- Yum! Brands (YUM) decided to spin off its China business and shareholders have generally reacted pretty favorably. The WSJ walks through the potential value propositions of both companies, but one class of investors is decidedly less excited about the move: bondholders. Barron’s points out that the new parent company is expected to dramatically increase its leverage and as a result, spreads have widened dramatically. The expectation is that the credit rating agencies will put the company on downgrade watch, further hurting bondholders. On top of that, the company is shrinking its revenue base by shedding its China operations, although the expected steadiness of royalty cash flows vs. volatile earnings may somewhat offset that concern. Equity holders have cheered most spinoffs and these decisions are for the most part done without any shareholder or bondholder approval. It will be interesting to see if that dynamic changes in the future as their popularity continues to grow.
- The fall edition of CSB’s Graham & Doddsville newsletter was recently released. It’s usually a great read featuring interviews with investment managers along with some investment ideas from students. The current issue features an interview with the team at Global Endowment Management and their associate James Ferguson answered a question about activists:
G&D: Do you have any view on activism and what seems to be the growing trend of activist managers?
JF: Interestingly, at the Daily Journal meeting, Munger basically acknowledged that in some cases they are needed, but in other cases, they are not, and I think that’s probably how we think about it—it’s very dependent on the situation and the activists themselves. It is about the time horizon of the activists: are they really in it for the long haul? I am sure there are some people tagging along, calling themselves activists, trying to get companies to lever up and buy back shares to get a stock pop. That probably is an increasing risk, but some activists do add real value— it’s probably a good thing to have them watching over a company at the end of the day.
Typically, ‘sometimes yes and sometimes no’ answers aren’t very satisfying, but I think it’s a pretty fair and accurate response in this case. Not all are created equal or deliver the same amount of value. Just see the recent WSJ report which tracked their performance.
Disclosure: Author holds no position in any stock mentioned.