Spin-Off Research In the News

4 Ways To Profit From The Spin-Off Advantage

Posted by Joe Cornell on Wed, Oct 21, 2015 @ 12:10 PM


Wayne Duggan | Seeking Alpha | October 21, 2015


  • Research has consistently shown that spin-offs outperform the broad market in their first years of trading.
  • A new study found that spin-offs between 2009 and 2013 averaged 17% out-performance in year one.
  • There are several different types of upcoming spin-offs in Q4 that offer unique investment opportunities.

More and more companies seem to be recognizing the benefits of spinning-off assets or stand-alone business segments these days. In 2014, there were 60 completed U.S. spin-offs, third most of all time behind only 1999 and 2000.Spin-Off Advisors is predicting another 51 completed spin-offs by the end of 2015 as well.


Why spin-off?

Spin-offs are typically viewed as positive for the parent company. The move is often made in an attempt to unlock some type of value in the parent company's core business. For example, a company with a large, well-established, high margin, highly profitable business may also have a smaller segment that requires large debt load and/or operates on extremely low margins, but is a very high growth business. These two types of businesses typically appeal to different investors, and running both of them under the same corporate roof could mean that both the full fundamental value of the core business and the full growth value of the smaller business are not fully realized in the combined company's share price.

By spinning-off the smaller company, the parent company immediately removes debt from its balance sheet, improves its overall margins and appeals more to value investors. The stand-alone growth business is free to shine on its own for growth investors as well.

Boosting margins, stimulating growth, adjusting debt, improving borrowing prospects and increasing market valuation are all common reasons why companies choose to spin-off businesses.

Hitting the ground running

While spin-offs can certainly benefit the parent company in a wide range of ways, recent research by Cantor Fitzgerald has shown that it's the newly formed company that tends to steal the show in the market. All the public spin-offs completed between 2009 and 2013 combined to outperform the S&P 500 in their first full year of trading by an average of more than 17 percent!

And the Cantor Fitzgerald data is no fluke. There have been several other studies over the past few decades that have confirmed that spin-offs outperform the broad market in their first year.


Investors who would like to see this spin-off trend boosting their portfolio performance won't have to wait for long. There are several different types of spin-offs that are set to take place before the end of the year. Here are four unique spin-off investment opportunities.

Separating high-growth business from high-income business

In what appears to be a fairly standard spin-off, Hewlett-Packard (NYSE:HPQ) is expected to finally spin-off its enterprise operations, including its faster-growing corporate hardware and services segments, from its legacy personal systems and printing business on or around November 1. The newly formed Hewlett Packard Enterprises is not initially expected to generate as much profit as its parent company, despite the fact that the enterprise business will have roughly twice the assets that will remain in the parent company. However, with an uncertain future in the printing and PC business, the enterprise business certainly seems like a safer long-term bet.

Unlocking equity value

One of the more intriguing upcoming spin-offs is the highly anticipated spin-off of Yahoo! Inc.'s (NASDAQ: YHOO) Yahoo Small Business segment. If you don't know anything about Yahoo Small Business, don't worry: it's likely that YHOO shareholders don't either. And they don't care.

What they do care about is the 384 million shares of Alibaba Group Holding Ltd (NYSE: BABA) that will be accompanying Yahoo Small Business during the spin-off, hopefully tax-free. Unfortunately, the IRS recently created quite acorporate cliffhanger by failing to rule on YHOO's Private Letter Ruling Request, meaning that the company still does not know whether the terms of its proposed spin-off will satisfy the requirements for a tax-free exemption.

If YHOO is allowed to proceed with the spin-off tax-free, there is clearly some value to be had for investors. Even though BABA's share price has declined by 29 percent so far this year, YHOO's stake is still worth about $27 billion. At YHOO's current share price, that value makes up 87.9 percent of the stock's entire market cap.

Opco/propco deal

Finally, another type of spin-off that has gained popularity in recent years is the opco/propco spin-off, which is what Darden Restaurants, Inc. (NYSE:DRI) has planned in Q4. Here's DRI's plan: the company is going to create a new REIT and transfer ownership of 430 of its properties (along with about $1 billion in debt) to the REIT prior to spinning it off. The REIT will then lease the properties back to the parent company. DRI is hoping that the end result will be a reduction of its debt load by nearly two-thirds, a more favorable tax structure for both entities and the unlocking of the full value of DRI's property assets.
Diversified alternative

If none of the deals above appeal to you, or if you prefer a more diversified way to play the spin-off trend, the Guggenheim Spin-Off ETF (NYSE: CSD)is an option. The fund invests at least 90% of its assets in companies that are between 6 and 30 months removed from being spun out. The fund misses out on the first six months following the spin-out, and it holds the stocks until 1.5 years after Cantor Fitzgerald's one-year cutoff mark. Although it hasn't demonstrated the 17 percent annual outperformance that Cantor Fitzgerald found, the fund has still outperformed the S&P 500 by nearly 20 percent over the past five years.


