Tuesday, May 19, 2015

Twenty-five spinoffs that blew up

Consolidated Freightways (1996) - The unionized division of a large trucking company. Its financial condition steadily deteriorated after the spinoff, and it finally went bankrupt in 2002 when couldn't obtain a surety bond it needed to operate.

Reliance Acceptance (1997) - A subprime auto lender that spun out of a regional bank named Cole Taylor Financial, Reliance went bankrupt a little more than a year after its spinoff. David Einhorn was a shareholder and mentions in Fooling Some of the People All of the Time that Reliance had a lot of defaulted loans for which it couldn't locate and repossess the collateral.

Solutia (1997) - A chemical-manufacturing spinoff from Monsanto that went bankrupt in 2003. Environmental liabilities played a starring role in the company's collapse.

Vlasic Foods (1998) - Campbell's Soup spun this off as a way to jettison several of its secondary brands, including Vlasic pickles and Swanson frozen foods. It also used the spinoff to jettison $500mm of debt. The company went bankrupt within three years.

Azurix (1999) - This was Enron's water unit. It had negative cashflow and problems with big projects in India and Argentina. According to Wikipedia, "The company was formed with an IPO of $800 million and an opening stock price of $22.00, which fell to $2.00 within two years."

Avaya (2000) - A spinoff from Lucent, it lost 95% of its value in the following two years. The stock subsequently recovered, but total return from the the spinoff until Avaya's leveraged buyout in 2007 was still negative.

Huttig Building Products (2000) - A spinoff from Crane Corp. Management at the time of the spinoff was incompetent and nearly ran the company into the ground. They were replaced with better operators, but then the company suffered during the housing bust. Huttig has survived two near-death experiences, but the stock is still below where it was on the date of the spinoff.

Synavant (2000) - Synavant began life as a unit of IMS Health that offered marketing software to drug companies. The company lost a few big contracts post-spinoff, and the stock went to zero.

Visteon (2000) - After Ford spun Visteon off, it looked very cheap on projected earnings, but the earnings never materialized. The company limped along until 2009, when it filed for bankruptcy.

MCI (2001) - Worldcom issued an MCI tracking stock in 2001 as a way to separate its declining long-distance business from the rest of the company. While this wasn't a true spinoff, it served the same purpose as many spinoffs. MCI was saddled with a lot of debt and a big inter-company payable. The tracking stock became worthless after the Worldcom accounting fraud was revealed, but it had already lost most of its value by then.

Agere (2002) - Another spinoff from Lucent. Like Avaya, this one plunged right after the spinoff, partially recovered, but still gave investors negative long-term returns.

Constar (2002) - The plastic-packaging division of Crown Cork & Seal. It had less pricing power than Crown's can business and a large debt load. It's filed for bankruptcy three times since the spinoff.

Blockbuster (2004) - Separated from parent Viacom in 2004 and paid a large special dividend in the process. The debt it took on to pay the dividend, along with the innovator's dilemma, prevented it from competing effectively with Netflix.

ACCO Brands (2005) - This office-products company was a spinoff from Fortune Brands and MeadWestvaco. I'm not familiar with the company, but a Value Investors Club writeup argues that sales of office products have fallen since 2007 and are in secular decline. Acco's stock is down 70% since the spinoff.

Tronox (2005) - Like Solutia, Tronox went bankrupt because of environmental liabilities and a recessionary economy. Spun off from Kerr-McGee in what was later ruled to have been fraudulent conveyance.

Idearc (2006) - Verizon shrewdly spun off this yellow-pages publisher before yellow pages became obsolete. Burdened with billions of debt, Idearc quickly went bankrupt. Unlike Kerr-McGee, Verizon managed to beat a fraudulent-conveyance rap.

Seahawk Drilling (2009) - A spinoff from Pride International that served drillers in the Gulf of Mexico, Seahawk was saddled with a big tax liability and aging assets, its largest contact was set to expire, it served a high-cost basin, and business suffered after the Macondo disaster. Bankrupt within two years.

Lone Pine Resources (2011) - Spun out of Forest Oil. I'm not familiar with Lone Pine, but the stock went straight down after the spinoff, and the company filed for bankruptcy in 2013.

NovaCopper (2012) - A copper-themed exploration spinoff from NovaGold. This has lost nearly 90% of its value in an extended bear market for exploration stocks.

Orchard Supply (2012) - A regional chain of hardware stores spun off from Sears. High debt, high prices, and competition proved a fatal combination for the company.

Sears Hometown and Outlet (2012) - Another dud from Sears. The spinoff was supposed to carve out a niche in towns and smaller cities where competition would be less intense. The stock has tanked and many Sears Hometown franchisees feel that the company has given them a raw deal.

Civeo (2014) - Hedge funds pressured Oil States International to spin off Civeo, its roughneck hotel unit. It's probably glad they did, because Civeo is down 80% since the spinoff.

Paragon Offshore (2014) - Noble Corp. spun this off with aging assets and a lot of debt right before oil prices plunged.

Rayonier Advanced Materials (2014) -- I haven't followed this one, but Rayonier spun it off last year. Down 60% since then.

Seventy-Seven Energy (2014) - Formerly the captive services division of Chesapeake Energy, this has fallen 80% in its eleven months as a public company.

Some general opinions

Many companies use spinoffs as "garbage barges" that separate problematic business units from the rest of the company. This all but guarantees that spinoffs' returns will vary a lot-- they may outperform the market on average because they tend to undervalued at the time of the spinoff, but some of them have structural flaws that will sink them even if they're priced cheaply.

I don't think spinoffs, on average, are undervalued any longer. They were historically undervalued because investors overlooked them, but the growth of the hedge-fund industry has changed that. By now everyone has read Joel Greenblatt's book and knows his techniques for finding special situations, and some of Greenblatt's disciples are managing large funds.

Glenn Chan writes that spinoffs "[A]re gimmicky. Most of the time they lower the intrinsic value of the business due to legal and accounting fees." I agree, especially with regard to some of the recent spinoffs that activist shareholders have pushed through. Spinoffs that are intended to garner higher stock-market valuations can actually destroy value through transaction costs, increased public-company costs, and in some cases loss of focus.

1 comment:

  1. Probably the best spinoff in recent years was DF/WWAV. Quite undervalued as recently as 2013, and given that DF had IPO-ed a portion of WWAV prior to the spin, this was easy to value.

    On the other side of the scale, DD/CC was a disaster. Of course, Ellen Kuhlmann is completely incompetent.


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