Corporate spinoffs can create stock-buying opportunities

ANDREW LECKEY

July 28, 1993|By Andrew Leckey | Andrew Leckey,Tribune Media Services

Breaking up is -- relatively -- easy to do.

The corporate spinoff is the 1990s method of shedding an unwanted business to boost overall shareholder value. There's been a rush of activity, with nine spinoffs this year and 32 pending.

In a spinoff, a firm breaks itself up and leaves shareholders with stock in two separate companies instead of one. Or it may sell stock to the public to establish a value and then spin it off.

This year's plans by famous parent firms such as Sears, Litton Industries, Marriott and Pacific Telesis are examples of such restructuring strategies. RJR Nabisco Holdings Corp.'s intent to create a separate class of stock for its Nabisco Food Group was dropped because of weak food stock prices and tobacco business concerns.

"Many of the synergies of the 1960s and 1970s conglomerates really didn't pan out, and companies wound up with divisions which have little to do with each other," said Mark Zahorik, vice president at Keeley Asset Management, a Chicago investment firm that emphasizes corporate spinoffs.

"The spinoff is like a dividend in which the shareholder gets shares of the new company, and it's great for the company spinning off the division because the process is done on a tax-free basis."

The spinoff often results in two solid new investments, each with greater long-term stock-price potential than before. A brighter spotlight on two separate entities can mean better recognition on Wall Street, where pure plays are preferred.

"Historically, a lot of real dogs have been spun off, but in the last two years, we've seen more strategic spinoffs in which there simply was a conflict between two businesses," said Darren Bagwell, managing analyst with the Spin-Off Report, a research report that caters to institutional clients.

"Just remember that spinoffs are notorious for falling below their initial trading prices, because these companies tend to be much smaller than their parent company, and usually don't pay dividends and don't fit easily into industry categories."

Among spinoff companies, Zahorik and Bagwell recommend purchasing shares of:

* Caremark International, a company in the home-infusion business that was spun off by Baxter International.

* Alltrista Corp., maker of plastic food containers spun off by Ball Corp.

* Dovatron International, a computer electronics manufacturer spun off by Dover Corp.

Other Zahorik spinoff picks include Aptar Group, a maker of pumps and aerosol valves for personal-care products and pharmaceuticals that was spun off from Pittway Corp., and SpaceLabs Medical, a maker of patient monitoring equipment for acute care spun off by Westmark International (now called Advance Technology Laboratories).

He also recommends burglar-detection equipment firm Pittway, parent of the Aptar spinoff.

"While technically not 'pure' spinoffs, the Sears, Roebuck moves to sell off 20 percent of its Dean Witter, Discover & Co. unit in an initial public offering and 20 percent of its Allstate unit are important forms of restructuring," said Martin Skala, senior editor of The Outlook, a publication of Standard & Poor's.

Skala recommends the stock of these parent companies that are about to conduct spinoffs:

* Dial Corp., which spun off GFC Financial and is spinning off its van and bus making division, Motorcoach Industries International.

* Ralston Purina, which will create a new class of common stock for its ailing Continental Baking unit.

* General Signal, which is offering a public sale in its subsidiary Electoglas Inc.

Stock of Sears, a company actively unloading its non-retail divisions, is recommended by David Shulman, chief equity strategist for Salomon Brothers in New York, who warned: "The investor must examine each spinoff deal transaction by vTC transaction, for you just can't generalize."

There's a new positive attitude at companies after a spinoff because "managements are no longer encumbered by each other's performances," said Robert Reitzes, director of research for C.J. Lawrence in New York, who recommends Morton International, which spun off its Thiokol Corp. aerospace division.

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