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
TOPICUS.COM INC. $124 is a hold. The company (Toronto Venture symbol TOI; Manufacturing sector; Shares outstanding: 39.9 million; Market cap: $4.9 billion; No dividend paid; Takeover Target Rating: Medium; www.topicus.com) is a Netherlands-based provider of education, finance and health-care software....
SHAW COMMUNICATIONS INC. $37 is a hold. The company (Toronto symbol SJR.B; Utilities Sector; Shares outstanding: 498.7 million; Market cap: $18.5 billion; Dividend yield: 3.2%; Takeover Target Rating: Lowest; www.shaw.ca) recently accepted a takeover offer from rival cable TV and wireless carrier Rogers Communications Inc....

On May 22, 2019, apparel maker VF Corp. spun off its Lee and Wrangler jeans business into a separately traded company called Kontoor Brands. Investors received one share in Kontoor for every seven VF shares they held.


The COVID-19 lockdowns hurt both stocks, but they have rebounded with the reopening of retail stores....
VALVOLINE INC. $37 is a buy for aggressive investors. The company (New York symbol VVV; Manufacturing & Industry sector; Shares outstanding: 180.8 million; Market cap: $6.7 billion; Dividend yield: 1.4%; Takeover Target Rating: Medium; www.valvoline.com) is a leading provider of automotive services and premium branded lubricants....
Spinoffs remain a great way for companies to unlock their hidden or under-appreciated assets. However, firms can also opt to unlock that value through a sale. Here are two recent good examples, although we prefer George Weston, over Dorel, for your new buying.


GEORGE WESTON LTD....
HILTON WORLDWIDE HOLDINGS INC. $145 is a hold. The company (New York symbol HLT; Consumer Sector; Shares outstanding: 278.7 million; Market cap: $40.4 billion; Dividend suspended; Takeover Target Rating: Medium; www.hiltonworldwide.com) owns, manages and franchises hotels under several brands, including Hilton, Waldorf Astoria, Doubletree and Embassy Suites by Hilton....
Calls by activist investors for corporate breakups are working. In fact, IBM, GE and Johnson & Johnson have all announced or completed spinoffs in the past few weeks. That pressure should draw more attention to the prospects of these two stocks, but we see just one as a buy right now.


ROYAL DUTCH SHELL PLC ADR is a hold. The company (New York symbols RDS.A $45 and RDS.B $45; Resources sector; ADRs outstanding: 2.05 billion; Market cap: $92.3 billion; Dividend yield: 3.6%; Takeover Target Rating: Lowest; www.shell.com) is one of the world’s largest oil companies with about 87,000 employees in 70 countries....
H&R REIT’s net asset value (NAV)—the market value of its properties minus any mortgage liabilities—stood at $22.77 a share as of September 30, 2021. That’s 33.9% more than the current trading price of the units.


To narrow that gap, H&R now plans to spin off its retail properties as a separate, publicly traded REIT....
ENERAL ELECTRIC CO. $102 remains a hold. The conglomerate (New York symbol GE; Manufacturing sector; Shares outstanding: 1.1 billion; Market cap: $112.2 billion; Dividend yield: 0.3%; Takeover Target Rating: Medium; www.ge.com) plans to break itself up into three separate companies.


In early 2023, GE will hand out shares in its healthcare business, which makes X-ray equipment, MRI and ultrasound scanners, as tax-deferred dividends....
In 2019, Pfizer decided to focus on its main prescription drug business, which offers investors higher long-term returns than either over-the-counter and generic drugs.


As part of that plan, on November 16, 2020, the pharma giant combined its Upjohn division (generic pharmaceuticals) with Netherlands-based Mylan N.V....