Spin-offs Dent Credit Ratings

Shareholders may greet some spin-off transactions warmly, but creditors may see only downside risks.
Vincent RyanOctober 10, 2014
Spin-offs Dent Credit Ratings

All hail the spin-off?

A recent Boston Consulting Group report showed that, in addition to causing a share-price pop, divestitures can improve the performance of a parent company’s remaining operations. In analyzing 6,642 firms since 1990, BCG revealed that on average a company’s earnings before interest, taxes, depreciation, and amortization margin rose by more than 1% between the time news broke about the exit and the end of the fiscal year.

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The impact was even greater for distressed sellers, found BCG, with those companies improving their EBITDA margins by 14% on average.

But a report by Standard & Poor’s on Friday suggests companies that split in two may be hurting their credit standings.

Since Aug. 1, 2013, S&P has lowered or placed on “creditwatch with negative implications” one-third of its ratings on companies that initiated spin-off transactions.

“In contrast, we raised the ratings, revised the outlook to positive or placed the ratings on ‘creditwatch with positive implications’ on about 16% of the parent companies that executed spin-off transactions,” says S&P.  “Longer-term credit quality for companies that execute a spin-off has deteriorated as well, since about 40% of these issuers now have lower ratings,” writes S&P.

dv1370011The weakening of a credit rating or rating outlook is often due to a reduction in cash flows for the parent company “without a corresponding reduction in debt,” S&P says.

In 2014,  there have been 57 spin-offs by U.S. nonfinancial companies, up from 44 for all of 2013 and 33 in 2012, says S&P. Some of the deals have been spurred by demands of large, activist shareholders.

On Friday, security software company Symantec announced the latest such transaction. It will separate its security business from its information management segment (storage and backup products). The transaction, resulting in two publicly traded companies, is expected to close by December 2015.

“As the security and storage industries continue to change at an accelerating pace, Symantec’s security and IM businesses each face unique market opportunities and challenges. It has become clear that winning in both security and information management requires distinct strategies, focused investments and go-to market innovation,” Michael A. Brown, Symantec president and chief executive officer, said in a press release.

But on Friday S&P placed parent company Symantec Corp.’s “BBB” credit rating on “creditwatch negative,” citing diminished business diversity and cash flow.

Symantec shares were down 3.3% at 11: 16 a.m.

Kimberly-Clark, Blackstone, Hewlett-Packard and EBay have all announced spin-offs in the last two weeks. EBay’s shares initially reacted positively to the announcement of the PayPal divestiture but have now fallen below the pre-annnouncement price.

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