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Spin offs, historically, have done well

Spin offs are created when a large company decides that one of its divisions would do better on its own or when tax laws/regulations make cutting the division sensible. Management realizes it’s hard to keep all the pieces together, and orphans away one or more divisions into the marketplace, which in turn unlocks value the general market may have been missing when the spun off division was hidden under the parent’s umbrella. Historically speaking, spin offs have been immense shareholder wealth creating vehicles, as several academic studies have proven. A well know study from Penn State found that spin offs beat the SP500 by 10% per year in the first three years; a McKinsey & Co. study published in 1999 proved similar: during the 1988-1998 decade, spin offs outperformed the broad market and their ex parents by 10%. Although spin offs facilitate a wider understanding of the orphan’s business and valuation, it never happens overnight – the typical spin out belongs to a boring industry and not widely disseminated via loud press coverage; furthermore, institutions take time to warm up the story, which subsequently creates a nice opportunity for retail investors, who can pick up shares before the large mutual funds have kicked the tires, modeled everything, and gotten acquainted with the story. As a spin out, LO offers investors tangible ownership in the company, whereas before, a holder of Lorillard/Carolina Group was limited to an economic interest (dividends only). Besides wider investor appeal, management walks away with better decision control after the spin & will likely allocate more capital towards dividend payouts than its former parent, Loews, was allocating.