Spinoff Odds & Ends: South Africa Spinoffs, David Einhorn Buys Some $HPE

Lets close off the week with some happenings in the world of spinoffs:

1) Spinoffs Are Popular On The Johannesburg Exchange

Every so often, a reader writes in to the site to let us know that our international coverage is weak (some use nicer language…others less nice). To which we reply thanks for reading and that volunteers are always welcome (and they really are). Usually they are referring to European or maybe even Asian spinoffs, but apparently a real hotbed for spinoffs that we haven’t been covering is in South Africa. Apparently of the 17 new listings this year, 6 (or more than 33% for those that like games with statistics) were carve outs from other companies. Patrycja Kula-Verster, business development manager in the primary markets division at JSE, put it in blunt terms: “If you ask me what the common theme is, if you further analyse the listings for this year, I would say it would definitely be the spin-offs”. There it is. Despite the political turmoil, the market is hot for IPOs, especially those that are carve outs. I don’t expect our coverage of this space to suddenly increase though so if you happen to have any insights, please feel free to share.

2) David Einhorn’s Greenlight Likes Hewlett-Packard Enterprise (HPE)

Greenlight Capital released its Q3 letter this week and the firm has initiated a position in Hewlett Packard Enterprise. Readers of this site will know that HPE emerged from the breakup of Hewlett-Packard in late 2015 and ever since then has been in a seemingly never ending ‘slimming down’ process. The company has been particularly fond of the Reverse Morris Trust method, with two spinoffs this year using that approach. It spun off a business into CSC, now DXC Technology (DXC) and just last month it merged its software assets into Micro Focus International (MFGP).

Mr. Einhorn thinks that ‘earnings have been depressed by higher input costs and separation-related expenses, but HPE has an opportunity to significantly reduce its cost base.’ As a result, the fund believes HPE’s earnings power will grow ‘to $1.40-$1.70 in the next few years’ (read the letter to see the adjustments made to EPS).

Bloomberg recently looked at HPE’s performance compared to the old hardware business and the results weren’t what most predicted, but that was before Micro Focus took off a bit. Perhaps with all of the breakups done, the company can finally move past the one time costs, focus on growth and make shareholders happy.

On a separate note – do you think his opining on the market seemingly changing the way it values companies is more sour grapes or is he onto something?

Disclosure: Author holds no position in any stock mentioned.