Comcast and Tax-Free Spinoffs. More Companies Should Do Them.
I like Comcast’s (CMCSA) plan to spinoff its legacy linear cable business. Disney (DIS) may eventually follow suit once they feel comfortable with profit margins in the streaming business.
I wrote about tax-free spinoffs earlier this year in multiple articles and have privately advocated to CEOs over the past year that they consider separating slower growth, high margin legacy businesses from faster growth, lower margin new businesses such that the new business will be better positioned to capture a “growth” valuation multiple post-spin.
Before executing a tax-free spinoff, a CEO has got to be confident in his/her leadership teams for the legacy business and the growth business as each will trade publicly. In addition, the growth business has got to generate sufficient cash to survive on its own. I suspect the reason we do not see more tax-free spinoffs is that CEOs wish to aggregate control - to grow their portfolios - rather than do what is in the best interest of shareholders. Given the rise of passive investing over the past decade-plus, it has become increasingly easy for CEOs to pull the wool over investors’ eyes and to avoid conversations such as these. I suspect that Comcast will find success with its tax-free spinoff, and that as investors recognize that success, some active managers will start to ask the question of other companies.
Hopefully more companies will simplify their story for investors via tax-free spinoffs.
Reach out to me if your company is considering a tax-free spinoff or if you are an investor with questions: jmaietta@tek2day.com