By Dani Burger | Bloomberg News | October 10, 2016

A favorite tool of activists for enhancing stock returns is working again after one of its roughest stretches of the bull market.

After a year in which spun-off shares languished, announced plans from the likes of Hewlett Packard Enterprise Co. and Procter & Gamble Co. have lifted returns from newly independent stocks more than twice as much as the S&P 500 Index’s in 2016.

Companies tracked by the Bloomberg Spinoff Index are up six of the last seven months and climbed 0.5 percent on Monday, while the S&P 500 also added 0.5 percent to 2,164.65 at 12:45 p.m. in New York.

The revival ends a yearlong dry spell in which a proliferation of spinoffs in struggling industries such as oil and raw materials turned sentiment against the tactic. A rebound in energy stocks and a flurry of separations in technology, this year’s second-best performing industry in the S&P 500, is spurring the turnaround.

“When there was a weaker market over the past year, there were more unknown factors -- there’s an unknown management team, their spinoff is a bad business, and there’s limited financial statements tied to these new companies,” said Jonathan Morgan, an analyst for Edge Consulting Group LLC, a Morristown, New Jersey-based research firm that analyzes spinoffs and special situations. “Now the risk appetite is growing for spinoffs and there are so many more interesting names coming up.”

In September, money manager TPG said it would invest in Intel Corp.’s cybersecurity spin-out in a deal that values the business at $4.2 billion. Intel shares have since climbed to the highest level since since the dot-com bubble. Last week, insurance giant MetLife Inc. gained more than 5 percent in two days after disclosing plans to carve out a retail subsidiary with $240 billion in assets that offers retirement products and other services.

Investors are rewarding all sides. This year, parent companies have gained an average 2.3 percent in the four weeks after making public their plans to spin off shares. That’s 1.5 percentage points more than the S&P 500 over the same time frame for the biggest spread since 2010, data compiled by Bloomberg show. Meanwhile, an index tracking child shares reached its highest level ever at the end of last month.

It was a different story altogether in 2015. Parent companies fell nearly 2 percentage points more than the S&P 500 a month after a spinoff was announced in the worst relative performance since 2011. Spinoffs dropped 2.7 percent in the worst year since 2011.

Energy Boost

The S&P 500’s advance reversed a 0.3 percent decline on Friday. The Dow Jones Industrial Average added 95.14 points, or 0.5 percent, to 18,335.63 today. The Nasdaq Composite Index increased 0.8 percent. West Texas Intermediate crude futures in New York rose 2.6 percent.

“The gains today could be because Putin has said that he’s willing to reduce output and freeze production to increase the price of oil,” said John Conlon, chief equity strategist at People’s United Wealth Management which oversees $5.5 billion. “The earnings season is now going to be grabbing attention for the next three weeks. The market is still betting that Hillary Clinton will win the election.”

Equities were rising Monday in the face of risks from U.S. elections to higher borrowing costs and corporate earnings in the final quarter of the year, with strategists saying a holiday rally is not in the cards. Stocks have gotten off to a rocky start in October, with the S&P 500 ending a three-week winning streak as recent economic data and hawkish comments by Fed officials boosted speculation of a rate increase by year-end. The benchmark is 1 percent below a record reached in August.

Tech Spins

Technology companies make up the majority of those pursuing the spinoff strategy, with a total value of $9.7 billion within the Russell 3000, or an 119 percent increase from last year, data from Bloomberg show. Previously it was energy companies, looking to alleviate squeezed profit margins as the price of crude plummeted, said Joe Cornell, an analyst at Spin-Off Advisors LLC, an equity research firm in Chicago.

“If you look back to 2014, there were quite a few spinoffs of various energy names, and a lot of those did that at the wrong time when the price of energy was high,” Cornell said. “This year, the IPO market was cut in half, so the IPOs and IPO spinoffs that happened this year have been of higher quality.”

To be sure, there are still laggards among the bunch. After posting its worst quarterly loss in at least a quarter century, Occidental Petroleum Corp. said in February it would distribute its California business to stockholders in the form of a special dividend. It fell 2.8 percent in the month after announcing its spinoff while the S&P 500 gained 5.4 percent.

Even though profits look better this year, companies that pursue spinoffs tend to struggle with raising their margins when compared to U.S. companies as a whole, according Abhra Banerji, the director of quantitative research at Evercore ISI. That may have discouraged investors in the past, but in 2016, buying profitable companies hasn’t paid off. A strategy which owns companies with the most earnings momentum and shorts those with the least has fallen 4.3 percent year-to-date, data from Evercore ISI show.

