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
THE CHEMOURS CO. $49 (New York symbol CC; Manufacturing sector; Shares outstanding: 185.2 million; Market cap: $9.1 billion; Takeover Target Rating: Highest; Dividend yield 1.4%; TSINetwork Rating: Extra Risk; www.chemours.com) began trading in July 2015 after Du- Pont spun off the company....
Spinoffs are often seen as an effective way for a holding company to eliminate its “holding company discount.” That discount is usually evident in the stock price of a company that holds a variety of assets, or that invests in a number of businesses.

Given the diverse asset base of a holding company, investors often overlook, or discount, any holdings that comprise just a small part of its total assets....
INNOVATIVE INDUSTRIAL PROPERTIES INC. $25.83 (New York symbol IIPR; Manufacturing Sector; Shares o/s: 6.8 million; Market cap: $175.6 million; Takeover Target Rating: Medium; Dividend yield: 3.9%; TSINetwork Rating: Speculative; www.innovativeindustrialproperties....
In 2000, the old Hewlett-Packard spun off its testing equipment business (Agilent). Since then, Agilent has completed two spinoffs of its own: Verigy (in 2006), a maker of computer chip testing gear; and Keysight (in 2014), focused on products for testing electronic equipment....
LOMA NEGRA (ADR) $25 (New York symbol LOMA) is the leading cement and concrete producer in Argentina, with about a 45% market share. Its quarries in the country hold sufficient reserves for more than 100 years of production. In addition, Loma Negra is one of the leading cement manufacturers in Paraguay.

The company is controlled by Portugal cement producer InterCement Group, the world’s tenth largest cement producer.

On October 31, 2017, Loma Negra began trading on the New York exchange....
NOVARTIS AG (ADR) $87 (New York symbol NVS; Manufacturing & Industry sector; ADRs outstanding: 2.3 billion; Market cap: $200.1 billion; Takeover Target Rating: Lowest; Dividend yield: 3.1%; TSINetwork Rating: Above Average; www.novartis.com) is a Swiss-based company that researches, develops, manufactures, and markets a range of healthcare products worldwide.

Novartis has now hired an investment bank to review options for its dermatology business....
UNITED TECHNOLOGIES CORP. $134 (New York symbol UTX; Manufacturing & Industry sector; Shares o/s: 798.6 million; Market cap: $107.0 billion; Takeover Target Rating: Lowest; Dividend yield: 2.1%; TSINetwork Rating: Above Average; www.utc.com) has four main businesses: Climate, Controls & Security makes Carrier heating and air-conditioning equipment, and burglar alarms and firesafety products; Pratt & Whitney manufactures aircraft engines; Aerospace Systems makes engine-control systems and other aircraft parts; and Otis makes elevators and escalators.

The company will now buy Rockwell Collins Inc....
PROCTER & GAMBLE CO. $91 (New York symbol PG; Consumer sector; Shares outstanding: 2.6 billion; Market cap: $236.6 billion; Takeover Target Rating: Lowest; Dividend yield: 3.0%; TSINetwork Rating: Above Average; www.pg.com) is one of the world’s largest makers of household and personal-care goods.

Activist investor Nelson Peltz owns about 1% of Procter through his firm Trian Partners....
TENNANT CO. $73 (New York symbol TNC; Manufacturing & Industry sector; Shares outstanding: 17.9 million; Market cap: $1.3 billion; Takeover Target Rating: Highest; Dividend yield: 1.2%; TSINetwork Rating: Average; www. tennantco.com) makes industrial floor and street-cleaning equipment, including scrubbers, sweepers and polishers....
On November 28, 2017, the old Consol Energy Inc. split into two, separately traded, public companies. While one firm mines coal, the other produces natural gas.

Under the terms for the spinoff, Consol shareholders received one share of the coal company (which kept the Consol Energy name) for every eight shares they held in the old Consol Energy....