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News: Analysis & Commentary: DEALS
THE WHIRLWIND BREAKING UP COMPANIES
Westinghouse and CBS, Disney and ABC, Kimberly-Clark and Scott Paper. In 1995, mergers are booming. But as the trips to the altar grab headlines, a quieter trend is reshaping the corporate landscape just as dramatically: spin-off mania.
"There's fever right now in the spin-off market," says Barbara Goodstein, a Rothschild Inc. vice-president who analyzes such deals. This year, 26 spin-offs with a market value of $16.7 billion have closed. An additional 20 deals, worth an estimated $18 billion, are pending, says Frederic Escherich, a managing director at J.P. Morgan & Co. In all of 1994, companies completed 27 spin-offs with a record value of $22.6 billion.
CORE STRENGTHS. Why such activity? The hot stock market has helped, as have tax laws that allow spin-offs to preserve far more value than would outright sales of the same businesses. More than anything, though, corporations are facing relentless investor pressure to rethink their business portfolios. Viacom International Corp.'s spin-off of its cable-TV operations, completed on July 25, will "ensure that Viacom and its shareholders receive the maximum value for assets that no longer fit our long-term growth plans." says Viacom CEO Frank J. Biondi Jr.
A subsidiary isn't meeting expectations? Doesn't jibe with the latest strategic plan? Dump it. Focus on core strengths. That's what Tenneco is doing in gradually spinning off its Case Corp. construction equipment unit (page 62). Bally Entertainment Corp. is thinning down, too, transferring to shareholders its health-and-fitness business. "The day of the conglomerate is a thing of the past," says Lee S. Hillman, Bally's chief financial officer.
That's a bit of an overstatement. Yet even the quintessential conglomerate, $25 billion ITT Corp., said in June that it would split itself into three separate publicly traded companies, spinning off two divisions to shareholders. Investors, who have endured years of subpar stock performance, say they generally are pleased with the deal. "They've created three very strong companies for shareholders to choose from to invest in," says Matt Greenberg of Greenhaven Associates Inc., which holds several thousand ITT shares.
By yearend, Greenberg expects the three companies' stocks to be trading at a combined price of about $140. ITT shares now fetch $120. Pipe dream? In each of the past three years, shares of spun-off companies on average have outperformed the Standard & Poor's 500-stock index, says Rothschild's Goodstein. In 1994, shares of spun-off companies appreciated an average of 20.2% in their first year, compared with the S&P's rise of 1.5%. According to a J.P. Morgan study, parent companies outperform the market by 5% to 6% between the announcement date and the date of the spin-off.
Case in point: Ralston Purina Co. spun off its breakfast-cereal division, RalCorp Holdings, in April, 1994, when the new entity began trading at 15. Today, RalCorp trades around 23. Ralcorp CEO Richard A. Pearce says that under Ralston-Purina, his business suffered because management and operations were focused on the company's bigger pet-food business. As an independent company, Ralcorp has been able to reduce costs, establish better control over operations, and allocate capital where it has the most benefit. "You'll see more and more of these spin-offs," he predicts.
All that, and tax advantages, too. In the typical spin-off, at least 80% of the shares of the subsidiary are distributed to holders. When structured this way, it's tax-free for both the investors and the company. "Spin-offs are the last great opportunity for companies to dispose of a business tax-free," says Brian Finn, co-head of mergers and acquisitions at CS First Boston Inc. That's one reason W.R. Grace & Co. is divesting its kidney-dialysis division, National Medical Care Inc., to shareholders. Although Grace had received a $3.5 billion bid for the unit from director Constantine L. Hampers, an outright sale would have forced an estimated tax hit of $850 million to $1 billion.
Not all spin-offs work out, of course. At Aviall Inc., an aircraft-parts distributor caught in an industry downturn, business is as lackluster today as it was before Ryder System Inc. spun it off in December, 1993. Back then, Aviall shares traded at 163/8; it closed Aug. 1 at 81/8. But such mediocrity has been the exception: Enough spin-offs produce sufficient wealth to keep shareholders pounding on corporate doors for more.
Corporate spin-offs announced since May
SPRINT Cellular phone business
UNION PACIFIC Oil, gas, and mineral unit
TENNECO Case equipment unit
VIACOM Cable-TV operations**
ANHEUSER-BUSCH Campbell Taggart bakery
ITT Broken up into three public
W.R. GRACE National Medical Care dialysis
TRAVELERS Transport Holdings long-term
HILTON HOTELS Casino operations
KIMBERLY-CLARK Tobacco-related businesses
**Telecommunications Inc. will acquire resulting company
DATA: COMPANY REPORTS, ROTHSCHILD INC.By Stephanie Anderson Forest in Dallas, with Greg Burns in Chicago and Gail DeGeorge in Miami