Spin-Off Research In the News

Reasons to Rally?

Posted by Joe Cornell on Mon, Dec 12, 2011 @ 15:12 PM


Barron's | Streetwise | By Michael Santoli

Reasons to Rally?

Excerpt from December 12, 2011

Then there's TripAdvisor, the largest travel site on the Internet, and a profitable one, at that. TripAdvisor, which helps people find good ways to jet away from it all, is about to be spun off, quietly and without much hoopla, by Expedia (EXPE). TripAdvisor, whose site features user reviews on hotels and such, has expanded revenue by about 30% lately, and runs 50% operating margins.

Expedia shares are at $28.50, up nicely from $25.17 when the stock was mentioned favorably here last spring, based in part on the TripAdvisor spinoff (May 16). Yet there remains some upside for Expedia holders, as the Street will focus on TripAdvisor, once it comes public, in the context of other 'Net plays.

Expedia holders last week approved the spinoff, which will net them one Trip-Advisor share for each Expedia share they own. Beforehand, Expedia will execute a 1-for-2 reverse stock split. The "when issued" shares of the post-split Expedia (EXPEV) and TripAdvisor (TRIPV) now reflect that cosmetic doubling in price.

Based on the prevailing price-to-sales and price-to-cash-flow ratios of similar companies, some professional investors peg TripAdvisor's post-split value above $35, versus $27.91 on the when-issued market. Spin-Off Research, a firm that analyzes such corporate cleavings, pegs the combined value at more than $66 per post-split Expedia share, which computes to more than a 15% gain from Expedia's current pre-split quote.

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Tags: Expedia, EXPE, TripAdvisors

Spin Doctors

Posted by Joe Cornell on Mon, Dec 05, 2011 @ 11:12 AM

Spin Offs unlock value

Spin doctors By Demitri Diakantonis  

The prolonged recession and volatile stock market have caused many companies to re-evaluate their portfolios to see which assets they can shed to raise cash. Companies have historically moved to spin off assets to achieve this goal, and the last five or so years have been no exception. During the recession — and in some cases prior to it — several diversified companies began to spin off assets with the goal of slimming down and re-investing in core businesses.

Years later, despite a few notable failures, the majority of these spinoffs are paying dividends for shareholders of the targets, as these businesses were able to discover their growth potential.

Take Virtus Investment Partners Inc. Phoenix Cos. filed to spin off the Hartford, Conn., financial services company in June 2008. Since that transaction was completed at the end of that year, Virtus' stock has gained 761% of its value through Nov. 30, helped in part by the fact that it now offers safer investment options such as mutual funds.

Spinoffs remain an attractive option for companies, as the number of them completed this year is on pace to match or surpass those from last year. According to Dealogic, there have been 68 global spinoffs completed through Nov. 17, valued at $105.8 billion, compared with 74 completed global spinoffs, valued at $53.7 billion, for all of 2010.

A Deal Pipeline analysis of 10 notable spinoffs that were completed and began trading in 2009 shows that most deals have returned modest value to investors. Seven out of the 10 targets have seen a minimum share gain of about 25% through Nov. 30, from when their respective transactions were completed. Seven out of the 10 parents have seen their stock increase by at least 4% through the same time frame.

"[Spinoffs] statistically outperform the market by a whole [wide] margin," says Joe Cornell, the founder of Chicago research firm Spin-Off Advisors LLC. "A lot of times, when these companies are spun off, they are much more focused. Historically, they create a lot of value for shareholders."

One of the most successful spinoffs in the past five years involves Big Mac maker McDonald's Corp. divesting Denver Mexican fast-casual chain Chipotle Mexican Grill Inc. in a deal that was completed in October 2006. Since then, Chipotle's stock has gained about 559% while McDonald's gained nearly 179%.

At the time, McDonald's decided to focus on expanding its international efforts in global markets such as Asia, Africa, the Middle East and Russia in order to keep pace with fast-food competitor Yum! Brands Inc.

McDonald's has made substantial progress in its efforts, as its global store count has grown from 31,377 in 2007 to 32,737 in 2010. In the meantime, Chipotle has grown at an even faster rate, almost doubling in size. The chain's emphasis on healthy fresh food, affordable prices and quick service has allowed it to grow from 570 stores in 2006 to 1,084 as of the end of 2010.

