Sum-Of-Parts Plays: Real Or Imagined?

Includes: AA, AABA, HPQ, SWY
by: Stocks & Shares

Recent news stories featured Alcoa (NYSE:AA) and Hewlett-Packard (NYSE:HPQ) as sum-of-parts plays without any indication that either firm is considering or would consider a break-up.

This is jumping the gun. Instead, investors interested in following corporate actions should wait for investor activists to accumulate shares in a break-up candidate or for an executive to announce such intentions.

Breaking Up Is Hard To Do

Typically, management does not want to cede control over a business segment. Selling a piece of a company is like giving up or admitting defeat for most managers, and as a group they tend to fight asset disposal. It is also theorized that executives refuse to give up control because having more assets under their control helps justify high salaries and lofty egos. The idea is that a CEO of a $3 billion company seems to have more clout than a CEO of a $2 billion company.

Value is not enough. Consider how UBS (NYSE:UBS) analysts concluded that Hewlett-Packard ought to separate the business solutions division from its personal computers and printer operations. According to their analysis, HPQ shares would be worth $20 or more per share if the businesses were run separately. This is much higher than the roughly $14 price of shares today. The analysts led by Steven Milunovich stated, "HP, with its fully developed enterprise and consumer businesses, should split up in order to realize greater value." Any loss in purchasing power would be more than made up for by an increase in management focus.

Regardless, Hewlett-Packard refuted the concept that it would break up. According to spokesman Michael Thacker, Hewlett-Packard is stronger together than apart and the customers believe in one HP. CEO Meg Whitman said that she would not spin off the personal computer business though this course of action was considered by her predecessor Leo Apotheker.

However, the UBS analysts suggest that HP could break up if "prompted by activists or private equity." Whitman said the enterprise business and the software business would be the only growth engines for HP. Milunovich believes that at current share prices HP investors are actually getting the printer and PC business for free.

Such scenarios are great fodder for analysts, but without a management decision a spinoff or business sale will not happen. There is no way to unlock value without a key.

Another study turned to Alcoa and investigated whether the firm as a whole is worth more than its parts. Bloomberg averaged the work of four different analysts who each used a sum-of-the-parts valuation of Alcoa's four divisions as separate businesses. The average of these estimates for the parsed businesses would be worth $14.82 a share. This is almost twice the value of Alcoa shares which trade near $8.70 today.

However, this result may not matter at all. Alcoa CEO Klaus Kleinfeld said that keeping the company together makes sense. His rationale was based on how the firm is a global, large company with sophisticated intra-company purchasing. This environment is thought to let the business segments flourish.

Real Spinoff Candidates

In contrast, Yahoo (YHOO) is somewhat more likely to sell off business units. The ascent of new Yahoo CEO Marissa Mayer has increased the odds for the sale of other non-core assets and the return of capital to shareholders. She has demonstrated that she is not afraid to shake things up by implementing major changes in the firm's upper management line-up. Essentially, she has the freedom to make big changes to the company since she would be correcting the mistakes of others instead of admitting her own. Moreover, activist investors are well represented among shareholders and the board of Yahoo. Mayer would have their support to sell more non-core assets, Yahoo! Japan in particular. Such a deal may be delayed since the presumptive acquirer, Softbank, is now focused on buying a controling interest in Sprint (S).

More certain than possible Yahoo spinoffs, Safeway (NYSE:SWY) announced that its gift card business, Blackhawk Network Holdings, is planned to IPO in the first half of 2013.

An overview of price multiples reveals that Safeway is particularly attractive.















Diversified Computer Systems






Grocery Stores






Internet Information Providers




Clearly, investors seeking to play corporate events should consider Safeway as a potential buy candidate. It is arguably cheaper than Alcoa or Hewlett-Packard and is far more likely to actually go through with a spin-off.

Please read the article disclaimer.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in SWY over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.