The Coming Spinoff Boom

by: Dana Blankenhorn

One great early sign of normalcy in a market is the corporate spinoff.

Spinoffs usually happen only when companies feel they can extract value by separating from a piece of themselves, that the two parts will be worth more than the whole. When values are collapsing, when fear rules the market, spinoffs become scarce.

The Spinoff Report, which follows the market, estimates 81 such deals went down last year, with a market cap of $420 billion, but that value could more than double this year to $960 billion. A roadshow will talk about some of them, including deals involving Conoco Philips (NYSE:COP), Sara Lee (SLE) and Level 3 (NASDAQ:LVLT).

Our Robert Broens has looked at the Sara Lee deal, noting that spinning off the company's coffee and tea business later this year, creating $4.55 billion in stock, will kill a "conglomerate discount" currently averaging 7%.

Bankers like spinoffs not just for the fees they generate, but because they let companies get rid of under-performing assets at a profit. Often these deals are just preludes to more action, as 30% of spinoffs are re-acquired over the following two years. They can also lead to new bond sales, as with the Conoco deal. The new Philips 66 refining business has already sold bonds worth $7.7 billion.

The year is already off to a spinning start with Samsung's spinoff of its LCD business, ElPaso's (EP) sale of its exploration unit, Kraft's sale of its grocery business and Hartford's (NYSE:HIG) exit from life insurance and annuities. It also means bulls can start circling other conglomerates, like News Corp. (NASDAQ:NWS), in hopes of extracting valuable units.

My view is that the spinoff boom may also make other deals make sense that otherwise make no sense, like HP's (NYSE:HPQ) combination of its printing and PC units. Combining its consumer computing into one balance sheet could easily be followed by a spinoff that would greatly profit investors.

So a lot of companies that look like dead money may not be. Let the rumors begin. And let the spinoff profits roll.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.