Spinoff Odds & Ends: The Time Is DNOW, Redux and More

Hedge funds get rich using OPM (other people’s money) so why not use OPW (other people’s work) to generate some ideas? Might be helpful if volatility is back…

  1. Clark Street Value takes a look at two upcoming real estate related spinoffs. The first is Spirit Realty Capital’s (SRC) upcoming ‘bad asset’ portfolio spinoff. It will consist of properties attached to Shopko, some workout assets and a Master Trust full of assets. The analysis is worth reading in its entirety, but the author thinks SRC is attractive and due for a multiple re-rate. The other spinoff is hotel company La Quinta’s (LQ) pre-Wyndham(WYN) merger spinoff of Corepoint Lodging, its ‘propco’. The new company will be a REIT and the author points out that due to the upcoming merger it’s possible to back out the value being assigned to spinco. At the time of the piece, there wasn’t a ton of upside, but the author thinks the risk/reward profile is attractive. The La Quinta spinoff is actually a rare species: a taxable spinoff. The author notes that this is due to rules surrounding REIT spinoffs which changed back in 2015-2016 as part of a budget deal between Republicans and Democrats. REIT spinoffs used to be quite common and activists seized upon the theme, but eventually the federal government got tired of losing the revenue and made it rather difficult for non-REITs to pursue.
  2. Value & Opportunity has been looking at a number of special situations recently. Last December, amidst the talk of GE’s (GE) woes, the blog took a look at GE’s credit card focused spinoff Synchrony Financial (SYF). The company has outperformed both its parent and the overall index since its spinoff. The name has also received a lot of love from value investors and Berkshire(BRKB) has been increasing its stake in the store credit card business. The blog takes a closer look at the business and its performance, but ultimately doesn’t think it’s cheap enough to step in at this point. For what it’s worth, Synchrony is one of the five members of Mohnish Pabrai’s Spinoff Index for 2018 (it was also a member in 2017).
  3. The TGV Partners fund annual letter lays out the fund’s thesis for oil parts distributor Now Inc (DNOW). The company is also known as Distribution Now and was a 2014 spinoff from National Oilwell Varco (NOV). Fun fact: our piece on that spinoff is one of the site’s most popular of all time. Go figure. Despite a number of years of pain due to the surrounding environment (it is a very cyclical business), the fund is quite positive on both the business (or at least its long term prospects) and on the management team. The fund recommends loading up the boat for more – bold position!
  4. Not spinoff related, but the Q4 Financial Analysts Journal had an interesting piece questioning the value of traditional EPS forecast focused security analysis. The authors instead suggest a different model focused on determining a company’s ‘strategic assets’ and ‘competitive edge’ is more worthwhile. Most analysts already look at these things and some probably include part of their analysis. I don’t see a wholesale change coming though. The authors do make some good points though and it’s always good to read about different ‘models’ to evaluate companies.

Disclosure: Author holds no position in any stock mentioned.


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