Medtronic And Others Think Twice Before Spinning

Spinoffs take a lot of time. It really isn’t so surprising considering the plethora of regulatory and logistical issues that arise from splitting up a business. While often overlooked as one time charges, companies spend millions upon millions planning and executing these transactions. As a result, at least 6 months usually pass between the date of announcement and the actual spin, with the process more often than not taking a year (or more). As we have noted before, the cycle has even been extended to include speculation about potential spins. For the patient investor, the lengthy process provides ample time to perform in depth due diligence and get a firm handle on the situation however, it also gives management time to evaluate other options for their neglected/unstrategic/overlooked unit.

So while the current year has seen an explosion in spinoff transactions, we have also witnessed some potential spins fall by the wayside for varying reasons. Most recently, instead of pursuing a spinoff, Medtronic (MDT) is selling its Physio-Control unit to Bain Capital for $487 million. As we noted in an earlier post, the company had long discussed shedding the ‘non-core’ unit, but various struggles have delayed any movement of the business. The sales price is a little more than 1x sales which reflects some of the margin issues the unit has had (which we also discussed in our earlier post – shameless plugging). For the most recent quarter, Physio-Control had sales of $109m.

Bain should be somewhat familiar with the business having previously bought it from Eli Lilly in 1994. The private equity firm then took it public the following year and Medtronic purchased Physio in ’98 for roughly $535m. Whooops. The current deal with Bain is expected to close in Q1 2012.

While the Medtronic/Physio-Control spin was probably more speculation, it isn’t the only spin to be scrapped this year. Here is a brief recap on a few other situations that have occurred:

1. It only cost the CEO (Leo Apotheker) his job, but the highest profile cancelled spin (at least recently) is probably Hewlett-Packard’s (HPQ) PC unit. Shortly after taking the helm, new CEO Meg Whitman announced that the company would retain the PC unit because unloading it would potentially damage the HP brand and hurt relationships with customers. Apparently margins aren’t everything.
2. IDT (IDT) cancelled its planned spin off of Innovative Communications Technologies Inc (ICTI) due to risk concerns related to unloading its patent portfolio. Keeping IP in house makes sense.
3. El Paso (EP) sold itself, thereby killing plans to spin off its E&P business. The acquirer plans on selling the potentially spun-off assets and using the proceeds to fund the transaction.
4. CompuCredit’s (CCRT) planned spin of Purpose Financial Holding was shelved earlier this year and the Form 10 withdrawn.

While it was sad to see them go (especially HP – what drama!), it is worth remembering some of these names because in non-sale situations there is always the chance the spinoff will be revisited. Luckily there are plenty of other special situations going on right now to keep one occupied. As always, we will keep you updated.

Have a Happy Thanksgiving!

Disclosure: Author holds no position in any stock mentioned.