“Low profitability and revenue growth companies have outperformed this year relative to the high profitability and revenue growth companies. This could be playing in to the out performance of spinoffs,” Banerji said. “If nothing, it is a good tailwind.”

To contact the reporter on this story:

Dani Burger in New York at dburger7@bloomberg.net

To contact the editors responsible for this story:

Jeremy Herron at jherron8@bloomberg.net

John Shipman

By Barbara Soderlin | Omaha World-Herald | October 13, 2016

ConAgra Foods’ spinoff of its frozen potato business into a stand-alone company could shape up to be one of the year’s most lucrative spinoff deals, one analyst told The World-Herald.

But others are skeptical about whether the two companies will fare much better on their own than they have together, and about how quickly shareholders could see a gain.

Either way, the deal will sharpen the focus on the remaining ConAgra business, with its motley crew of grocery store food brands, and will put to the test Chief Executive Sean Connolly’s vision to break up the formerly Omaha-based food manufacturer.

Shareholders and analysts will be looking for clues today in the first of two investor presentations. Executives of the future Lamb Weston stand-alone potato business will lay out the most detailed information yet about the new company’s corporate structure, spending priorities and growth plans. A second presentation Oct. 18 will give the same details on the remaining — and renamed — Conagra Brands business so investors can evaluate each business on its own merits.

The spinoff is another major step in Connolly’s plan to boost value for ConAgra shareholders by cutting costs and breaking the company into pieces, freeing up resources to focus on a core business of grocery store food brands like Slim Jim and Marie Callender’s. The spinoff comes after he sold ConAgra’s private-label food business to a competitor, laid off 1,000 people in Omaha and moved ConAgra’s headquarters to Chicago.

ConAgra now will split apart its potato business — a maker of McDonald’s french fries — from its consumer food brand business, saying that on its own, each company will be more focused, more flexible and better-positioned for success.

ConAgra shareholders will receive one Lamb Weston share for every three shares of ConAgra stock owned as of Nov. 1. Shares will be distributed Nov. 9.

The new Conagra Brands will trade on the New York Stock Exchange under the company’s current symbol, CAG. Lamb Weston shares also are expected be listed on the NYSE, under the symbol LW. Lamb Weston will be based in Eagle, Idaho, a Boise suburb. Its biggest customer is McDonald’s, with about 12 percent of sales.

One firm that studies spinoff deals has been telling clients to buy ConAgra shares now, before the spin, and to hang on to both companies’ shares after the spin. ConAgra has already been a “winner” for clients, said Jonathan Morgan, a deals analyst and partner at the Edge Group, a New York firm that studies spinoffs. ConAgra stock is up about 12 percent so far this year, compared with about 5 percent for the broader stock market.

“From what we know as of now, this is plating up to be one of the better spinoffs this year.”

Lamb Weston is a “really good business,” Morgan said, with strong operating profit margins and plenty of cash. Commercial food sales — mostly the Lamb Weston business — represented about 32 percent of total ConAgra sales in the first quarter of its 2017 fiscal year.

But Conagra Brands, too, will be under strong management and has more gains ahead if it sells other assets and invests in its plans to reinvigorate its branded food business, Morgan said.

Returns on spun-off companies so far in 2016 are outperforming the broader index, according to Chicago-based Spin-Off Research. But that’s no guarantee of success. Four in 10 spinoffs produce negative returns in their first year, according to a study the Edge conducted with accounting firm Deloitte. Another 40 percent see returns of more than 20 percent in their first year.

Will Lamb Weston join the list of successes?

The idea behind the spinoff makes sense, but any increase in value may already be built into ConAgra’s stock price, said Joanna Makris, analyst for the Spin-Off Report at New York firm PCS Research Services.

“What is the next catalyst for the stock? It’s real performance,” she said.

Conagra Brands will have a strong balance sheet with little debt and will be able to invest for growth, she said. That could mean developing new products and buying new, premium brands, like the recent purchase, for $109 million, of Chicago food businesses Frontera Foods and Red Fork.

In the spinoff, Lamb Weston will incur $2.38 billion in debt to pass cash back to its parent company, according to company filings and analysts. That’s one way a company can pull money out of a spinoff. That is not a worrisome debt level for Lamb Weston, Makris said.

She said Lamb Weston, as a higher-margin, higher-growth business, should see “healthy investor interest” as that company works to build its international business. Lamb Weston is seeing growing U.S. sales as more Americans eat at restaurants, and it says it has significant opportunity to expand overseas as fast-food chains expand.

