Interesting spin-offs from Sweden

Spinoff stocks can be an interesting hunting ground for value investor. You can beat the market by investing in these stocks. Studied fact is that spinoff companies outperform the market averages.


How are spinoff companies performed?

Many studies have found that both spinoffs and parents do outperform the market. One study by Patrick Cusatis, James Miles and J. Randall Woolridge was published in a 1993 issue of The Journal of Financial Economics. It determined that spinoffs and parents surpassed the S&P 500 Index by an average 30% and 18% respectively during the first three years of trading in spinoff shares.

In another study, Chip Dickson discovered that between 2000 and 2005, spinoffs beat the market an average 45% during their first two years, while parent companies beat it by an average 40% in the same two years. Also one study completed at Penn State, covering period from 1963 to 1988, found that stocks of spinoff companies outperformed S&P 500 Index by about 10% per year in their first three years of independence. Parent companies also outperformed their industry by more than 6% annually during the same three-year period. Lastly, can be mentioned study made by JPMorgan. They examined spinoffs from 1985-1995 and estimated excess returns of 20% for spinoffs and 5% for parents over the first 18 months.

If the past experience of previous studies holds true in the future, market beating results could be achieved most easily by buying a portfolio of recently spun-off stocks. But you can achieve even better results if you are willing to do a little of your own work. It means trying to pick most favorable spinoff situations, instead of random sampling or buying every spinoff stocks.

There are many reasons why companies pursue spinoff transactions. One of the most common reasons is that unrelated business needs to be separated via spinoff. In many cases a spin-off will allow each business to focus on its own strategic and operational plans without diverting human and financial resources from the other business. Sometimes, the motivation for a spinoff comes from a desire to separate out inferior business from the better one. Occasionally, this worse business is difficult to sell and via spinoff the debt load can be shifted from the parent to the new spinoff company. Also strategic, regulatory and tax considerations may be the cause of spinoff transaction. The list could continue almost indefinitely.


How to find the right spinoff stocks?

What are we looking for finding the best spinoff companies? Of course, fundamentals and valuation affects the decision. But more is required common sense, logic and little experience.

  1. Insiders own and buy

Nobody knows the situation better than insiders. If they continue as owners or buy more, it is the best possible signal. In spinoff situations, you really should be in the same boat with insiders. Keep an eye on the insiders and watch what are they doing.

  1. Big institutions are selling new spinoff company

Often new spinoff company is too small or totally in a different business and therefore inappropriate for big institutional portfolio managers or pension funds. This can lead to large sales of stock solely for reasons not be based on specific investment merits and therefore might create a buying opportunity.

  1. Uncovered or hidden value found in a new formed company

After spinoff, you can find that one of the companies is fundamentally evaluating much greater business than before. Maybe because of oversold new company is strident undervalued. Or because of company leverage risk / reward situation is favorable.

Yes, generally the best thing is to own the parent company even before spinoff. But you do not have to start guessing which companies will spinoff in the near future – it’s not a solid investing method – because as the studies confirm, first three years are the best time to own spinoff companies. So you have plenty of time analyze companies and situation after the spinoff. Autor is happy long-term owner of SCA and B&B Tools.


Svenska Cellulosa AB and Essity

SCA has been for a long time one of the leading hygiene and forest products company in Sweden. It is really Nordic blue-chip stock. After spinoff Essity (the hygiene business), SCA concentrate to operate in the forest products business. In 2016, the hygiene products business accounted for 86% of Group sales and the forest products business for 14%.

SCA is Europe’s largest private forest owner. Paper is the biggest sector following forest and wood. Pulp sector is the smallest one. Forest sector has best margins and it gives largest profits to the company. Forest industry is mature business and not necessarily high growth is expected, except in Asia. On the other hand, the company’s competitive position is strong and it is generous dividend payer.

At first glance Essity looks more interesting. The hygiene business has been growing and more profitable part of old SCA. Margins and return on capital have been clearly above the forest business. On the other hand, notably higher debt level can cause surprises. Leverage works in both directions.

Both companies are also after spinoff firmly owned by Industrievärden. Industrivärden is holding company and an active, long term owner of many large Swedish companies.


Bergman & Beving and Momentum Group

The purpose of the split and separate listing of the Momentum Group operating segment was to increase the Group’s earnings growth through an even clearer focus on the development of leading brands and attractive market channels in profitable niches.

Bergman & Beving changed its name from B&B Tools back to the original format. Although the focus will remain on organic volume growth in existing markets, strong balance sheet and low debt make it possible to carry out a number of interesting corporate acquisitions.

Acquisitions of Arbesko, the Nordic regions leading brand of safety and work footwear, and UVECO are well suited to the company’s other business. Acquisitions always involve a risk, but the company has pretty good track record. Costs reduction through increased efficiency and a reduction in funds tied up in working capital is another short-term goal.

Bergman & Beving does not offer high returns on the invested capital or high margins. On the other hand, the stock price has fallen so low, that even the smallest positive profit news may raise the stock price considerably. Insider buying is also a good sign.

Momentum Group comprises two business areas – Tools & Consumables and Components & Services. As part of the restructuring of the future Momentum Group acquired 12 operating companies, directly and indirectly, from B&B Tools in 2016/17. These internal acquisitions were primarily financed through a shareholders’ contribution paid to Momentum Group by B&B Tools. Growth in the construction sector is favorable to the company. Sweden and Finland are well on track and in Norway the worst is probably behind.

Important acquisition was an agreement to acquire 70% of the shares in TriffiQ, one of Stockholm’s largest resellers of workwear, protective footwear and custom workwear. The acquisition of TriffiQ is well in line with company’s strategy for future growth and development.

Anders Börjesson and Tom Hedelius families have 27.8% voting rights in both companies. I’m pretty sure that this spinoff will not be the last company arrangement which we will hear.

You have to notice that all these companies have two series of stocks. Series A stocks carries more votes than series B stocks. This is very common in Sweden, even though all investors do not love it.


Things happen in threes – Autoliv plans spinoff its fast-growing electronics business

Maybe you don’t have to wait a long time for the third Swedish spinoff. Autoliv is the worldwide leader in automotive safety systems. Passive Safety is a great cash flow generator, and it is going to be a relatively stable business. Electronics is completely different, it’s a clear growth business. Electronics need heavy investments unlike more mature and stable growth passive safety business which requires the highest requirements on quality and manufacturing efficiency. It will be very interesting spinoff if realized, although the process may take around one year. Please follow the situation and do your own home work.


Want to learn more about spinoffs:

Joel Greenblatt: You Can Be a Stock Market Genius

Joseph W. Cornell: Spinoff to Payoff

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