European Spin-offs – Reality check part 3 (and final)
Due to overwhelming demand (ok ok, it was only wexboy asking for it), I decided to add part 3 to my series about spin-off companies (part 1, part 2) in order to focus on a longer term view.
This time I selected 143 spin offs beginning on 01.01.2001 which were completed before December 2008 in order to analyse 1, 2 and 3 year performance numbers with the goal to validate the claim that year 1 and or year 2 are always difficult for spin offs and year 3 is kind of “take off”. Again, I compared the performance to the Stoxx 600 price index.
So let’s move directly to the results:
| Year 1 | Year 2 | Year 3 | Total | ||
|---|---|---|---|---|---|
| Spin off Performance | 30.3% | 20.4% | 4.8% | 42.8% | |
| BM Performance | 1.8% | 1.0% | 3.9% | 3.8% | |
| Delta | 28.5% | 19.4% | 0.9% | 39.0% |
Those results are surprising (at least to me) in different ways:
1. Using this universe (since 2001), Spin-offs suddenly show a significant outperformance over 1,2 and 3 years
2. In contrast to “conventional” wisdom, the outperformance is highest on average in the first and second year !!!
The top ten 3 year outperformers are interesting as well:
| Completion/Termination Date | Target Name | 3Y outperformance |
|---|---|---|
| 04.03.2005 | Altri SGPS SA | 603.1% |
| 05.04.2007 | Net Entertainment NE AB | 576.4% |
| 13.12.2001 | Distrigaz | 534.8% |
| 10.09.2004 | Aker ASA | 504.1% |
| 28.04.2005 | Sensys Traffic AB | 400.4% |
| 21.10.2008 | Reinet Investments SCA | 394.4% |
| 21.01.2005 | FormPipe Software AB | 304.4% |
| 25.02.2002 | Falck Renewables SpA | 284.5% |
| 23.06.2003 | Exmar NV | 223.6% |
| 06.10.2003 | Hypo Real Estate Holding AG | 218.8% |
Quite a lot of them were spun off just right in time to participate fully in the 2006/2007 stock market bubble. Hypo Real Estate, as everyone knows for example was nationalised soon afterwards but in the first 3 years it was an extremely succesful spin-off. Total Produce, one of my current holdings scores relatively bad, beining in the lower half and underperforming the benchmark by almost -30% over the 3 year period following the spin off.
Some companies of the Top 10 (Net Entertainment, Distrigaz, Reinet) really look like long term winners, the others seem to be more a result of large market betas.
The 10 top loosers are:
| Completion/Termination Date | Target Name | 3Y outperformance |
|---|---|---|
| 23.04.2008 | SharpView AB | -85.3% |
| 28.02.2005 | Moviemax Media Group | -90.5% |
| 31.01.2003 | Albany Capital PLC | -94.3% |
| 05.01.2004 | Sorin SpA | -98.0% |
| 23.01.2003 | Troms Fylkes Dampskibsselskap AS | -110.0% |
| 16.12.2002 | Dickinson Legg Group PLC | -113.2% |
| 14.08.2002 | Mymetics Corp | -118.0% |
| 02.03.2004 | Medoro Resources Ltd | -137.6% |
| 03.03.2003 | NGP SpA | -145.0% |
| 06.02.2004 | Marakand Minerals Ltd | -145.6% |
One could describe them either as micro cap or penny stocks or as some kind of “fad” company.
So what can we conclude from this exercise ? From my point of view, the following points are relevant:
1. Spin-offs can be an interesting “special situation” investment, however they are far away from being anything like a “sure thing”. In any case it doesn’t make sense to concentrate exclusively on them as Greenblatt did recommend.
2. Any analysis based on past data depends highly on the universe and time frame chosen and should be only used as one of many indicators
3. I couldn’t find any prove for the theory that spin-offs underperform in the first year and outperform in later years
4. However it seems to be a good idea to keep away from “fadspin-offs” (Internet, renewables) and/or micro cap spin-offs, as this seems to be one of the surest ways to loose money..
value and opportunity 
Thanks MMI!
And I suspect you would get many more variable results depending on the timeframe/other criteria you picked… I’m not a huge fan of screens and/or mechanical strategies – i) if they work, there’s always a ton of institutional money ready to crush the life out of the potential returns, and ii) I just always wonder if I could weed out the losers from such approaches.
But I think they can be used sensibly sometimes to provide a list of names to research – spinoffs are the same – some spinoffs can definitely possess special factors that promote out-performance, but at the end of the day they are just another section of the market where you just have to grind through the normal research to find a potential winner.
I was interested also to see the % of French spinoffs you found.
Thanks again,
Wexboy
Thanks Wexboy for your overwhelming demand
One question to the Greenblatt’s book reader. He mentioned to buy stocks with leverage for example in LEAPS. Is that in special situations a adorable stragety? It sounds simple and easy how he writes about it, but i have had always my doubts about it?
Roman,
from my point of view, this was one of the weakest parts of the book. However, the answer depends on the risk appetite and personal investment style. Personally, iw ould not want to pay the option premium.
mmi
I agree – I was also heavily influenced by Greenblatt’s book (I think it’s one of the best investing books of all time), and I’ve been looking through spin-off filings for the past few years, but I haven’t found much I’ve liked..
Having a motivated management team is key, but most importantly there must be a good business model underlying the new company (which isn’t always the case)…
To paraphrase Buffett, even a solid and motivated management team can lose when faced with a bad business model..
Great posts, even though only Wexboy requested it a lot of people will benefit.
I don’t think spin-offs are the panacea that a lot of people make them out to be, I think spin-offs can be a good hunting ground but your research just proves that not all spinoffs are good investments.
I think for a spinoff to unlock value a very specific set of conditions usually need to be in place, things such as high management motivation, hidden value. As as you note great market conditions, most of those spins really benefited from the 06/07 tailwind.