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
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....
PINEAPPLE FINANCIAL INC. (www.gopineapple.com) is a Toronto-based mortgage broker and technology firm. Its exclusive software helps homebuyers search and apply for mortgages from over 40 lenders. It also provides a variety of back-office services to mortgage brokers and agents to help them with email marketing and data reporting.


Pineapple now plans to raise up to $17 million U.S....

On August 3, 2021, L Brands (old New York symbol LB) became two separate firms: Victoria’s Secret and Bath & Body Works. Investors received one new share of Victoria’s Secret for every three shares of L Brands they held. L Brands then changed its name to Bath & Body Works.


Both stocks initially rose after the split....
TEGNA INC. $20 is still a hold. The company (New York symbol TGNA; Consumer sector; Shares outstanding: 222.9 million; Market cap: $4.5 billion; Dividend yield: 1.9%; Takeover Target Rating: Highest; www.tegna.com) owns 64 TV stations and two radio stations in 51 U.S....
Entertainment firms continue to rebound following easing COVID-19 restrictions and venue re-openings. These two companies now aim to further boost value with spinoffs. Still, neither stock currently inspires our confidence.


LIBERTY MEDIA GROUP operates a variety of communications and entertainment businesses through three tracking stocks: Liberty SiriusXM Group (Nasdaq symbols LSXMA, LSXMB, and LSXMK) operates satellite radio and online streaming services, as well as concert promoter Live Nation; Braves Group (Nasdaq symbols BATRA and BATRK) owns the Atlanta Braves professional baseball club; and Formula One Group (Nasdaq symbols FWONA and FWONK) owns the commercial rights to the famous motor racing series.


Note: Tracking stocks give investors financial exposure to a specific aspect of a larger company’s business, but usually come with limited or no voting power....
VERTIV HOLDINGS CO. $14 is a hold. The company (New York symbol VRT; Manufacturing & Industry sector; Shares outstanding: 377.3 million; Market cap: $5.3 trillion; Dividend yield: 0.1%; Takeover Target Rating: Medium; www.vertiv.com) makes equipment for datacentres, such as uninterruptible power supplies, room cooling systems and server racks.


Private equity firm Platinum Equity acquired this business from Emerson Electric in December 2016....
Activist investors tend to do a good job identifying ways that under-performing companies like Suncor and Alphabet can boost shareholder value. Even though they’re not always successful, those high-profile investors help draw attention to firms with already-good long-term prospects.


SUNCOR ENERGY INC....
Canadian equipment auctioneering firm Ritchie Bros. recently agreed to acquire IAA Inc., a firm that Kar Auction Services spun off in June 2019. IAA salvages damaged vehicles and sells them through online auctions.


At the time of the split, we recommended IAA as a spinoff buy....