It's up to each reader to choose his or her preferred way to invest in spin-offs. However, the numbers show that spin-offs have consistently proven to be a source of alpha for opportunistic investors, and that's what this site is all about!

Click here to view article on seekingalpha.com: 4 Ways To Profit From The Spin-Off Advantage


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

Dell Dusts Off Dot-Com Curio With Tracking Stock in EMC Buyout

Posted by Joe Cornell on Tue, Oct 13, 2015 @ 10:10 AM


By Oliver Renick, Lu Wang and Dani Burger | Bloomberg News | October 12, 2015

About a quarter of Dell Inc.’s $67 billion valuation for EMC Corp. hinges on a type of security that most of Wall Street considers an artifact of the technology bubble: tracking stock. Should anyone be concerned?

Roughly $9 of the $33.15 a share takeover price will be conjured by allowing EMC holders to hang on to the company’s stake in Palo Alto, California-based software maker VMware Inc., acquired 11 years ago. Rather than just handing over the stock, Dell will issue securities designed to mimic shares of VMware that are already publicly traded. In effect, EMC holders get a market for shares they couldn’t previously touch -- although they won’t exactly own them, either.

The concept of creating stock that reflects a set of assets without conferring all the normal privileges of ownership dates to the 1980s -- and became a full-blown craze during the dot-com era. The market crash of 2000 spelled doom for the lion’s share of trackers. A handful still exist in John Malone’s media empire, while most of the others have been retired.

“My experience had been that they’d gone away, they were popular in the late ’90s but they all either converted into real spinoffs or got folded back into the parents,” Joseph Cornell, founder and editor at Spin-Off Research in Chicago, said in a phone interview. “They’re a flaky security. They don’t have the same characteristics of a real spinoff -- it’s a way to highlight the assets without giving up control. They’re kind of a ‘trust-me’ security.”

EMC owns roughly 81 percent of VMware, with the rest trading publicly under ticker VMW. Hopkinton, Massachusetts- based EMC paid $635 million for VMware in 2004, then spun off a stake in 2007. The business carried a market value of more than $34 billion as of last week, ranking it among the biggest corporate investment returns in tech history.

Possible Discount

While the companies released only a few details about how the WMware tracker will be designed, Michael Dell and EMC Chief Executive Officer Joseph M. Tucci said in a CNBC interview Monday that they expect the price to hew closely to the public version of VMware when it’s issued. Still, the two securities won’t be the same.

"They don’t have any voting rights and they don’t actually own the asset, only the economic interest in the asset," Derrick Wood, an analyst at Susquehanna International Group LLP said by phone. "If VMware were to go bankrupt, they’d have no rights on any of the assets. We think that the tracking stock will trade at a 5 to 10 percent discount because it doesn’t have any voting rights."

At the same time, benefits may accrue from the additional liquidity in VMware, a company that differs from other tracking stock candidates because its assets are already known to investors who have had eight years to analyze its results as an independent firm.

“It’s sort of unprecedented, but that’s the argument that EMC is making because they want to justify this idea that they can issue this as a good compensation for shareholders,” said Jason Benowitz, a New York-based senior portfolio manager at Roosevelt Investment Group Inc. which oversees $4.5 billion and owns shares of VMware.

“Typically there is much less historical transparency into the operations of a business unit that has a tracking stock,” Benowitz said. “That is another reason why the tracking stock discount could be narrower in this case.”

Share Dilution

VMware stock dropped 8.1 percent on news of the buyout, a swoon analysts ascribed to concerns about millions of new shares coming to the market. Mizuho Securities USA cut its rating on VMware to neutral from buy on Monday.

“We think the introduction of tracking stock combined with Dell’s purchase of EMC will be a negative for the stock,” analyst Abhey Lamba wrote. “Our checks on VMW’s near-term business remain positive but the increase in effective float will likely have a negative impact on stock performance.”

