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
XPO LOGISTICS $95 (New York symbol XPO; Manufacturing sector; Shares outstanding: 119.6 million; Market cap: $11.4 billion; Takeover Target Rating: Highest; No dividends paid; TSINetwork Rating: Average; www.xpo. com) is a major global provider of supply-chain services.

The company operates two business segments: The Logistics division (35% of sales) provides contract, warehousing, distribution, and inventory management....
Most firms looking to go public launch an initial public offering, or IPO. That’s where they hire an investment firm to promote the new shares and underwrite the listing process.

Spotify AB is a major Swedish-based music streaming service. Launched in 2008, it lets users listen on demand to a library of more than 30 million songs.

Spotify now plans to bypass the traditional IPO process in favour of a rare direct listing on the New York exchange.

The standard IPO is better suited to firms looking to raise capital, but it also has the potential to dilute the interest of current shareholders....
DAVIDSTEA $3.80 (Nasdaq symbol DTEA; Consumer Sector; Shares o/s: 25.8 million; Market cap: $98.0 million; Takeover Target Rating: Lowest; No dividend; TSINetwork Rating: Speculative; www.davidstea.com) first sold shares to the public in June 2015 at $19 each....
On November 1, 2016, Arconic spun off its bulk aluminum business (Alcoa). Each investor received one Alcoa Corp. share for every three ARNC shares they held.

The split has let both companies focus on improving their core operations. Their smaller size has also enhanced their takeover prospects....
ROOTS CORP. $10.06 (Toronto symbol ROOT) is a Canadian fashion retailer focused on sweats and other casual clothing. It also makes leather goods, including handbags, jackets and shoes. The chain has 116 stores in Canada, four in the U.S., and 138 across Taiwan and China....
WYNDHAM WORLDWIDE CORP. $112 (New York symbol WYN; Consumer sector; Shares outstanding: 101.2 million; Market cap: $11.3 billion; Takeover Target Rating: Medium; Dividend yield: 2.1%; TSINetwork Rating: Extra Risk; www.wyndhamworldwide.com) plans to spin off its hotel business as Wyndham Hotel Group....
BROADRIDGE FINANCIAL SOLUTIONS INC. $89 (New York symbol BR; Finance Sector; Shares o/s: 116.6 million; Market cap: $10.4 billion; Takeover Target Rating: Medium; Divd. yield 2.2%; TSINetwork Rating: Average; www.broadridge.com) began trading on April 2, 2007, after it was spun off from New York-listed Automatic Data Processing (symbol ADP).

We recommended the spinoff shortly after that, in the May 2007 issue of our Stock Pickers Digest newsletter at $20.68 a share.

We said then that we thought Broadridge was a pioneer....
PARK HOTELS & RESORTS $29 (New York symbol PK; Consumer Sector; Shares outstanding: 214.8 million; Market cap: $6.2 billion; Takeover Target Rating: Medium; Dividend yield 6.1%; TSINetwork Rating: Average; www.pkhotelsandresorts.com) owns 67 premium-branded Hilton hotels with more than 35,000 rooms....
PENTAIR PLC $70 (New York symbol PNR; Manufacturing Sector; Shares outstanding: 181.6 million; Market cap: $12.7 billion; Takeover Target Rating: Medium; Dividend yield 2.0%; TSINetwork Rating: Average; www.pentair. com) is a diversified industrial manufacturing company that sells to businesses in the food, water and energy markets.

On April 28, 2017, Pentair completed the $3.2 billion sale of its Valves & Controls business to Emerson Electric (New York symbol EMR)....
HILTON WORLDWIDE HOLDINGS $77 (New York symbol HLT; Consumer Sector; Shares outstanding: 321.0 million; Market cap: $24.7 billion; Takeover Target Rating: Low; Dividend yield 0.8%; TSINetwork Rating: Average; www.hiltonworldwide.com) owns, manages and franchises hotels under several brands, including Hilton, Waldorf Astoria, Doubletree and Embassy Suites by Hilton....