2014 has been a record year for corporate spinoffs, with 46 such deals announced year to date through October in the U.S. Stalwarts such as Procter & Gamble, Hewlett-Packard (HP), eBay and Symantec have joined this trend to bring more value to their shareholders.
In many cases company managements see opportunities through spinoffs to improve their stock prices short-term as well as create long-term shareholder value. Previously they may have used plentiful capital to acquire a host of businesses, but in the process created groups that are fairly diversified with limited synergies between the parts.
The theory cited by both company managements and activist shareholders to justify spinoffs is that investors value the discrete businesses more highly than diversified businesses with limited operating synergies. A division with different business characteristics than the parent can be spun off and appeal to other investor constituencies. One classic example is spinning off a low-growth division with appeal to investors that like businesses with strong free cash flow even if there is limited growth, and positioning the remaining business as a higher growth, pure play entity.
Several studies of spinoffs completed during the past 30 years have concluded that units spun off on average perform better than the overall market (but it is less clear if the parent company stock performance improves). Often the spinoffs are treated as “stepchildren” before separation and have been denied capital resources. As a stand-alone entity the spinoff can allocate capital to its best and highest use, and thus create more value.
Aswath Damodaran, Professor at New York University and a leading authority on company valuations, recently made the point on his blog that spinoffs may be effective tools in improving stock prices. Whether real new value (i.e. higher cash flow or growth) can be created in spinoffs is less clear according to Damodaran, and looking at HP specifically he is skeptical. With the HP breakup there are no clear game changers like new management, culture change, less regulation, higher leverage or lower taxes that could reasonably be expected to create more value.
Notable completed and announced spinoffs during 2014 include the following:
- BHP Billiton (BHP) – Non-Core Metals Businesses – Announced
- eBay (EBAY) – PayPal – Announced
- Gannett (GCI) – Newspaper Publishing Business – Announced
- Hertz (HTZ) – Equipment Rental Business – Announced
- Hewlett-Packard (HPQ) – PC and Printer Business – Announced
- Procter & Gamble (PG) – Duracell – Announced
- Symantec – Information Management Business – Announced
- Agilent (A) – Keysight Technologies (KEYS) – November 1, 2014
- Kimberly-Clark (KMB) – Halyard Health (HYH) – October 31, 2014
- Tribune Media (TRBAA) – Tribune Publishing (TRUP) – August 4, 2014
- Time Warner (TWX) – Time Inc. (TIME) – June 6, 2014
- Sears Holdings (SHLD) – Land’s End (LE) – April 4, 2014
In many cases the market reception to the spinoff announcement has been clearly positive with a jump in stock price, especially during the first half of the year. However, recently these price jumps have been smaller and sometimes been quite fleeting. Many times the stock price increases upon an activist shareholder announcing his position, thus effectively pricing into the stock a future spinoff.
I expect spinoffs to continue in 2015 as the track record of creating value over time continues to be attractive, although the format may change over time. For example, more energy companies have been placing acceptable assets into Master Limited Partnerships (“MLP”) and leasing them back, with the separate stocks commanding a higher total value than as one company. Ultimately it is about finding the structures that have the best appeal and benefits for investors.