2014 may be the year of the spinoff, with a record number of deals coming to market in which a parent company raises capital by listing one of its units as a separate business, according to the co-founder of The Spinoff Report.
Spinoffs are the “new golden route to value” for both investors and the companies involved, according to Ryan Mendy, COO of the New York-based firm, which has been involved in more than 200 spinoffs.
'Investors are very interested in this situation because you do have that unlocking value that comes from companies forming a better strategy, that’s ultimately more in line with their more interested shareholder' - Ryan Mendy, The Spinoff Report
He estimates $2 trillion US will be raised in the next year alone through up to 46 spinoffs in North American markets.
In an interview with CBC’s The Lang & O’Leary Exchange, Mendy argued spinoffs are often better bets for investors than IPOs, which tend to see their stock price plunge after a listing.
“Investors are very interested in this situation because you do have that unlocking value that comes from companies forming a better strategy, that’s ultimately more in line with their more interested shareholders,” he said.
He gave the example of Time Warner spinning off its Cable unit or Encana Corp. splitting from Cenovus and pending deals at Baxter International and Chesapeake Energy.
According to the Spinoff Report, corporate spinoffs delivered an average return of 20 per cent from 2000-2010 in the year post demerger.
Market conditions right
The conditions that are encouraging spinoffs now include company balance sheets with lots of cash and markets that have moved up considerably in the last two years.
“I think what it indicates is that we’ve gone from a distressed period, all the way up to a value period where we have cash come back into value,” Mendy said.
He said the spinoff benefits the parent company by exposing its core value to the market.
“You’re just not transparent enough. You need to demonstrate where the value is in your strategy. You’ve gone from 10 years ago being worth something, got destroyed six years ago, now you’re back up to where you are, but ...there’s no value for shareholders from 10 years ago,” he said.