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COMMENT
Spin-Off Success Stories

By David Kuo (TMFDragon)
May 23, 2005

In the entertainment world, a spin-off is a television strategy that creates a new programme around characters appearing in a show already being broadcast. Remarkable successes include Mork & Mindy and Lavern & Shirley, which were spun-off from Happy Days, and Frasier. There have been some notable flops too - Baywatch Nights anyone?

Spin-offs in the business world seem to be more reliable. AstraZeneca (LSE: AZN) has flourished after it was spun-off from ICI (LSE: ICI) in 1993 and Vodafone (LSE: VOD) was let loose from Racal in 1988. More recent examples include BT Group (LSE: BT.A) demerging its wireless business O2 (LSE: OOM) in 2001 and Burberry (LSE: BRBY), which has performed well since its demerger from GUS (LSE: GUS). There is ongoing talk that GUS may spin off its credit-checking business Experian.

In industry, a spin-off takes place when an existing publicly listed outfit sells a part of its business by issuing new shares to create a separate company. Often new shares will be offered to existing shareholders first before fresh investors are allowed to buy equity in the new business.

Generally, spin-offs are about separating a healthy operation, and it is done for a variety of reasons. For the parent company, a spin off helps to sharpen management focus by allowing it to concentrate on its core operation instead of a being distracted by a subsidiary.

For the spin-off company, its management is free to develop its own ideas. It can sometimes be an indication that the subsidiary it is ready to take on new challenges on its own. Moreover, because it no longer has to compete for the parent company's attention and capital, it has a better chance of growing quickly.

Consequently, a spin-off can be beneficial both to the parent company and the newly formed business. Additionally, in most cases spin-offs can unlock hidden shareholder value too. This is especially true if the market values the two separate businesses higher than if the two businesses are lashed together as a single unit.

That said spinning off a separate business can present interesting problems for the private investors. Often the company that is spun-off may be significantly smaller than the parent company. Therefore, a once-tidy portfolio of a handful of carefully selected companies can quickly become disjointed and disparate. Consider say, someone who owned shares in Hays (LSE: HAS), Kingfisher (LSE: KGF) and Countrywide (LSE: CWD). Instead of owning shares in just three companies the portfolio would also include shares in DX Services (LSE: DXS), Kesa Electricals (LSE: KESA) and Chesnara (LSE: CSN). What a mess!

One obvious solution may be to quickly sell any shares following a demerger to help maintain order in your portfolio. However, a better option is to weigh up the merits of the two separate companies, as you would with any investment. This may require slightly more investigation because all corporate actions will change the make-up of a business in one way or another. But who said picking winners is supposed to be easy!