Sometimes an opportunity is just too good to be true. Such may be the case with the eagerly anticipated Tyco (TYC)Â Spinoffs.
Tyco is a ginormousÂ conglomerate with it’s hands in everything from fire extinguishers and security to healthÂ care to electronics to sprinkler and valve fittings. Tyco is splitting into three businesses in an effort to pump up falling share prices. It’s a case of the parts being worth more than the whole. And it doesn’t hurt thatÂ Dennis Kozlowski is behind bars.
Spinoffs are a common strategy of late and many investors salivate at the opportunity to buy into a leaner, meaner company early on. In 2006 $54.5 billion worth of business units were broken out of their parents as new companies, spinoffs, carve-outs, or other strategies. A spinoff is defined as a company completely divesting itself of a business unit. A carve-out is when the parent company keeps most of the unit but sells off smaller pieces that don’t match the core strategy of the business unit. Ameriprise — Buffet has cut his holding of Ameriprise by more than a third, by the way — is a spinoff of American Express. Chipotle from McDonald’s. Tim Hortons — which the Canadians are bananas over — from Wendy’s.
Why are investors excited? The market generally rewards a good spinoff.Â According to USA Today,Â the spinoffs and carve-outs over the last 12 months have gained over 15% on average since their divestitures. The Standard & Poor’s 500 during the same time periods gained just 5.9%.
Investors haven’t reacted so well to the Tyco spinoffs. The stock has plummeted. That usually perks up Moat Investors’ ears, but Tyco probably has more to lose. Sluggish and unpredictable sales cloud Tyco. TycoÂ cut its fiscal first-quarter estimate by about 7%, due to weakness in some of its businesses. There isn’t a big or long-term win here. That happened back in July of 2002 when Ed Breen was named CEO. Tyco is up over 160% from that period.
Tyco and Tyco spinoffs are not a Moat Investor play.
Â As Fat Pitch Financials said in a recent post:
Many investors, including several prominent value investors,Â had been waiting for this spinoff opportunity for quite some time.Â But as you can imagine, if everyone was waiting for this opportunity, the likelihood of the market mispricing these stocks was slim to none.Â
Fat Pitch goes on to give their analysis of how to consider the value of a spinoff, or at least the Tyco spinoffs. It’s a worthy read that details their process:
- Review of the presentations given at the June 19th Tyco Investor Meeting (which he found on the Google cache since Tyco pulled them from their site — good trick)
- Evaluation of Tyco Electronics likely small moat due to competitive pressures
- Evaluation of Covidien, a medical device manufacturer with some moat — trading above instrinsic value
- Evaluation of the parent company with strong brands, good moat, high switching costs but currently valued well beyond a margin of safety.
I’ll pass on this one. Not that there may not be some value there some day. Certainly Tyco International has strong brands and a repaire reputation. But there are better stocks right now. Can you say Panera (PNRA)?