Spin-Off Categories

Introduction

There are a handful of common, overlying features at spin-offs that we use to categorize companies in order to help us better understand the investment situation before digging into the specifics. This allows investors to efficiently filter through opportunities to find ones that fit their investment philosophy and mandate. Spin-offs generally fit into one or more categories based on the company’s size, growth characteristics, business quality, key drivers, and transaction structure.

Higher Quality Lower Quality

Description:

The company spins-off either a much higher quality (higher merited valuation) business or a much lower quality (lower merited valuation) business to allow investors to better value the assets individually.

Most common with these types of companies:

Conglomerates and companies where the customer/asset mix is not homogeneous.

Reasons Executed:

The higher quality business is underappreciated as part of the larger entity.

High Growth Low Growth

Description:

Separate off the lower growth (typically lower valuation) business from the higher growth (typically higher valuation) business in order to improve the consolidated company’s valuation

Most common with these types of companies:

Companies that fit this category come in all different shapes and sizes.

Reasons Executed:

The higher growth business is underappreciated as part of the larger entity.

Big Company Small Company

Description:

A large company spins-off a subsidiary that is a relatively small percentage (~<25%) of the consolidated company’s profits.

Most common with these types of companies:

Large conglomerates

Reasons Executed:

The smaller business is not being appreciated by the market (valuation discount) and/or as part of the larger entity itself (neglected). Thus, a company can separate off a relatively smaller business from a relatively larger business in order to improve the consolidated company’s valuation.

Clean Separation

Description:

Companies in this category don’t have a stark difference in business quality, size, or growth profile between the subsidiaries.

Most common with these types of companies:

Conglomerates where the subsidiaries are dissimilar, but contribute relatively the same amount of revenue and/or profits to the overall company.

Reasons Executed:

There is a lack of synergies between the segments and/or to close a sum-of-the-parts conglomerate discount.

Spin and Merge

Description:

Either the parent or spin-off is going to merge with another company post-spin-off.

  • Parent
    • Spins off the company and then subsequently merges with another company
  • Spin-off
    • Spins off from the parent and then immediately merges with another company
Most common with these types of companies:

Conglomerates executing M&A

Reasons Executed:

To increase the scale in one of their segments or subsidiaries, but not the other(s).

Merge and Spin

Description:

Two or more companies merge and then spin-off one or more of the subsidiaries. This has been done on a handful occasions where companies merge, combine subsidiaries, generate synergies, and then break up by spinning off the combined subsidiaries.

Most common with these types of companies:

Conglomerates executing M&A

Reasons Executed:

To increase the businesses scale in some (or all) segments and then separate them off to stand on their own. Also, these transactions are more efficient from a tax perspective than companies selling businesses to each other.

Carve-Out Distribution

Description:

A mechanism to distribute ownership of a publically traded security to shareholders either through a pro rata distribution (spin-off) or by giving shareholders the choice of owning either the parent company or the CarveCo through an exchange offer.

Most common with these types of companies:

Companies that have previously carved-out a subsidiary through an IPO.

Reasons Executed:

To distribute the company’s remaining ownership of the subsidiary to shareholders.

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2018-11-13T08:34:33+00:00