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
One of the main benefits of a spinoff is that it lets both the parent and new company better focus on their core businesses. A good example is water equipment specialist Pentair, which spun off its electrical cabinet business nVent in April 2018.


Since the breakup, nVent has gained 24%, while Pentair is down 11%....
LIGHTSPEED POS INC. $23 (Toronto symbol LSPD; Manufacturing & Industry sector; Shares outstanding: 81.5 million; Market cap: $1.9 billion; No dividends paid; Takeover Target Rating: Lowest; www.lightspeedhq.com) offers point-of-sale software programs to small retailers and restaurant operators....
SNC-LAVALIN GROUP INC. $36 (Toronto symbol SNC; Manufacturing & Industry sector; Shares o/s: 175.6 million; Market cap: $6.3 billion; Divd yield: 1.1%; Takeover Target Rating: Medium; www.snclavalin.com) is a leading Canadian engineering and construction company that specializes in large-scale infrastructure projects such as roads, bridges, transit systems and water-treatment plants.


The stock has dropped 33% in the past six months....

Honeywell International Inc. (New York symbol HON) recently spun off two of its smaller operations—Garrett Motion and Resideo Technologies. Both stocks are down since they become independent firms. Slow starts, however, are typical for new spinoffs, and we like their prospect.


GARRETT MOTION INC....
EATON CORP. PLC $81 (New York symbol ETN; Manufacturing & Industry sector; Shares outstanding: 423.6 million; Market cap: $34.3 billion; Dividend yield: 3.5%; Takeover Target Rating: Medium; www.eaton.com), based in Ireland, makes a wide variety of electrical power products such as circuit breakers, power distribution units, panel boards, load centers, motor controls, meters, sensors, relays and inverters....
TENNECO INC. $33 (New York symbol TEN; Manufacturing & Industry sector; Shares outstanding: 51.4 million; Market cap: $1.7 billion; Dividend yield: 3.0%; Takeover Target Rating: Medium; www.tenneco.com) is a leading maker of auto parts....
STUART OLSON INC. $4.17 (Toronto symbol SOX; Resources sector; Shares outstanding: 27.8 million; Market cap: $115.9 million; Dividend yield: 5.8%; Takeover Target Rating: Highest; www.stuartolson.com) provides governments and businesses with construction, electrical contracting, earthmoving and insulation services....
L BRANDS INC. $27 (New York symbol LB; Consumer sector; Shares outstanding: 275.1 million; Market cap: $7.4 billion; Dividend yield: 4.4%; Takeover Target Rating: Medium; www.lb.com) owns two main retail chains: Victoria’s Secret stores (which sell lingerie); and Bath & Body Works outlets (personal-care products, including soaps and shampoos).


Activist investor Barrington Capital Group has sent a letter to L Brands’ chairman and CEO Leslie Wexler demanding that the company split into two separate firms: one would control the Bath & Body Works chain; the other would operate struggling Victoria’s Secret.


Barrington also wants the company to replace some of its directors, which it feels are too closely tied to the CEO.


The breakup would improve the value of both retail chains....
DANAHER CORP. $128 (New York symbol DHR; Manufacturing & Industry sector; Shares outstanding: 701.9 million; Market cap: $89.8 billion; Dividend yield: 0.5%; Takeover Target Rating: Medium; www.danaher.com) makes precision-testing equipment and tools....
HELEN OF TROY LTD. $112 (Nasdaq symbol HELE; Shares outstanding: 25.6 million; Market cap: $2.9 billion; No dividends paid; Takeover Target Rating: Medium; www.hotus.com) designs and distributes a wide variety of consumer products in three categories: Health & Home (46% of its 2018 sales), which includes thermometers and blood pressure monitors; Housewares (31%) such as food preparation tools and bathroom accessories; and Beauty (23%), which includes shampoos and skin creams,


The company will now sell the Personal Care business of its Beauty division....