Much of the negative sentiment that blew up around tracking stocks over the last decade stems from their performance during the Internet bubble, when companies were eager to highlight anything with a dot-com handle.

GM Pioneers

Trackers have been around since 1984, when General Motors Co. introduced a class of stock linked to its former computer- services unit, Electronic Data Systems Corp. A second class, for its Hughes Electronics Corp. satellite unit, came out the following year. General Motors retired Electronic Data in June 1996, and spun off Hughes in 2003.

During that span, as many as 39 trackers were minted -- though only 10 remained a year after GM disposed of Hughes in a deal with News Corp., according to a research note in 2004 from Lehman Brothers Holdings Inc. Among those that famously fizzled were Walt Disney Co.’s Go.com and Alcatel SA’s Alcatel Optronics.

Liberty Media

One corporate mogul who never gave up on the concept is Malone, the billionaire founder of Tele-Communications Inc. who is now chairman of Liberty Media Corp. Malone split his Liberty Interactive Corp. into two tracking stocks in 2012, one that tracks interests in home shopping services QVC and HSN and another that included interests in Expedia Inc., Time Warner Cable Inc. and AOL Inc.

“I’d point to Liberty Media today, which has a collection of tracking stocks and people view the management as quite savvy,” Benowitz said. “They’ve been able to exchange these different tracking things to realize value over time, and they do it in a tax-efficient way.”

The VMware security differs from most earlier versions of tracking stocks in several respects. In most incarnations, such shares were issued to reflect subsidiary assets of a company that itself was publicly traded -- something EMC will no longer be. The stock being created in the Dell buyout will represent a stake in a full-blown, existing public company and trade in the same market as VMW’s common stock.

Viewed from that perspective, the creation of tracking stock to fuel Dell’s buyout of EMC makes more sense, according to a note from Kevin Buttigieg, an analyst at MKM Partners LLC.

Among other things it shows that Dell wants to maintain control over a company in a way that simply selling the VMware stock outright wouldn’t have allowed.

“EMC holders will have to decide whether they want to keep the VMware tracking stock or sell it and put their money elsewhere,” said Lamba at Mizuho. “It’s helping them get some more value out of their ownership, but if it were an all cash deal it would be more attractive. There’s more certainty in the value whereas a tracking stock depends on the value of VMware’s stock.”



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, Tracking

Put Alcoa's Spinoff on Your Watch List

Posted by Joe Cornell on Tue, Oct 06, 2015 @ 10:10 AM



Brett Owens | Contrarian Outlook | October 5, 2015

Aluminum maker Alcoa (AA), down 41% year-to-date, is starting to attract attention from contrary-minded investors. They’re misguided – it’s foolish to buy a stock just because it’s gotten crushed. But they’re actually on the right track (albeit for the wrong reason), because Alcoa’s ugly duckling business is likely to deliver beautiful swan stock returns.

The corporate spinoff – where a company splits into two (and sometimes more) new publicly traded firms – is barely a blip on the radar for many first-level investors. They prefer to fixate on its much-ballyhooed cousin, the IPO.

That’s too bad for them, because while hot new offerings may pop for big gains out of the gate, they’re equally likely to erase those gains—and more—once the hype dies down. They’re also much more likely to be overpriced at the outset. The ignored spinoff is where the real returns are at.

IPOs Sink, Spinoffs Outperform

So far, this has been a tough year for spinoffs, with the Guggenheim Spin-Off ETF (CSD)—a reasonable proxy for their performance—down more than 15% year-to-date, compared to a 7% decline for the S&P 500.

But it’s been an even rougher year for IPOs: as of Monday’s close, the Bloomberg IPO Index, which tracks the performance of stocks during their first year of trading, was down 26.6% since the start of 2015.

Of course, a single nine-month period is largely irrelevant from a long-term investor’s point of view. Luckily for us, there are studies available spanning longer timeframes. In 2013, for example, researchers at the University of Florida released a study looking at what IPOs between 1970 and 2011 returned in their first five years as publicly traded companies.

The findings? IPOs underperformed other firms of the same size (judged by market cap) by 3.3%, excluding the first day of trading. When you zero in on the latest 11-year period, that gap narrows to 1.8%—though IPOs trailed by an especially glaring 18.0% in Year 1.

