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Spin off value assigned by company and impact on price


dyow
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So I want to understand the impact of a spin.  Let me know if i am correct.

 

Company A stock price is $10. The Company will spin a B co.  Every share of A will get one share of B.

 

Before the spin, the company will assign a value to Co A (say 80%) and Co B (20%) and will notify the exchange.  On the day of the spin the exchange will assign the opening trading price of Co A at $8, and Co B will trade at $2 - based on the allocation the company has specified.  Is this how it works?

 

The company i am looking at has not mentioned anywhere the value allocation so i have no idea where to find this info before the spin (i looked at all their filings/CCs etc).  Even checked the OCC site for the impact on options after the spin....but i found nothing.

 

anybody know if there is a way to get this info?.....I might have to call IR bc i can't find this anywhere, but thought i would try here first.

 

 

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Only reading this quickly, but I think you’re mixing value assigned with price when you say after spin one share will be at $8 and one at $2, but your ratio was 1:10.

 

OCC - it depends on the size and nature of what’s spun/Dividenden out.

 

You are right i edited the post thanks...not thinking straight today

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Before the spin, the company will assign a value to Co A (say 80%) and Co B (20%) and will notify the exchange.  On the day of the spin the exchange will assign the opening trading price of Co A at $8, and Co B will trade at $2 - based on the allocation the company has specified.  Is this how it works?

No, no, no. The only thing that matters is at what price people are willing to buy and sell Co A and Co B. Maybe the next day Co A opens at $1 dollar and Co B opens at $100 dollar... there is no formula, or any rule. The price of the new stock can be lower or higher than the price of the original company.

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Before the spin, the company will assign a value to Co A (say 80%) and Co B (20%) and will notify the exchange.  On the day of the spin the exchange will assign the opening trading price of Co A at $8, and Co B will trade at $2 - based on the allocation the company has specified.  Is this how it works?

No, no, no. The only thing that matters is at what price people are willing to buy and sell Co A and Co B. Maybe the next day Co A opens at $1 dollar and Co B opens at $100 dollar... there is no formula, or any rule. The price of the new stock can be lower or higher than the price of the original company.

 

Interesting, and if the case, i was completely off. i understand that the trading on that day could cause the price to fluctuate to anything.  I assumed that that there was some type of mechanism/guidance on the initial spin.  I noticed that there is a "when issued" market before the spin off, this might be the mechanism for the market to try and determine the potential spin off price. I need to look more into this...thanks.

 

The let the market figure it out makes sense to me, idk why i assumed otherwise, it must be bc i have gone insane.

 

 

 

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I think Hielko and Sunrider capture two different and opposing forces that affect the final result:

 

Let's simplify the example a bit first: Company A spins off a sub, 1:1, i.e. after spin there remains the same amount of A shares and Aspin shares. What would be the prices of A and Aspin and does the company influence them?

 

Well, even at 1:1 spin we need to know how much ops (revenues/earnings/FCF) goes into A and Aspin. Also how much of balance sheet goes into A and Aspin.

Here is where the situation becomes hairy. In super simple case both A and Aspin gets 50%/50% of everything. Then both will trade at 1/2 of the pre-spin A price (assuming the businesses A and Aspin gets are "the same").

 

But in reality this is not what happens. A might get 80% of revenues, 30% of earnings, 10% of FCF, 60% of cash, 20% of debt. Aspin gets the remainder. What now?

 

That's where two factors come in: Company does indicate where it thinks A and Aspin should trade. Clearly, this is only a guess. It may or may not affect the tax side of equation (I am not sure, I am not expert, all that). OTOH, Hielko is right that once the trading starts, investors may decide that company's guess was total crap and the shares should trade at a very different price. You as investor may or may not be able to sell/buy at the company indicated price. It depends how fast the price moves and if it even starts at the company-indicated level.

 

Edit: BTW, the 10:1 spin ratios is mostly a company trying to indicate that the spinoff is ~1/10 of the original company. In reality, every spinoff could be 1:1 in share count and the price would just be 10:1. But companies try to "lead" or "guess" or "indicate" the price by doing the 10:1 ratio and making investors think in terms of spinoff being 1/10 of original company that way.

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I think Hielko and Sunrider capture two different and opposing forces that affect the final result:

 

Let's simplify the example a bit first: Company A spins off a sub, 1:1, i.e. after spin there remains the same amount of A shares and Aspin shares. What would be the prices of A and Aspin and does the company influence them?

 

Well, even at 1:1 spin we need to know how much ops (revenues/earnings/FCF) goes into A and Aspin. Also how much of balance sheet goes into A and Aspin.

Here is where the situation becomes hairy. In super simple case both A and Aspin gets 50%/50% of everything. Then both will trade at 1/2 of the pre-spin A price (assuming the businesses A and Aspin gets are "the same").

 

But in reality this is not what happens. A might get 80% of revenues, 30% of earnings, 10% of FCF, 60% of cash, 20% of debt. Aspin gets the remainder. What now?

 

That's where two factors come in: Company does indicate where it thinks A and Aspin should trade. Clearly, this is only a guess. It may or may not affect the tax side of equation (I am not sure, I am not expert, all that). OTOH, Hielko is right that once the trading starts, investors may decide that company's guess was total crap and the shares should trade at a very different price. You as investor may or may not be able to sell/buy at the company indicated price. It depends how fast the price moves and if it even starts at the company-indicated level.

 

Makes sense, thanks.....for the reasons you pointed out, i assumed mgmt/the exchange would "guide" the market initially because of the complexities in valuing 2 companies after a separation - but when trading begins the market would decide. 

 

The tax cost basis is a good point, i would assume that if mgmt gives guidance in terms of how tax basis should be allocated - this should approximate their assigned values to each business.

 

 

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