by Jeff Reeves | August 8, 2012 9:47 am
“What is a stock spin-off, exactly, and why is United Online (NASDAQ:UNTD) spinning off FTD?”
Companies “spin off” divisions into separate companies fairly frequently. Typically, it’s a way to refocus the business by providing different goals and leadership instead of trying to have one management team overseeing disparate operations.
Sometimes it’s a subtle difference. This year, Kraft (NASDAQ:KFT) is spinning off its North American grocery business from its global snack foods brands, which will be renamed Mondel?z. After all, marketing mac & cheese at the supermarket is vastly different than trying to get Oreos to catch on in European convenience stores. Also, there is little growth in the North American grocery market, whereas global snacks are booming — so it’s a difference in attitude and expectations as well as strategy.
Another recent group of spin-offs include oil majors separating their “upstream” from “downstream” businesses. ConocoPhillips (NYSE:COP) recently spun off its refining business as Phillips 66 (NYSE:PSX). Marathon Oil (NYSE:MRO) has retained exploration operations while it spun off Marathon Petroleum (NYSE:MPC) to operate its pipelines and refineries. Clearly there are big differences between extracting oil from the ground and bringing it to market.
This disparity in mission informs us about what United Online is doing with FTD. United owns the NetZero Internet service provider and Classmates.com … neither of which seem to be super-correlated to FTD’s business model. So, they are splitting up the company for strategic reasons.
The FTD segment accounted for 65% of 2011 revenue. This is up from 60% in 2010 and 55% in 2009, so clearly it’s the driving force for the company. Freeing this division up to pursue growth without distractions seems like a good idea — and Wall Street thinks so, too. The stock has been rallying recently on the spin-off news and has popped 25% in the past few days as a result.
The bad news, of course, is that United Online’s leftovers will not be nearly as attractive. After all, landline Internet is hardly a growth industry right now. Unlike Kraft or Conoco, what’s left over at United isn’t very encouraging for investors.
But as for FTD, this move could liberate it from bureaucracy and help it grow. And if NetZero and Classmates.com crash and burn … well, FTD shareholders will be protected from the carnage.
I would caution against investing immediately in United Online in anticipation of the spin-off, because as I said, a stake in those other media and communications businesses doesn’t seem wise. If you get in before the company splits up, you’ll be stuck with some of both.
If you like FTD, wait until it’s standing alone. The earnings and revenue performance in past reports, when broken out separately from United Online’s other operations, are indeed encouraging. But I like to wait and get a few legitimate quarterly reports before I pass judgement on any newly minted stock.
Do you have a stock that’s on your mind? Drop me a line at email@example.com and I’ll take a look at it.
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not hold a position in any of the aforementioned securities.
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