Posted by: Howard Silverblatt on February 23, 2011
Over the last month, five S&P 500 issues have declared their intention to break off part of their ongoing business operating and distribute the shares to existing holders, leaving them with separate companies, and eleven separate stocks. Unlike the typical buy, merge and grow through acquisitions philosophy, this approach speaks to a more centralized product line, with future M&A concentrating on closely related product lines. The separation also leaves investors with the decision of keeping or selling the issues, since the new entities need to be evaluated separately. Historically speaking, there are no rules, and there are no clear winners or losers; there is however an old saying to follow senior management - that’s where the money is (or is going). Over the next month or so, each company will distribute information regarding the separation, along with proforma income and balance sheet information. S&P will also evaluate the issues, to determine their proper industry classification and membership.
There had been a significant discussion about special dividends last year, which did not materialize for big-cap issues, as well as maximizing shareholder return - to which there has been an increase in announced buyback programs (we will need to wait and see if the authorization turns into market execution). Earlier this year, Motorola Corp separated itself into two companies by distributing stock of Motorola Mobility Holding (MMI; S&P added it the S&P 500), and then changed its name to Motorola Solutions, Inc (MSI; it remained in the S&P 500). Public awareness and speculation on spin-offs is growing.
Doing some research, it appears that over the past 25 years the S&P 500 has accounted for 20% of the U.S. spin-off distributions, with the statistical likelihood of an S&P 500 issue doing a spin-off being 203% higher than a non-S&P 500 issue. Given the average size of an S&P 500, the statistic also speaks to their ability to divest; the wiliness is another issue. Building down is not exactly an American tradition. Currently, however, it would appear that the idea has gained some ground. The idea of business concentrating on one thing, and doing it well, as compared to the old Gulf and Devourer is nice for smaller companies, but will large-caps (or their egos) be satisfied? Isn’t bigger better? This is America - we have no limits (unless there is another liquidity crunch). But as we are all leanings, having a credit line doesn’t mean you should use it; maybe good business is making good product, and making good product is a full time job, which require full time attention to a single product line.
Below is the recent gang of five:
ITT Corp (ITT) plans to split into three companies, concentrating on: defense and information, industrial business, and water technology
Marathon Oil (MRO) plans to spin-off its refinery operations; the new company will be called Marathon Petroleum Corp and will trade under (MPC)
Marriott International (MAR) plans to spin-off its timeshare business, focusing on its hotel business line
Sara Lee Corp (SLE) plans to split itself into two companies, one concentrating on U.S. domestic operations, and the other on non-U.S. international operations
Williams Companies (WMB) plans to divest its independent exploration and production company via a partial IPO in the third quarter of 2011, then to spin-off the remainder to shareholders in 2012
Also on the table, from last year, Sunoco (SUN) plans to distribute Suncoke Energy (metallurgical coke) to its holders, concentrating on refining, supply, and its retail marketing business