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
DEFINITY FINANCIAL CORP. $29 is a buy. The company (Toronto symbol DFY; Finance sector; Shares outstanding: 115.9 million; Market cap: $3.4 billion; Dividend yield: 1.7%; Takeover Target Rating: Medium; www.definityfinancial.com) is the new name for the parent of Economical Insurance....
DOREL INDUSTRIES INC. $26 is a hold. The company (Toronto symbol DII.B; Consumer sector; Shares outstanding: 32.5 million; Market cap: $845.0 million; No dividend paid; Takeover Target Rating: Medium; www.dorel.com) makes ready-to-assemble home and office furniture; juvenile products such as car seats, strollers, high chairs, toddler beds and cribs.


Dorel has now completed the sale of its Sports business, which makes bicycles under several brands, to Dutch transport conglomerate Pon Holdings for $810 million U.S....
Shares of Lennar hit a new all-time high of $117.54 on December 13, 2021. That’s largely because low interest rates and the COVID-19 pandemic continue to spur demand for new houses.


We feel the stock will surpass that record in 2022 as the upcoming spin-off of its mortgage origination and apartment operations unlocks the hidden value of those assets.


LENNAR CORP....
TIDEWATER RENEWABLES LTD. $14 is a hold. The company (Toronto symbol LCFS; Manufacturing Sector; Shares outstanding: 34.7 million; Market cap: $485.8 million; No dividend paid; Takeover Target Rating: Medium; www.tidewater-renewables.com) produces low-carbon fuels from renewable sources such as used cooking oil, inedible animal fats and waste wood....
Some spinoffs pay off almost immediately. High-quality firm Carrier is an example and is now up 235% since it was spun off less than two years ago. However, other spinoffs, like Vector Group and its recent Douglas Elliman spinoff, carry much more risk. Those two stocks will probably stay in a narrow range for the next year or so.


CARRIER GLOBAL CORP....
ZENDESK INC. $98 is a hold. The company (New York symbol ZEN; Manufacturing & Industry sector; Shares outstanding: 120.9 million; Market cap: $11.8 billion; No dividend paid; Takeover Target Rating: Medium; www.godaddy.com) makes cloud-based software that helps businesses manage their customer relationships.


Zendesk recently agreed to acquire Momentive Global Inc....
Activist investors make their money by targeting underperforming firms they feel would benefit from better management or assets sales. Here’s our analysis of two U.S. companies that are now under pressure from prominent activists.


DANA INC. $24 is a hold. The company (New York symbol DAN; Manufacturing & Industry sector; Shares outstanding: 144.2 million; Market cap: $3.5 billion; Dividend yield 1.7%; Takeover Target Rating: Medium; www.dana.com) makes a variety of parts, including axles, driveshafts and transmissions, for leading automakers such as Ford, General Motors, Chrysler and Toyota.


Billionaire activist investor Carl Icahn now controls 9.9% of Dana’s shares....
Intel recently announced a new long-term strategy, which mainly involves expanding its ability to make chips for other companies.


To help fund the cost of building new chip plants, Intel will sell a minority stake in its Mobileye business to the public in 2022....
GLAXOSMITHKLINE PLC ADRs $46 is a spinoff buy. The company (New York symbol GSK; Manufacturing sector; ADRs outstanding: 2.7 billion; Market cap: $124.2 billion; Dividend yield: 4.7%; Takeover Target Rating: Medium; www.gsk.com) is a U.K.-based global healthcare firm that develops and sells products in three main markets: pharmaceuticals (50% of 2020 revenue), vaccines (21%) and consumer healthcare (29%).


In June 2021, Glaxo announced that it would spin off its consumer operations as a separate firm; it owns 68% of this business, with Pfizer Inc....
We have selected Becton Dickinson as your #1 Spinoff Buy for 2022.


The medical device maker now plans to set up its diabetes-products business as a separate, publicly listed company. The split should unlock some of Becton’s holding company discount and let it focus on its new products such as COVID-19 testing kits.


Moreover, Becton’s spinoff—to be called embecta Corp.–will also be better positioned to launch its own new products and expand in emerging markets....