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
WANDA SPORTS GROUP CO. LTD. $4.44 (Nasdaq symbol WSG) sold 23.8 million American Depositary Shares (two ADSs represent three of its class A ordinary shares) on July 29, 2019 at $8.00 each for a total of $190.4 million.

Based in China, Wanda operates various mass-participation sporting events, including marathons and mountain-bike races....
KONTOOR BRANDS INC. $34 (New York symbol KTB; Consumer sector; Shares outstanding: 56.9 million; Market cap: $1.9 billion; Dividend yield: 6.6%; Takeover Target Rating: Medium; www.kontoorbrands.com) makes denim apparel under several brands, including Lee, Wrangler and Rock & Republic....
UNITED TECHNOLOGIES CORP. $127 (New York symbol UTX; Manufacturing & Industry Sector; Shares outstanding: 862.8 million; Market cap: $109.6 billion; Dividend yield: 2.3%; Takeover Target Rating: Low; www.utc.com) has four main divisions: Pratt & Whitney manufactures aircraft engines (29% of 2018 revenue, 14% of earnings); Carrier makes heating and air-conditioning equipment under the Carrier brand, as well as burglar alarms and fire-safety products (28%, 40%); Collins Aerospace Systems manufactures aircraft controls (24%, 25%); and Otis makes elevators and escalators (19%, 21%).

United Technologies’ overall revenue fell 3.1%, from $57.9 billion in 2014 to $56.1 billion in 2015 on the sale of its Sikorsky helicopter business to Lockheed Martin for $9 billion....
LAMB WESTON HOLDINGS INC. $68 (New York symbol LW; Consumer sector; Shares outstanding: 146.1 million; Market cap: $9.9 billion; Takeover Target Rating: Highest; Dividend yield: 1.2%; www.lambweston.com) is a leading producer of frozen french fries, potatoes and other packaged vegetables.

The company was a wholly owned subsidiary of Conagra Brands until November 9, 2016....
NUANCE COMMUNICATIONS INC. $17 (Nasdaq symbol NUAN; Manufacturing & Industry sector; Shares outstanding: 285.6 million; Market cap: $4.9 billion; No dividends paid; Takeover Target Rating: Medium; www.nucance.com) specializes in speech and imaging technology....
MIDDLEFIELD BANC CORP. $49 (Nasdaq symbol MBCN; Finance sector; Shares outstanding: 3.2 million; Market cap: $156.8 million; Dividend yield: 2.4%; Takeover Target Rating: Highest; www.middlefieldbank.com) provides personal and commercial banking services through 15 branches in northeastern and central Ohio.

Activist investor Ancora Advisors, which owns about 5.5% of Middlefield stock, wants the company to sell itself or replace its management....
ASHLAND GLOBAL HOLDINGS INC. $73 (New York symbol ASH; Manufacturing & Industry sector; Shares outstanding: 60.5 million; Market cap: $4.4 billion; Dividend yield: 1.2%; Takeover Target Rating: Medium; www.ashland.com) makes a variety of specialty chemicals.

The company has three main businesses: Specialty Ingredients (roughly 65% of its total sales) makes coatings, adhesives and other products for the pharmaceutical, food and construction industries; Composites (25%) makes plastics and resins for the construction and industrial-products markets; and Intermediates and Solvents (10%) makes chemicals for plastics makers....
TENET HEALTHCARE CORP. $21 (New York symbol THC; Consumer Sector; Shares outstanding: 103.4 million; Market cap: $2.2 billion; No dividend paid; Takeover Target Rating: Highest; www.tenethealth.com) is one of the largest for-profit hospital chains in the U.S....
Yum Brands is a powerful example of why we strongly believe in the potential of spinoffs. In November 2016, the company spun off its Chinese operations as Yum China. Investors then received one share of the new firm for each Yum Brands share they held.

Since the split, Yum Brands has jumped 93%, while Yum China is up 69%....
SUNDIAL GROWERS INC. (www.sundialcannabis.com) is an Alberta-based producer of cannabis for medical and recreational uses. It has five facilities: two in Alberta, and three in the U.K. Sundial is also building a sixth facility in B.C.


The company plans to go public in the next few weeks, and will list its shares on the U.S....