What is a Spin-Off?
A parent company creates a spin-off division as an independent entity when it believes the spin-off will be more valuable on its own. Also known as a spinout or starburst, a spin-off occurs when the parent distributes shares of a subsidiary to its shareholders. This process is a form of divestiture.
Key points:
- A spin-off is an independent company formed when a parent company issues shares in a subsidiary to its shareholders.
- A parent may pursue a spin-off if it anticipates the new entity will be worth more independently.
- Spin-offs have their own management and name, but may still receive support from the parent company.
How a Spin-Off is Created
A parent company may spin off a part of its business if it anticipates profitability. The spin-off will operate with its own management and name, while retaining the same assets, intellectual property, and workforce. The parent may still provide financial and technological support.
To create a spin-off, a corporation distributes 100% of its ownership in the targeted unit to existing shareholders as shares. It may also offer a discount for shareholders to exchange their parent company shares for those of the spin-off.
For instance, an investor could trade $100 of the parent’s stock for $110 of the spin-off’s stock. Spin-offs can enhance shareholder returns by allowing newly independent companies to concentrate on their specific products or services.
Benefits of a Spin-Off
- A spin-off can help a business unit concentrate its resources and enhance management of areas with higher long-term potential.
- Companies can optimise operations by divesting less productive or unrelated subsidiaries.
- When a segment has distinct strategic goals from the parent company, a spin-off can create independent value for both the company and its shareholders.
Risks of a Spin-Off
- A company’s share price and that of its spin-off can be volatile, often with high initial selling activity.
- Parent company shareholders might reject the spin-off shares if they don’t align with their investment criteria.
- As a result, the spin-off’s share price may decline in the short term due to this selling, despite positive long-term prospects.
Examples
South32 Limited
Perth-based South32 was originally a component part of the BHP Billiton conglomerate. In 2015, BHP Billiton opted to focus on its core assets and reorganised non-core assets into South32. This move allowed South32 to concentrate on its portfolio of base metals and minerals. Since the spinoff, South32 has grown into a significant player in the mining industry, with operations across several countries.
TWE
Treasury Wine Estates (TWE) was spun off from Foster’s Group on 16 May 2011. Foster’s, originally known for its beer, decided to separate its wine business to allow each segment to thrive independently. TWE has since become one of the world’s largest wine companies, with a portfolio of iconic brands and a strong presence in key markets globally.
Orica and Incitec Pivot
Orica Limited, originally a part of ICI Australia, underwent a significant transformation in the 1990s, spinning off its fertiliser and industrial chemicals business into Incitec Pivot. This spinoff allowed Orica to focus on its mining services and chemicals business while enabling Incitec Pivot to become a leading player in fertilisers and explosives.
FAQs
What Does a Spin-Off Mean for Shareholders?
A spin-off occurs when a parent company distributes shares of a subsidiary or division to its shareholders, creating a new independent business.
How Do Spin-Offs Affect Corporate Strategy?
Spin-offs can lead to strategic shifts, enabling companies to focus on specific goals, such as prioritising growth in one entity and improving profit margins in another.
What Is the Key Distinction Between a Spin-Off and a Split-Off?
While both involve the distribution of shares, a split-off requires shareholders to choose between retaining shares in the parent company or exchanging them for shares in the newly formed company.
Conclusion
A spin-off, or spinout, creates a new company from an existing one. It’s a form of divestiture, used when the parent company believes the new entity will have greater value independently.
DISCLAIMER: This article is for informational purposes only and does not replace official business advice. AVANTE PARTNERS has no relationships with any companies mentioned.
