Spinoffs – An independent company comes into being through the sale or distribution of new shares in a new business or division or subsidiary of the holding company. The new entity may be more or less profitable, maybe underperforming, a distraction of key management or main fact have great growth prospects. These prospects may not be fully reflected in the valuation of the conglomerate or holding company. This “conglomerate discount” as referred to by The Economist is often the driving force behind the decision to spin off divisions. The sum of the parts listed separately is often expected to exceed the valuation of the original group. This is another way of unlocking value for shareholders.
The spinoff now attracts individual attention and publicity. It is no longer an obscure element of a sprawling empire. It now has a clear profit centre with a logical and comprehensible group structure. The balance sheet is often strengthened before listing and the company primed to succeed. Management certainly would not want to be associated with failure particularly after extensive publicity.
Spinoffs may also arise from hostile takeovers. Target companies may try to deter raiders by selling off various divisions or when taken over parts or divisions may be listed separately to raise cash or streamline the group.
After the spinoff is completed, you will be able to check the director’s dealings and can then see if insiders are accumulating the stock. This may provide excellent confirmation that you are onto a good thing.
So spinoffs often have strong balance sheets and great growth prospects. The newly freed management is rejuvenated, entrepreneurial and have big stakes in the company. There are often synergistic, rationalization and cost cutting opportunities.
BUT WATCH OUT – not all spinoffs are guaranteed success stories. Also, never forget the better the spinoff the worse the effect on the host.
If one of your shareholdings is subject to a spinoff, make sure you back the right horse!