One of the more common, and commonly criticized, tactics that activists use to get value out of a company is to spin-off some of its assets, either fueling new investments that have better synergy with core businesses or for a round of buybacks and dividends. With steady inflows to activist funds, investors and management alike have to be aware of possible spin-off plays, and Horizon Kinetics co-founder and CIO Murray Stahl highlights a few that he thinks investors should pay special attention to.
Spin-off #1: Bob Evans Farms Inc.
Stahl would like to see Bob Evans Farms Inc (NASDAQ:BOBE) make two big changes: selling their real estate and spinning off its packaged food business. Of more than 500 restaurants, 482 are on company owned land with a combined value of around $626 million, which could be sold and then leased from the new owners to free up cash for other purposes. One drawback of this approach is that it would require Bob Evans to take a big tax hit since it has owned some of these properties for a long time and the prices have appreciated since then. Another is that, since the land is appreciating in value already, the returns on whatever investment are made would have to be outstrip both the return from owning land and the loss from now having to pay rent.
The second proposal is already in the works, a campaign by hedge fund manager Tom Sandell that started earlier this year. Spinning off the packaged food business would have a more certain impact, since Bob Evans Farms Inc (NASDAQ:BOBE) is valued as a restaurant chain even though 25% of its profits come from packaged foods, which normally have a higher valuation. Separating the two would allow the packaged food business to benefit from re-rating.
Spin-off #2: Baxter International
“Medical products are consistently misunderstood by the investment community,” writes Stahl. “While it is true that biosurgery medical products are surgical implements and many surgical instruments are priced as commodities, Baxter’s instruments are not only high-technology products, they are literally changing the nature of surgery.”
Stahl explains that Baxter International Inc. (NYSE:BAX)’s high tech products (absorbable bandages, sprayable sealant that stops bleeding, soft tissue repair patches) don’t just make surgery easier and produce better results, they make new types of surgery possible.
That’s why Stahl thinks that Baxter International Inc.’s (NYSE:BAX) decision to split into a high-tech business and a pharmaceutical business is such a good idea. The first can get the higher valuation that is normally associated with tech companies while the second can continue on with moderate valuations.
Spin-off #3: Gannett Co.
Gannett Co., Inc. (NYSE:GCI) is considering separating its publishing and broadcasting businesses, which would roughly split the company in half revenue-wise. This would follow the path of a number of previous similar spin-offs such News Corp (NASDAQ:NWSA) (NASDAQ:NWS). from Twenty-First Century Fox Inc (NASDAQ:FOX) and Graham Holdings Co (NYSE:GHC) from Washington Post.
The big difference he sees is that Gannett Co., Inc.(NYSE:GCI)’s publishing business already gets 30% of its revenue from digital and plans to grow that segment of its business, so there isn’t the sense of a healthy broadcaster shedding a business model on the decline as there certainly was with the Graham Holdings/Washington Post deal.
“Gannett projects it will have $1 billion of operating cash flow. That is a lot of money with which to buy back stock and to reorganize the company. Spun out the right way, this transaction could significantly enhance the value of Gannett,” writes Stahl.
