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

Medical device maker Enovis (formerly called Colfax) recently spun off its non-medical businesses as a separate firm called ESAB.


We feel the split makes a lot of sense, as there was little overlap between the two businesses. Focusing on their separate markets should spur both “pure-play” stocks higher over the next few years.


ENOVIS CORP....
BROOKFIELD ASSET MANAGEMENT INC. $59 is a hold. The company (Toronto symbol BAM.A; Finance sector; Shares outstanding: 1.6 billion; Market cap: $94.4 billion; Dividend yield: 1.2%; Takeover Target Rating: Lowest; www.brookfield.com) is an asset manager that controls firms in the real estate, renewable power, infrastructure and private equity industries.


The company plans to spin off its asset management business into a separate, publicly listed company....
COVID-19 lockdowns slowed the progress of Yum Brands and its spinoff Yum China. (The two split in November 2016.) Even so, Yum is still up an impressive 76% since the spinoff, while Yum China has gained a strong 69%.


We still like the long-term outlook for both stocks even as new lockdowns in China hurt Yum China’s current sales and earnings.


The truth is pandemic lockdowns encouraged both companies to accelerate the adoption of digital ordering and delivery services....
FIDELITY NATIONAL FINANCIAL INC. $43 is a hold. The company (New York symbol FNF; Finance sector; Shares outstanding: 283.6 million; Market cap: $12.2 billion; Dividend yield: 4.1%; Takeover Target Rating: Medium; www.fnf.com) is a Florida-based provider of title insurance and home warranties to the real estate and mortgage industries.


The company now plans to set up its life insurance subsidiary—F&G Annuities & Life Inc.—as a separate, publicly traded firm.


Under the plan, it will hand out 15% of its F&G shares to its own investors as a special dividend in the third quarter of 2022....
NIELSEN HOLDINGS PLC $27 is a hold. The New York-based company (New York symbol NLSN; Manufacturing & Industry sector; Shares outstanding: 356.5 million; Market cap: $9.9 billion; Dividend yield: 0.9%; Takeover Target Rating: Highest; www.nielsen.com) is a provider of information and measurement services to give companies a better understanding of consumer behaviour....
AT&T recently spun off its media operations as it continues to shift its focus to its main telecom businesses. The plan should benefit both companies considering investors tend to prefer pure-play firms. We like both, but feel AT&T is the better choice right now.


AT&T INC....
PRIMARIS REAL ESTATE INVESTMENT TRUST $15 is a buy. The REIT (Toronto symbol PMZ.UN; Manufacturing sector; Units outstanding: 98.3 million; Market cap: $1.5 billion; Distribution yield: 5.3%; Takeover Target Rating: Medium; www.primarisreit.com) owns 35 enclosed and open-air shopping malls in Canada....
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.


So far, Victoria’s Secret is up over 20% since the spinoff, while the former parent is down 8%....
DOLLAR TREE INC. $174 is a buy for aggressive investors. The company (Nasdaq symbol DLTR; Consumer sector; Shares outstanding: 225.1 million; Market cap: $39.2 billion; No dividends paid; Takeover Target Rating: Medium; www.dollartree.com) is North America’s largest operator of dollar stores, with 16,077 locations in 48 U.S....
Shares of retail chains suffered in 2020 and 2021 as COVID-19 shutdowns hurt customer traffic and sales. Those lower share prices have attracted activist investors who are demanding retailers add value by finding new buyers or spinning off their smaller assets ....