Spinning A Story About Spinoffs

By admin_45 in Blog

There were fewer US public company spinoffs last year than in the dark days after the 2008 Financial Crisis. In fact, you have to go all the way back to 1991 to find a year where American publicly held companies did fewer spins. The numbers: 19 spinoffs last year, 20 each in 2009/2010, and 18 in 1991.

We find that recent performance quite strange, because spinoffs are reliable tools for corporate managers to unlock shareholder value. With a strong US economy and robust capital markets, this is the kind of environment in which a parent company would want to spin off assets to give them their best chance of success. It is also the ideal backdrop for the managers of the spun-off asset to reap the benefits of being independent.

Moreover, several studies show how spinoffs typically outperform the broader market, so active managers are missing out during the current spin off drought as well. Here are a couple of the most recent examples we could find, along with two other ways to measure the spinoff market:

• A study by Deloitte and The Edge found that from 2000 to 2014 spinoffs worldwide “generated over 10x times the average gains of the MSCI World Index over the first 12 months”. It also found that “spinoff transactions have a value creation effect with Parents adding 14% on average and Spinoffs adding 22% on average a year after the effective date (separation / first listing date)”. When looking at just the US, the average performance of returns over one year was 21% for parents and 27% for spinoffs. Link here.

• A Credit Suisse analysis looked at spinoffs by year among the top 1,000 US companies by market cap from 1995 to 2012. It found that parents and spun-off companies outperformed the S&P 500 by 9.6% and 13.4% respectively in the first 12 months after the effective date of spinoff. Link here.

• Our friend Joe Cornell, President and controlling principal of Spin-Off Advisors, pointed us to the Bloomberg US Spin-Off Index which includes US spinoffs with market caps of over $1 billion and keeps each in the index for 3 years. He noted that since the index’s inception in 12/31/2002, it has returned +1,043% compared to +222% for the S&P 500.

• There is an ETF in the space called the Invesco S&P Spin-Off ETF. It is up +10.4% over the past year and +3.0% YTD, although it is underperforming the S&P 500 which is up 14.4% on the year and +5.4% YTD.

So why was last year so weak for spinoffs and have they since rebounded?We again refer to our “go-to-guy” for spinoffs, Joe Cornell, who has excellent data on the space. A huge thanks to him for providing us with the following figures:

• Since 1985, there have been 34 spinoffs a year on average, although they are certainly cyclical. The number of spinoffs a year wax and wane with the market environment, rising during economic booms and falling during market troughs.

• They peaked at 66 in both 1999 and 2000 before the dot-com bubble burst, and did not get back up close to that level until 2014 when there were 60 spinoffs. They’ve fallen in the years since: 2015 (40), 2016 (35), and 2017 (19).

• Spinoffs have picked back up this year, however, with 28 US spinoffs to be completed in 2018 so far according to Spin-Off Advisors. That’s still lower than the average of 34 since 1985, but an improvement from last year and more in line with prior cycle levels.

What do we make of all this? A few points:

#1 - We think the fall in the number of spinoffs since 2014 is temporary, and is partly due to public market activist investors favoring stock buybacks over spinoffs as their go-to recommendation for enhancing shareholder value.

#2 - There has not been much pressure on marketing leading companies (I.e. Tech) to pursue spinoffs. Given tech’s impressive gains, a break up there would need to stem from a regulatory push. There is a groundswell forming on this point, as we have repeatedly highlighted.

#3 - We do not think the recent lull in spinoffs is a negative harbinger for markets, but may reflect that conglomerates are less prevalent than in the past. We do, however, think it plays a role in the trend to fewer publicly listed US equities.

As an aside, Joe Cornell also relayed that current M&A investment banking strategy plays a role in the lower number of spinoffs lately: “Some companies announce spin-offs as a way to flesh out buyers for those assets (either strategic or private equity). When multiples are high, some planned spins end up turning into sales.”

We’d also add that given record high levels of buybacks over the past few years, activist investors or corporate managers may pivot back towards favoring spinoffs as another way to create shareholder value.

Summing up: no matter how many spinoffs there are a year, they are one strategy that has a strong history of outperforming so it is an area we will continue to watch closely.