Spin-Off Research In the News

Inside Wall Street: More upside potential at Pfizer

Posted by Joe Cornell, CFA on Mon, Jun 18, 2012 @ 14:06 PM

Inside Wall Street, Joe Cornell, Joseph Cornell, Gene MarcialThe world's largest drugmaker plans to spin off its animal health unit, which should boost its stock.

By Gene Marcial


Pfizer (PFE +0.09%) isn't just developing more innovative drugs to stay on top of the global health care business. The world's biggest research-based pharmaceutical company also continues to look for ways to enhance shareholder value.

Spinning off its animal health care division, which generated sales of $4.2 billion in 2011, is its latest investor-incentive brainstorm.

Pfizer announced on June 7 that it would spin off to shareholders its animal health unit and turn it into an independent, publicly traded company. Pfizer will shortly file a registration statement for an initial public offering for the new company, to be called Zoetis, in which it will hold a minority stake.

That should be welcome news to Pfizer shareholders, who will have the opportunity to own shares in a thriving new company in an expanding industry. Global demand for products and services for animals has been strong.

More details about the planned spin-off will be revealed in Pfizer's second-quarter announcement. In the meantime, the animal health unit will be treated as a continuing operation for financial reporting purposes. The animal division has been a positive contributor to Pfizer's bottom line, but the company believes the unit will perform better as an independent company and, at the same time, further improve shareholder value.

"Pfizer animal health unit is a dynamic business with strong fundamentals, an expanding and loyal direct consumer base and a proven management team," said Pfizer chairman and CEO Ian Read. "Our focus continues to be on taking the action that will generate the greatest after-tax value for our shareholders," he added.

Zoetis plans to build on Pfizer's leadership in providing a diverse portfolio of animal vaccines, medicines, biopharmaceuticals, diagnostics and genetic tests to prevent and treat diseases in livestock and companion animals, according to Read.

The animal unit has more than 9,000 employees and markets its products in more than 120 countries, including the emerging nations. It has its own extensive research operations and holds leading market positions in North America, Europe, Africa, the Middle East, Latin America and Australia.

The spin-off is expected to be completed before July 2013. "We think Pfizer could entertain a split-off transaction where investors choose stock in either Pfizer or the new company," says Joseph Cornell, the president of Spin-Off Research.

In a split-off, holders of Pfizer shares must choose to continue owning the stock or exchange some or all of the parent's stock for shares in the spin-off company. Typically in a spin-off the parent offers its existing shareholders stock in the subsidiary in exchange for shares in the parent.

Cornell notes that to induce enough shareholders to swap stock, investors are offered shares in the unit that are worth more than the shares being returned to the parent company. This offered premium explains why split-offs are often oversubscribed. Some successful split-offs have been those of Sara Lee (SLE -0.95%)/Coach (COH -0.70%), Du Pont (DD +0.16%)/Conoco (COP -0.62%) and Bristol-Myers Squibb (BMY +1.14%)/Mead Johnson Nutrition (MJN +2.03%).

Shares of Pfizer have leaped from $16 a share in April 2011 to a 52-week high of $23.08 on April 27, 2012. Currently trading at $22, the stock is expected to continue rising.

Analyst Herman Saftlas of S&P Capital IQ, who rates Pfizer as a "buy," expects improving bottom-line trends, "helped by growth in emerging markets, cost restructurings and share buybacks." Generic competition for its blockbuster cholesterol drug Lipitor, which produced sales of $9.6 billion in 2011, is expected to drive down sales in 2012. Lipitor's patent expired in November 2011. But Saftlas says he likes Pfizer's R&D pipeline, with key catalysts on three potential breakthrough drugs expected over the near term.

Saftlas says Pfizer's animal health division offers one of the largest-selling and broadest product lines in the field, including feed additives, antibiotics and other veterinary products. Pfizer's bottom line is expected to be helped by more buybacks with its ample cash stash. Operating cash flow for 2012 is projected at about $19 billion. In April 1012, Pfizer agreed to sell its nutrition unit to Nestle for $11.8 billion. That should give the company more ammo for more share repurchases.