"In today's environment, being well diversified is not necessarily a plus," says Mesirow Financial Holdings Inc. vice chairman Jeff Golman. "Being in three to four different lines of businesses is not really a good thing."

Eight out of the 10 spinoffs analyzed by The Deal Pipeline were carried out so the parents could become industry pure plays. Most of their strategies worked because they have paid off modestly for shareholders.

Aside from Virtus, other big gainers on the list include: Time Warner Cable Inc.'s 152% rise in its stock value after it was spun off from Time Warner Inc. and Mead Johnson Nutrition Co., which saw its market value increase by 75% after Bristol-Myers Squibb Co. divested it.

On the other end of the spectrum, for three of the targets and their parents, it has been a different story, as they have underperformed since their transactions were completed. The most notable disappointment on the list is Internet media company AOL Inc., which as of Nov. 30 had lost 39% of its market value after its spinoff from Time Warner in March 2009.

Though Time Warner's investors have cheered the spin — with its shares gaining almost 20% through Nov. 30 — some industry analysts believe that the AOL-Time Warner merger was a disaster from the start and should never have happened to begin with.

"[They are] two very different companies and with very different cultures, and Time Warner, the larger firm, clearly resisted being led by the smaller firm," says Rob Enderle, an analyst at Enderle Group Inc. "It was a forced marriage, and divorce was inevitable. AOL is a media company which has collected some interesting news properties and failed to retain the high-profile talent. As a result, they had trouble retaining their audience, and the market has punished them for that."

AOL is not the only stock to be punished after a spinoff. Consider Aviat Networks Inc. (formerly known as Harris Stratex Networks Inc.). Since being spun from Harris Corp. in June 2009, the Morrisville, N.C.-based wireless transmission company has made a few missteps. Despite what it saw as increased demand for wireless networks, Aviat has struggled as its broadband customers have cut their own spending. In an attempt to make up for its ill-timed mistakes, Aviat launched a restructuring process that involves overhauling management, cutting costs and developing new products. In July, Aviat named its chief sales officer, Michael Pangia, as its new CEO.

Yet spinning off Aviat has worked out well for Melbourne, Fla.-based Harris. As of Nov. 30, the communications technology company has seen a 21% share gain. Harris put Aviat on the auction block in December 2008, but opted for a spinoff because it is believed that buyers were unable to obtain financing at the time. The move gave Harris the chance to focus on making communication systems for the aerospace and defense and healthcare sectors. Harris has seen an increased demand from international government and military agencies including Iraq, Pakistan and Saudi Arabia. The company's fiscal 2011 revenue increased to $5.92 billion from $5.21 billion through the same time period in 2011.

"Some spins are driven by the parent's desire to get a poor business off the books," Cornell says. "The parent can load up the spin with debt to improve their own balance sheet. Spinoffs on the whole have consistently beat the market. This does not suggest every spin will be a good investment."

Then there is Salt Lake City medical diagnostics company Myriad Genetics Inc., which spun off biotechnology company Myrexis Inc. in July 2009 (formerly known as Myriad Pharmaceuticals Inc.), so the target could use its own financial resources to establish a capital structure and pursue product growth as an independent company. Unfortunately, the move backfired for both companies. Through Nov. 30, Myrexis had lost about 36% of its market value, and Myriad had declined by about 18%.

Morningstar Inc. analyst Karen Anderson believes one thing that has pressured Myriad shares is the cutback on medical visits by patients who lost their healthcare insurance when they were laid off.

Meanwhile, Myrexis has been restructuring over the past year because it has yet to commercialize any drugs, which is what most of its revenue stream relies on. Myrexis changed CEOs, cut costs and staff, and stopped contracting its research services. The company says it has enough working capital to keep its operations afloat until June 2014. In September, Myrexis appointed CFO Robert Lollini as its CEO, and the company shifted its core product focus in the past year to concentrate on treatment therapeutics, including cancer therapies.

