(Bloomberg) -- Large corporations are providing much-needed activity in lackluster US equity capital markets, taking units public to unlock value and slim down their businesses.
Cummins Inc. is set to be the latest entrant, with the carveout of Atmus Filtration Technologies Inc. this week slated to raise roughly $275 million based on the mid-point of its proposed price range. That would mark the ninth-biggest initial public offering in the US over the past year.
The prospective transaction comes just a few weeks after Kenvue Inc., the consumer health unit of Johnson & Johnson, raised $4.4 billion, including so-called green-shoe shares, in the largest US IPO since November 2021. That milestone heralded the growing popularity of separations from publicly traded companies, which overall accounted for four of the five largest US IPOs in the past year and raised a combined $7.8 billion, data compiled by Bloomberg show.
“Typically, the spinoff IPOs tend to have a better track record of profitability as well as a greater cushion of capital,” said Roth MKM analyst Rohit Kulkarni. “In today’s risk-off market sentiment, such offerings are better received by investors.”
The Bloomberg US Spin-Off Index, a 16-member gauge of just carveouts, is up 2.6% over the past year through Wednesday’s close. That compares with a 1.7% drop in the broader Renaissance IPO ETF, tracking more than 80 newly minted public firms and includes some spinoffs, and a 5.5% gain in the benchmark S&P 500. As for large recent divestitures, Kenvue has rallied 18% from its IPO price and Intel Corp.’s self-driving technology unit Mobileye Global Inc. has nearly doubled from its October listing. That said, not all have been a roaring success — American International Group Inc.’s Corebridge Financial Inc. is down 16% since September.
A research report by Goldman Sachs Group Inc. and Ernst & Young found that corporate separations are becoming more popular among boardrooms, with a large spike in 2022 alone. And if executed well, “they can lead to an excess blended return of roughly 6% from announcement to two years post-close as compared with their respective company’s sector index,” according to the report earlier this month.
Read more: Goldman Banker on Why Companies Spin to Win: Bloomberg Deals
Expected moves from Laboratory Corporation of America Holdings, Kellogg Co. and Danaher Corp. are lighting up the calendar this year, according to Oppenheimer’s event-driven equities analyst Michael Broudo.
Different from traditional IPOs that often are sensitive to market windows, spinoffs are “idiosyncratic” and mostly due to company specific decisions, with total deal volume holding up well during various market cycles, he said. “Whether in bull market or bear, there tends to be always a healthy pipeline of 20 to 30 spinoffs in the works.”
--With assistance from Bailey Lipschultz.
(Updated with share moves and chart at close)
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