10 Rules for Spin-off Success

I’ve been investing in spin-offs for the past 15 years and have learned many lessons.

How’d I learn them?

Mainly, the hard way!

But today I’m sharing those lessons so you don’t have to make the same mistakes.

#1. Forget that “spin-offs outperform” 

In aggregate, they generally will but each situation is unique. If you go in thinking “spin-offs outperform” you will have a positive bias which will be costly.

#2. Look for “too good to be true” situations

In the spin-off world, there are many “too good to be true stories” that work out. Thungela Resources (TGA) trading at 2x free cash flow in July ’21, IAC Interactive (IAC) trading at a negative enterprise value (backing out MTCH and ANGI stake) just prior to the MTCH spin-off, and BBX Capital (BBXIA) trading at 50% of net cash post spin are just a few examples.

#3. Absolute value trumps relative value

Countless examples but just to name one: Vimeo (VMEO) looked cheap on a relative basis vs. other high growth SAAS names at $50 per share post spin.

On an absolute basis, not so much…


#4. Wait as long as possible to invest in sum-of-the-parts (SOTP) stories


IAC Interactive (IAC) traded at a negative EV (backing out MTCH/ANGI stake) on the day before its Match (MTCH) spin despite having one of the best management teams (Barry Diller and Joey Levin) calling the shots.

Don’t buy a SOTP story until the breakup is imminent.

5. Be wary of Value Investor Club (VIC) write ups

VIC is a famous members-only forum created by Joel Greenblatt.

To gain access to VIC, you need to be voted in by existing members.

The general public can access VIC ideas 45 days after they’ve been published.

VIC write ups are usually persuasively written by smart, sophisticated investors.

But everyone in the world looks at them. They are useful but don’t use them as your primary idea generator.

#6. Do your own work

Recent example…

Sum-of-the-part (see rule #4!) write ups for Bausch Health (BHC) had Bausch & Lomb (BLCO) generating $900MM of EBITDA in 2022.

But these estimates ignored stand alone public costs and other headwinds. The S-1 filing disclosed annualized EBITDA of $660MM.

To state the obvious, this has big implications for Bausch & Lomb’s (BLCO) valuation.

#7. Use sell side research

The sell side gets a bad rap but provides a ton of value. They are industry experts and will have a much better sense of fair value and appropriate comps for the spin-off than I will. You just need to know how to use them…

If they publish a SOTP valuation pre-spinoff, their valuation of the spin-off will be a good fair value estimate. If a spin-off drops precipitously once trading begins, the sell side analyst will generally initiate at a price target that implies 20% or maybe 30% upside…

But you know their “real/unbiased” valuation implies 100%+ upside. A sell sider will rarely issue a 100% upside price target (no incentive to put him/herself out there). Use sell side research but of course don’t forget rule #6.

#8. High cost of debt is a red flag

Super obvious but I’ve learned it the hard way. KLX Energy Services (KLXE), Quorum Health (QHC), and Recro Pharma (REPH) are all examples of companies with 10%+ debt. If the interest rate is that high, debt holders view the business quality as very low.

#9. Dividend as a catalyst

A dividend initiation can be a positive catalyst that forces a spin-off to re-rate quickly.

Dividend policy will be disclosed in the spin-off’s form 10.

I wrote a twitter thread with more details including two case studies.

#10. The most successful spin-offs grow the top-line

It’s fine to buy a slow growth spin that has been indiscriminately sold – IF – you are confident there is a catalyst to force a re-rate (like Kontoor Brands (KTB) or Jackson Financial (JXN)), but generally the spins that perform best will be the faster growers.

So there you have it. My 10 Rules for Spin-off Success.

Do you have any spin-off investing rules to live by?

Share them with me at rich@stockspinoffinvesting.com.