Why spin-offs like Domain.com can turn into share market stars

Spin-offs like South32 Ltd (ASX:S32) can often become high-return investments that outperform their former parents.

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With the much-anticipated listing of Fairfax Media Limited's (ASX: FXJ) online real-estate business Domain set to occur in a matter of weeks, now could be a good time to consider how some other high-profile spin-offs have performed on the ASX.

Orora Ltd (ASX: ORA) was listed in December 2013 after global giant Amcor Limited (ASX: AMC) demerged its Australasia and Packaging Distribution business. Since then shares in Orora have increased 175% compared to Amcor's relatively poor 40%. Orora has been expanding its North American operations of late and appears set for growth.

South32 Ltd (ASX: S32) with its diversified mining assets spread across Australia, Southern Africa and South America was mockingly referred to as "CrapCo" around the time of its split from BHP Billiton Limited (ASX:BHP) in May 2015. However, since listing, South32 shares have easily outperformed their former parent, up 55%, while BHP has fallen 11% over the same timeframe.

Macquarie Atlas Roads Limited (ASX: MQA) was split out of Macquarie Infrastructure Group in February 2010 and has significant interests in toll roads in the United States, France, and Germany. Macquarie Atlas Roads shares have been a stellar performer since listing, up close to 565%.

National Australia Bank Ltd's (ASX: NAB) troublesome UK bank Clydesdale & Yorkshire Bank was divested in February 2016, and is known by Google Finance as CYBG PLC CDI 1:1 (ASX: CYB). NAB spent considerable time and money cleaning up Clydesdale & Yorkshire Bank before it was sold at a discount to book value. Despite the overhang of Brexit, CYBG's share price has risen 25% since the divestment, whilst NAB is up 20%.

Foolish takeaway

Spin-offs can often be attractive investments for several reasons;

  1. Management of the spin-off can focus on that specific business segment without the distraction of troubled or underperforming areas of the parent company
  2. Parent companies do not want the spin-off to fail, as this could reflect badly on the parent
  3. Management of the spin-off may now have greater power and freedom to cut costs and streamline the business
  4. It is common for investors of the parent to be allocated shares in the spin-off on a proportional basis. Large investors with a significant stake in the parent company could cause problems if they believe they are being sold a dud

Domain could well be another spin-off success story; already a profitable business that has been operating its flagship website domain.com.au since 1999.

Another positive under the proposed arrangement is that Fairfax will retain 60% ownership of Domain and existing shareholders the remaining 40%.

Motley Fool contributor Ian Crane owns shares in Amcor Limited and National Australia Bank Limited. The Motley Fool Australia owns shares of National Australia Bank Limited. 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. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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