For 2013, Saftlas expects Pfizer to post earnings of $2.33 a share, up from an estimated $2.24 a share in 2012. In 2010, Pfizer earned $1.11 a share.

Tags: Sara Lee, SLE, COP, Pfizer, PFE, ConocoPhillips

One last spin: Once-eclectic Sara Lee soon to be down to meat and cheesecake

Posted by Joe Cornell, CFA on Mon, Jun 25, 2012 @ 10:06 AM
spin off, spinoff, Sara Lee, SLE, DE Master Blenders

Remaining product lines of renamed Hillshire Brands will come back to Chicago

June 23, 2012 | By Emily Bryson York, Chicago Tribune reporter

It has made Coach handbags, Isotoner gloves, Kiwi shoe polish and Playtex bras. But by Thursday,Sara Lee Corp.will have slimmed down to meat and cheesecake.

What was a $20 billion, multinational holding compnay with more than 150,000 employees in 2000 will become a food-focused company renamed Hillshire Brands, with about 8,500 employees, a portfolio of meat products and frozen desserts and nearly $4 billion in sales.

The tighter focus is the result of a 12-year process in which Sara Lee has spun off and sold businesses, due in part to investment trends that have dimmed the appeal of diversified conglomerates. But experts also say the Downers Grove-based company never found a solid base business in any particular segment, even though Sara Lee boasted of such marquee names as Coach, Hanes undergarments and its eponymous cheesecakes.

Hillshire Brands' new CEO is betting that a simpler mission will improve shareholder returns.

"I've long been a believer in the power of a focused company," said Sean Connolly. "When you're focused, you can make sure you're nurturing your brands and paying attention to consumers. The evidence is clear that big, unfocused companies don't deliver."

Sara Lee will complete the spinoff of its remaining international coffee and tea business Thursday, a $3.3 billion company now called DE Master Blenders 1753 and based in the Netherlands.

Hillshire Brands will begin trading on the New York Stock Exchange under the ticker HSH. About 85 percent of its sales will come from meat products like Jimmy Dean, Hillshire Farm, and Ball Park. About 15 percent of its sales will be composed of the frozen desserts like the cheesecake Midwesterners long have wistfully associated with the S&P 500 company.

New company, narrower focus

Connolly came to Sara Lee in January, after a decade at Camden, N.J.-basedCampbell Soup Co., where he helped build the company's V8 business by reframing it as a fruit and vegetable drink and an easy vehicle for nutrients.

He plans something similar at Hillshire: to extend its biggest brands beyond raw sausage and hot dogs and into new supermarket aisles and categories. As an example, Connolly pointed to the frozen breakfast sandwiches, quesadillas and casseroles that have become an important part of the Jimmy Dean business over the last decade. These products have higher margins and took the well-known sausage brand into the freezer aisle.

New products will be key to Hillshire's growth, he said. By fiscal 2015, new offerings should equal 13 to 15 percent of company sales, up from an average of 9 percent over the last four years.

Hillshire also is looking to grow sales among certain consumers, such as Hispanic families and calorie-conscious women. Jimmy Dean Delights, a line that includes breakfast sandwiches and bowls with fewer than 300 calories, have been a success with women, he said. The company also plans to launch a Mexican-style corn dog to appeal to Hispanic families.

To support its goals, Hillshire will beef up its marketing budget. Connolly has projected a marketing investment equal to 5 percent of sales by fiscal 2015, up from 3.6 percent of sales for the fiscal year to date.

While Hillshire's frozen desserts business, including its cheesecakes, seems to have little to do with sausage, Connolly argued that the business is extremely popular in commercial food service and gives Hillshire a chance to sell those clients on its meat products.

He added that the bakery expertise helps Hillshire make better-quality frozen breakfast sandwiches, which have been a growth engine for Jimmy Dean in recent years.

