DealTalk: Spinoffs back in fashion amid pressure to perform

By Mark McSherry

NEW YORK (Reuters) - The spinoff, that old ploy for companies keen to unlock value, is back in vogue. The trend is due partly to increased pressure on chief executives to boost shareholder returns as activist investors prowl for undervalued companies and leveraged buyout firms itch to put their billions to work.

After four slower years when the combined value of U.S. spinoffs ranged from roughly $25 billion to $55 billion, 2006 saw a big comeback for such deals, with their total value topping $145 billion, according to research firm Dealogic.

Already in 2007, completed U.S. spinoffs have reached at least $80 billion, up from $60 billion at this stage last year.

Some of the biggest spinoffs this year were Altria Group's 89 percent stake in Kraft Foods Inc. and Duke Energy Corp's natural gas unit, now trading as Spectra Energy Corp.

"Mounting pressure from private equity and increasing shareholder activism have created a produce-or-perish environment that demands the maximization of shareholder value," Keefe, Bruyette & Woods analyst Melissa Roberts wrote in a report.

Of course, many well-performing companies spin off businesses from a position of strength and reap the benefits.

But others seem to make the move as a way of taking matters into their own hands, rather than being pushed by an activist investor like Carl Icahn or facing an unwanted bid from a private equity firm.

It's not hard to see why.

Spun-off companies are often worth more as independent entities than they were as part of a larger organization.

New stock from spinoffs is often distributed to existing investors, and Keefe, Bruyette & Woods said those shares usually outperformed the overall market.

Shares of the parent company can also get a lift, due often to a perception that it has become leaner and is concentrating on its core business.

"We found that pure spinoffs tended to provide the highest returns to shareholders as both the parent company and the spinoff saw post-spin performance that exceeded the overall market," Roberts said.

KBW found that spinoffs outperformed the Standard & Poor's 500 Index by 10 percent to 20 percent over three years.

What's more, investors in spinoffs often enjoy a takeover premium. KBW studied 1,000 spun-out businesses and found that half of them were eventually acquired, within an average of five years.

IF YOU CAN'T BEAT 'EM

Instead of running away from private equity firms, some companies contemplating spinoffs happily embrace them.

On April 3, Marshall & Ilsley Corp. , Wisconsin's largest bank, announced a plan to separate its Metavante Corp. unit in a deal valuing the payment processor at about $4.25 billion, including debt.

Under the plan, private equity firm Warburg Pincus would invest $625 million for a 25 percent stake in Metavante, while M&I shareholders would own the remainder.

Experts anticipate similar deals.

"Companies are really being forced to stick to their core business, and those that aren't are the ones that are being targeted by the activist shareholders, by the hedge funds, the large money managers," said Steven Bernard, director of M&A market analysis at Robert W. Baird & Co.

"It's basically unlocking the value that people feel has been buried inside the bigger entity," Bernard added.

Sometimes, however, the activist shareholders get there first.

On February 26, forest products company Temple-Inland Inc. , under pressure from billionaire shareholder Icahn, said it would spin off two businesses and sell its timberland operations, sending its shares up more than 12 percent.

Temple-Inland said the spinoffs would include its financial services operations in Guaranty Bank and more than 236,000 acres of real estate operations.

KBW speculated that companies currently considering spinoffs include CapitalSource Inc. for its health care REIT, CIT Group for aerospace assets, and Synovus Financial Corp for its card processing unit.

CapitalSource spokesman Michael Weiss said: "We believe our health care business is an important asset, and we are looking at a variety of methods for our shareholders to realize full value for it. We are focused currently on the acquisition of TierOne Bank, however, rather than a spinoff or other possible scenarios."

CIT has confirmed it is considering the sale of aerospace assets. Synovus Financial declined to comment.

Whatever the motivation, experts see spinoffs popping up more often on the list of strategic options that companies consider.

"Investors are seeing what private equity firms are doing to create value," said an investment banker who requested anonymity, "and they are asking their companies: 'How can you do that for us and get us more value and do it in a public arena?"'

(Additional reporting by Jessica Hall)

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