Spin-Off Research In the News

Activists’ Secret to Unlocking Value Falls Flat in Stock Market

Posted by Joe Cornell on Mon, Nov 02, 2015 @ 12:11 PM

By Dani Burger and Lu Wang | Bloomberg | November 2, 2015

From Carl Icahn to Barry Rosenstein, activists are in love with spinoffs as a way of unlocking stock market value. At the moment, they’re not working.

Emerson Electric Co. and RR Donnelley & Sons Co. are among American stocks that have declined an average of 1.1 percent in the month after announcing the actions this year -- the first negative return for that group since 2007, according to data compiled by Bloomberg. Companies from Chemours Co. to Talen Energy Corp. that have been carved out of corporate parents and handed to shareholders as separate securities are down 2.3 percent in 2015, trailing the Standard & Poor’s 500 Index.

Held up as a cure for ailing share prices by investors who say a company’s parts are worth more than the whole, spinoffs are struggling to live up to their billing after almost 80 were carried out since 2013. Companies created by the corporate action are in some cases being denigrated as unwanted baggage of the old economy or receptacles for debt.

“Investors are not anxious to jump on what could just be financial engineering,” said Alan Gayle, senior strategist for Atlanta-based RidgeWorth Investments, which oversees $40 billion. “Before, it was an offensive move where you had segments of companies that were growing very rapidly and they wanted to unlock potential from a valuation standpoint. Now the prospects are not as clear.”

Growing Pressure

Chief executive officers at U.S. firms are under growing pressure to find ways to keep the bull market going as earnings grind to a halt after six years of expansion. In addition to share buybacks and takeovers, they’ve turned to spinoffs as a way of focusing businesses or as a tactic for salvaging waning growth.

While not every corporate breakup involves a spinoff, the topic was thrust back into the news last week when billionaire investor Icahn disclosed an investment in American International Group Inc. and said it should split into three companies. The 79-year-old billionaire floated the idea in a letter made public on Oct. 28 as a way of limiting regulation spurred by its size.

Almost $4 billion was added to its market value that day.

Earlier this year, Rosenstein’s Jana Partners called on Qualcomm Inc. to consider spinning off its chipset business as part of a strategic review of options to boost shareholder value.

It’s hard to see why activists are so excited about spinoffs, based on trading in 2015. In a Bloomberg index that tracks deals with a value of more than $1 billion, 14 newly minted companies have lost an average 8.6 percent since being listed, while their parents declined 2.4 percent.

EBay, DuPont

Among the disappointments are PayPal Holdings Inc. and Talen Energy. Shares of PayPal have slipped 1.9 percent since EBay Inc. broke off the payments business, bowing to pressure from Icahn. Talen Energy has tumbled 58 percent after PPL Corp., the power company in Allentown, Pennsylvania, separated it to refocus on its “high performing” utility assets.

DuPont split up its less profitable chemicals business as Chemours, and its stock has dropped 4.4 percent. The former unit is down 67 percent after taking on some of the parent’s environmental liabilities and inheriting a debt load to help DuPont fund buybacks. Energizer Holdings Inc. and Baxalta Inc. took out borrowings of at least $600 million to finance a payment to their parent companies.

“We’re seeing more of these forced company spinoffs,” said Jonathan Morgan, an analyst for Edge Consulting Group LLC, a Morristown, New Jersey-based research firm that analyzes spinoffs and special situations. “Because companies are doing poorly, there are more activists, and more activists forcing spinoffs, moving further away from value spins.”

A representative of Icahn didn’t immediately respond to a request for comment while one for Rosenstein declined to comment.

Profit, Valuation

Even as valuations sit near two-year highs, only two of this year’s spinoff parents are expected to report an increase in earnings next year, analyst estimates compiled by Bloomberg show. At its June peak, the Bloomberg Spin-Off Index was trading at 21.3 times earnings, a 14 percent premium over the S&P 500.

Spinoffs still represent good investment opportunities, especially those driven by business considerations rather than activist investors, according to Joe Cornell, an analyst at Spin-Off Advisors LLC, an equity research firm in Chicago. The Bloomberg Spin-Off Index had advanced more than 17 percent a year from its 2002 inception through 2014, almost double the gain in the S&P 500.

Vista Outdoor Inc., a sports and recreation company, and Cable One Inc., a former unit of Graham Holdings Co., are among this year’s winners, climbing at least 8 percent.

‘Good Pond’

“Not all spinoffs make sense, but as a group they’ve tended to provide a lot of excess returns relative to the market.

