How to spot and profit from a spin-off

Spin-offs can be great opportunities for canny investors

How to spot and profit from a spin-off

FTSE 100 constituent Reckitt Benckiser is set to spin-off its US-based pharmaceutical business and its shares have risen on the news. Certainly, spin-offs designed to unlock shareholder value can be good news for investors in a number of ways.

Often when a division is spun-off, some institutions tend to sell their shares in it immediately as they are mainly interested in the parent company. This can result in a temporary mispricing of the spin-off.

This is what initially happened when Carphone Warehouse spun off its home phone and broadband division into TalkTalk.

Alternatively, the shares of the parent bounce on the announcement as is the case with Reckitt Benckiser. The announcement was well flagged in advance, so investors had plenty of opportunity to buy in beforehand.

How to spot a spin-off

For that very reason it is well worth reading the interims and end of year announcements from companies in some detail. For example, GlaxoSmithKline, the UK largest pharmaceutical company has recently signalled that it may spin-off its consumer health division. This is a £6bn business that includes Panadol painkillers and Corsodyl mouthwash.

Other companies that have been linked to talk of spin-offs include:

  • BG Group. In June Deutsche Bank recommended that the most effective way it could create value would be by demerging its liquefied natural gas (LNG) operations. Others have said it could spin-off its Brazilian assets.
  • Imperial Tobacco has already announced plans to spin off its Logista distribution unit through a flotation in Spain.
  • Home Retail Group is considering a plan to spin off its Homebase chain of DIY stores to concentrate on its more successful Argos shops.
  • In time, even Tesco may go down this route in order to revive its flagging share price. According to Mark Kleinman writing back in September 2013, Tesco had considered spinning off its Asian operations and listing them separately. While ex-ceo Philip Clarke apparently opposed this, Tesco’s new boss, Dave Lewis, might think differently.

Company REFS screen

Given that many spin-offs are often an attempt to find value in a large company where returns are slowing, I ran a screen on Company REFS for possible candidates among the FTSE 100. Searching for companies where the trend for Returns on Capital Employed showed the most rapid deterioration brought up the following 5 names: Glencore, BG Group, Shroders, AstraZeneca and BP.

This might be too small a sample, but I’d be interested to hear if readers have had any success in developing screens of their own to hunt down these beasts.

 Further reading

One of the most accessible books I’ve read that covers spin-offs is Joel Greenblatt’s ‘You can be a stock market genius’. Another fine book is Marty Whitman’s ‘The aggressive conservative investor’.

We’ve also covered broker views on Tesco.

The writer has shares in Tesco.

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About Author

Christopher Menon

Every Investor Editor Chris Menon is a financial journalist who has written regularly for national newspapers, magazines and websites about personal finance, with particular emphasis on investing.