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
TELUS CORP. $29 is a buy. The company (Toronto symbol T; Utilities sector; Shares outstanding: 1.4 billion; Market cap: $40.6 billion; Dividend yield: 4.7%; Takeover Target Rating: Medium; www.telus.com) is now buying LifeWorks Inc....
RYDER SYSTEM INC. $72 is a hold. The company (New York symbol R; Manufacturing & Industry sector; Shares outstanding: 51.1 million; Market cap: $3.7 billion; Dividend yield: 3.2%; Takeover Target Rating: Medium; www.ryder.com) leases truck fleets, mainly under long-term deals....
A key reason behind our enthusiasm for spinoffs is that the newly spun-off firm could become an attractive takeover target. For example, several firms would probably be interested in buying Aramark’s uniforms business following its spinoff in order to take on industry leader Cintas....
DANAHER CORP. $251 is a buy. The company (New York symbol DHR; Manufacturing & Industry sector; Shares outstanding 715.9 million; Market cap: $179.7 billion; Dividend yield: 0.4%; Takeover Target Rating: Medium; www.danaher.com) is a leading maker of precision-testing equipment and tools....
Spinoffs pay off in key ways: they let businesses better focus on their main operations, and they open the door to possible takeovers. Here are two recent examples.


CRANE HOLDINGS CO. $88 is a buy. The company (New York symbol CR; Manufacturing & Industry sector; Shares outstanding: 56.1 million; Market cap: $4.9 billion; Dividend yield: 2.1%; Takeover Target Rating: Medium; www.craneco.com) makes and distributes products for the construction, aerospace, defence, and other industries....

XEROX HOLDINGS CORP. $14 is a hold. The company (Nasdaq symbol XRX; Manufacturing & Industry sector; Shares outstanding: 154.9 million; Market cap: $2.2 billion; Dividend yield: 7.1%; Takeover Target Rating: Medium; www.xerox.com) is a leading manufacturer of photocopiers, printers, scanners and related equipment.


Company CEO John Visentin died suddenly in June....
Activist investors tend to target companies that can enhance shareholder value through asset sales or other moves. However, you have to evaluate these pressure campaigns on a case-by-case basis. Sometimes these moves succeed (see FedEx), but others seem poised to fail (Kohl’s).


FEDEX CORP....
Foodmaker Kellogg now plans to split into three separate firms. That will divides its mature cereal segment from the faster-growing, more trendy categories of snacks and plant-based foods. While the split should unlock value, rising costs for ingredients, packaging and shipping could offset those benefits....
SUNCOR ENERGY INC. $40 is still a buy. The company (Toronto symbol SU; Resources sector; Shares outstanding: 1.44 billion; Market cap: $57.6 billion; Dividend yield: 4.7%; Takeover Target Rating: Medium; www.suncor.com) is Canada’s largest integrated oil firm, with major projects in the Alberta oil sands....
On May 22, 2019, apparel maker VF Corp. spun off its Lee and Wrangler jeans business as a separately traded company called Kontoor Brands. Investors received one share in Kontoor for every seven VF shares they held. So far, the split has produced mixed results: VF is down 45%, but Kontoor is up 19%.


Even so, we feel both stocks are poised to move higher in the next few years, particularly as shoppers return to retail stores following COVID-19 lockdowns....