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NEW YORK: Corporate breakups have come back in vogue, but only one of the two blue-chip spinoffs joining the S&P 500 Index this week found favour with investors.
GE Vernova Inc, General Electric’s (GE) clean energy spinoff, has climbed some 19% from the start of early trading to outshine the index’s flat performance.
Solventum Corp, a health company spun out of 3M Co, has traded in the other direction, with the stock falling nearly 30% from the start of when-issued trading last week, Bloomberg data show.
While early trading for spinoffs can be choppy, the divergence casts a measure of doubt on the rationale for separating large corporations into their constituent parts.
For GE Vernova, the spin was highly-anticipated and closely-watched as investors piled into GE before the deal was completed. GE Aerospace, the standalone company under the ticker GE, has climbed 4% this week to add to an 88% surge over the last year, as the stock closed at a seven-year high.
By contrast, though 3M’s separation of Solventum fuelled some optimism on Wall Street, analysts cited the unit’s heavy debt load as a concern. Whatever gains were envisioned have gone to the parent, which has climbed 7.1% from the open on March 26.
Jim Osman, founder of special situations research firm The Edge Consulting Group, recommends clients wait to buy either company.
GE Vernova is “at a fair valuation, suggesting the timing for action might be more favourable down the line,” Osman said.
“Caution is key,” he said of Solventum, given its leverage is higher than peers. The company has about US$8bil in debt, and is guided for organic revenue growth between minus 2% and zero in 2024.
Bloomberg Intelligence said “Solventum’s spinoff from 3M faces steep hurdles in the next two years, with a stock-keeping unit reorganisation likely leading to a 2% revenue decline this year, well below its previous market expansion.”
The two companies are sizeable enough to merit joining the S&P 500, which would typically draw in flows of cash from investors that track the benchmark. GE Vernova’s market capitalisation was roughly US$37bil at Wednesday’s close, while Solventum’s was US$11bil.
Both stocks have drawn mixed reactions from the analysts that are early to cover them.
For GE Vernova, JPMorgan Chase & Co advised clients to look for a slide in the shares to buy given that it’s trading near the firm’s US$141 year-end price target.
RBC Capital Markets was bullish, however, touting a greater flexibility as a standalone company to pursue high-growth strategies. Spin-Off Research started coverage on the energy unit with a hold recommendation and a US$145 price target.
The firm rated Solventum a buy, while Edward Jones assigned it a hold, data compiled by Bloomberg show. — Bloomberg
