Recently, there has been a spike in spin-off transactions. Examples include Fortune Brands (NYSE: FO) and its plans to spin off non-liquor related business, a move by Marathon Oil (NYSE: MRO) to spin off its refining business and Motorola splitting into Motorola Solutions (NYSE: MSI) and Motorola Mobility (NYSE: MMI) to separate its smartphone business from other operations.
No doubt, the results can be nice for investors. Just look at ITT (NYSE: ITT). In early January, it announced that it would spin-off its water and military technology businesses. And Wall Street loved it. On the announcement, ITT’s stock spiked 16.5%. The belief was that the company would have more focus and improve its competitiveness. Besides, the ITT shareholders would not have to worry about declining military spending. Ultimately, profits should increase.
So what are some of other companies that are ripe for spin-offs? Here’s a look:
Pfizer
Since reaching $14 in July of last year, Pfizer (NYSE: PFE) stock has had a nice run. It’s now trading at $20. Unfortunately, it is still well below the price it traded back in 2000; that is, about $45 per share. The fact is that Pfizer has been living off several blockbuster drugs that will soon come off of their patents. At the same time, the pipeline of new drugs has been meager.
But Pfizer has a new CEO, Ian Read, who wants to shake things up. For example, this week he agreed to sell its Capsugel business to KKR (NYSE: KKR) for $2.38 billion.
Yet this should only be the start. Pfizer has several other substantial businesses like animal health, generic pharmaceuticals and nutritionals.
Pfizer has certainly noted the success of the spin-off strategy from rival Bristol-Myers Squibb (NYSE: BMY). In early February 2009, it issued shares in Mead Johnson Nutrition (NYSE: MJN) and since then, the stock has gone from $26.81 to $58.33 and the price-to-earnings ratio is at 27. Consider that Bristol-Myers’ multiple is only 14.
Applying the same valuation multiple to Pfizer’s nutritionals unit, a spin-off would result in a valuation of about $7 billion.
Symantec
Back in late 2004, Symantec (NASDAQ: SYMC) stock was trading at about $32 and its core security software business was strong. But to push growth, the company agreed to spend $13 billion on Veritas Software, which was a major storage provider. The strategic rationale was that there would eventually be lots of synergies between security and storage.
However, the merger turned out to be a dud. Symantec’s stock price is now trading at $18.46.
Yet security and storage remain solid businesses, which have promising long-term futures. Over the past few years, Hewlett-Packard (NYSE: HPQ), IBM (NYSE: IBM) and Dell (NASDAQ: DELL) have paid hefty premiums for these types of companies.
For Symantec, a good way to realize this value is to spin-off its storage business. Top companies in sector include NetApp (NASDAQ: NTAP) and EMC (NASDAQ: EMC), which trade at cash flow multiples of about 15.
Assuming Symantec’s storage business can trade at the same levels, it would be about $15 billion. That’s roughly the parent company’s current market cap.
Yahoo
In 2008, Microsoft (NASDAQ: MSFT) offered $33 per share to buy Yahoo! (NASDAQ: YHOO). But it was not high enough to reach a deal. Well, now the shares of Yahoo! are trading at $16.84.
The company has continued to suffer, though. It has failed to deal with the growing threat of Facebook and Google (NASDAQ: GOOG). There have also been layoffs, which have caused low morale.
But Yahoo! still has some juicy assets, such as a 35% stake in its Japan business and 40% of Alibaba, a top e-commerce operator in China. Based on the market values of these assets, a sale could result in cash of $14 to $15 per share.
True, a transaction will not be easy because of shareholder agreements and taxes. But with so much at stake, there should be lots of incentive to get a deal done.
General Electric
General Electric (NYSE: GE) understands the importance of spin-offs. For example, it structured a deal to transfer a 51% controlling stake in the NBC Universal division to Comcast (NYSE: CMCSA).
For a company like GE, it is important to have a highly optimized portfolio of companies, which have scale and large cash flows. But to grow, the company is now focused on the global market for energy infrastructure.
So it probably makes sense to spin-off other businesses. And perhaps the most obvious is GE Capital. The business suffered greatly during the financial crisis of 2008 – but it has since recovered nicely.
The valuation? Well, assuming it is about 1X book value, it would be about $68 billion.
As of this writing Hilary Kramer did not own a position in any of the stocks named here.
