As the three-ring circus of rising interest rates, inflation, and bank failures plays out, investors may be searching for opportunities that are less exposed to the performance of the overall economy. Corporate spinoffs and separations are worthy of consideration.
Some recent spins have been notable successes. Shares of
General Electric
(ticker: GE) and the recently spun off
GE HealthCare Technologies
(GEHC) are up 44% and 38%, respectively, year to date. Investors who bought GE stock 12 months ago are up more than 70% on their holdings. The
S&P 500
and
Dow Jones Industrial Average
are down about 9% and 3% over the same span.
What’s more, American depositary receipts of
Alibaba Group Holding
(BABA) are up more than 20% over the past month after the Chinese online giant announced plans to reorganize, paving the way for it to break up into many smaller pieces.
Screening for attractive spins, however, is more involved than just simply eyeballing price/earnings ratios.
Barron’s reached out to Jim Osman, founder of research firm the Edge, which identifies opportunities in special situations, including spinoffs, mergers, management changes, and shareholder activism.
Spinoffs, in particular, have been fertile ground in the past. Osman has been tracking them for 20-plus years and found that companies involved in spinoffs beat the market in the one- and two-year periods following the spins.
He highlighted six companies involved in spins that can generate above-average returns in coming years. Buying shares of the six now look attractive to Osman. They are:
Madison Square Garden Entertainment
(
MSGE
),
Bausch Health
(BHC),
Lions Gate
(LGF/B),
Kellogg
(K),
3M
(MMM), and
Danaher
(DHR).
| Company / Ticker | Market Cap (bil) | PE 2024E | What’s Spinning | Timing |
|---|---|---|---|---|
| Madison Square Garden Entertainment / MSGE | $2.0 | 25.8 | Sphere Entertainment | April |
| Bausch Health / BHC | $2.7 | 2.3 | Baush & Lomb Eyecare, Solta Medical | First half 2023 |
| Lion Gate Entertainment / LGF | 2.5 | 38.9 | Media Networks | Q3 2023 |
| Kellogg / K | 22.2 | 15.9 | Cereal | Q4 2023 |
| 3M / MMM | 56.7 | 10.8 | 3M Healthcare | Q4 2023 |
| Danaher / DHR | 181.8 | 22.6 | Environmental & Water Business | Q4 2023 |
Sources: Bloomberg, The Edge
The event coming soonest is
Madison Square Garden Entertainment,
which is due to spin off its live entertainment assets. The newly formed live entertainment company will take on the name Madison Square Garden Entertainment and will include a diverse collection of performance venues, the entertainment and sports bookings business, and the Christmas Spectacular Starring the Radio City Rockettes production. The remaining company will be called Sphere Entertainment and will be comprised of the Sphere in Las Vegas, MSG Networks, and the Tao Group Hospitality businesses.
Madison Square stock has slid a net 25% over the past 12 months, but that includes a gain of 25% in the latest three months, which reflects optimism as the Sphere spinoff approaches. The transaction “is a key catalyst in allowing the value behind MSG’s assets to be properly [realized],” adds Osman.
Bausch Health
was once branded as Valeant Pharmaceuticals, and the stock trades for about two times estimated 2023 and 2024 earnings per share. Shareholders are suing to block a spinoff of the eye-care business, announced in 2020. It’s been a long time coming, and if the spinoff is allowed to proceed, the stock should rise.
Lions Gate
Entertainment is due to split into two companies by the end of 2023: one focused on streaming and the other on television and movie production. “Separating the streaming service from the movie and TV production studios helps to make the two businesses more attractive for potential post-Spin acquisitions,” says Osman.
Lions Gate isn’t a household name. Kellogg is—literally. The breakfast giant announced in mid-2022 plans to break up into two companies. The spin should be done by the end of 2023. Its global snacking business will be named Kellanova. The North American cereal business to be called W.K. Kellogg Co.
It’s “a great choice for investors who wish to invest in different parts of the traditional larger business,” says Osman. “The global snacking company has world-class brands and a higher growth segment.”
3M isn’t such as straightforward as Kellogg. The industrial conglomerate has been beset by legal troubles tied to potentially faulty earplugs sold to the military as well as chemicals it produced that were found in water supplies. Its shares are down about 60% from record highs reached in early 2018.
That performance has CEO Mike Roman is in the hot seat and feeling pressure to generate shareholder value, says Osman. A spin might be able to do it. 3M announced plans to spin off its healthcare business in July.
Danaher isn’t a struggling business. Many view it as the gold standard for running a conglomerate. It’s due to spin off its water and environmental-related businesses by the end of 2023.
“Danaher has a history of worthwhile transactions for investors,” says Osman. It isn’t a bad idea to hold Danaher stock and stick around for the ride.
Investors’ interest might be piqued by some or all of the six spin situations. Still, a screen is only the beginning of an investment process. Digging into a company’s situation after identifying it as a candidate is the next step along the way.
Write to Al Root at allen.root@dowjones.com
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