Shares of Agilent (A) took a jump on Thursday after the company announced its intentions to split the company in two separate publicly traded companies.
While it might easily take a year before the split materializes, investors are cheering already.
Given the historical strong performance of the to be spun-off companies, today's action might provide an interesting opportunity for shareholders to participate in.
While it is obviously too late to benefit from Thursday's jump, opportunistic investors should mark their calendars. When the split becomes effective, which is estimated to happen in 2014, the spun-off electronic measurement product company, as well as the combined value of the company, might easily jump again, as we have seen in previous spin-offs.
Agilent announced that it will split its operations in two separate companies.
Agilent will create a company focused on life sciences, diagnostics and applied markets (LDA) which will retain the current Agilent name. The other company, which still has to be named, will focus on electronic measurement (EM) products.
The separation will be done in a tax-free spin-off of the electronics measurement company to current Agilent shareholders.
This is not the first split for shareholders in the company, which has seen four major spin-offs since 2005. I think it is a wise decision to split the company up. The current valuation looks rather appealing to some of Agilent's competitors as recent underperformance in the measurement division has impacted the overall valuation, thereby the valuation of the healthcare business as well.
Splitting the company in two separate entities should allow investors to value both stand-alone companies, thereby "unlocking" current value being destroyed by the "conglomerate discount."
Agilent aims to complete the transaction before the end of 2014.
Benefits For Shareholders
With the split, current shareholders will own shares in two separate businesses which are focused solely on their own operations. Each company will have a unique investment profile, allowing it to attract its own investment clientele depending on the risk tolerance of investors.
Both firms hold leading positions within their industry, and should be well-capitalized having debt-to-EBITDA ratios of 2.0x or less.
Historically other splits have boded well for shareholders, notably in the company which has been spun-off from the "mother" company.
The newly formed Agilent company will focus on life sciences, diagnostic and applied markets. Balanced geographical operations, a recurring revenue base, opportunities in emerging markets, molecular diagnostics and clinical market opportunities should provide an attractive growth profile.
Full year revenues for the business are seen around $3.9 billion for this year. Agilent will continue to pay a dividend yield which is equivalent or more to the current dividend yield.
Current CEO Bill Sullivan will remain to lead the company.
The newly formed Electronic Measurement Company will hold leading positions in communications, aerospace, defense, computers and semiconductors markets. Revenues for the year are seen around $2.9 billion as the new company does not anticipate paying a dividend.
Current Chief Operating Officer Ron Neresian will become CEO of the new business.
Agilent ended the third quarter with $2.33 billion in cash and equivalents. The company operates with $2.70 billion in total debt, for a modest net debt position.
The company is on track to generate annual revenues of around $6.8 billion, as earnings could approach $950 million, or around $2.85 per share.
The current $17 billion market capitalization values the firm at 2.5 times annual revenues and around 18 times annual earnings.
Implications For Investors
While the split is still a long time away, shareholders are already benefiting from it. Following the announcement, shares saw gains of up to 6%, boosting the market capitalization of a firm by almost a billion.
Investors are comforted by the strong performance of other recent spin-offs. Murphy Oil (MUR) has just finished its spin-off of Murphy USA (MUSA) in recent weeks. A year earlier, refiner and marketer Phillips 66 (PSX) was spun-off from ConocoPhillips (COP) as shares in the spin-off promptly doubled amidst a favorable refining environment.
As mentioned before, Agilent has transformed itself many times in its history. The business was originally a spin-off itself from Hewlett-Packard (HPQ) back in 1999, and has four major spin-offs since 2005 as mentioned above.
The company's trouble, which is holding the valuation of the entire business down, is the struggling electronic measurement business. This results in the well known "conglomerate discount" and affects the value of the healthcare unit.
Thursday's jump clearly demonstrates this effect as apparently investors are willing to pay up to a billion more if the company is focused, just showing how real the "conglomerate discount" really is, even in today's world. The electronic measurement business has seen some recent weakness on the back of cuts in defense spending and a soft communications market.
Back in November of last year, I last took a look at Agilent's prospects. I concluded that the company which traded around $38 per share was a good addition for long-term investors. Ever since, shares have risen by roughly a third to their low-fifties. Unfortunately I did not act upon my own advice to buy into this compelling opportunity. For now investors can be happy with Thursday's returns, but keep an eye on this one for the future.
While the actual split might be due next year, investors might have an opportunity to buy the spun-off company, which shares have historically seen decent returns in splits.