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
VF CORP. $90 (New York symbol VF; Consumer sector; Shares outstanding: 395.6 million; Market cap: $35.6 billion; Dividend yield: 2.3%; Takeover Target Rating: Medium; www.vfc.com) has completed the spinoff of Kontoor Brands Inc....
The ongoing trade war between the U.S. and China—with its tariffs and retaliatory tariffs—has hurt Chinese demand for U.S. ethanol, a corn-based fuel additive.


However, the Trump administration is also making it easier for U.S. refineries to add higher levels of ethanol to U.S....
Our Takeover Target Rating considers a range of factors to determine the chances of a spinoff company attracting takeover interest in the short to medium term:


We look for a profitable spinoff with low debt and with hidden assets. As well, spinoffs with no major shareholder and facing little regulatory or anti-trust constraints have strong appeal.


Does the spinoff have an affordable market value, meaning it’s a manageable purchase for a major industry competitor? Spinoffs with top-quality, but underperforming, assets also attract takeover interest....
We think that spinoffs are the closest thing you can find to a sure thing for two main reasons:



  1. The management of a parent company will only hand out shares in a subsidiary to its own investors if it’s all but certain that business, and the parent, will be better off after the spinoff.
  2. Spinoffs involve a lot of work and legal fees....

As a general rule, if a company’s two classes of shares trade for roughly the same price, you’re better off buying the voting shares. That’s because they may move substantially higher than the non-voting shares if a shareholder who is trying to take control of the company accumulates a large enough number to mount a takeover attempt....
LAMB WESTON HOLDINGS INC. $70 (New York symbol LW; Consumer sector; Shares outstanding: 146.5 million; Market cap: $10.3 billion; Takeover Target Rating: Highest; Dividend yield: 1.1%; www.lambweston.com) was a wholly owned subsidiary of Conagra Brands until November 9, 2016....
On May 31, 2017, Tegna set up its Cars.com subsidiary as a separate firm. Investors received one share in the new company for every three Tegna shares they held.


Since the breakup, Tegna is up about 12%, and its recent acquisitions should let it profit from the 2020 U.S....
NASPERS LTD. (ADR) $51 (U.S. over-the-counter bulletin board symbol NPSNY; Shares outstanding: 2.1 billion; Market cap: $107.1 billion; Dividend yield: 0.2%; Takeover Target Rating: Lowest; www.naspers.com) is a South African media and Internet firm....
FMC CORP. $81 (New York symbol FMC; Manufacturing sector; Shares outstanding: 131.6 million; Market cap: $10.7 billion; Dividend yield: 2.0%; Takeover Target Rating: Medium; www.fmc.com) makes crop protection chemicals, including insecticides, herbicides and fungicides.


In October 2018, FMC set up its lithium business as a separate company called LIVENT CORP....
SONY CORP. ADRs $48 (New York symbol SNE; Manufacturing & Industry sector; ADRs outstanding: 1.3 billion; Market cap: $62.4 billion; Dividend yield: 0.6%; Takeover Target Rating: Lowest; www.sony.net) is a leading maker of consumer electronics such as TV sets and video game consoles (under the PlayStation brand)....