Spin-Off Research In the News

When some parts are worth more than the whole

Posted by Joe Cornell, CFA on Mon, Jul 02, 2012 @ 10:07 AM

Spinoffs accelerate as executives look to show off hidden value in their companies.

spin-off research, spinoff, joe cornell, joseph cornell, chicago tribune

June 30, 2012

Companies have been spinning off assets for a while now, but the trend is accelerating at a dizzying pace.

Looking to unearth value the investing market doesn't recognize, another spate of conglomerates is coming unglommed. The idea is to give businesses their own spotlight and managers their independence, better positioning everyone.

"We're definitely seeing quite a lot of companies have announced plans to split into parts the last six to 12 months," said Joe Cornell, founding principal of Chicago's Spin-Off Advisors. "I've been putting out this service for 15 years and I can't remember a time when it's been more robust."

A new era dawned Friday for local food fave Sara Lee, which recently split in two. That's when Hillshire Brands — which got custody of Sara's frozen dessert and meat lines — began trading as its own company. Some see the streamlined Hillshire as a likely takeover target.

Just a day earlier, Rupert Murdoch's News Corp. announced plans to separate its publishing business from its booming broadcasting and entertainment holdings. Announcing the move to employees, who have long suspected the company's newspapers such as The Wall Street Journal and New York Post were subsidized by profits from its lucrative cable TV channels, Murdoch wrote that "our publishing businesses are greatly undervalued by the skeptics."

Murdoch can point to CBS Corp., which was spun off of Viacom in 2005. CBS supposedly was the slow-growth company, saddled with assets in broadcast TV and radio and outdoor advertising that were said to be holding back Viacom's sexy MTV Networks cable juggernaut. But since the split, CBS stock has outperformed Viacom's and both have grown.

"The spun-off business is usually a smaller piece relative to the parent and it's a much better dynamic," Cornell said. "You go from being the red-headed stepchild of some huge conglomerate, begging for capital. Then, once you're out on your own, management is more properly incentivized to how that specific business is run and it ups the entrepreneurial zeal. … You're forced to sink or swim on your own. You don't have your parent to lean on anymore. It forces them to get efficient and run the business tight."

Infant formula maker Mead Johnson & Co., which has its corporate headquarters in Glenview, has thrived since being spun off byBristol-Myers Squibbthree years ago.

Another winner has been Deerfield-based Fortune Brands' spinoff of Beam Inc.'s liquor business last year from what became Fortune Brands Home & Security, maker of locks, windows and faucets.

Spinoffs don't always pay, but often there is a boost from improved operation or the interest of strategic buyers eyeing a newly streamlined company. In any case, "spinoff companies tend to outperform the S&P by a wide margin," Cornell said, citing academic studies.

That's part of the calculus in the plan by Northfield's Kraft Foods to break off Mondelez International as a $35 billion snack foods company, while retaining its North American grocery business known for brands like Velveeta, Kraft Macaroni & Cheese and Oscar Mayer.

Ditto for Chicagoland's Abbott Laboratories, when it focuses on medical products and spins off what will be called AbbVie, a research-based pharmaceutical company that also will be publicly traded.

"Companies are confronted with this severe recession and are searching for ways to use assets more effectively," said Purdue University's John McConnell, a professor in finance and management who co-wrote the 2005 book, "Corporate Restructuring," and a 2004 paper, "Predictability of Long-Term Spinoff Returns." The recent rash of spinoffs is "related to the macroeconomic environment we've been confronted with the last three years."

When capital markets broke down in 2008 many planned spinoffs got postponed because of market instability, Cornell said. That's part of why we're seeing so many now.

"When things settled down, they came back and started to knock off the dust on some of these deals, so some of that is pent-up demand," Cornell said. "The other thing is at this point in the cycle, you've made all the easy moves to unlock value. You've got costs down. You've laid off people. You're really running lean, and if you think you've got some parts of your business that are worth more than the market values them, this is a very tax-efficient way to distribute value to shareholders."

Cornell is author of "Spin-off to Pay-off: An Analytical Guide to Investing in Corporate Divestitures." The book's publisher,McGraw-Hill, last year sold its TV stations group and this year plans to spin off its education assets while retaining financial products like Standard & Poor's Ratings Services and the S&P index business.

"It's usually a much better dynamic for the company that's being spun off, going from a conglomerate structure to a much more focused business," Cornell said. "In the 1960s and '70s, guys would pay a higher multiple for conglomerates because they thought maybe it would smooth out the earnings cycle. If one business was doing poorly, another would do well in a different industry, and guys were happy to pay up for that.

"The reality is that's really hard to do. It's hard to run eight, nine different businesses and allocate capital efficiently."

And when the stock market is in the doldrums, with concerns about the eurozone and other problems looming large, it can be difficult to get investors to pay attention to the strength of an asset, said Jim Cramer, the voluble analyst, on CNBC last week.

"There's this ennui," Cramer told viewers. "So some executives just say, 'Listen, I'm going to show you my company is worth a lot and the only way to do that is break it up so you can see the parts.' That way the focus is on the company," not outside economic factors.

Then Cramer suggested that perhaps Deerfield-based Baxter International should split, with one company in pharmaceuticals and the other in medical devices.

"If you have things buried inside other businesses and you don't think the market is valuing it," Cornell said, "the easiest thing to get value is do a tax-free spinoff as opposed to selling it outright to a private equity firm, where you're going to get a big bill from Internal Revenue."

Any way you slice it, a spinoff is worth considering.


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Sara Lee, Hillshire Brands, News Corp, Kraft and Beam Spinoffs featured (SLE, HSH, NC, KFT, BEAM).

Tags: HSH Spinoff