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.
A good example is Labcorp, which recently spun off its clinical drug testing business as Fortrea....
KELLOGG COMPANY $67 is a spinoff buy. The company (New York symbol K; Consumer sector; Shares outstanding: 342.8 million; Market cap: $23.0 billion; Divd.ield: 3.6%; Takeover Target Rating: Medium; www.kelloggcompany.com) will spin off its North American (U.S., Canadian, and Caribbean) cereal business in the fourth quarter of 2023....
IHS HOLDING LTD $9.11 is a hold. This Cayman Islands incorporated firm (New York symbol IHS; Utilities sector; Shares outstanding: 333.6 million; Market cap: $3.0 billion; No dividend paid; Takeover Target Rating: Medium; www.ihstowers.com) operates roughly 40,000 cellphone towers in Africa, Latin America and the Middle East.
The company’s shares are now down 35% since it first sold shares to the public in October 2021 at $14.00 each.
Activist investment firm Blackwells Capital, which holds a stake of undisclosed size in IHS, wants the company to appoint more independent directors with relevant industry experience....
NRG ENERGY INC....
Due to opposition from U.S. regulators, Algonquin Power recently cancelled its $2.65 billion U.S. purchase of Kentucky Power Co., which generates and distributes electricity to 228,000 customers in the state.
As well, activist investment firm Starboard Value recently disclosed that it now owns 7.5% of Algonquin....
In November 2016, former parent company Yum! Brands Inc....
Shares of furniture retailer Leon’s rose 10% after it announced its own plans to spin out its real estate holdings as a REIT....
CAVA GROUP INC., founded in 2010, operates 263 fast-casual restaurants in 22 states and Washington DC. It specializes in Greek and Mediterranean-style dishes.
Cava has completed an initial public offering (IPO) of 14.44 million common shares at $22 a share....
The company took its current form in January 2023 when General Electric Co....