Breaking Up Is Hard To Do

AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Over the last year several companies have spun off into separate companies. In general, this has been beneficial to shareholders as well as streamlining operations like the Kraft Foods and its spinoff of the international division into Mondelez, Conoco Phillips' spun off Philips 66, and Brown Forman's spun off of Beam (NYSE: BEAM) .

In the New Year, a number of notable spin offs are planned including News Corp (NASDAQ: NWS), Abbott Laboratories (NYSE: ABT) and The McGraw Hill Companies (NYSE: MHFI) .

Breaking Up Can Be Painful, Too

In the case of Abbott Labs, the new company will be called AbbVie and will consist of the biologics and brand name pharmaceuticals with more than half of its sales comprised of Humira, a drug for psoriasis and arthritis.

The new company as shown by a chart in Fool Keith Speights’ article drilling down on AbbVie will rely strongly on Humira for profitability and it goes off patent in 2016. That leaves seven other drugs, excepting Androgel, with less than double digit sales growth. Sixteen per cent of the remaining pie is drugs in trials and under development. Also, the fresh company faces the market already saddled with a debt burden of twice its cash.

Parent Abbott Labs looks like it’s keeping the best assets for itself with the infant formula and nutrition drinks, the medical devices, generics, and diagnostics altogether earning 21.5 billion in 2011. Abbott currently has a 3.10% yield and a forward P/E of 12.48, but these figures will be adjusted post-split.

Lately the spinoffs have been performing well, like Beam and Phillips 66, but in this case the new company looks like it will be weak with significant growing pains.

Breakups Can Be A Good Thing

Rupert Murdoch’s News Corp, famous for its tabloids’, screaming headlines, and Fox networks’ sensational journalism has seen some pretty juicy headlines about itself over the last few years, the kind of scandals that are its bread and butter. Still, the stock has managed to pull itself out of the muck.

The entire newspaper division has had problems. Just this week it shut down  the iPad app for its New York Post. Of course in the recent past, there was the phone hacking scandal which caused the demise of its British tabloid, News Of The World.

News Corporation will become the publishing and education company and the current entertainment division will become Fox Group. Fox Group will keep the television and cable assets, movies, and direct satellite broadcasting. After the split both companies will offer Class A Common and Class B Common voting shares.

In the past this two tier share structure has led to corporate governance risk rated High Concern for shareholder rights. Another note of concern is that Rupert Murdoch will Be Chairman of News Corporation but will also be Chairman and CEO of Fox Group. Depending on your opinion of Rupert Murdoch, that could be an asset or a liability to Fox Group.

That said, Fox Group may be the place to be after the split as its entertainment division is the area with juice and they are planning to expand sports programming in Asia, Europe and Latin America. Are you ready for some futbol? Shareholders who were concerned about the industry wide decline of newspapers can now buy solely into entertainment.

News Corp is trading at a 23.24 P/E and has a 0.70% yield, pre-split.

A Private Split Up

McGraw Hill is in a slightly different situation. It is splitting off its educational content arm to private capital, Apollo Global Management (NYSE: APO) and keeping its finance content divisions: Standard & Poor's ratings, S&P Capital IQ/S&P Indices, and the Commodities & Commercial division. The new company will be called McGraw Hill Financial.

Although it is selling the education arm current shareholders will not receive cash or Apollo shares from the closing of the sale. Monies from the sale at $2.5 billion, less a half billion or so in write-downs, are earmarked for debt reduction, share repurchases, and possible acquisitions.

Right now, McGraw-Hill has a 1.80% yield and trades at a 18.69 P/E. The company expects this deal to close by spring of 2013. At that time it's anyone's guess what the stock will be trading at and likely won't hear more until the next earnings release on January 28 when management plans to go into more detail about the breakup.

On December 6 the company announced that it would pay a special dividend of $2.50 a share to shareholders of record on December 18 instead of using $200 million for a share buyback as planned.

Buying A Breakup?

Sometimes when a couple breaks up you're forced to choose one side or another. In the case of Abbott Labs I would stay with Abbott Labs and let AbbVie struggle on without me. Fox Group is probably the better buy between News Corporation and Fox Group. As for McGraw Hill, you might want to capture the special dividend but after the earnings release in January it's anyone's guess where the stock price might go. Shareholders should listen very carefully to this one to determine if the new McGraw Hill Financial is better off broken up.


leglamp has no positions in the stocks mentioned above. The Motley Fool owns shares of The McGraw-Hill Companies. Motley Fool newsletter services recommend Beam. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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