Meantime, a 2012 Credit Suisse study that focused on the top 1,000 US companies by market cap tells a different story on spinoffs. It looked back over the preceding 17.5 years and found that spun-out firms outperformed the S&P 500 by 13.4% in their first 12 months as public companies, while parents topped it by 9.6%.

Lots of Spinoffs—and Plenty of Time to Choose

There are plenty of reasons why a company may go the spinoff route, but a common one is that the move sharpens management’s focus. The teams in charge of both new firms can zero in on their main businesses instead of juggling a mixed bag of operations that often have little in common.

Companies are also responding to a long-term shift in investor demand from conglomerates to pure plays. Activists are playing a big role here, too, pushing more companies to separate out faster-growing operations so they’ll be easier for the market to see—and value—than if they stayed buried within a conglomerate.

These factors are driving the number of spinoffs to historically high levels: by the end of 2015, research firm Spin-Off Advisors predicts 51 companies will have announced breakups. That’s down from 60 last year, but it still marks the third-highest total in the past two decades, behind 1998 and 1999 (66 apiece) and 2014. It’s also up from 37 in each of 2012 and 2013.

This means that second-level investors have lots of time after a split to research these companies for themselves before taking action.

In his 1997 book, You Can Be a Stock Market Genius, hedge fund manager Joel Greenblatt cited a 1993 Penn State study showing that on average, spinoffs beat the S&P 500 by 10% a year through the first three years—though the biggest gains came in Year 2.

The Credit Suisse study also indicated an adjustment period: it found that spinoffs trailed the S&P 500 during the first 28 days before moving ahead of the benchmark, while parent firms took 27 days to do so. By day 60, both the parent and spinoff had returned on average 2.2% more than the index.

If you think about it, this makes sense: suppose you’re an investor in XYZ Co., and you receive shares of its newly spun-off widget division. You didn’t pick the stock yourself, so you may decide it’s not the best fit for your portfolio. The result? A higher chance you’ll unload it—and probably within the first year.

Turning a Duckling Into a Swan

Here’s something else most investors miss about spinoffs: it’s often the unloved, or “boring,” stock that turns out to be the better investment.

A good example is Abbott Laboratories’ (ABT) January 2, 2013, separation of its pharmaceutical business, Abbvie Inc. (ABBV), into a new public company.

“Some saw Abbvie’s products as dead weight, begging to be jettisoned so that Abbott’s faster-growing diagnostics and nutrition business could soar,” wrote Fortune magazine reporter Jen Wieczner in a June 29 article.

But nearly three years and a number of successful drug launches later, Abbvie has run circles around its former parent, returning 56%, compared to just 27% for Abbott. Abbvie also boasts a higher dividend, offering a 3.9% yield, compared to 2.5% for Abbott.

That brings us to the latest split to hit the news: Alcoa Inc.’s (AA) separation of its faster-growing engineered-products business from its aluminum-production operations, which have struggled in the face of a persistent aluminum glut. The transaction is slated for the second half of next year.

Will we look back three years later and see the same pattern we saw with Abbvie and Abbott?

Time—and the aluminum market’s supply/demand balance—will tell, but I wouldn’t be surprised if that’s how things play out. Put Alcoa’s future spinoff on your watch list.

  Download Alcoa Announcement


To view this article on contraryinvesting.com click here: Put Alcoa's Spinoff on Your Watch List


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.

REIT Gambit Meant to Cut Telecom Carrier’s Debt Proves Costly

Posted by Joe Cornell on Mon, Oct 26, 2015 @ 13:10 PM


By Lily Katz | Bloomberg | October 26, 2015

Windstream Holdings Inc. became the first U.S. telephone company to turn its network assets into a real estate investment trust in April, providing a possible a blueprint for other small carriers seeking to reduce their debt and free up cash. Six months later, it’s still the only telecom REIT.

Windstream’s stock has plummeted 46 percent, while its REIT -- Communications Sales & Leasing, Inc., or CSAL -- has dropped 34 percent. The shares’ performance reflects concern about Windstream’s ability to grow beyond its landline phone business, and also throws into question whether REITs will work for other small telecom carriers like CenturyLink Inc. and Frontier Communications Corp.

“The fact that nobody else has followed suit in that six- months-to-a-year time frame is an indication that it’s not as much of a slam dunk as maybe the initial reaction might have led you to believe,” said Jeffrey Langbaum, an analyst with Bloomberg Intelligence.

