Drumming Up The Rumor Mill – Spinoffs That Might Be

It’s the dog days of August and sports fans are in a frenzy. Has Tiger rebounded? Not this year. Exciting pennant races? Nope. What really has fans hopping and going wild is the start of NFL training camps. Really? Meaningless training camps? Yup and that fact is symbolic of the NFL’s power and outright dominance over the US sporting world. Interestingly, the more popular the sport has become, the more its ‘season’ has extended beyond the regular preseason-postseason arc. The draft, free agency, and minicamps have all become media events and it is conceivable that in the near future we will be talking about football all year long. Which depending on who you ask, isn’t necessarily a bad thing…

So why talk about football in an investing blog? Well, one of the great things about spinoffs is that the length of the process provides ample time for investors to pore over all of the documents and come up with an opinion. In the spirit of the NFL, let us extend that already long timeline a bit further and look at some potential spinoffs which have yet to be formally announced:

1) Northrop Grumman (NOC)/Naval Shipbuilding Business – with budget cuts looming for the navy, NOC has determined its shipbuilding businesses to be “non-core to its aerospace and technology businesses”. According to CEO Wes Bush, a spinoff will be their first option, but they are open to bids from outside companies. Many P/E firms have expressed interest as well. The segment had sales of $6.2 billion last year and a backlog of $19.1 billion (3/31).

I have a hard time believing they are going to sell this company to a private equity firm or to an international firm. We are talking about a company that makes machines of war for our navy (including nuclear vessels) and employs 40,000 people in suffering regions such as Louisiana and Mississippi. Also, the Navy said it will ‘monitor the situation’. Yikes. Needless to say, with all of the political angles this is could get messy. As a result a spinoff might make the most sense thereby keeping the company in American hands.

2) AMR/AmericanAirlines and American Eagle – by no means an original idea as the company looked into this move as early as 2007, when many of the other larger players separated ownership of their short-haul regional business. At that time, AMR decided to keep the company in house, but recently released a statement saying they were “reiterating” its examination of spinning off Eagle” . Perhaps shrinking to the third largest carrier has put a fire under management. While it seems the company is seriously pursuing its options, according to a recent letter from Tony Gutierrez, head of the pilot’s union, a spinoff is only one its options. While an IPO or financial buyer are less likely options, there is the chance of a merger or acquisition with another carrier. This is a situation worth watching.

3) Rowan Companies (RDC)/LeTourneau Tech – another idea which has been in the works for some time. In the beginning of 2008, investors including Steel Partners have been pushing for a spinoff of LeTourneau (manufacturer of front-end loaders, log stackers and mobile offshore drilling rigs) because they believe it would unlock value for Rowan. According to Rowan CEO and President Matt Ralls, it is just a matter of timing before it gets done. Maybe. While the past few years have been rough, you would think this transaction would have happened already if management was fully committed to the idea.

4) Nearly every financial company – the dust is still settling from the new financial regulation, but it seems certain that there will be some divisions that get cut. Reports of spinoffs have hit almost every financial firm, including Morgan Stanley (Frontpoint) and Goldman Sachs (GS Principal Strategies). While I doubt any of these become stand alone public companies, it is worth examining the parents and any affects on the bottom line from losing these often profitable businesses.  There is a lot of uncertainty right now and that is usually accompanied by some nice opportunities.
…and with these examples I am sure that I have just scratched the surface. Feel free to post a comment with any potential spinoffs you have come across.

2 thoughts on “Drumming Up The Rumor Mill – Spinoffs That Might Be

  1. john

    Right! The pace is one of the things that I love about stock spin-offs. It is one of the few areas where us natural plodders seem to have the upper hand. I have to remind myself not to fall in love with a company as I learn more and more about it. It does eventually come down to price and volume just like every other stock trade, no matter how seductive the story.

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