Spinoff View from The Edge
Spinoff View from The Edge
Current Spinoff Environment
The Edge monitors all spinoffs over $250m Market Cap and >$2m ADV. The amount of spinoffs on the current calendar is the highest we have ever seen. We currently have 52 Parents on the spinoff calendar worth over $1.3trn. The value of the transactions has also risen over the past few years rising from $650bn in 2014 and $600bn in 2013. A lot of our clients recently, particularly our activist friends are interested to learn more of our view based upon our factual based studies, as such to invest. Companies spinoff for a number of reasons, but the main reasons for the result of the current expanded calendar at The Edge has been two fold. Firstly, the market hasn’t been good for IPOs for spinning off ‘bad’ businesses over the last few years. It’s been very hard to ‘sell’ to the investor community post the 2008/9 crises as they have been a lot more picky about investments compared to the 2000-2007 period, so we have seen a dramatic rise in spinoffs, as companies have been forced to put their money where their mouths are and let the market decide on their perceived higher SOTPs value. Siemens is a good example of a major company that decided to spinoff their lightbulb business after a failed IPO in 2012 spinning in 2013. Secondly, as companies still remain on the back foot and general weakness remains in earnings, it has led to the rise of the Activist investor and one of their in main focus points has been on creating value via Spinoffs. We have seen this in the likes of Icahn in Gannett forcing the spinoff of the publishing business and PayPal (PYPL) / Ebay (EBAY) Third Point pushing Dow Chemical (DOW), Jana Partners in Computer Sciences Corp (CSC) and even in Darden (DRI) where Starboard Value have been long since pushing the company to break up. The perception that these activists could be the ‘good guys’ has led more and more of value orientated investors to pop up and be bolder. We have also seen big money flow into funds proposing to be of an activist nature.
Outlook For Spinoffs
We view the reasons above as turning around over the next 12 months quite sharply on two fronts. Spinoff announcements will lessen as the market for IPO appetite increases and secondly they won’t provide much value in terms of an investment idea unless properly analyzed. One of the reasons is that they have gotten alot of attention by the mainstream, so companies that have been spinning off are doing so at the ‘right’ or too higher price. Graham Holdings (GHC) spinning off their cable assets Cable One (CABO) Listing. A good 30% higher than our predicted technical split price on the back of hype.
Here at The Edge, we have seen the same pattern in 2002 and 2006 and 2011. The strategy sees attention as a good source of return and its get over crowded. The Edge believe there is value in the space and investors who look at it should be pushing their brokers quite strongly to show them not only coverage but the particular angle that no one is covering. Blackstone (BX) with the Spinoff of their M&A business is one which we perceive there to be value in but see no coverage from The Street. 2014 was a blockbuster year for IPOs and we see 2015 as achieving even higher volume as strong debuts from the like of Fitbit (50% in one day) even after increasing its price range and also Shake Shack (SHAK) being another winner. The average IPO in the first four months of 2015 produced a first-day gain of 17%, the second highest annual figure since 2000, behind only the 21% average firstday gain in 2013. All in all, this has enabled companies and investors to gain more confidence and this is also in synch with our view that we are nearing the top of the cycle Sikorsky is an interesting example of a company pursuing a sale instead of a Spinoff we see due to a change in environment.
