2025 could be year of the spinoff as breakups such as Honeywell grow
Even in a volatile market inundated with the latest policy changes, one corporate event last week highlighted a growing trend that may help investors through the rest of the year. Lennar last week completed its spinoff of Millrose Properties , siphoning off its land banking assets into a real estate investment trust that will now acquire and develop land for Lennar and other homebuilders. The move kicks off the spinoff calendar for 2025, a year that many expect will see more companies splitting off businesses that investors hope will unlock greater value for shareholders. At least 10 spinoffs are set to close through December. “The calendar is starting to fill up with opportunities,” said Brian Leonard, a small-cap and midcap portfolio manager at Keeley Teton. He said he will be monitoring the transactions for potential investments. Some spinoffs to be completed this year include Honeywell , which last week said it is splitting into three independently listed companies by the end of 2025 or early next year. Last November, Comcast said it plans to create a new company for its cable network businesses, including USA Network and CNBC, in a spinoff set to be completed by year’s end. ‘A coiled up spring’ There are more spinoffs expected this year, partly because interest rates have finally eased off their highs, and because companies — with shareholders seeking earnings growth in an expensive market — are reviewing their businesses in hopes that the sum of their parts may be greater than the whole. “The real focus is on companies’ ability to manufacture growth and how they’re going to continue to move ‘the ball down the football field.’ How they keep on moving forward,” said Leonard. “Oftentimes, that results in some sort of corporate action.” Spinoffs, mergers and acquisitions and restructurings are a “coiled up spring” set to break out from a two-year low, with plenty of money ready to be deployed from the sidelines, said Thorne Perkin, president of Papamarkou Wellner Perkin. The money manager told CNBC that he spends his days speaking with investors at family offices and institutional funds who are sitting on “20%, 30%, 40%, 50%” in cash, and who have been reluctant to sell companies into a weak market with high interest rates. “There’s plenty of capital out there. It’s just been on the sidelines,” Perkin said. “It’s a lot of people sitting on their hands.” Why spinoffs? For investors, it is a unique opportunity to invest in spinoffs, as the separate businesses are likely more focused and agile, potentially unlocking their full potential. What’s more, spun-off companies typically outperform their parent companies for the first 400 trading days after the close date, according to Trivariate Research. On average, over the next 18 to 24 months, the spinoffs outpace the S & P 500 by an average of 10%, the firm said. Additionally, spinoffs in businesses different from their parent companies perform better than those spun off into the same industries. However, there are risks. Spun-off companies typically experience more near-term volatility, especially as funds sell shares in new businesses that do not meet their investment criteria. However, the short-term dip could be an opportunity for a quick-eyed investor to snag a bargain. For example, Keeley Teton’s Leonard said he would wait and see what happens with Millrose Properties, the company spun off from Lennar. In the first trading week following the spinoff, shares of Lennar rose 2%, while Millrose Properties plunged 15%. “It’s kind of the first one of many we’re looking at, at least about 10 to 14 additional businesses this year,” Leonard said. “Lennar’s going to lead the pack coming out first.” — CNBC’s Fred Imbert contributed to this report. Disclosure: Comcast owns NBCUniversal, the parent company of CNBC.
