Spin offs

Part
01
of two
Part
01

Company Spin-off Cost: Case Studies

One way that CEOs have been looking to raise stock prices is through company spin-offs. This most often occurs in cases where companies have assets that are not being reflected in the value of their stock. Even though the two counterparts may be successful, removing one from the other can end up being more profitable in the long run for each resulting company and their shareholders. A study done at Emory University showed that spin-offs usually reap profits for the parent company in the long run of about 3%. Spin-offs are historically the most successful when stock market sentiment is bullish. They most often occur in the mid to late phases of a bull market. The combined rise in equity of the parent company and the spin-off are what makes investing in a spin-off worth the overall costs.

Presented below are three cases of spin-off companies that have occurred over the last five years. The companies are in the size range of $100 million to $1 billion. The cost to spin-off over the last five years was found to range between $12.9 and $150 million.

RECENT SPIN-OFFS

Market conditions have been ripe for spin-offs over the last five years. The market has been on a bull-run since the bottom in 2009 with a minor pause here and there. Costs to spin vary greatly, depending on how much of the structure is already in place. Below are three case studies of recent spin-off costs.

Autoliv Nissan Brake Systems Cost $150 million

Autoliv Nissan Brake Systems is a spin-off from Autoliv Inc. The project cost was announced to be $70 million. The costs were said to be related to accounting, finance, legal, IT and listing. Autoliv Inc. claims that most of the project costs will not be tax-deductible and will be booked in the quarter that they are incurred. Other costs of this venture are tax related. The cost to legally separate the entities will cost up to $80 million. These costs will be reported in the first half of 2018. Add these two together and the total outgoing cost for the Autoliv Nissan Brake Systems spin-off is $150 million.
Autoliv Inc also reported a one-time, non-cash, goodwill impairment charge of $234 million, this does not change overall EPS outlooks, it simply takes into account the restructuring of Autoliv Inc’s total assets. Therefore, the number was not figured into the total cost for the spin-off. Autoliv Nissan Brake Systems reported annual revenue is $150 million.
Let it be noted that the annual revenue for Autoliv Inc in 2017 was $10.382 billion.

Cars.com Cost $12.9 million

The parent company Tegna announced that they would be listing Cars.com as a spin-off company in the spring of 2017. The cost to spin-off was reported to be $12.9 million. These costs are primarily associated with the relocation of headquarters and administrative expenses. Car.com annual revenue was reported to be $626.3 million for 2017.
The annual total revenue for Tegna was reported to be $1.903 trillion for 2017.

ADP Dealer Services Cost Between $55 and $65 million

ADP spun off its ADP dealer services in 2014. The deal cost $15 million and spin-off related expenses were between $40 - $50 million. ADP reported that they would disclose the total amount of the discontinued operations for the fiscal year 2015. The total reported discontinued operations revenue for the year of 2015 was $76 million. These costs were not broken down in the annual report.
When the spin-off was announced it was said that ADP stood to gain $700 million from the spin-off. ADP Dealer Services was estimated to have brought in 16% of ADP’s total revenue for the fiscal year 2013. The ADP investor call reported that ADP Dealer Services grew 7% that year. ADP Dealer Services estimated annual revenue for 2015 was calculated as follows:
(ADP annual revenue 2013) x (.16)
($9.442 billion) x (.16) = $1.51 billion for 2013
ADP Dealer Services 2013 revenue + (((ADP Dealer Services 2013 revenue) x (0.07)) x 2) = estimated ADP Dealer Services revenue for 2015
$1.51 billion + ((($1.51 billion) x (0.07)) X 2) = $1.72 billion

ADP Dealer Services estimated 2015 revenue was $1.72 billion.

CONCLUSION

The cost to spin-off varies from company to company. Each company reported on above included all information about each sim-off that has been made publicly available for spin-off sized in the mid-range of revenues between $10 million and $1 billion. Spin-offs recently announced for 2017 and 2018 have been from behemoth companies spinning smaller companies in the excess of billions of dollars. The cost for a spin-off of a mid-sized company in the three studies above is between $12.9 and $150 million. Cost includes relocation, legal fees, listing fees, administrative costs and financing fees.

Part
02
of two
Part
02

List of Recent US Company Spin-offs

Company spin-offs occur at different times and for reasons specific to each company and, as a result, the number of spin-offs that occur annually varies. To build a list of recent company spin-offs, we searched for and found pre-compiled lists of spin-offs that occurred in 2016, 2017, and 2018. We compiled a list of 34 companies that completed spin-offs in 2016, 28 that completed spin-offs in 2017, and one, Liberty Global that spun-off Liberty Latin America (LILAC) in early 2018. The name of the spun-off company, the name of the parent company, year of spin-off and sources have been entered into the attached spreadsheet. Per this request, the companies have been entered chronologically beginning with 2016.

Findings

2016

Our research generated 34 companies that completed spin-offs in 2016. Companies completing spin-offs in 2016 range from well-known companies like Fiat Chrysler which spun-off Ferrari N.V., MGM Resorts International which spun-off MGM Growth Properties LLC, and ConAgra which spun-off Lamb Weston to lesser-known companies such as Greatbatch which spun-off Nuvectra and Energy Future Holdings which spun-off Vistra Energy Corp.

2017

Our research generated 28 companies that completed spin-offs in 2017. Companies completing spin-offs in 2017 range from well-known companies like Hewlett Packard Enterprise Company which spun-off two companies, Micro Focus International and DXC Technology Co, Hertz Global Holdings which spun-off Herc Rental, and MetLife which spun-off Brighthouse Financial to lesser-know companies such as V Group Inc which spun-off Fernhill Beverage Inc and Actelon which spun-off Indorsa.

2018

After exhaustive searching, we were able to find one company that has completed a spin-off in 2018. That company, Liberty Global, spun-off Liberty Latin America (LILAC). It will not be the only company to complete a spin-off during 2018. A list provided by InsideArbitrage shows approximately 19 companies with potential spin-off dates during 2018. Three spin-offs scheduled to potentially happen in 2019 are listed here as well.

Conclusion

Company spin-offs occur at different times and for reasons specific to each company and, as a result, the number of spin-offs that occur annually varies. A list of company spin-offs that occurred in 2016, 2017, and 2018 including the name of the spun-off company, the name of the parent company, year of spin-off and sources have been entered into the attached spreadsheet. Information about potential spin-offs occurring in 2018 and 2019 has been included above.
Sources
Sources