That’s a good pond to fish in,” Cornell said. “To the extent that the companies are doing spins voluntarily rather than doing them under duress with guys leaning on them to do it, it’s better if they see the break-up value rather than having someone beat them up to try to do that to take value out over a short- term basis.”

Madison Square Garden Co., yielding to an initiative led by investor John A. Thaler’s JAT Capital Management LP to boost value, broke up its slowing sports and entertainment businesses from the media operations. Shares of the parent company have dropped 12 percent since the September split.

Performance Reversal

Among some 30 companies in the Russell 3000 Index that have expressed spinoff plans since January, almost 60 percent fell over the following month. The post-announcement decline of 1.1 percent is a reversal from an increase of 4.3 percent in 2014 and compares with an average return of 1.9 percent since 2005, data compiled by Bloomberg show. 

Yum! Brands Inc. shares have dropped 2.9 after an announcement last month that it would break up its China business, heeding calls from hedge fund manager Keith Meister.

Air Products & Chemicals Inc., an industrial-gas producer targeted by activist investor Bill Ackman, has slipped 3.3 percent after saying in September that it plans to separate its materials technologies unit.

“They’re not going out of fashion, and everyone is going to continue to focus on them. But it’s not the case anymore that you can do a blanket investment of spinoffs in the market,”

Morgan said. “Hedge funds have to earn a buck for clients, especially activists. It’s affecting the quality.”



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.

Tags: Spinoff, ipo, carve-out, Spin-Off

Refinery Spinoffs Score

Posted by Joe Cornell on Mon, Nov 16, 2015 @ 12:11 PM

Energy stocks have had a terrible time of it in the past 20 months. Yet shares of refiners, an energy subgroup, have rallied by the same percentage.

By Vito J. Racanelli | November 14, 2015

Energy stocks have had a terrible time of it in the past 20 months, falling by a third since oil prices began to plunge in mid-2014. Yet shares of refiners, an energy subgroup, have rallied by the same percentage. The discrepancy owes in large part to the fact that crude oil, refiners’ main feedstock, has fallen by far more than the price of petroleum products, such as gasoline.

Many refiners were spun out of integrated oil-exploration companies in the past four years, a process that has also helped to unlock value in the group. Marathon Petroleum (MPC), for instance, was spun out of Marathon Oil (MRO) in 2011, and Phillips 66 (PSX) was set loose from ConocoPhillips (COP) in 2012. (See table nearby for a more complete list of refiner-company spinoffs.) These and other refinery operators have been the subject of bullish stories in Barron’s in recent years.

With the exception of the exploration and production company California Resources (CRC), which we’ll get to in a minute, these spun-out companies are up 50% to 177% since their first day of trading, far exceeding returns of the parent stocks and the broad market. Shares of the parent companies, meanwhile, have done poorly after the split. And shares of leading integrated companies that didn’t spin out refining assets, including ExxonMobil (XOM) and Chevron (CHV), have fallen 25% and 33%, respectively, since mid-2004.

In the energy sector, as in many industries, parent-company valuations sometimes don’t reflect the full worth of the underlying businesses. While mergers are growing in volume and size, studies have shown that spinoffs outperform the market over a two-to-three-year period.

“There’s a better dynamic when a company is spun off from a bigger company,” says Joe Cornell, publisher of Spin-Off Research. After the spinoff, managers tend to focus on shareholder value, improving capital allocation, cutting costs, and creating operating efficiencies, which lead to a rise in the shares, he says.

An exception is California Resources, an exploration and production company spun out of Occidental Petroleum (OXY) last December, which has fallen 40% since. It “came out of the gate late,” with oil prices already down sharply, says Cornell.

Buying individual spinoffs can be rewarding but risky. A less risky play can be accomplished with an exchange-traded fund, although there aren’t many spinoff-oriented ETFs to choose from. Guggenheim Spin-Off (ticker: CSD) is one, but it doesn’t buy a spinoff stock until six months after the shares have begun trading. Thus, it often misses a large chunk of the early gains to be had in many spinoffs, Cornell notes.

This ETF has lagged the Bloomberg U.S. Spin-Off Index for many years. The index includes 20 spinoffs with market caps of at least $1 billion. There will be more spinoffs coming, according to Cornell. Some 49 have been completed this year, with 30 expected so far for 2016.

Spinoffs tend to rise in a bull market but do less well when the market isn’t rallying. This year, for example, with the broad market dithering and down 2%, the Bloomberg Spin index is off nearly 6%.


View the article on barrons.com: Refinery Spinoffs Score


Tags: ConocoPhillips, carve-out, Spin-Off, Phillips 66, Murphy Oil Spin-Off, Murphy USA Spin-Off, Marathon Petroleum Carve-out