$140 406
$120 $100
275 226
$96.9
206
199
154 84
70
71
31
$80 $60 $41.2
125
128
$54.9
$42.6
$38.7
$36.2 $24.5
$23.7
$85.3
63
$48.9
$45.6
$40 $20
222
213
$42.7 $36.3
$21.9
$15.4
$0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Proceeds ($Billions)
Number of IPOs
50.0%
41.6%
30.0% 20.0% 10.0%
40.8%
39.8%
40.0%
34.4%
40.0% 31.8%
32.8%
25.1% 14.5%
10.5%
26.6%
20.5%
20.3%
18.8%
9.6%
28.8%
17.3%
14.1%
0.0%
-9.8%
5.6%
27.3% 21.0% 13.5% 7.2%
-10.0% -20.0%
-17.5%
-30.0% 2010
2011
2012
2013
2014
Avg. Total Return
Avg. First-Day Return
Avg. Aftermarket Return
% Deals with Negative First-Day Return
% Deals Priced Below the range
Recent Spinoff Performance
Recent spinoff performance is also an indication that these situations are well covered at the moment. If you had bought every spinoff in the asset class in 2013, you would have made a 15% return, 2014 yielded a 15% return and currently 2015s numbers are -6.5%. The perception that all spinoffs make money is a fallacy. Our 15 year study with Deloitte indicates that 40% are flat or negative over 1 year performance. Investors should be looking at the part of the Spinoff or parent that contains the gold, then advice on what part to invest or not invest in and finally the timing, not just the situation. Again, our experience has seen similar patterns in 2007 and 2002.
Activist Pressure Waning
The new safe and feel good environment has led investors to really question the value of activists and their performance against the benchmarks. How much better? In 2013 the HFR Activist index posted a total return of 16%, less than half the S&P 500 Index’s total return of 32.4%. In 2014 the HFR Activist Index saw returns of 4.8%, far below the S&P 500’s 13.7%. Icahn in Chesapeake, Trian and Peltz in BoNY and DuPont are good recent examples of where activists have failed. Probably due to the reasons outlined.
The Edge Conclusions
The Edge sees the volume of spinoffs declining and a further rise in M&A. We view a market correction within the next 12 months as highly likely and further and advising clients and investors to be cautious and not get caught up in a bubble. However, for the rest, they will, because after all, Greed is Good.
For additional information or to request a free trial or just sign up to our free newsletter, please check in here http://www.edgecgroup.com/#contact Nimble Investor? Want the insight into Spinoffs without the cost? Edge Lite $99 http://www.edgecgroup.com/nimble-investors/ Kind Regards The Edge Team
Current Spinoff Environment
The Edge monitors all spinoffs over $250m Market Cap and >$2m ADV. The amount of spinoffs on the current calendar is the highest we have ever seen. We currently have 52 Parents on the spinoff calendar worth over $1.3trn. The value of the transactions has also risen over the past few years rising from $650bn in 2014 and $600bn in 2013. A lot of our clients recently, particularly our activist friends are interested to learn more of our view based upon our factual based studies, as such to invest. Companies spinoff for a number of reasons, but the main reasons for the result of the current expanded calendar at The Edge has been two fold. Firstly, the market hasn’t been good for IPOs for spinning off ‘bad’ businesses over the last few years. It’s been very hard to ‘sell’ to the investor community post the 2008/9 crises as they have been a lot more picky about investments compared to the 2000-2007 period, so we have seen a dramatic rise in spinoffs, as companies have been forced to put their money where their mouths are and let the market decide on their perceived higher SOTPs value. Siemens is a good example of a major company that decided to spinoff their lightbulb business after a failed IPO in 2012 spinning in 2013. Secondly, as companies still remain on the back foot and general weakness remains in earnings, it has led to the rise of the Activist investor and one of their in main focus points has been on creating value via Spinoffs. We have seen this in the likes of Icahn in Gannett forcing the spinoff of the publishing business and PayPal (PYPL) / Ebay (EBAY) Third Point pushing Dow Chemical (DOW), Jana Partners in Computer Sciences Corp (CSC) and even in Darden (DRI) where Starboard Value have been long since pushing the company to break up. The perception that these activists could be the ‘good guys’ has led more and more of value orientated investors to pop up and be bolder. We have also seen big money flow into funds proposing to be of an activist nature.