By January, Hillshire plans to move 500 to 600 employees back to Chicago, on the Near West Side, which Connolly sees as fitting because of the company's roots in the city.

Like the company's history, the mechanics of its separation are a little complicated.

Company shareholders will receive one share in DE Master Blenders for every share owned in Sara Lee. The company stock will also go through a one-for-five reverse split, meaning shareholders will receive one share in Hillshire for every five shares held in Sara Lee. This relatively unusual division prevents the new Chicago-based company from debuting as a $5 stock.

"It's more of a marketing or appearance sort of thing," said Joe Cornell, managing principal of Spin-Off Advisors and author of "Spin-off to Pay-off." "They'd rather not have a sub-$10 stock, but cutting the pie differently doesn't change the value."

Shareholders will also receive a $3 special dividend.

A winding road

Established in Baltimore as a sugar, coffee and tea business in 1939, the company moved to Chicago in 1942 and changed its name to Sprague Warner-Kenny Corp., going public in 1946.

The company nabbed Kitchens of Sara Lee in 1956, as part of an acquisition of Piggly Wiggly supermarkets. Hillshire Farm, Hanes and Chef Pierre, a maker of frozen prepared desserts, and others were purchased in the 1970s.

James Schrager, a clinical professor of entrepreneurship and strategic management at the University of Chicago's Booth School of Business, explained, "it became very, very profitable to be in a conglomerate and the stock market welcomed and rewarded executives who went out and bought other companies."

However, "by the mid-'80s everyone figured out it was a temporary gain," he said. "In fact, it's much harder to manage a company than it seems when they're just buying a good brand when you don't know what's going on inside them." But Sara Lee kept buying.

Brands like Jimmy Dean, Kiwi shoe polish, and Champion sportswear joined the portfolio in the 1980s. Sara Lee Corp. became the company's official name in 1985.

Sara Lee bought Playtex in the 1990s, along with other apparel, meat and coffee brands, reaching the $20 billion sales mark in 1998. Then growth plateaued. Sara Lee began scaling back in 2000, spinning off Coach and selling other businesses.

After years of lackluster earnings, Sara Lee announced plans to spin off or sell 40 percent of its businesses in 2005, including its apparel division led by Hanes, European packaged meats and U.S. retail coffee. PepsiCo alum Brenda Barnes was named CEO and credited with accelerating the company's divestitures.

"They've tried to say for years now, 'We've gotten to a manageable collection of businesses,'" said Tim Calkins, a clinical professor of marketing at Northwestern University's Kellogg School of Management. "Then a few years later they would say, 'Now we've gotten to a manageable collection of businesses,' but each time the company really struggled and ended up splitting up some more."

Sara Lee announced major sell-offs in 2009 and 2010: its household and body care business to Unilever, followed by its North American bakery business to Grupo Bimbo. Barnes stepped down in 2010, after suffering a stroke. She was succeeded by Marcel Smits, who announced the intention to break up the company in early 2011.

After the split, the question for a number of industry analysts is whether a smaller company can stay independent, or if it's likely to be absorbed by a larger one. After all, Hillshire's first-year sales are expected to be about half those of meat-industry competitor Hormel and a fraction of those of Tyson Foods.

"There tends to be a lot more merger activity with these companies post-separation or spinoff," said Cornell, estimating that companies are three to four times more likely to be bought by a larger company within six to 12 months following separation.

As for Sara Lee in particular, Cornell added, "We think both pieces could be good takeover targets by a strategic buyer, for a bigger competitor to pay up for them."

For his part, Connolly believes meat consumption in the United States will only grow.

"The vast majority of consumers love meat in the foods they eat," Connolly said. "Consumers are just eating meat differently, which is why we're so committed to innovation and following consumer trends to give them meat in the products they want."

Tags: Sara Lee, SLE, D.E. Master Blenders 1753, SLE Spin-Off, Sara Lee Spin-Off