New York symbol A; Aggressive Growth Portfolio, Manufacturing & Industry sector; WSSF Rating: Average) is the world’s leading maker of testing and measurement equipment. Companies in telecommunications, electronics and medical sciences use Agilent’s equipment to improve the quality of their own products. Agilent gets about two-thirds of its revenue from customers outside of the United States. Revenue fell from $8.4 billion in 2001 (fiscal years end October 31) to $6.0 billion in 2002 after the company sold a division. The end of the tech boom also cut demand for its products. Revenue rose from $6.06 billion in 2003 to $7.2 billion in 2004, but slipped to $6.9 billion in 2005....

One of the ways a company can try to unlock its own hidden value is by creating a separate company out of a 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. In the past few years, it has become common to do both. 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 the spin-off. Both generally do better than comparable companies for at least several years after the spin-off takes place. We would never invest purely because of a spin-off, of course, because there is no guarantee of this “spin-off bonus”. However, it’s certainly a plus....

CHIPOTLE MEXICAN GRILL INC. $50 (New York symbol CMG) is an 50.8%-owned McDonald’s unit that operates 500 Mexican food restaurants in 23 states. This past January, Chipotle sold “A” shares (one vote per share) to the public at $22 each. McDonald’s offer lets its investors exchange all or some of their shares for Chipotle Class B common shares (10 votes per share; New York symbol CMG.B). The company will calculate the final exchange ratio before the offer expires on October 5, 2006. McDonald’s designed the offer so that its investors get to acquire Chipotle at a 10% discount. It feels the swap is tax-deferred, but the IRS has yet to issue a final ruling....

MCDONALD’S CORP. $40 (New York symbol MCD; Conservative Growth Portfolio, Consumer sector; WSSF Rating: Above average) is giving its stockholders an opportunity to exchange their McDonald’s stock for a holding in its Mexican food subsidiary. CHIPOTLE MEXICAN GRILL INC. $50 (New York symbol CMG) is an 50.8%-owned McDonald’s unit that operates 500 Mexican food restaurants in 23 states. This past January, Chipotle sold “A” shares (one vote per share) to the public at $22 each. McDonald’s offer lets its investors exchange all or some of their shares for Chipotle Class B common shares (10 votes per share; New York symbol CMG.B). The company will calculate the final exchange ratio before the offer expires on October 5, 2006....

NOVELIS INC. $24 (Toronto symbol NVL; Conservative Growth Portfolio, Manufacturing & Industry sector; SI Rating: Average) is the world’s largest maker of rolled aluminum products, including beverage cans, packaging and automotive parts. The company recently restated its earnings to correct accounting problems related to its spin-off from Alcan. It now earned $1.21 a share (total $90 million) in 2005, up 63.5% from $0.74 a share ($55 million) in 2004 (all amounts except share price in U.S. dollars). Sales rose 7.7%, to $8.4 billion from $7.8 billion. Novelis now buys aluminum to make its products. But 20% of its sales are under contracts that limit its ability to pass along rising aluminum costs to its customers. Novelis is phasing out this practice, a remnant from its days as part of Alcan, and aims to eliminate half of its price-capped contracts by the start of next year....

For years, people have talked about and worried about the boom or ‘bubble’ in real estate. Many take it on faith that dire effects await the entire economy when the boom ends — when real-estate sales slow down and real-estate prices quit rising or go into reverse. That’s partly due to the accompanying slowdown we can expect in the spin off economic activity of real estate sales — the money earned by real estate agents, bankers, furniture retailers, renovators and so on. There is also the shrinkage in the so-called ‘wealth effect': if your house is gaining in value, you may be inclined to spend more on consumer goods, even if you have to borrow. Pessimists draw the obvious conclusion that when the boom ends and home prices quit rising, all this related spending will end too, and eliminate a source of fuel that the economy has come to depend on. However, obvious conclusions can be misleading....

AMERICAN EXPRESS CO. $52 (New York symbol AXP; Conservative Growth Portfolio, Finance sector; WSSF Rating: Average) is a major financial services company, with offices in over 130 countries. In September 2005, the company handed out all of its shares in subsidiary Ameriprise Financial Inc. (see page 73) to its own investors as a tax-deferred dividend. The spin-off let AmEx focus on its credit card business (90% of revenue), and its travel services operations (10% of revenue). The company is starting to realize some of the benefits of a recent Supreme Court ruling that that made American Express cards available through more banks. A new alliance with affinity credit card issuer MBNA (now a subsidiary of Bank of America) has also expanded the number of cards outstanding, and spending per card....

VERIZON COMMUNICATIONS INC. $33 (New York symbol VZ; Conservative Growth Portfolio, Utilities sector; WSSF Rating: Average) is investing heavily to expand its wireless networks, and replace traditional copper phone lines with high-speed fiber optic cables. These upgrades should help it attract new customers, and offer new services such as TV programs and games. As part of this strategy, Verizon will probably either sell or spin off its telephone directories business by the end of this year. This business accounts for about 5% of its total revenue, and is facing growing competition from online search services. A straight sale would give Verizon more cash to upgrade its networks. However, it would have to pay tax on the proceeds....