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Skarbeck: Wave of corporate spinoffs may lift shareholder wealth

November 15, 2014

Ken SkarbeckInvestors are seeing an increase in corporate spinoffs as companies seek to unlock shareholder value. Companies with two or more distinct businesses operating under their umbrella will sometimes conclude that spinning off a subsidiary into a separate company is beneficial to all stakeholders.

Last month, eight new spinoffs were announced, adding to 122 currently in the works. Due to the accounting and legal aspects of separating a company, it can take several months from the time of a spinoff announcement to the actual separation into two publicly traded companies.

To many CEOs, the idea of a spinoff goes against the grain of growing a business larger. Yet there are a variety of reasons management will decide to spin off a subsidiary.

A shareholder-oriented management might believe the stock market is not properly valuing the whole company and that, if it is separated into two entities, investors will accord a higher valuation to the separate businesses. In other words, the sum of the parts is greater than the whole.

In other cases, the spinoff might be unrelated to the company’s core operations, or it might be a smaller segment of the overall company. Freed from the larger company, it can have greater opportunities to grow.

As a stand-alone business, the spinoff’s financial statements will provide a clearer picture of its operations, allowing the company better access to capital to finance growth via acquisitions. Or the business might attract a larger competitor or private equity firm looking to make an acquisition.

A few Indiana companies have recently engaged in spinoff transactions.

Two weeks ago, Jasper-based Kimball International spun off its Kimball Electronics business. Kimball was a classic case for a spinoff, as the company had two distinct, unrelated businesses. The company’s electronic manufacturing business was spun off into Kimball Electronics, while the firm’s business and hotel furniture division retained the Kimball International moniker.

Spinoffs will change the makeup of your portfolio, since the division into two publicly traded firms adds a new company. While the spinoff transactions usually do not create a taxable event, shareholders must adjust their cost basis in the original company’s stock to reflect the division into two companies. In Kimball’s spinoff, about 30 percent of the original company value was assigned to Kimball Electronics and the “new” Kimball International (the furniture business) retained about 70 percent.

Last May, Simon Property Group Inc. spun off its smaller strip center business into a retail real estate investment trust called Washington Prime Group. The new firm was deemed to have a separation value of about 6 percent of the overall Simon business. Since the spinoff, Washington Prime announced a $4.3 billion acquisition of Glimcher Realty, thus demonstrating Washington Prime’s flexibility in deal-making as a separate company. Under the roof of Simon Property, it was unlikely this acquisition would have occurred.

NiSource, the northern Indiana utility based in Merrillville, announced in September it would spin off its natural gas pipeline business into an entity called Columbia Pipeline Group.

Spinoffs can create new opportunities for shareholders. Investors should be on the lookout for attractive investments that might surface in spinoff businesses.•

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Skarbeck is managing partner of Indianapolis-based Aldebaran Capital LLC, a money-management firm. His column appears every other week. He can be reached at 818-7827 or ken@aldebarancapital.com.

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