By VITO J. RACANELLI | SATURDAY, DECEMBER 1, 2012
SPINOFF DEALS HAVE BEEN HOT this year. Mergers and acquisitions have not, though Corporate America is awash with cash.
In 2012, there have been 58 spinoffs announced so far, and 30 of them have been completed, according to Joe Cornell, head of Spin-Off Advisors and a longtime veteran of the field. The 2012 spinoffs completed to date are valued at about $105 billion, higher than last year's 25 spinoffs valued at $94 billion. With the possible completion by Dec. 31 of five or 10 more of this year's announced spinoffs, the 2012 final value should be significantly higher than 2011's.
If the Abbot Laboratories (ticker: ABT) spinoff of AbbVie—which begins trading on a when-issued basis this month but isn't officially completed until Jan. 1—were included, then the 2012 spinoff value would soar to $170 billion, Cornell points out. Other big spinoffs this year included Kraft Food Groups (KFRT), out of Mondelez International (MDLZ), and Post Holdings (POST), a maker of brand-label cereals spun out from Ralcorp Holdings (RAH), a private-label foods maker.
The Ralcorp split up, effected last February, is interesting for a couple of reasons. First, last Tuesday ConAgra (CAG) agreed to buy Ralcorp for $4.95 billion, or $90 a share. In these pages one year ago, when the pre-spin Ralcorp traded at $79, we suggested Ralcorp's July 2011 decision to split off Post would result in two smaller companies, each potentially attractive to bigger players in their sectors.
The rationale behind spinoffs is straightforward. Typically, they are done when one or more of a company's disparate divisions don't fit with the others, and the combined market value doesn't fully reflect the value of the various businesses. It's a tax-efficient way of giving shareholders separate shares of the new company, often a pure-play stock.
The hope is that the total value of the two will be higher than the value of the pre-split company. These moves often create investments that are easier for analysts and investors to understand and that can also be attractive acquisition targets. For a pre-spinoff Ralcorp holder, the gain is $11 a share from the ConAgra offer and about $17 worth of Post Holdings shares, a 35% return from one year ago.
That's the classic spinoff motivation. But as Cornell notes, what's driving the activity higher lately is intensifying agitation by a number of big institutional shareholders—such as Pershing Square Holdings and JANA Partners—for such moves. Institutions are buying stocks and then leaning on management to create value, he says, particularly where there's an argument that the sum of the parts is greater than the whole.
Only the latest example, he notes, is the pressure from Relational Investors and California State Teachers' Retirement System, to urge bearings maker Timken (TKR) to spin off its steel unit.
Studies show that spinoffs often outperform the market over a two-to-three-year period, Cornell says. As of Thursday, the Bloomberg U.S. Spun-off Companies Index of 20 spinoffs with a total market value of at least $1 billion is up about 42% year to date. Stocks are in the market-weighted index for three years after their spinoff dates and the return noted above is for the entire portfolio, not an average return.
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