Kimberly-Clark Corp. (KMB:US), the maker of Kleenex tissues and Huggies diapers, plans to spin off its health-care business, leaving management to focus on its consumer and professional brands.
The tax-free deal would create a stand-alone, publicly traded company with about $1.6 billion in annual sales, Dallas-based Kimberly-Clark said yesterday in a statement.
The unit that would be separated makes products such as sterile wraps, surgical face masks and catheters. About 70 percent of its sales last year were in North America, with most of the rest in Europe and Asia. Third-quarter revenue rose after the division posted declines in the previous four quarters.
“The business has been very volatile for them for years, and we had been questioning if they know how to run the business well,” Ali Dibadj, an analyst at Sanford C. Bernstein & Co., said in an e-mail. “We’re encouraged that they are spinning it off; however, we would have liked them to do it when their valuation was lower, not at the elevated levels it is at today.”
Dibadj, based in New York, has a market perform rating (KMB:US) on Kimberly-Clark shares, the equivalent of hold. The company’s stock is valued at 18 times (KMB:US) projected 2014 earnings, according to data compiled by Bloomberg.
The shares fell 0.4 percent to $109.26 at the close in New York in New York. They’ve gained 29 percent this year, compared with a 26 percent increase for the Standard & Poor’s 500 Index.
Chief Executive Officer Thomas Falk said Kimberly-Clark didn’t look into selling, rather than spinning off, the health-care unit.
“We see health-care companies of this size and scale competing successfully in the marketplace,” he said today on the company’s investor call. “Spin gives you a high certainty of transaction completion.”
Selling the company would carry certain tax costs that “would be a challenge,” Falk said.
Kimberly-Clark’s intent to separate its health-care unit contrasts with competitors such as Clorox Co. and Newell Rubbermaid Inc. (NWL:US) that are seeking to deepen their operations in the market. Newell sells telemedicine systems that let doctors consult with patients hundreds of miles away, while Clorox has made acquisitions of infection-control products it sells to hospitals and other institutions.
Although Kimberly-Clark has been in the health-care business since the 1970s, and has made acquisitions (KMB:US) in the sector such as the $263 million purchase of drug-delivery systems maker I-Flow Corp. in 2009, the strategy of the unit is “going more and more into things that have less to do with where the rest of Kimberly-Clark is heading at this point in time,” Falk said.
Robert Abernathy, group president for Europe, global nonwovens and continuous improvement and sustainability, will be chief executive officer of the new health-care company if the spinoff is completed, Kimberly-Clark said. Abernathy joined in 1982 and has held senior management positions, including responsibility for the health-care business from 1997 to 2004.
The health-care division posted a 4 percent increase in sales in the quarter ended Sept. 30 on a currency-neutral basis, lower than the companywide 5 percent sales gain on that basis. Last year, the unit accounted for 7.7 percent (KMB:US) of the company’s $21.1 billion in sales.
Kimberly-Clark’s management will continue to study the potential spinoff and make a final recommendation to its directors within the next several months. The transaction probably would be completed by the end of the third quarter next year if approved by the board, the company said. It hired Morgan Stanley to advise it during the process.
A spinoff would likely slow the rate of dividend increases for a period of time, Chief Financial Officer Mark Buthman said on the investor call.
A year ago, Kimberly-Clark’s European unit announced a restructuring that included exiting most of its diaper business there, along with some lower-margin businesses such as consumer tissues, and paring its European manufacturing and administration operations.
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