3 Companies That Could Unlock Shareholder Value Through a Split or Spinoff

By Markets Fool.com

There are a number of reasons companies might consider spinning off parts of their operations. A spinoff may happen if a company's sales are sliding and it needs to raise cash. In other cases, activist investors lobby aggressively for a spinoff after they've crunched the numbers and decided that there's untapped value being tied up in a particular part of a company's business. Either way, the goal of a spinoff is the same: to create shareholder value.

Continue Reading Below

Identifying companies that are ripe for a spinoff isn't easy, so we asked our Motley Fool experts to come up with a list of companies they think could be worth more to investors if they were to be split up. Read on to learn which companies they picked and how you could profit from them.

Brian Orelli
Somewhere under all ofPfizer's fat is a fast-growing biotech. But investors have a hard time seeing it and therefore don't give the segment the appropriate value.

Earlier this month, Pfizer announced that it wasbuyingHospira, bulking up its generic-drug business. Investors cheered, sending Pfizer up nearly 3% on the day, but don't take that as an endorsement for a larger Pfizer. Many investors were probably buying with the expectation that having a larger presence in global established pharmaceuticals -- Pfizer's term for generic drugs -- will make that business segment easier to spin off. For low-margin generic drugs, bigger is better.

Pfizer has been exploring the idea of spinning off one or more segments since the middle of 2013, when it announced plans to separate its branded drugs into two businesses and create a third segment for the aforementioned established pharmaceuticals. For reasons I don't fully understand, the company decided it was too hard to create three years of audited financials retrospectively, so it'll need prospective results from 2014 to 2017 before a split can occur.

While the generic-drug business is the obvious spinoff, we could see a some of the branded-drug segments split off as well. Pfizer put about half of the branded-drug revenue in what it calls the global innovative pharmaceutical segment, but it separated out oncology, vaccines, and consumer health care into a separate group, each reporting independently.

Continue Reading Below

If we see Pfizer bulking up one or more of those segments through acquisitions, it could be a sign that it's prepping to spin off the segment.

Dan CaplingerOne idea for a spinoff involves global restaurant chain operatorYum! Brands, which operates the KFC, Pizza Hut, and Taco Bell chains. Among Yum!'s restaurants, Taco Bell stands out as having an almost entirely domestic focus. KFC is prominently featured in China and has more than twice as many stores abroad as it does within the U.S. market. Pizza Hut has a larger presence in the U.S., but it still has more than 40% of its locations in foreign countries. By contrast, Taco Bell has less than 5% of its stores abroad, and they make only a tiny contribution to the chain's overall revenue and profit.

Investors have had high hopes for Taco Bell, with hedge fund manager David Einhorn going so far as to say that the Mexican food chain could pose a challenge toChipotle Mexican Grill, given enough time. Recently, some of those investors believe Taco Bell would be better able to overcome its competitive challenges as an independent entity, with management free to deal specifically with Taco Bell's needs rather than overseeing two other international brands. With Taco Bell bringing in more than a fifth of Yum!'s overall operating profit, the unit would be large enough to survive as a separate entity, or it could also become a reasonable acquisition target for another restaurant player looking to grow its U.S. presence.

One company that could potentially unlock shareholder value through a split or spinoff isCitigroup. This isn't a new idea.

One firm suggested that Citigroup would be more valuable as three separate units before the financial crisis ever occurred. Since the crisis, many journalists and industry experts, and even politicians, have made the case that Citigroup would be better off and more stable if it were to split.

It would be complicated to divide some of the pieces of Citigroup, but there are some distinct businesses that would make sense as independent companies. For example, Citigroup's profitable North American consumer business, which includes the credit cards and branch banking operations, would be a company similar in structure toSynchrony Financial, which was spun off fromGeneral Electric last year.

Citigroup's wholesale and corporate banking business could be easily run as an independent company, with a huge foreign-exchange business and large investment bank. The bank's Mexican business could also work well as a stand-alone company. According to an analysis in aNew York Timesarticle, these three divisions of Citigroup could be worth about $200 billion (27% higher than Citigroup's current market cap) if the company were broken up, and that doesn't even include many other parts of the company's business.

While it may not happen anytime soon, Citigroup could potentially unlock value for its shareholders if it were to split up.

The article 3 Companies That Could Unlock Shareholder Value Through a Split or Spinoff originally appeared on Fool.com.

Brian Orelli has no position in any stocks mentioned. Dan Caplinger owns shares of General Electric Company. Matthew Frankel has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill. The Motley Fool owns shares of Chipotle Mexican Grill, Citigroup Inc, and General Electric Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.