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
ADAGIO THERAPEUTICS INC. $27 is a hold. The company (Nasdaq symbol ADGI; Manufacturing sector; Shares outstanding: 108.5 million; Market cap: $2.9 billion; No dividend paid; Takeover Target Rating: Lowest; www.adagiotx.com) is developing drugs that aim to treat and prevent illness caused by COVID-19 and its new variants....
PEPSICO INC. $156 is a hold. The soft drink maker (Nasdaq symbol PEP; Consumer sector; Shares outstanding: 1.4 billion; Market cap: $218.4 billion; Dividend yield: 2.8%; Takeover Target Rating: Medium; www.pepsico.com) has agreed to sell a 61% controlling stake in its Tropicana juice business to private equity firm PAI Partners....
Generic drugmaker Perrigo recent sold its topical treatments business instead of spinning it off as originally planned. We feel the transaction will ultimately pay off for investors, as the cash from the sale will let the company make acquisitions to fuel its long-term growth....
GOLD RESOURCE CORP. $1.65 is a hold. The company (New York symbol GORO; Resources sector; Shares outstanding: 74.5 million; Market cap: $122.9 million; Dividend yield: 2.4%; Takeover Target Rating: Medium; www.goldresourcecorp.com) owns six gold properties, two of which are operating, in the southern state of Oaxaca, Mexico.


On December 31, 2020, Gold Resource spun off its U.S....
On December 1, 2020, the old Aaron’s Inc.—a seller of furniture and electronics—set up its financing division as a separate firm called PROG Holdings. So far, the new retail company’s share price has risen 27%, while the finance business is down 19%. Despite the mixed performance, we still think the breakup will benefit both firms long term.


THE AARON’S COMPANY INC....
OATLY GROUP AB (ADSs), $15 is still a hold. This Swedish company (Nasdaq symbol OTLY; Consumer sector; ADSs outstanding: 591.8 million; Market cap: $8.9 billion; No dividend paid; Takeover Target Rating: Lowest; www.oatly.com) is the world’s largest producer of oat milk....
While activist investors continue to target underperforming companies like Comtech, some are going after firms like GM over their environmental record. In the case of Comtech and GM, we feel activist involvement could improve shareholder value. Still, we’re not ready to recommend either stock for your new buying right now.


COMTECH TELECOMMUNICATIONS CORP....
In October 2019, foodmaker Post Holdings sold shares of its BellRing Brands business to the public through an IPO. BellRing makes protein bars, shakes and nutritional supplements.


Post now plans to distribute its remaining BellRing shares to its own investors, probably in the first half of 2022.


The plan should benefit shareholders of both firms....
VEONEER INC. $36.57 is now a hold. The company (New York symbol VNE; Manufacturing & Industry sector; Shares outstanding: 112.0 million; Market cap: $4.1 billion; No dividend paid; Takeover Target Rating: Highest; www.veoneer.com) makes automotive radar, cameras with driver-assist systems, night-vision equipment, and brake controls.


On June 29, 2018, Swedish auto parts makers Autoliv spun off Veoneer as a separate firm....
One of our long-time favourite stocks, Danaher Corp. spun off its industrial testing equipment business as Fortive in 2016. That new firm then spun off its own automotive-related businesses in 2020 as Vontier.


As we often point out, new spinoff firms tend to move sideways for the first year or two until they build up a following among brokers and investors....