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
APHRIA INC. $8.31 is a hold. The company (Toronto symbol APHA; Manufacturing & Industry sector; Shares outstanding: 289.3 million; Market cap: $2.4 billion; No dividend paid; Takeover Target Rating: Medium; www.aphrirainc.com) is a leading Canadian producer of medical and recreational marijuana....

Takeovers are a great way for companies to enter new markets and add value. We like Visa’s takeover of a small fintech company, but anti-trust regulators could kill the deal. Another deal to acquire railroad operator Kansas City Southern would also likely face regulatory hurdles.


VISA INC....
HUNTSMAN CORP. $25 is a buy. The company (New York symbol HUN; Manufacturing & Industry sector; Shares outstanding: 220.8 million; Market cap: $5.5 billion; Dividend yield: 2.6%; Takeover Target Rating: Lowest; www.huntsman.com) is a leading producer of specialty chemicals for makers of adhesives, textiles, construction materials, paints, detergents and automotive products.


In August 2017, Huntsman used an IPO to sell 26.1 million shares of its Venator Materials PLC (New York symbol VNTR) unit for $20.00 a share....

Study after study has shown that after an initial adjustment period of a few months, spinoffs tend to outperform groups of comparable stocks for several years. Still, in looking at two recent spinoff deals, we feel the spinoff of Pfizer’s generic drug business is more attractive than Artis REIT’s plan to separate its Canadian retail properties.


PFIZER INC....

The price for West Texas Intermediate crude oil fell to a negative $37 U.S. a barrel in April 2020 as the COVID-19 pandemic, combined with a lack of storage space, triggered a massive sell-off of oil futures contracts. Prices have since recovered to around $42 U.S.


However, oil demand remains vulnerable as the second wave of COVID-19 could lead to more lockdowns....
Eli Lilly has gained over 25% since it spun off its Elanco animal health business two years ago. The split lets the company concentrate on its main pharmaceutical business. In addition to its impressive portfolio of current products and those in its pipeline, Eli Lilly’s new breakthrough drug to treat patients in the early stages of COVID-19 should spur its long-term growth.


Meanwhile, spinoff Elanco has struggled since the split but a new plan to lower its costs and debt sets it up for future growth....
HILTON WORLDWIDE HOLDINGS INC. $89 (New York symbol HLT; Consumer Sector; Shares outstanding: 277.3 million; Market cap: $24.7 billion; Dividend suspended; Takeover Target Rating: Lowest; www.hiltonworldwide.com) is a hold. The company owns, manages and franchises hotels under 18 brands, including Hilton, Waldorf Astoria, Doubletree and Embassy Suites by Hilton....
EMERSON ELECTRIC CO. $69 (New York symbol EMR; Manufacturing & Industry sector; Shares o/s: 609.2 million; Market cap: $42.0 billion; Divd. yield: 2.9%; Takeover Target Rating: Medium; www.emerson.com) is a hold. The industrial equipment maker is buying Open Systems International for $1.6 billion....
A key benefit of spinoffs is that they create “pure play” companies that focus on a single business. That makes them easier for investors to value.


A good example is cardboard maker WestRock, which spun off its Ingevity chemical business in 2016 to create two pure-play firms....
EXELON CORP. $42 (New York symbol EXC; Utilities sector; Shares outstanding: 974.5 million; Market cap: $40.9 billion; Dividend yield: 3.6%; Takeover Target Rating: Medium; www.exeloncorp.com) is a hold. The company operates several regulated power and natural gas utilities, including Commonwealth Edison in Illinois and PECO Energy in Pennsylvania.


Partly due to pressure from activist firm Corvex Management, Exelon is reportedly developing a plan to spin off its non-regulated operations....