Spin-Off Research In the News

Breaking Up Is Not So Hard to Do at Baxter to Safeway: Real M&A

Posted by Joe Cornell, CFA on Tue, Apr 15, 2014 @ 14:04 PM



By Tara Lachapelle and Manuel Baigorri

April 10 (Bloomberg) -- Companies are breaking up like never before.

A record 28 U.S. spinoffs were announced in the first three months of the year, the most in one quarter since at least 2002, according to data compiled by Bloomberg. Corporations from Baxter International Inc. to Hertz Global Holdings Inc. are looking to narrow their focus and separate unrelated businesses with the hope that it will result in billions of dollars of added value. Occidental Petroleum Corp. and Safeway Inc. are also among companies breaking off parts, with spinoff stocks outperforming the broader market since 2009.

Following decades of bulking up through acquisitions, executives and boards are reassessing the makeup of their businesses -- sometimes with a nudge from activist shareholders -- and finding that investors often favor simpler companies, said Oscar Gruss & Son Inc. The same forces may now be at work in Europe, which hasn’t yet joined in on the trend, say bankers from Deutsche Bank AG, Morgan Stanley and JPMorgan Chase & Co.

“We’ve seen a big upswing in spinoffs,” Joe Cornell, founding principal of Spin-Off Advisors LLC in Chicago, said in a phone interview. “The U.S. has been ahead of the curve as far as spinoffs, but this will probably be a bigger theme globally going forward. The kind of restructuring companies here have been doing is catching on.”

$326 Billion

Companies representing $326 billion of market value announced almost 30 U.S. spinoffs from Jan. 1 to March 31, data compiled by Bloomberg show. That’s almost double the quarterly average of 15 for the last three years.

In Europe, there were nine spinoffs last quarter, close to that region’s average in the same period. The combined market value of the European companies selling units was the equivalent of about $104 billion.

Part of the attraction of a spinoff -- as opposed to selling a business to a single buyer -- is that there are tax advantages for shareholders, said Henry Stewart, head of consumer investment banking for Europe, the Middle East and Africa at Morgan Stanley, who sees spinoff activity picking up in Europe.

“With equity capital markets strong, spinoffs and sub-IPOs have become a very attractive option for companies seeking to maximize the value of their assets,” Stewart said.

Automatic Data Processing Inc., the payroll-and-benefits provider, said today it is planning a tax-free spinoff of its auto-dealer services unit. The shares fell 0.9 percent to $75.22.

Spinoffs have been particularly popular among U.S. health- care and consumer companies. Drugmaker Baxter said March 27 that it will use a spinoff to split into two pieces in 2015 -- one business focused on developing medicines and another that sells medical products to hospitals. Abbott Laboratories and Pfizer Inc. also spun off businesses in the last two years.

Europe Lagging 

In Europe, none of the major health-care companies have announced spinoffs in the last decade, data compiled by Bloomberg show.

“Most large-cap businesses have been focused on reorganizing their product portfolios,” said Cathrin Petty, co- head of health-care investment banking at JPMorgan for Europe, the Middle East and Africa. That’s a longer process for a more regulated industry such as health care, she said.

“We will start to see pharmaceutical and med-tech companies look to sell non-core assets” once they’ve completed the reorganization, Petty said.

Consumer Industry

Recent spinoffs in the U.S. consumer industry include Kraft Foods Group Inc. separating from snack-maker Mondelez International Inc., Fortune Brands Home & Security Inc. from the Beam Inc. bourbon business and clothing brand Lands’ End Inc. from retailer Sears Holdings Corp.

“This hasn’t been as extensive in Europe yet, although the trend is certainly growing,” said Scott Bell, global co-head of consumer and head of U.K. investment banking coverage and advisory at Deutsche Bank in London.

Europe hasn’t yet embraced spinoffs to the extent the U.S. has because there are fewer European consumer conglomerates, according to Bell.