REIT conversions are one way companies including retailers and casino owners have found to squeeze out more profit by lowering their tax rates. REITs don’t pay federal income taxes with the understanding that they distribute at least 90 percent of taxable earnings to shareholders as dividends. While wireless tower companies such as American Tower Corp. have converted their assets into REITs, it hadn’t previously been tried with infrastructure like Windstream’s.

Windstream turned its copper and fiber networks, along with other assets, into a REIT as a way to cut debt by about $3.2 billion and help produce about $115 million a year more in free cash flow to build out infrastructure necessary to support faster Internet service in rural America. After the company announced the spinoff on July 29, 2014, shares rallied as much as 26 percent, the biggest daily jump since the Little Rock, Arkansas-based company went public in 2005. On that day, the S&P 500 Telecommunication Services Index rose 2.2 percent for the biggest advance in more than four months.

“Being the first telecom REIT, the entire industry shot up,” said Barry McCarver, an analyst at Stephens Inc., which advises Windstream and CSAL.

On Monday, Windstream was little changed at $7.17 at 9:50 a.m. in New York. CSAL fell 1.2 percent to $19.83.

In the months since the REIT’s debut, investors have questioned whether a REIT will work for a company like Windstream, said James Moorman, an analyst at DA Davidson & Co. “REIT investors have typically been kind of skeptical about anything that’s not a true REIT,” he said.

For one, Windstream is CSAL’s only leaseholder, meaning the cash is coming from one place.

“You have a pretty sizable universe of REITs out there that have a long operating history,” said Langbaum, the Bloomberg Intelligence analyst. “Investors might not want to hold a REIT that is nothing more than a bunch of leases to Windstream.”

Combined, Windstream and its REIT offer a dividend that is 30 percent lower than what Windstream had paid out before the spinoff. But at about 12 percent, the REIT’s dividend yield is still more than double the average of health-care, apartment, office, mall and shopping-center REITs, according to data compiled by Bloomberg.

“It may take some time for them to prove that the business actually works before REIT investors are willing to pay up for it, which is why in the meantime you’ve got to offer a higher dividend yield in order to compensate for that risk,” Langbaum said.

David Fish, a spokesman for Windstream, said in an e-mailed that the company is confident in the “strategic rationale” for the REIT transaction.

Mark Wallace, CSAL’s senior vice president, chief financial officer and treasurer, said he thinks Windstream would spin off assets into a REIT again if given the opportunity. “They would still say that the spinoff accomplished their objectives even though their performance and our performance, which is closely linked, has clearly been down, mostly due to market conditions," Wallace said.

CenturyLink spokesman Mark Molzen said the company has “elected not to pursue a REIT structure at this time.” A spokesman for Frontier declined to comment.

Declining Revenue

Windstream’s free cash flow turned negative in the second quarter, and the company has projected 2015 service revenue to fall as much as 3 percent.

The company’s bonds are among the worst performers in the Bloomberg U.S. Dollar High Yield Corporate Bond Index for Communications. While Windstream bonds are rated B2 by Moody’s Investors Service and BB- by Standard & Poor’s, they trade at yields more reflective of peers rated CCC. That discount may reflect investor concern about leverage, free cash flow and management’s embrace of shareholder returns, Bloomberg Intelligence analyst Stephen Flynn wrote in a note this month.

Windstream’s shares have plunged 70 percent since going public in 2005 as the company has contended with a decline in its landline business. The provider lost 86,400 small-business, high-speed Internet and TV subscribers in the last year, while gaining 300 enterprise customers. Unlike larger carriers Verizon Communications Inc. and AT&T Inc., Windstream doesn’t have a lucrative wireless unit on which to fall back.

Windstream’s former chief executive officer, Jeff Gardner, left the company in December 2014 amid declining revenue and narrowing margins. Then the company was delisted from the Standard & Poor’s 500 Index after the close on April 6, less than a month before CSAL began trading.

“If it’s a bad business and they split the business in two, then they have two bad businesses,” said Joe Cornell, an analyst at Spin-Off Advisors LLC, an equity research firm in Chicago, Illinois.

Earlier this month Windstream agreed to sell its data- center business for $575 million, which would ease refinancing concerns about its $1.1 billion bond maturity in 2017, Flynn said. That deal is scheduled to close within four months.

Also, in August, the company introduced a $75 million share-repurchase program and accepted $175 million in annual federal funding to expand broadband Internet services in rural areas. Since those announcements, the stock is up 39 percent.



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: Spin-Off