Outlook For Spinoffs
We view the reasons above as turning around over the next 12 months quite sharply on two fronts. Spinoff announcements will lessen as the market for IPO appetite increases and secondly they won’t provide much value in terms of an investment idea unless properly analyzed. One of the reasons is that they have gotten alot of attention by the mainstream, so companies that have been spinning off are doing so at the ‘right’ or too higher price. Graham Holdings (GHC) spinning off their cable assets Cable One (CABO) Listing. A good 30% higher than our predicted technical split price on the back of hype.
Here at The Edge, we have seen the same pattern in 2002 and 2006 and 2011. The strategy sees attention as a good source of return and its get over crowded. The Edge believe there is value in the space and investors who look at it should be pushing their brokers quite strongly to show them not only coverage but the particular angle that no one is covering. Blackstone (BX) with the Spinoff of their M&A business is one which we perceive there to be value in but see no coverage from The Street. 2014 was a blockbuster year for IPOs and we see 2015 as achieving even higher volume as strong debuts from the like of Fitbit (50% in one day) even after increasing its price range and also Shake Shack (SHAK) being another winner. The average IPO in the first four months of 2015 produced a first-day gain of 17%, the second highest annual figure since 2000, behind only the 21% average firstday gain in 2013. All in all, this has enabled companies and investors to gain more confidence and this is also in synch with our view that we are nearing the top of the cycle Sikorsky is an interesting example of a company pursuing a sale instead of a Spinoff we see due to a change in environment.
$140 406
$120 $100
275 226
$96.9
206
199
154 84
70
71
31
$80 $60 $41.2
125
128
$54.9
$42.6
$38.7
$36.2 $24.5
$23.7
$85.3
63
$48.9
$45.6
$40 $20
222
213
$42.7 $36.3
$21.9
$15.4
$0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Proceeds ($Billions)
Number of IPOs
50.0%
41.6%
30.0% 20.0% 10.0%
40.8%
39.8%
40.0%
34.4%
40.0% 31.8%
32.8%
25.1% 14.5%
10.5%
26.6%
20.5%
20.3%
18.8%
9.6%
28.8%
17.3%
14.1%
0.0%
-9.8%
5.6%
27.3% 21.0% 13.5% 7.2%
-10.0% -20.0%
-17.5%
-30.0% 2010
2011
2012
2013
2014
Avg. Total Return
Avg. First-Day Return
Avg. Aftermarket Return
% Deals with Negative First-Day Return
% Deals Priced Below the range
Recent Spinoff Performance
Recent spinoff performance is also an indication that these situations are well covered at the moment. If you had bought every spinoff in the asset class in 2013, you would have made a 15% return, 2014 yielded a 15% return and currently 2015s numbers are -6.5%. The perception that all spinoffs make money is a fallacy. Our 15 year study with Deloitte indicates that 40% are flat or negative over 1 year performance. Investors should be looking at the part of the Spinoff or parent that contains the gold, then advice on what part to invest or not invest in and finally the timing, not just the situation. Again, our experience has seen similar patterns in 2007 and 2002.
Activist Pressure Waning
The new safe and feel good environment has led investors to really question the value of activists and their performance against the benchmarks. How much better? In 2013 the HFR Activist index posted a total return of 16%, less than half the S&P 500 Index’s total return of 32.4%. In 2014 the HFR Activist Index saw returns of 4.8%, far below the S&P 500’s 13.7%. Icahn in Chesapeake, Trian and Peltz in BoNY and DuPont are good recent examples of where activists have failed. Probably due to the reasons outlined.
The Edge Conclusions
The Edge sees the volume of spinoffs declining and a further rise in M&A. We view a market correction within the next 12 months as highly likely and further and advising clients and investors to be cautious and not get caught up in a bubble. However, for the rest, they will, because after all, Greed is Good.
For additional information or to request a free trial or just sign up to our free newsletter, please check in here http://www.edgecgroup.com/#contact Nimble Investor? Want the insight into Spinoffs without the cost? Edge Lite $99 http://www.edgecgroup.com/nimble-investors/ Kind Regards The Edge Team
