Spinoffs

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
FRESHII INC. $2.26 is a hold. The company (Toronto symbol FRII; Consumer sector; Shares outstanding: 24.2 million; Market cap: $54.7 million; No dividend paid; Takeover Target Rating: Highest; www.freshii.com) operates fast-food restaurants that offer healthful menu options focused on fresh produce and lean proteins.


The company sold shares to the public and began trading on the Toronto Exchange at $11.50 in late January 2017.


Freshii has now accepted a $2.30-a-share takeover offer from Foodtastic Inc., a Montreal-based, privately held franchisor of multiple restaurant brands in Canada....

Spinoffs tends to take several years to pay off. A good example is Keysight—spun off by parent Agilent in November 2014.


The new stock made little progress in its first five years, but shot up in late 2020 and hit a record high of $208 in late 2021....
ALKERMES PLC $28 is a hold. The company (Nasdaq symbol ALKS; Manufacturing sector; Shares outstanding: 164.3 million; Market cap: $4.6 billion; No dividend paid; Takeover Target Rating: Medium; www.alkermes.com) is a developer of pharmaceutical drugs and is based in Ireland....
Spinoffs are a great way for companies to sharpen their focus on the more-profitable segments of their businesses. Here are two recent examples we feel will pay off for investors over the next few years.


BAXTER INTERNATIONAL INC. $44 is a buy. The company (New York symbol BAX; Manufacturing sector; Shares o/s: 504.1 million; Market cap: $22.2 billion; Dividend yield: 2.6%; Takeover Target Rating: Medium; www.baxter.com) makes a variety of medical devices, including intravenous pumps and kidney-dialysis equipment.


Baxter now plans to spin off its Renal Care and Acute Therapies businesses as one separate company....
OKTA INC. $69 is a hold. The company (Nasdaq symbol OKTA; Manufacturing & Industry sector; Shares outstanding: 160.2 million; Market cap: $11.1 billion; No dividend paid; Takeover Target Rating: Medium; www.okta.com) is a cybersecurity firm that provides companies with workforce identity and customer identity solutions.


Okta first sold shares to the public and began trading on Nasdaq in April 2017 at $17 a share.


In May 2021, it completed the acquisition of Seattle-based Auth0 for $6.5 billion....

These two entertainment firms have struggled lately despite the lifting of COVID-19 restrictions and the reopening of their theme parks. Those struggles have prompted activist investors to demand changes at both companies. Still, we believe Disney, with its greater array of businesses and entertainment content, is currently the better pick for your new buying.


WALT DISNEY CO....

Conglomerate General Electric is moving ahead with its plan to break itself into three separate companies: Healthcare products (X-ray equipment, MRI and ultrasound scanners); renewable energy and power (turbines and equipment for wind farms); and Aviation equipment (jet engines).


Studies show that spinoffs tend to outperform comparable stocks for several years, and we expect the breakup plan will ultimately pay off for GE investors....
SUNCOR ENERGY INC. $44 is a buy. Canada’s largest integrated oil firm (Toronto symbol SU; Resources sector; Shares outstanding: 1.35 billion; Market cap: $59.4 billion; Dividend yield: 4.7%; Takeover Target Rating: Medium; www.suncor.com) recently opted to retain its chain of 1,875 Petro-Canada gas stations after conducting a strategic review....
We’ve selected Johnson & Johnson as your #1 Spinoff Buy for 2023.


The pharmaceutical giant is shifting its focus to its prescription drugs and medical device businesses. Under that plan, it will soon spin off its consumer products business as a separate, publicly traded firm called Kenvue.


While pharmaceuticals and medical devices are riskier to develop, they promise faster sales growth and higher returns.


Johnson & Johnson has gained 3% since it announced the split in November 2021, and should go higher as COVID-19’s strain on hospitals further eases....
TMX GROUP LTD. $139 is a hold. The company (Toronto symbol X; Finance sector; Shares outstanding: 55.6 million; Market cap: $7.7 billion; Dividend yield: 2.4%; Takeover Target Rating: Medium; www.tmx.com) owns Canada’s two primary stock exchanges, the Toronto Stock Exchange and the Montreal Exchange, as well as clearing entities for domestic Canadian markets (CDS and CDCC).


TMX Group is now paying an undisclosed sum for Boston-based Wall Street Horizon Inc....