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TMFDeej (99.47)

You SPIN me right round, baby right round

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March 27, 2012 – Comments (3) | RELATED TICKERS: ABT , PFE , COP

 

As someone who loves to follow special situation investing, I always try to keep abreast of all of the latest news about spin-offs, one of the quintessential types of special situation investments (how's that for a big word :)).  Here's the latest news from that sub-segment of the market:

Abbott Laboratories' (ABT) break-up into two companies, one that sells medical devices and one that sells pharmaceuticals is still on track for later this year.  Here's a brief article on the subject: Abbott Laboratories Split Will Make The Perfect Team For Investors .

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Pfizer's (PFE) has been on a roll lately after officially to go aheard with the long speculated spin-off of its animal nutrition unit.  As I have said in the past I have mixed emotions about being a Pfizer shareholder.  Not only is Big Pharma not exactly the most ethical industry in general, but I have heard some very specific ethically questionable things about the animal nutrition unit from someone who used to work there.  Having said that, enough people do benefit from some of the company's products that I have turned a blind eye to the negative.  Thus far that has been a prudent financial decision, seeing PFE rise more than 44% since my initial purchase both in real-life and CAPS.

Today Goldman publshed a report stating that it believes a full break-up of PFE is possible: Pfizer Rises After Goldman Raises Potential for Full Breakup.

Read, at a recent meeting with Goldman analysts, indicated he may be willing to further split up the company after selling or spinning off those two units, Jami Rubin, a Goldman analyst, wrote in a note to investors.

“We see these moves as first steps in a potential full- scale breakup,” akin to the split now taking place at Abbott Laboratories (ABT), Rubin wrote.

Abbott, based in Abbott Park, Illinois, said Oct. 19 it plans to divide into two publicly traded companies, with one focused on drug development and the other on products including medical devices, infant formula and generics.

Rubin said a further breakup would be dependent on Pfizer’s success in getting new, brand-name drugs approved by U.S. regulators. “If the pipeline is successful and drives meaningful top-line growth, management will want to separate the businesses so investors can better value the pharma business,” Rubin said in her note. She said that a breakup could happen by 2015.

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ConocoPhillips' (COP) scheduled split into an E&P company and a downstream company also appears to be on schedule for later this year, Phillips 66: Making Money From The ConocoPhillips Spin-Off .

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While we're on the subject, I often ask myself the question "Is it better to buy stock in a company pre-spin-off or post-spin-off?"  I think that the answer is that it depends.  Traditionally, going back to when Joel Greenblatt's classic work "You Can Be a Stock Market Genius" brought the concept of investing in spun-off companies to the mainstream, one would wait until the unwanted shares of a spun-off company were discarded by shareholders and buy on the dip.  However, given the surge in publicity about and popularity of spin-offs I often see the stock of companies pop on the initial spin-off announcement and continue to surge as the date of the event approaches.  As a result, I use a two pronged approach to this sort of situation.  I buy stock in a spin-off situation that I like ASAP and then add to either the former parent company or the new entity if they experience significant weakness after the event occurs.

I currently own stock in all of the aforementioned companies, ABT, PFE and COP.  In addition to them, I own stock in the following companies that have also announced impending spin-offs...

 

- Covidien (COV)

- Tyco (TYC)

I also own a small position in Pepsi (PEP) which has been mentioned by many intelligent analysts, including Mario Gabelli, as a potential spin-off dandidate though has not officially announced its intention to make such a move yet.

Looking at this large number of spin-offs one may ask, Deej why have you passed on some of the recent ones such as EP, SLE, RAH / POST, or EXPE / TRIP?  To be honest with you, I really don't know.  I generally tend to gravitate more towards value stocks, particularly ones that pay me dividends to wait for the transaction to occur.  Neither Ralcorp nor Expedia pay dividends, so that's probably why I parhaps foolishly eliminated them from consideration for my real-money portfolio.  EP is right up my alley, but it had surged so much by the time I had looked at it I thought that it was too expensive...of course it then went on to be bought out at an even higher premium.  Oh well, live and learn.  As for Sarah Lee, again I'm not sure why I didn't participate in its special situation but if another one like it comes along there's a good chance that I will.

That's all the thoughts that I have on spin-offs right now, but I'd love to hear yours.  Please share the names of any companies that are going to split up that you find attractive, potential spin-off candidates, or even your success stories from past spin-off situations.  I love reading comments...at least the nice ones ;).  I'll leave you with a few more recent good articles on this subject for anyone who's interested. 

Thanks for reading and have a great evening everyone!

Applying Joel Greenblatt's Strategies To ITT

How Best To Profit From Stock Spin-Offs

3 Companies Effectively Using Spin-Offs To Unlock Shareholder Value

Hindsight: The Marathon Oil Refining Spinoff And The Prospects For Phillips 66

Potential Spin-Offs To Consider (Part 1)

Potential Spin-Offs To Consider (Part 2)

Deej

3 Comments – Post Your Own

#1) On March 27, 2012 at 3:36 PM, somrh (91.33) wrote:

I currently have a position in SLE so I might be biased but there may be more upside. There is "concern" that there might not be much institutional interest in the coffee company which will be headquartered in the Netherlands. So that might be something to watch post-split.

A site that I subscribed to and gives a good review of up and coming spinoffs is here:

www.stockspinoffs.com/

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#2) On March 27, 2012 at 9:23 PM, TrojanFan (32.38) wrote:

I am currently investigating strategies and approaches for shorting CMG (Chipotle Mexican Grill) which was spun off from MCD.  The valuation on CMG post spin off has gotten to be absolutely absurd.  They are trading at an enterprise value of over 29 times EBITDA currently, which is close to the level they peaked at at the end of 2007, beginning of 2008.

Of course a plausible argument can be made that the downturn of the share price in that instance was brought on not by the valuation per se, but was a result of a downturn in economic fundamentals which no longer supported the notion of holding the stock at such a lofty valuation. The stock lost nearly 75% of its value from peak to trough which took less then a year to play out. What an awesome short that would have been!

In the circles I travel in (distressed / high yield credit investing) there are some that feel we are approaching another cycle peak, though we haven't actually gotten there yet and personally I'm very open to this view.  I can think of a myriad of catalysts that could kick things over the edge, though, and in the event that any of those situations actually plays out I want to already be short some of the more extended momentum stocks and CMG certainly makes the list. Given the propensity of this stock to sell off in the event of a turn in the economic cycle, it makes a very sensible short hedge for a properly balanced long/short portfolio.

I'm presently debating the merits of going long on some long dated put options as opposed to taking an outright short position and facing initial and ongoing collateral posting requirements.  So far it seems to me that the risk reward on the options when weighed against the capital intensiveness of openning and maintaining the short position argue in favor of put options, but I'm still evaluating and analyzing.

Given that the spirit of this blog seems to be intended to lean in the more bullish direction, I should point out how terrific that spinoff has been for those who were long the spun off company.  I seriously doubt that such value would have been recognized by the market (even if I view it to be irrational) had the business remained captive inside of MCD.

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#3) On April 02, 2012 at 2:50 PM, TrojanFan (32.38) wrote:

I noticed your green thumb selection of JACK last Friday and in your commentary I saw that you cited the potential to spin off Qdoba as a means of unlocking some pent up hidden value there.

I couldn't help but think of this blog when I saw that green thumb pick and especially when I read your reasoning for it.

Might I ask if my posting above was in any way inspirational to your research that led to this selection? :)

I think you may have homed in on an intriguing possibility here and I'm going to investigate it further.

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