Those companies “are quite streamlined already,” he said. “In addition, many are family-owned businesses, which may not feel as much pressure coming from potential activist shareholders.”

Bill Ackman’s Pershing Square Capital Management LP was the activist hedge fund behind the Fortune-Beam breakup. Nelson Peltz, of Trian Fund Management LP, is currently agitating for PepsiCo Inc. to separate its soda and chips businesses. Carl Icahn proposed EBay Inc. split off PayPal, though he backed away from that push last month.

Activist Investors

“You’ve got more and more activist investors who have either arbitrage or dealmaking backgrounds coming onto boards and they’re thinking outside the box,” Louis Meyer, a special situations analyst at Oscar Gruss in New York, said in a phone interview. “The big picture is, how do you create more value.”

In the past five years, the Bloomberg U.S. Spin-Off Index advanced 228 percent, double the gains in both the Standard & Poor’s 500 and Russell 3000 indexes. The Stoxx Europe 600 Index rose 78 percent during that period.

Spinoffs and breakups have been embraced by investors because they prefer to own companies that they understand and that refrain from operating in too many different industries, Meyer said. When companies get too big and have disparate businesses, a slower-growing or less-profitable piece can drag down the market value of the whole company, he said.

Simple Preference

“Investors are definitely putting a premium on pure plays,” Meyer said. “They don’t want to have to figure out your company. People like a simple, easy story.”

One long-speculated breakup candidate in Europe is Siemens AG, the continent’s largest engineering company, which gets 18 percent of its revenue from health care.

The Munich-based company is exploring a sale of its microbiology unit as it reviews its business strategy, people familiar with the matter said last month, asking not to be identified because the talks are private. Investment banks have also been gauging private-equity interest in the larger diagnostics division even though the company hasn’t decided to sell it, according to people familiar with the matter.

“There’s certainly some parts of Siemens where a breakup might be suitable,” Nick Heymann, an analyst with William Blair & Co. in New York, said in a phone interview. “We’ve seen really good success” in breakups by Siemens’s peers, such as Ingersoll Rand Plc.

Leverage Argument

Ingersoll-Rand, based in Swords, Ireland, spun off its North American lock-making business Allegion Plc last year after activist investor Peltz pushed for a breakup. Both stocks have since risen.

Marc Langendorf, a spokesman for Siemens, declined to comment on whether the company has any plans for a breakup.

Many European businesses remain heavily indebted, which may force them to trim their portfolios and spin off units, according to Enrique Quemada, chief executive officer of OnetoOne Corporate Finance, a Madrid-based investment bank specializing in mergers and acquisitions.

“We are poised to see more and more asset sales or spinoffs down the road as they try to maximize value,” Quemada said in a phone interview.

European drugmakers from Switzerland-based Novartis AG to Spain’s Zeltia SA are already considering asset sales or spinoffs. Novartis, after selling its diagnostics unit to Spain’s Grifols SA in January, is conducting a strategic review.

The company is exploring options for its animal-health and vaccines businesses, people familiar with the matter said, asking not to be named because the process is confidential.

Sea Creatures

Zeltia, which develops cancer drugs from sea creatures, is considering a spinoff of its biotechnology unit to list it on the Nasdaq Stock Market, people familiar with the matter said.

Reckitt Benckiser Group Plc, the British maker of Nurofen painkillers and Durex condoms, said last year it will start a strategic review of its pharmaceutical unit following calls from analysts to exit the business.

“We’ll likely continue to see more divestitures from European pharmaceutical companies in the near future,” said Anthony Hartley, managing director for health-care investment banking at UBS AG in London. “Many companies may consider potential spinoffs as they seek higher valuations for their non- pharma businesses as a way to enhance returns to shareholders.”


Tags: Kraft Spin-Off, Mondelez Spin-Off, Blackhawk Spin-Off, Baxter Spin-Off, Safeway Spin-Off, Ingersoll-Rand Spin-Off, Occidental Petroleum