Spinoff Odds and Ends: HPQ vs. HPE, Treasury Wine(TSRYY)

A few links for today

1. Bloomberg takes a look at how HP Inc (HPQ) and Hewlett Packard Enterprise (HPE) are doing since their 2015 breakup and to the surprise of the afor today:uthor – and I would guess to absolutely no readers of this site – the ‘runt of the litter’ HP Inc is actually doing well. Newsflash: it’s actually quite a common story for spinoffs. According to the author, HP Inc has momentum after streamlining operations, cutting costs and finding ways to grow (buying Samsung’s printer business) despite a lackluster PC and printer environment. It’s also active in 3D printing, another area of growth. On the other hand, HPE, the ‘exciting’ business, has struggled recently as management has been eternally occupied with a seemingly never ending quest to slim down even further. The company is about to execute another spinoff, this time of its software business via Reverse Morris Trust with MicroFocus, next month(trading at MFGP-WI right now). In the meantime, sales expectations are constantly missed. Even including the .086 shares of DXC received earlier this year, it looks like HPQ is soundly outperforming HPE since the spin. Just another instance of the ‘bad business’ coming out ahead for shareholders…
2. Treasury Wine (TSRYY) is a 2011 spinoff from Foster’s International and is the owner of various brands such as Penfolds and Wolf Blass. The business struggled post-spin with various turnaround efforts failing, especially in the US where it had to destroy millions of dollars of inventory. In 2014, new CEO Michael Clarke pitched a new strategy to amongst other things, focus more on the luxury business, but some questioned whether or not he could deliver. A very public bidding war then emerged between private equity heavyweights KKR and TPG, but ultimately neither of the firms were willing to pull the trigger at their initial price of $5.20 AUD (which the company thought was too low anyways). After rejecting the bids (and taking a lot of flack), we noted that ‘management may have dodged a bullet, but now comes the hard part – actually delivering good news and proving to shareholders that they made the right choice by not selling ‘low’ and sticking with them to turn around the company.’ Well…score one for management. Mr. Clarke’s strategy worked and the company has since cut costs, reinvested in its top brands, improved margins and recently made a large acquisition of Diageo’s US wine business at an attractive price. Investors are all aboard and after just a few years the stock is sitting at $13.87 AUD, you know, just 2.6x the initial bid price. That’s why we play the games right? Given the success of the company’s upmarket brands, some had speculated that the company would demerge (spinoff to those of us in the US) its commercial brands portfolio. Mr. Clarke ruled out a spinoff though, simply saying they ‘believe that we do not need to demerge’. He thinks the business is really ‘primed’ now and expects margins to soar even higher. Given his success to date, I doubt he will receive too serious of a challenge on that front…at least while things are going well.

Disclosure: Author holds no position in any stock mentioned.