To be sure, a division does not have to be underperforming to be considered a spinoff candidate. In most cases, spinoff candidates have more growth potential going it alone than by being part of a conglomerate. When they are spun off, management teams can give those companies more attention by focusing on things like organic growth such as new product development.

This is what happened when Dublin, Ohio, medical-products distributor Cardinal Health Inc. completed its spinoff of San Diego medical-technology company CareFusion Corp. in September 2009. The move bode well for both companies. Increasing sales from its pharmaceutical segment gave Cardinal 78% in shareholder gains through Nov. 30, while CareFusion gained more than 32%, mainly driven from growth in its critical care technology segment.

"Smaller, more focused businesses are run better," says Cornell. "Managers cap the businesses properly, they launch new products and increase margins."

Though a target company may benefit from being spun off, sometimes the move proves disastrous for the parent. This was the case with Phoenix after it spun Virtus. The deal hasn't been fruitful for Phoenix's investors, as its stock declined more than 40% through Nov. 30 in the wake of its spinoff.

Phoenix stated in its 2010 annual report that its balance sheet has been impacted by relatively low interest rates, which have provided lower returns on its investments. One of Phoenix's primary sources of capital is investing through mutual funds, pension plans and endowments.

Yet in most of The Deal Pipeline's analysis of 10 notable spinoffs, both the parent and target benefited. Time Warner Cable serves as a success story and a contrast to the fate AOL ultimately endured. New York media conglomerate Time Warner Inc. announced the move in May 2008 so TWC's management could focus on making the company a pure play in the telecommunications sector, particularly in digital phones and Internet, giving it more financial flexibility to grow.

The spinoff gave Time Warner the chance to grow its branded content division. The move apparently worked well for both companies. TWC's stock has gained more than 152% since it began trading in March 2009, thanks in large part to an increased demand in high-speed data services. Its former parent company has also seen big rewards from the spinoff, as its stock has increased by almost 100% since the transaction was completed, mainly due to an increase in revenue from its film division.

Time Warner is not the only media company that has seen continued success from its content division. As of Nov. 30, Liberty Media Corp. of Englewood, Colo., has seen its shares rise by 189% after its spinoff of DirecTV Group Inc. in November 2009. Liberty Media said divesting the El Segundo, Calif.-based TV satellite company would clarify the target's capital structure and allow it to grow its content businesses. DirecTV shares have increased by about 49% through Nov. 30, as the company's subscriber base continues to grow.

Some conglomerates may not always be able to find buyers for their noncore assets, but it is common for companies to become takeover targets after they complete their breakups because buyers can assess better value on standalone businesses.

"Investors tend to pay higher stock prices for more discrete businesses than they do for consolidated ones," says Cornell. "Spinoffs are also more likely to be acquired post-spin."

For instance, Google Inc. paid $12.5 billion and a 63% stock premium for Motorola Mobility Holdings Inc. in August after the target was spun out from Motorola Inc. earlier in 2011. Likewise, Harris has previously been pegged as possible acquisition targets by some analysts. Buyers may already be eyeing companies that announced breakup plans in 2011, such as Abbott Laboratories' research-based pharmaceutical business, which will be spun from the parent by the end of 2012.

If buyers are looking for more target options, there are plenty to choose from. In 2011, Marathon Petroleum Corp. completed its spinoff of Marathon Oil Corp.; ITT Corp. finished spinning off its water technology business along with its defense and information businesses; Hotel operator Marriott International Inc. completed a spinoff of its timeshare business, now called Marriott Vacations Worldwide Corp.

A handful of notable spinoffs are expected to follow. Earlier this year, food conglomerates Sara Lee Corp. and Kraft Foods Inc. both announced that they will break up their companies. Sara Lee plans to separate its North American meats division from its international coffee and tea business, and Kraft will split its North American grocery business from its snacks division. On the energy side, ConocoPhillips Co. said it will spin off its exploration and production business.

The bottom line is that diversified conglomerates will never stop looking for ways to increase shareholder value, and spinoffs will always be an option on the table, given their track record of success.

"There is never a bad time to create value from shareholders," says Cornell. "Spinoffs historically have worked for shareholders."

Tags: Kraft, Abbott, Sara_Lee, Marathon, Marriott, ITT, ConocoPhillipps