Blue-Chip Spinoffs Fall Flat This Week With Investors Fleeing to Safer Bets

A group of highly-anticipated spinoffs stumbled out of the gate this week as a wave of selling across the market took a heavy toll on household names.

(Bloomberg) — A group of highly-anticipated spinoffs stumbled out of the gate this week as a wave of selling across the market took a heavy toll on household names.

Frosted Flakes maker WK Kellogg Co.’s split from Kellanova was met with a thud as investors dumped consumer staples stocks, while environmental-solutions firm Veralto Corp. — separated from Danaher Corp. — and Aramark’s Vestis Corp., which runs a uniforms and workplace supplies business, spiraled downward. Each of the three spun out stocks sank more than 10% this week.

While equities are in a tailspin with the S&P 500 Index on pace for a fifth straight week of declines, there was zero appetite across Wall Street for companies without track records of executing on their own. The group of companies underperformed the benchmark this week by more than 10 percentage points as markets were under pressure from the threat of higher interest rates for longer than expected, with jobs data on Friday only further stoking those fears.

“These are the first things to get hit when the market is lower and that creates an opportunity for investors,” Jim Osman, founder of special situations research firm The Edge Consulting Group, said by phone. “We’re seeing some great names under some real pressure.”

Through Friday morning, WK Kellogg shares had erased nearly one-third of their value since their so-call regular-way trading began on Monday after the deal completed. Meanwhile, Vestis had tumbled 23% and Veralto sank 12%.

Over the past few years, the performance of spinoffs have been mixed, with a basket delivering slightly lower returns than the broader market recently. The Bloomberg US Spin-Off Index has returned 47% over four years, trailing S&P 500’s 54% in the same stretch, when including dividends.

The slide in the latest spate of separations is fueling debate over quality and valuations, according to Michael Broudo, an event-driven equities analyst at Oppenheimer. 

“Veralto is a high quality company that came out too expensive while Kellogg is also too expensive and low quality so the movement is not a surprise,” he said in a telephone interview. 

With WK Kellogg, there’s been “a lot of selling from Kellanova shareholders and I think there’s a little bit more technical pressure coming,” Broudo said. However, it’s “trading at low multiples compared to peers, it’s not that levered, it’s got a margin story to it, and it’ll generate a fair amount of free cash flow.”

Still, digging into the valuation proposals of the separated companies takes work with a limited amount of sell-side research coverage. Meanwhile, a number of spinoffs are expected over the coming weeks and months ahead of General Electric Co.’s planned separation of its power-equipment and renewable-energy businesses early next year. That’s the most closely watched deal and a final step that will divide the former corporate titan into three separate stocks.

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