Wayne Duggan | Seeking Alpha | October 21, 2015
- Research has consistently shown that spin-offs outperform the broad market in their first years of trading.
- A new study found that spin-offs between 2009 and 2013 averaged 17% out-performance in year one.
- There are several different types of upcoming spin-offs in Q4 that offer unique investment opportunities.
More and more companies seem to be recognizing the benefits of spinning-off assets or stand-alone business segments these days. In 2014, there were 60 completed U.S. spin-offs, third most of all time behind only 1999 and 2000.Spin-Off Advisors is predicting another 51 completed spin-offs by the end of 2015 as well.
Spin-offs are typically viewed as positive for the parent company. The move is often made in an attempt to unlock some type of value in the parent company's core business. For example, a company with a large, well-established, high margin, highly profitable business may also have a smaller segment that requires large debt load and/or operates on extremely low margins, but is a very high growth business. These two types of businesses typically appeal to different investors, and running both of them under the same corporate roof could mean that both the full fundamental value of the core business and the full growth value of the smaller business are not fully realized in the combined company's share price.
By spinning-off the smaller company, the parent company immediately removes debt from its balance sheet, improves its overall margins and appeals more to value investors. The stand-alone growth business is free to shine on its own for growth investors as well.
Boosting margins, stimulating growth, adjusting debt, improving borrowing prospects and increasing market valuation are all common reasons why companies choose to spin-off businesses.
Hitting the ground running
While spin-offs can certainly benefit the parent company in a wide range of ways, recent research by Cantor Fitzgerald has shown that it's the newly formed company that tends to steal the show in the market. All the public spin-offs completed between 2009 and 2013 combined to outperform the S&P 500 in their first full year of trading by an average of more than 17 percent!
And the Cantor Fitzgerald data is no fluke. There have been several other studies over the past few decades that have confirmed that spin-offs outperform the broad market in their first year.
Investors who would like to see this spin-off trend boosting their portfolio performance won't have to wait for long. There are several different types of spin-offs that are set to take place before the end of the year. Here are four unique spin-off investment opportunities.
Separating high-growth business from high-income business
In what appears to be a fairly standard spin-off, Hewlett-Packard (NYSE:HPQ) is expected to finally spin-off its enterprise operations, including its faster-growing corporate hardware and services segments, from its legacy personal systems and printing business on or around November 1. The newly formed Hewlett Packard Enterprises is not initially expected to generate as much profit as its parent company, despite the fact that the enterprise business will have roughly twice the assets that will remain in the parent company. However, with an uncertain future in the printing and PC business, the enterprise business certainly seems like a safer long-term bet.
Unlocking equity value
One of the more intriguing upcoming spin-offs is the highly anticipated spin-off of Yahoo! Inc.'s (NASDAQ: YHOO) Yahoo Small Business segment. If you don't know anything about Yahoo Small Business, don't worry: it's likely that YHOO shareholders don't either. And they don't care.
What they do care about is the 384 million shares of Alibaba Group Holding Ltd (NYSE: BABA) that will be accompanying Yahoo Small Business during the spin-off, hopefully tax-free. Unfortunately, the IRS recently created quite acorporate cliffhanger by failing to rule on YHOO's Private Letter Ruling Request, meaning that the company still does not know whether the terms of its proposed spin-off will satisfy the requirements for a tax-free exemption.
If YHOO is allowed to proceed with the spin-off tax-free, there is clearly some value to be had for investors. Even though BABA's share price has declined by 29 percent so far this year, YHOO's stake is still worth about $27 billion. At YHOO's current share price, that value makes up 87.9 percent of the stock's entire market cap.
Finally, another type of spin-off that has gained popularity in recent years is the opco/propco spin-off, which is what Darden Restaurants, Inc. (NYSE:DRI) has planned in Q4. Here's DRI's plan: the company is going to create a new REIT and transfer ownership of 430 of its properties (along with about $1 billion in debt) to the REIT prior to spinning it off. The REIT will then lease the properties back to the parent company. DRI is hoping that the end result will be a reduction of its debt load by nearly two-thirds, a more favorable tax structure for both entities and the unlocking of the full value of DRI's property assets.
If none of the deals above appeal to you, or if you prefer a more diversified way to play the spin-off trend, the Guggenheim Spin-Off ETF (NYSE: CSD)is an option. The fund invests at least 90% of its assets in companies that are between 6 and 30 months removed from being spun out. The fund misses out on the first six months following the spin-out, and it holds the stocks until 1.5 years after Cantor Fitzgerald's one-year cutoff mark. Although it hasn't demonstrated the 17 percent annual outperformance that Cantor Fitzgerald found, the fund has still outperformed the S&P 500 by nearly 20 percent over the past five years.
It's up to each reader to choose his or her preferred way to invest in spin-offs. However, the numbers show that spin-offs have consistently proven to be a source of alpha for opportunistic investors, and that's what this site is all about!
Click here to view article on seekingalpha.com: 4 Ways To Profit From The Spin-Off Advantage
Spin-Off Research is published by Spin-Off Advisors, LLC. Spin-Off Research is a subscription-based service for Professional and Institutional Investors. Blog entries are delayed. Spin-Off Research subscriber-base receive the spinoff report at time of press via Email Bulletins. To learn more about becoming a subscriber, please contact us. Spin-Off Advisors, LLC provides coverage on all US and major Global spinoffs, carve-outs and split-offs; Spin-Off Research published since March 1997.