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


TRIBUNE PUBLISHING CO. $17.35 is a hold. The company (Nasdaq symbol TPCO; Consumer Sector; Shares outstanding: 36.8 million; Market cap: $638.5 million; No dividend paid; Takeover Target Rating: Highest; www.tribpub.com) publishes daily newspapers in eight U.S....



REXNORD CORP. $50 is a spinoff buy. The company (New York symbol RXN; Manufacturing Sector; Shares outstanding: 119.6 million; Market cap: $6.0 billion; Dividend yield: 0.7%; Takeover Target Rating: Medium; www.rexnordcorporation.com) is now spinning off its Process & Motion Control business in a tax-free spinoff to shareholders....



Empire, the holding company that owns the Sobeys grocery chain, hopes that its purchase of Ontario supermarket chain Longo’s will help it compete with rivals Loblaw and Metro, as well as U.S. giants Walmart and Costco.


We feel the company will apply the lessons it learned following its disastrous 2013 purchase of the Safeway chain in Western Canada for $5.8 billion....


The shares of Travel + Leisure and Hilton Grand Vacations are both up about 40% since the start of 2021 as the rollout of COVID-19 vaccines help to spur travel volumes. We feel their latest acquisitions will further add to your returns.


TRAVEL + LEISURE CO....


LEIDOS HOLDINGS INC. $101 is a buy. The company (New York symbol LDOS; Manufacturing sector; Shares o/s: 141.9 million; Market cap: $14.3 billion; Dividend yield: 1.3%; Takeover Target Rating: Highest; www.leidos.com) took its current form in August 2016 when Lockheed Martin (New York symbol LMT) separated its Information Systems & Global Solutions (IS&GS) business and then merged it with Leidos.


The company is now paying $380 million in cash for Gibbs & Cox Inc., a Virginia-based full-service engineering and design firm specializing in naval ship design....


ACI WORLDWIDE INC. $40 is a buy. The company (Nasdaq symbol ACIW; Manufacturing & Industry Sector; Shares outstanding: 116.8 million; Market cap: $4.7 billion; No dividend paid; Takeover Target Rating: Medium; www.aciworldwide.com) is the leading software provider for processing transactions by credit cards, debit cards, automated teller machines, point-of-sale terminals and interbank systems....


It generally pays to keep an eye on activist investors. Like us, they seek out companies that can boost share prices by selling or spinning off assets. Investment firm Starboard Value is now pressuring these three firms (including ACI, see box), but we see only two of them as buys.


ELANCO ANIMAL HEALTH INC....


Lennar is up nearly 40% since the start of 2021, partly because COVID-19 has spurred demand for new houses in suburban areas as more people work from home. Home buyers are also taking advantage of low interest rates to upgrade their homes. We feel these trends will continue to spur the stock higher in the next few years....

DANAHER CORP. $244 is a buy. The company (New York symbol DHR; Manufacturing sector; Shares o/s 713.1 million; Market cap: $174.0 billion; Dividend yield: 0.4%; Takeover Target Rating: Medium; www.danaher.com) is a leading maker of precision-testing equipment and tools....


WALMART INC. $132 is a buy. The retailer (New York symbol WMT; Consumer sector; Shares outstanding: 2.8 billion; Market cap: $369.6 billion; Dividend yield: 1.6%; Takeover Target Rating: Lowest; www.walmart.com) operates 11,443 outlets in 25 countries.


In August 2018, the company acquired 77% of Flipkart Group for $16 billion....