Spin-Off Research, the Chicago firm, said it expects Conagra Brands to use proceeds from the spinoff to boost its dividend or buy back shares. It values the current ConAgra Foods business at $21.1 billion, or $48.30 per share. It values the future Conagra Brands at $15.3 billion, or $35 per share, and the future Lamb Weston at $4.3 billion, or $29 per share.

Investment bank Jefferies reiterated its buy rating for ConAgra Wednesday, with a price target of $56. ConAgra stock closed at $47.22 a share Wednesday, up about 0.5 percent on the day.

Jefferies analyst Akshay Jagdale said he expects executives to offer conservative growth estimates, but he believes the companies’ assets are undervalued and that the spinoff could help unlock $14 billion in value.

For the Conagra Brands business, he projects flat to low single-digit sales growth, but double-digit earnings growth in the next couple of years.

There are risks, though, Jagdale and other analysts point out. He mentioned volatility in the cost of the commodities that are the raw materials of food manufacturing. Also, Conagra may not sell as many assets as expected.

Finally, ConAgra’s packaged food business is risky these days, with what Jagdale called high exposure to “center-store” categories — the nonperishable and frozen foods many consumers are no longer as excited about buying.

There’s also the perception that many of ConAgra’s brands are “value brands,” targeted at the kind of consumers who buy on price, not quality, Credit Suisse analyst Robert Moskow said during a Sept. 29 conference call with ConAgra executives.

Citi Research analyst David Driscoll said he is concerned that the two businesses might be less efficient on their own, now that they won’t be sharing back-office functions.

Executives downplayed those concerns, with Connolly telling analysts to tune in to today’s presentation: “We are confident you will see the unique opportunities available to both companies and why each is well-positioned to seize them.”

Click here to view the article on Omaha Wolrd Herald: How profitable will ConAgra Foods' spinoff be? Analysts are split

By Oliver Renick | Bloomberg News | October 31, 2016

Adient Plc, the car-seat maker carved from Jonson Controls International Plc, is arriving at a propitious time for spinoffs.

Shares of the Dublin-based manufacturer will change hands for the first time on exchanges today after two weeks of when- issued trading saw the price slip from as high as $54 on Oct. 17 to Friday’s close of $45.98. The stock added 0.9 percent to $46.37 Monday, for a market value of $4.3 billion. Wells Fargo & Co. and UBS Group AG are among seven firms tracked by Bloomberg rating the stock a buy. The average price forecast of eight analysts is $62.

Spinoffs are back in vogue with American investors after a rough start for 2016, in which a flurry of separations in struggling industries such as oil and raw materials turned sentiment against the tactic. A rebound in energy stocks and a handful of transactions in technology, this year’s second-best performing industry in the S&P 500, are spurring the turnaround.

Adient “is the cheapest auto parts supplier, yet we see a compelling margin expansion opportunity,’’ UBS analysts led by Colin Langan wrote in a report Monday. Chinese joint ventures are not being correctly valued by the market, the analysts wrote. “We see no structural reason why ADNT cannot close the margin gap with peers.”

The 46-company Bloomberg U.S. Spinoff Index is up almost 13 percent this year, almost three times the gain in the S&P 500 for the biggest outperformance since 2012, when the gauge surged 49 percent. Companies tracked by the Bloomberg Spinoff Index were up in six of the last seven months through September.

Investors are rewarding all sides. This year, parent companies have gained an average 2.3 percent in the four weeks after making public their plans to spin off shares. That’s 1.5 percentage points more than the S&P 500 over the same time frame for the biggest spread since 2010, data compiled by Bloomberg show. Meanwhile, an index tracking child shares reached its highest level ever at the end of last month.

It was a different story in 2015. Parent companies fell nearly 2 percentage points more than the S&P 500 a month after a spinoff was announced in the worst relative performance since 2011 and the spun-off companies dropped 2.7 percent.

Wall Street has liked the idea of the Adient spinoff since Johnson Controls announced the decision in July. Going into today, the stock carried buy ratings from five of seven analysts covering the independent company. The average target price is $62.38, according to data compiled by Bloomberg.

“The spinoff provides a great opportunity... to enhance its position as a global leader in automotive seating and interiors,” analysts at Spin-Off Research Inc., which has a buy rating on the company, wrote earlier in the month. “As it focuses more on its core business we expect the gap between the company’s margins and its pure play peers to narrow going forward.”

To contact the reporter on this story:

Oliver Renick in New York at orenick2@bloomberg.net To contact the editors responsible for this story:

Jeremy Herron at jherron8@bloomberg.net

Chris Nagi