Corporate Spinoffs: Should You Invest in RemainCo or BadCo?

During their recent episode, Taylor, Carlisle, and Asif Suria discussed Corporate Spinoffs: Should You Invest in RemainCo or BadCo?, here’s an excerpt from the episode:

Tobias: Tyler Pharris is our unofficial producers. He’s got a good question for you. “When a company is spinning out a BadCo does that tend to unlock value for the RemainCo or is the situation to short the BadCo after the spin? Any lessons on sizing around spinoffs?” I think you raised two good examples before where there was Ferrari coming out of Fiat. And Ferrari has been a great investment. Fiat, not so much. And then you mentioned another one too, where similar, the spinouts done really well. Chipotle-

Jake: Chipotle.

Tobias: -and McDonald’s. What are the lessons there? Is the spin the way to go?

Asif: Oh, It–

Tobias: I lost him. Go again. Go again Asif.

Asif: The question is spot on, because not a lot of people realize that sometimes the spinoff is being done to leave the parent company in a better shape. They tend to load the spinoff with a lot of debt and with bad assets. I’m not saying this is the case with the recent one where Howard Hughes is spinning off their Seaport division, if you will. They have this several block section in lower Manhattan where they’ve been investing a lot of money on the retail side, where they’ve been losing money. And so, they spun off that division. Bill Ackman who owns 37% of Howard Hughes through Pershing Square has indicated that now he wants to buy the company after they spun off their Seaport assets.

So, you got to look at what the spinoff is going to have. If the spinoff is of bad assets, then sometimes I end up buying the parent company, just like in the case of Howard Hughes, that may become more attractive for an acquirer. In the case of the spin off ending up with attractive assets, whether it’s Chipotle or Ferrari, or even Biohaven, which was spun out of a company that was also called Biohaven, because it was acquired by Pfizer, the spinoff was actually interesting, because it had a bunch of cash that the parent company gave to the spinoff, as well as a pipeline of drugs. It was trading at an extremely low valuation.

So, it’s a case-by-case basis. If I find that it’s a BadCo situation, then I end up buying the parent company. I do not short the BadCo shorting unless it’s a very specific situation, is very difficult to pull off.

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