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Kimberly Clark Corporation Prepares Another Spin-Off

November 23, 2013 | About:
Background of the Proposed Spin-Off

On November 14 Kimberly Clark announced the board of directors had authorized management to pursue a tax-free spin-off of the health care business, currently planned for 3Q, 2014. A spin-off would create a stand-alone, publicly traded health care company with approximately $1.6 billion in annual sales, 70% of which are derived from North America and net sales and leading market positions in both surgical and infection prevention products and medical devices (the maker of surgical masks, catheters, surgical gowns and drapes and other sterile supplies.) Robert Abernathy joined Kimberly-Clark in 1982 and is currently Kimberly-Clark Group President. He and 16,000 other employees would lead K-C Healthcare globally.

Chairman and Chief Executive Officer Thomas J. Falk had this to say, "While K-C Health Care has been part of our company since the 1970's, its strategic fit and growth priorities have changed over time and we now think that pursuing a spin-off makes sense for our shareholders. This move would allow K-C Health Care to optimize its performance and flexibility to pursue its own value-creation opportunities. A spin-off would also allow us to further sharpen our focus on our consumer and K-C Professional brands. This announcement is further evidence of our focus on creating shareholder value and how we use portfolio management to run our company." “I think the two companies will be better run as separate organizations rather than together,” he added.

More Information on K-C Health Care

K-C Health Care sells surgical and infection prevention products for the operating room and a portfolio of innovative medical devices focused on pain management, respiratory and digestive health. The business has the number one or number two market position in several product categories in the United States, including sterilization wrap, face masks, surgical drapes and gowns, closed suction catheters, pain pumps and enteral feeding tubes. K-C Health Care is a global leader in education to prevent healthcare-associated infections. Products are sold primarily under the Kimberly-Clark and ON-Q brand names. Total net sales are split approximately 70 percent surgical and infection prevention products and 30 percent medical devices. The business had more than 16,000 employees at the end of 2012, with a large majority located in low-cost manufacturing operations in Latin America and Asia. Business unit headquarters are in Roswell, Georgia.

Previous Kimberly Clark Spin-Off Performance

Neenah Paper (NP) Spin-off in 2004

Neenah Paper was named after the Kimberly Clark headquarters in Wisconsin and has two primary operations: technical products business and fine paper business. The Company’s technical products business is a producer of transportation and other filter media and coated substrates for industrial products backings and a variety of other end markets. The Company’s fine paper business is the supplier of writing, text and cover papers, bright papers and specialty papers in North America. The Company’s writing, text, cover and specialty papers are used in commercial printing and imaging applications for corporate identity packages, invitations, personal stationery and corporate annual reports, as well as, labels and packaging.

Revenue is up a total 65% since 2004 and the share price has appreciated, although not significantly. Ownership has continued to be diluted with an additional 2M shares introduced than was available in 2004, (14.7M vs. 16.5M) and equity has grown at roughly 3.5% for the last ten years, not spectacular value creation.

Below is a chart of the two years after the spin-off and the subsequent price performance of the company.

1385237009931.png

Midwest Express IPO in 1995 – Taken over by Republic Airways Holdings

Midwest had deep roots within the company and originated as a tool to shuttle executives around the country. Midwest was previously known as K-C airlines and Kimberly Clark sold the company in an initial public offering during September 1995.

A take over bid ensued and on August 14, 2007, AirTran increased its offer to the equivalent of $16.25 a share, slightly more than the $16 a share from TPG Capital investors group. However, Midwest announced TPG would increase its offer to $17 per share and a definitive agreement had been reached late on August 16, 2007.

On August 17, 2007 TPG and Northwest Airlines finalized their bid for Midwest with the final offer of $17 per share and a total deal of $450 million.

On February 1, 2008, Midwest Air Group announced that the US Department of Justice had cleared the acquisition of Midwest by TPG Capital and Northwest. This finalized the acquisition; trading of Midwest Air Group on the American Stock Exchange ceased at the end of the trading day on January 31, 2008, and stockholders in Midwest received the agreed-upon $17 per share. This ended the independent existence of Midwest Airlines.

On June 23rd, 2009 Republic Airways Holdings, Inc announced it would acquire Midwest Airlines for $31 million and is currently operated as a wholly owned subsidiary. The total loss of investment by TPG and Northwest was 93% or $419 million.

I was unable to find concrete data (in the limited time I had to conduct the research) on the performance of the individual subsidiary since acquisition in 2009 compared to the 1995-1997-time period, I would assume it is far worse. This assumption is based on examining the 1995 annual report and options with the nearest strike of $18 compared to the takeover price of $17, twelve years later. The ultimate winner of the Spin-off was Kimberly Clark, divesting a money losing business in an idiotic industry of airlines.

Schweitzer-Mauduit, Cigarette Paper Manufacturer (SWM) – 1995 Spin-off

This is the big winner of the portfolio of spin-offs and logically makes the most sense. The price has increased by around 500% since 1995, not including dividends. The Company manufactures and sells paper and reconstituted tobacco products to the tobacco industry as well as specialized paper products for use in other applications. The primary products in the group include cigarette, plug wrap and tipping papers, or Cigarette Papers, used to wrap various parts of a cigarette and reconstituted tobacco leaf, or RTL, which is used as a blend with virgin tobacco in cigarettes, reconstituted tobacco wrappers and binders for cigars. These products are sold directly to the tobacco companies or their designated converters in the Americas, Europe, Asia and elsewhere. Non-tobacco products are a diverse mix of products that includes low volume, high-value engineered papers as well as commodity paper grades produced to maximize machine utilization.

The company was up over 50% in the two year span after it was spun-off from Kimberly Clark as shown in the chart below.

1385238791238.png

All fundamentals have had impressive growth since the spin-off and this is the only winner of the three most recent spin-offs by Kimberly Clark.

Conclusion

K-C is 2 for 3 in regards to value creation at the parent (KMB) but they are batting 0.333 when it comes to providing lucrative deals for the capital markets to absorb. It is early, and much of the information regarding the deal will be coming in 2014 so I can not say wether the deal is enticing to me or not, but the health care business priced attractively, could be a big winner by 2017.

Anytime a Fortune 500 or another high profile company is spinning off a subsidiary, I will take the time to follow the story. Abbott Labs, Liberty Global, and Liberty Media Corporation are great examples from 2012-2013.

About the author:

Tannor Pilatzke
I am a self taught investor through Warren Buffett, Charlie Munger, Ben Graham, Peter Lynch, Joel Greenblatt, David Einhorn, Seth Klarman, Howard Marks, Phillip Fisher and Thornton O'Glove. My focus is a bottoms up Value-GARP strategy with a mix of top down contrarianism.

"When you find yourself on the side of the majority, it is time to pause and reflect." - Mark Twain

Visit Tannor Pilatzke's Website


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