Kimball’s Chairman Douglas Habig, a member of Kimball’s founding family, summed up the rationale behind the spin:
Since the founding of Kimball International over 60 years ago, our markets have evolved with some markets growing strongly while others we elected to exit. We have seen growth and then decline in markets from wooden television cabinets, acoustic pianos, electronic organs, to domestic U.S. wood veneer and dimension lumber markets. Surviving these changes required a constant reinvention of the Company within the markets we serve. These changes have been most acute in the last decade as we have developed a true global platform to serve customers within the EMS industry, as well as the impact of off-shore manufacturing in the furniture industry. As such, our Board determined that it is time to separate these businesses to allow for greater focus and growth. Additionally, the Board believes separating into two public companies will enable investors to value our different businesses separately, creating value and opportunities for both companies and their shareholders
Typical spinoff rationale – focused management, investor choice, sum of the parts value etc. I don’t think either business would be considered ‘sexy’, but that shouldn’t mean much to investors. The company as a whole isn’t very profitable, although margins, which are still low, have been improving over the past couple of years. The electronics group is the larger segment with ~$700m in revenue and ‘offers complete product life cycle support for electronic manufacturing assemblies in the Medical, Industrial, Automotive, and Public Safety market.’ Kimball currently carries very little debt and the new company is also expected to have a strong balance sheet.
Kimball International will remain a leading manufacturer of office and hospitality furniture, operating three different brands: Kimball Office, National Office Furniture and Kimball Hospitality. The furniture segment generates roughly $500m of revenue and profitability has been somewhat volatile. I haven’t had a chance yet, but it’s always worth looking into the real estate situation in instances like these.
The company actually has a rich history (it was originally known as the Jasper Corporation) which at one point saw it become the world’s largest manufacturer of pianos and organs. Jasper was founded by Arnold Habig back in 1950 and members of the Habig family are still in various leadership posts. That is going to change after the spinoff though and this transaction really seems like a ‘changing of the guard’ moment for the company. Kimball’s current President & CEO, James Thyen, and its Chairman, Doug Habig, will be relinquishing their positions post-spin. Donald Charron, currently President of Kimball Electronics, will become Chairman and CEO of the spinco while Robert Schneider, Kimball’s current CFO, will become Chairman and CEO of Kimball International.
The biggest change though is that Kimball’s dual share class structure is expected to be done away with post-spin. Kimball’s Class A shares, of which the family holds a sizeable stake, currently elects 6 out of 7 directors and effectively controls the company. These shares can be converted to B shares though. The publicly traded ‘B’ shares elects the final director and does have a small dividend preference. Interestingly, if class A shares ever become <15% of the total shares outstanding then the distinction between the two share classes are eliminated and they become the same. As a prerequisite to the spinoff, enough Class A shareholders must convert into B shares in order to trigger that measure, effectively creating one class of stock for both companies. The idea is that this will create more ‘value’ and in general is just better governance. According to a recent proxy statement the share classes breakdown as follows:
| Class A Oustanding | 8,160,423 | 21.4% |
| Class B Outstanding | 29,919,515 | 78.6% |
| Total: | 38,079,938 | |
| 15% Threshold – Class A Shares To Total Outstanding | 5,711,991 | 15% |
| Min Amt of Converted Class A To Trigger: | 2,448,432 | 30% |
Presumably there is agreement on the conversion point if the Class A board members approved the transaction, so I wouldn’t expect this to be an issue. It is worth noting though that Habig family members and the current CEO control only ~46% of the Class A shares, so it is possible for the conversion trigger to be tripped without their involvement. Of course, the rest of the Class A shareholders could be a large group of <5% family members etc. In the end, the family will end up a sizeable and influential stakeholder in both companies.
The market reacted quite favorably to the announcement and the stock saw a nice pop the next day. The spin is expected to be completed over the next 8-12 months and we will keep you updated as new milestones, such as SEC filings, are reached.
Disclosure: Author holds no position in any stock mentioned.