On 5 December debt-ridden integrated energy company Origin Energy Limited (ORG) announced it would be creating a spin-off company – (NewCo) – to run Origin’s conventional oil and gas assets.  The move maintains Origin’s utility assets and Queensland APLNG export project while strengthening the company’s beleaguered balance sheet, weighed down by massive cost overruns at APLNG.  In an interesting side note, Origin itself is a spin off company, separating from former parent building materials company Boral Limited (BLD) back in 1999.
Three days later on 8 December another member of the Top Ten ASX oil and gas companies, Santos Limited (STO) announced its plan to shave off about $2 billion in debt over three years by spinning off “non-essential” assets into a separate company.  The intent is to allow the Santos to focus on its self-described five natural gas core assets – Gladstone LNG terminal in central Queensland, Papua New Guinea LNG, Cooper Basin, Northern Australia and Western Australia Gas and pay down the massive debt load incurred from the LNG ventures it plans to keep.  The non-essential assets going into the new entity include the company’s oil operations in Vietnam and Indonesia and the Narrabri coal seam gas project in New South Wales.
Investors liked what they heard as the share price of both went up on the news.  Both had already experienced an upward bounce following the news of the OPEC deal to freeze production. Here is the chart:

In theory spin offs should produce a “win/win” situation, with both the parent company and its offspring benefiting.  What a company considers its core assets generally take precedence over assets tangential or minimally related to the core.  These assets are akin to the proverbial “red-headed stepchild.”  Management can ignore them and expansion capital is directed towards core assets. 
Separating allows the parent to focus exclusively on what it deems the most important while affording the child the opportunity to grow on its own.  In practice, things can take a different course, with winners and losers mixed. To illustrate, we will look at the performance of both parent and child in some recent spin offs.
BHP Billiton Limited (BHP) decided to narrow its broadly diversified operations by spinning off its non-core base metals and mining assets in Australia and Africa, including alumina, aluminium, coal, manganese, nickel, silver, lead and zinc into a separate company, The argument at the time was the cost savings of the spin off would allow BHP to weather the commodities downturn and remain focused on its core assets – iron ore, petroleum, copper and coal. 
This was arguably one of the largest ASX spin offs of all time and was years in the making, beginning with speculation in April of 2014; firming into a formal announcement on 15 August of that year.  Market reaction to the news was a resounding yawn with the share price barely moving.
On 18 May of 2015 the child – South32 (S32) – began trading on the ASX, closing its first day of trading at $2.05.  Here is a comparison of the stock price performance of this notable parent/child pair since the baby was born.

Not only has South32 outperformed its former parent since it went public, it has a brighter future as well. Here is a table with year over year price performance and some forward looking estimates.

South32’s dividend is unfranked but the forecasted growth is spectacular – from $0.014 per share in FY 2016 to $0.067 in FY 2018.  Earnings per share (EPS) are slightly less impressive – from a loss of $0.042 in FY 2016 to $0.20 in FY 2017 followed by a drop to $0.125 in FY 2018. The company has amassed a solid balance sheet with $1.2 billion total cash as of the most recent quarter against total debt of $9.3 million, putting South32 in an enviable position for potential acquisitions.  Speculation appearing in the Australian Financial Review has South considering a takeover offer for ASX graphite/vanadium miner Syrah Resources (SYR). 
On 5 October of 2012 iconic Australian brand Woolworths Limited (WOW) announced it would be spinning off its shopping centre property assets into a real estate investment trust (REIT) and the market reacted with a yawn equaling the response to BHP’s announcement of its spin off – the share price didn’t budge.  The child, Shopping Centres of Australasia (SCP) debuted on 26 November of 2012 with a first day closing price of $1.44 and has increased more than 60% since then.  The following chart compares SCP’s price performance to its former parent, Woolworths.

SCA Property Group owns 82 retail shopping centres in Australia and New Zealand.  FY 2016 Financial Results showed a 22.7% increase in net profit along with a 15.7% increase in operating income. 
The ASX REIT Sector is suffering a bit from the prospect of rising interest rates in the US making investments in Australia less attractive.  While SCP’s forward looking numbers best Woolworth’s, they are less than rosy. 

One parent company trailing its offspring may be poised to pull ahead.  In July of 2010 explosives and industrial chemical supplier Orica Limited (ORI) spun off its paint business into Dulux Limited (DLX).  This was a win for Dulux as the company expanded into other areas of the home improvement market as well as getting into the commercial market.  The company now offers branded adhesives, garage doors and openers, as well as sealants and construction chemicals. The Dulux stock price is up 147% since it closed its first trading day at $2.54.  Over that same period the Orica price has fallen 30%.  Here is a five year price comparison chart.

Orica has been badly hurt by the mining slowdown and posted a staggering $1.3 billion dollar loss in FY 2015. The company has been mired in a classic turnaround strategy that much to the relief of its shareholders looks to be taking hold.  For FY 2016 Orica reported statutory net profit of $343 million.  Take away the one off items and the net profit after tax (NPAT) was $389 million.  The company claimed its business improvement initiatives had a net benefit of $76 million; all this despite a 10% decline in sales revenue. Now let’s compare the two companies in terms of historical performance and forward looking estimates.

As you can see, Dulux has had the edge up until now, but at least according to analysts Orica has a better medium term outlook. 
Finally we look at a spin off where the parent – Tabcorp Holdings (TAH) – has arguably outperformed its child -The Star Entertainment Group (SGR), on some historical measures although both have posted positive historical performance as well as having positive forward growth estimates.  Tabcorp operates in the gambling business with wagering, Keno, and electronic gaming machines.  The company also operates Tabcorp Gaming Solutions which provides support services for its customers.  
In its past, it also operated casinos, which In June of 2011 were spun off into a new company called Echo Entertainment, which rebranded itself and its casino properties with the company  name changing to The Star Entertainment Group (SGR) in November of 2015.  Since it began trading as an independent entity, shares of Star Entertainment are up 34% while Tabcorp shares have risen 26% over the same period.  Here is a five year price performance chart comparing the two companies, showing that as of today’s date TAH is now the price performance leader.

The move has proven beneficial to both as Tabcorp freed itself of the capital requirements of casino operation and expansion which operating on its own Star has been able to do, with five multi-purpose casinos now in operation with a major Gold Coast expansion underway.  The following table includes the historical performance of both these successful companies along with growth estimates.

While the parent here has rewarded its shareholders with superior total returns over the last five years, the forward growth estimates suggest the child is ready to take the lead. 

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