Corporate Splits, Just as Easy as TomKat Divorce
Research Director, Mad Money
Sara Lee, a breakup name we highlighted back in April, is benefitting from being able to focus on two distinct growth strategies within its respective core markets. The company announced in January 2011 that it would be separating its “MeatCo,” now known as Hillshire Brands, and its international-focused “CoffeeTeaCo,” now known as DE Master Blenders 1753 (quite a mouthful of a name!) that trades on the Dutch Exchange. Hillshire will be emphasizing cost cuts along with innovation, while the Coffee Tea company will focus on acquisitions. Also on the food front, Kraft is a name we highlighted in January based on its announcement last year that it would be splitting its faster-growing global snacks business (“SnackCo”) and its mature domestic grocery biz with slower growth but higher margins and yield (“GroceryCo”). The announcement of the split brought Irene Rosenfeld off the "Mad Money" Wall of Shame (where she had been placed due to underperformance) and free into celebration mode.
Beam is another breakup name we highlighted back in October and which has continued to surge, up over 30 percent since then. Of course, BEAM is the liquor company stub of Fortune Brands, which sold off its golf segment and spun off its Home & Security business under the symbol FBHS.
Post, a stock we aptly recommended on Valentine’s Day from its split off from Ralcorp, is another one that has benefitted from the splitsville phenomenon. Even within the competitive cereal category, Post’s ability to invest in the business as a standalone company versus being starved as a part of Ralcorp will be key to future growth — something investors recognize despite recent lackluster results.
McGraw-Hill, which we highlighted back on May 31 on the pullback in shares, is aiming to break out its financial segment from its education business. This announcement last September to break up into “growth” (financial) and “value” (education) has been a key driver of the stock and makes strategic sense due to the segments’ very different profiles.
What else? Abbott. We highlighted the back in November largely based on its decision to split its branded drug company from its diversified medical products company that sells nutritionals, medical devices, generic drugs and diagnostic products. Here, the pharma biz will have slow and steady growth with a healthy pipeline of new drugs to keep the earnings coming with a solid yield. On the other hand, the medical products biz will have double-digit earnings growth. Again, the split allows for a separate growth vehicle and dividend vehicle. Breaking up has never felt so good! Remember, one of the reasons Bristol-Myers has been among the most successful big pharma names is because of its December 2007 decision to shed its non-core businesses and focus on its pipeline and innovation, positioning it strategically versus peers. In 2011, Bristol outperformed peers (up 33 percent versus 19 percent) largely due to this increased strategic focus. Not to mention that other names that are not breaking up may want to consider it — take Johnson & Johnson, for example. Goldman Sachs had a great piece out highlighting the value that could be created if new CEO Alex Gorsky separated out the consumer, pharma and medical device businesses.
Split-ups in the energy space also highlight the merits of separating growth and value businesses. Remember, Marathon announced in January 2011 that it would spin off its downstream business to focus on the higher-growth energy and production company. With the announcement, the stock opened 10 percent higher. The stock continued its upward trajectory, rising 30 percent until the spin-off of Marathon Petroleum was completed in July of that year. ConocoPhillips announced in July 2011 it would separate into two standalone public companies, something we highlighted and celebrated that day in a segment. With the spinoff of the downstream business, Phillips 66, from the stub energy and production company , each division could focus on its respective areas.
And separations in the industrials space have also been quite common, given the diversified nature of the industry. Look no further than ITT, which announced its split-up in January 2011 and completed it in October of last year … or, of course, Tyco, which announced in September of last year it would split into ADT North America residential security, flow control and fire and security. Of course, this follows its 2007 split-up that included getting rid of Covidien. It is also worth mentioning that Nelson Peltz’s stake in Ingersoll-Rand has been aiding in keeping the stock afloat amidst a multitude of macro worries. While a split here doesn’t look imminent, if management can’t prove that the whole is worth more than the sum of the parts, we may see some action.
The bottom line: When it comes to companies thinking of calling it splits, it often isn’t about heartbreak but instead about value creation. Even in a market that is hard to “game” — especially with a turbulent earnings season — keep a look out for case-specific value enhancers that are divorced from macro drivers.
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