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
HUT 8 MINING CORP. $9.10 is a hold. The company (Toronto symbol HUT; Finance sector; shares outstanding: 166.7 million; Market cap: $1.5 billion; No dividend paid; Takeover Target Rating: Medium; www.hut8mining.com) mines cryptocurrencies such as Bitcoin and Ethereum....
CEDAR FAIR L.P. $58 is a hold. The master limited partnership (New York symbol FUN; Consumer sector; Units outstanding: 56.8 million; Market cap: $2.7 billion; Distribution suspended in June 2020; Takeover Target Rating: Highest; www.cedarfair.com) owns 11 amusement parks and four outdoor water parks....
Computer chip and labour shortages as a result of COVID-19 continue to impact auto production. That, in turn, has slowed revenue and earnings at companies such as Aptiv that make auto parts. Even so, the stock is still up more than 40% since the company spun off its powertrain operations in 2017.


Aptiv recently announced a major acquisition that will help it profit as more automakers develop self-driving vehicles....
YUM CHINA HOLDINGS INC. $52 is a buy. The company (New York symbol YUMC; Consumer Sector; Shares outstanding: 428.0 million; Market cap: $22.3 billion; Dividend yield: 1.0%; Takeover Target Rating: Medium; www.yumchina.com) is China’s largest fast-food operator, with over 11,788 outlets, mainly under the KFC and Pizza Hut banners.


On November 1, 2016, Yum Brands (New York symbol YUM) spun off Yum China as a separate firm....

Two of America’s oldest companies, AT&T and General Electric, are now using spinoffs to unlock value for investors. We’re confident these moves will pay off, but only AT&T is suitable for your new buying.


AT&T INC. $24 is a spinoff buy. The company (New York symbol T; Utilities sector; Shares outstanding: 7.1 billion; Market cap: $170.4 billion; Dividend yield: 8.6%; Takeover Target Rating: Medium; www.att.com) is merging its media operations (Warner Bros....

KOHL’S CORP. $59 is a hold. The company (New York symbol KSS; Consumer sector; Shares outstanding: 139.2 million; Market cap: $8.2 billion; Dividend yield: 1.7%; Takeover Target Rating: Medium; www.kohls.com) operates 1,162 department stores in all states except Hawaii....
The easing of COVID-19 restrictions has hurt the shares of stay-at-home stocks Netflix and Peloton. As a result, both companies are now dealing with activists, which should help them rebound. However, their shares will likely remain volatile over the next few months.


NETFLIX INC....
IBM originally began operating in 1911 as the Computing-Tabulating-Recording Co. It changed its name to IBM in 1924. Over the decades, the company has shifted its focus in response to the rise of new technologies and trends.


IBM is once again transforming itself as a leading provider of cloud-based computing services....
INTERNATIONAL FLAVORS & FRAGRANCES INC. $137 is a buy. The company (New York symbol IFF; Consumer sector; Shares outstanding: 254.6 million; Market cap: $34.9 billion; Dividend yield: 2.3%; Takeover Target Rating; Medium; www.iff.com) makes compounds that improve the taste of food and the smell of consumer products.


On February 1, 2021, IFF merged with the nutrition and biosciences business of DuPont (New York symbol DD)....
Danaher is a great example of how a company can unlock value for shareholders with spinoffs. Since 2016, the conglomerate has completed two separate spinoffs. In that time, the stock has jumped over 280% compared to just 115% for the S&P 500 Index.


More spinoffs are possible—Danaher currently has over 20 different operating companies....