Matt Krantz | USA TODAY | December 10, 2015
Spinning-off assets seems to be Yahoo's (YHOO) answer to unlock trapped value. But this go-to tool isn't working like it used to -- and is actually making investors dizzy.
The Guggenheim Spin-Off exchange-traded fund, which tracks the performance of companies spun-off from their parent companies the past 30 months, is down 11.4% this year, trailing the near-flat performance of the Standard & Poor's 500 index. Spin-offs from big companies in the S&P 500 are down 6.4% on average this year, even worse than the 1.6% decline by the S&P 500 itself based on the same time periods, according to a USA TODAY analysis of data from S&P Capital IQ.
Seeing spin-offs, corporate divestitures where a chunk of a company is set aside as a separate entity, underperform recently is a bit of a surprise. Investors are used to these maneuvers being the secret sauce to gains. The Guggenheim Spin-Off ETF is up 78% over the past five years, topping the 67% gain by the S&P 500. Spin-Offs have performed well historically because the divested companies can focus on their niches without competing for resources with the parent company and aligning management incentives more directly with their performance.
The great track record of spin-offs has turned them into a go-to request by activist investors, including those now pressuring Yahoo. Now that stocks aren't cheap -- the S&P 500 is trading for roughly its average trailing valuation since 1988 -- cost-cutting has been done and revenue growth is muted, the spin-off is one of the only ways left to create value, says Paul McCann of Spin-Off Advisors. "Management is still looking for ways to unlock value – and spin offs are the way to do it," he says.
So far this year, a total of 40 U.S. companies have completed spin-offs, says Spin-Off Advisors. That's down from 2014's banner year with 60 spin-offs, but well above the average of 33.5 spin-offs over the past ten years. These aren't all small deals, either. A good chunk of this year's spin-offs - 13 - are coming from large companies in the S&P 500, according to a USA TODAY analysis of data from S&P Capital IQ.
Much of the underperformance of spin-offs started in early August when the broad market began to falter, McCann says. He says many of the spin-offs from recent years have been in the energy, chemicals and financials sectors, which have been poor performers. The worst performing big spin-off this year has been Chemours (CC), a chemical company spun-off from from DuPont (DD) in July. Shares are down a crushing 69% since the spin-off closing Wednesday at $6.15 a share.
That's not to say spin-offs are all bad. Their long-term track record is solid and a few deals are working out well. Four Corners Property (FCPT), a real-estate spin-out from Darden Restaurants (DRI), is up 22% since being spun off in the fall. The biggest shareholder in Four Corners is Starboard Value, with an 8% stake, which is the same hedge fund that's pressing Yahoo to spin off businesses.
Expect more spin-offs next year than this year, McCann says. There are already at least 41 spin-offs of total U.S companies in the works for 2016, which would already top this year's level. And 2016 will likely end up with even more. "Next year is looking stronger for spin-offs," he says.
S&P 500 SPIN-OFFS THIS YEAR AND HOW THEY'VE PERFORMED
Spin-off, symbol, parent, spin % ch.
Four Corners Property, FCPT, Darden, 21.7%
Gannett*, GCI, TEGNA, 16.2%
TopBuild, BLD, Masco, 14.7%
Baxalta, BXLT, Baxter, 13.7%
Urban Edge, UE, Vornado Realty, 3.9%
Care Capital, CCP, Ventas, -2%
PayPal, PYPL, eBay, -4.6%
Synchrony, SYF, General Electric, -5.8%
Hewlett Packard Enterprise, HPE, Hewlett-Packard, -11.6%
CSRA, CSRA, Computer Sciences, -15.2%
Columbia Pipeline, CPGX, NiSource, -38.7%
Chemours, CC, DuPont, -69.3%
Source: S&P Capital IQ, USA TODAY; *Gannett publishes USA TODAY
Follow Matt Krantz on Twitter @mattkrantz
* Publisher of USA TODAY
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