On Wall Street, at least, not only is breaking up not hard to do, it’s something companies are considering as a way to create shareholder value.
Last year produced a near-record number of spinoff announcements by U.S. companies, according to Goldman Sachs, with 44 unveiled. And the splits should keep coming as higher interest rates, a slowing economy, and continued adjustments to doing business in the postpandemic world weigh on corporate profits.
Management pitches for spinoffs tend to follow a similar script. They argue that a leaner, meaner company with more-focused executives and investors, and a more appropriate capital structure, will remove the “conglomerate discount” and boost valuations.
Lately, however, a growing number of spinoffs have felt more like a way for a company to shed underperforming businesses, divisions facing technological obsolescence, or unwanted debt.
Of the 20 spinoffs completed in 2022, the shares of only six have outperformed their former parent companies’ stocks. That’s counter to history, which has seen 55% of the 377 completed U.S. spinoffs since 1999 beat their parents stock-market performance by a median of four percentage points over the year following the split, per Goldman data.
There’s a wide range of performance, however. Some 10% outperformed by at least 70 percentage points, while 7% trailed by at least 70 percentage points. Recent winners include
International Paper’s
(ticker: IP) spinoff of
Sylvamo
(SLVM), which has outperformed by 77 percentage points since separation. On the other hand,
IBM’s
(IBM) spinoff of
Kyndryl Holdings
(KD) has trailed by 59 points, making it the biggest loser.
Company / Ticker | Recent Price | YTD Change | Market Value (bil) | P/E* | Spinoff Plans |
---|---|---|---|---|---|
BorgWarner / BWA | $50.22 | 25% | $11.8 | 10.0 | Separating its EV and internal-combustion engine businesses. |
Crane Holdings / CR | 121.23 | 21 | 6.9 | 15.0 | Spinning off its payments-focused business, leaving behind a more traditional industrial. |
Johnson & Johnson / JNJ | 153.95 | -13 | 405.1 | 14.7 | J&J will look more like a pharma company after spinning off its consumer business. |
Kellogg / K | 64.61 | -9 | 22.3 | 15.9 | Kellogg will be focused on snacks after shedding its North American cereal operations. |
*12-month forward estimate
Source: FactSet
A few factors correlate with better performance. Some are relatively obvious: Spun-off companies with lower valuations and less debt tended to beat their parents’ stocks. Others are less intuitive. From 2011 to 2021, spinoffs with lower profit margins than their sector outperformed, according to Chris Senyek, chief investment strategist at Wolfe Research, perhaps a function of mature companies spinning off faster-growing businesses that become more profitable later. Spinoffs in different sectors than their parents also have historically done better, he observes, thanks to benchmarking against a more relevant group of peer companies or a new management team.
Here are four spinoffs planned for 2023 that deserve a look:
•
Kellogg
(K) has snacking envy.
Mondelez International
(MDLZ), a junk-food pure play, trades at 20.4 times 12-month forward earnings, but Kellogg fetches just 15.9 times. The problem? Its North American cereal business. It’s growing slowly, despite owning brands like Froot Loops and Frosted Flakes, while going through a tough stretch that includes a strike and a fire at a Memphis plant. Kellogg plans to spin it off this year, keeping just its snacks, including Pringles and Pop-Tarts, its plant-based foods business, and cereal outside North America. J.P. Morgan estimates that the company will emerge with a lower profit margin than the cereal business, but with three times the sales growth, making it the more tempting half of the transaction.
•
Johnson & Johnson
(JNJ) will shed its consumer health segment later this year. That spinoff, to be called Kenvue, has Tylenol, Listerine, and Band-Aid, and makes up about 17% of the current company’s sales. Spun out, it could resemble
Procter & Gamble
(PG) and
Colgate-Palmolive
(CL), which trade for around 23 times forward earnings, well above J&J’s 14.7 times. Separation should help the business get greater attention and a higher valuation multiple, though unresolved liabilities from lawsuits over allegedly cancer-causing talc in baby powder will hang over the stock. J&J’s fortunes will be tied to its biotech and medical-device businesses, where its valuation makes more sense alongside peers like
Merck
(MRK) and
Pfizer
(PFE).
• Industrial company
Crane Holdings
(CR) plans to split into two entities of roughly equal size. The RemainCo will produce fluids for pumps and valves, aerospace parts, and power-management components. Crane NXT is more interesting. It will make products for processing cash and payments at ATMs and retail self-checkouts, and materials and security features for national mints. It’s a bet on growth in banking in developing markets and more self-service checkouts everywhere. Crane has a market cap of $6.9 billion. Post-split, both companies could be attractive acquisition targets.
• Automotive-parts maker
BorgWarner
(BWA) plans to spin off its internal-combustion engine operations—today’s profit machine—leaving the parent company focused on electric-vehicle components: tomorrow’s opportunity. A separation makes strategic sense, says Deutsche Bank’s Emmanuel Rosne. It will allow the spinoff, to be called Phinia, to maximize profits today, while the remaining BorgWarner invests in EV growth. Only one seems worthy of investment. Rosner notes that the EV business will have strong growth, “best in class” EV exposure, and will be worth more than the 10 times 12-month forward earnings BorgWarner commands now. Yet Phinia could be viewed as a melting ice cube that won’t get much credit from the market. Investors should wait until after the spinoff before wading in.
Write to Nicholas Jasinski at nicholas.jasinski@barrons.com
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