Quiet Spinoff, Big Opportunity?

Yesterday, postage meter company Pitney Bowes (NYSE: PBI), a Motley Fool Income Investor recommendation, announced plans to spin off its Capital Services business. The news came in a small press release without much fanfare. But I'd be willing to bet that Joel Greenblatt read about it.

Greenblatt is the author of You Can Be a Stock Market Genius, which I am currently reading and would highly recommend. He also ran Gotham Capital. From 1985 to 1995, the firm averaged 50% returns per year, after fees and before incentives. That is quite a track record, and spinoffs were one of his favorite investments.

Greenblatt says to look for three things from a spinoff: institutions don't want it, insiders do want it, and a hidden opportunity becomes available. Based on these criteria, let's see whether this transaction warrants further investigation.

Will institutions want it? There's a good chance they won't. Capital Services contributed $0.14 per diluted share of Pitney Bowes' $2.05 diluted EPS, or 6.8% of its profits. Given Pitney Bowes' current market cap of $10.4 billion, the market cap of the spinoff might wind up being a little too small for the market's bigger fish.

Another reason institutions partial to Pitney might not want its spinoff is the nature of the Capital Services business. Oddly, it exclusively provides financing for non-Pitney Bowes equipment, similar (but not identical) to the way GE Capital offers some financing separate from GE's (NYSE: GE) industrial businesses. While it's no surprise, then, that Pitney would want to part with this corporate odd man out, Pitney fans gratuitously receiving stock in this company may not want to hold it, either. Sweet -- more selling pressure.

Do insiders want it? You bet. Keith Williams and his team will move with the spinoff and continue to manage it. And Cerebus Capital Management purchased the remaining 19.9% of the common stock from Pitney Bowes to become a big insider. We'll have to wait for the Form 10 (the prospectus) to discover management's incentive compensation to see how closely its interests will be aligned.

Is it a hidden opportunity? I think so. I'm not sure how many people actually knew that Pitney Bowes even had this business. I know I didn't, but that's not saying much. It's not like American Express (NYSE: AXP) spinning off its Financial Advisor business or Morgan Stanley (NYSE: MWD) spinning off the Discover Card. I think people are more familiar with those businesses.

The bottom line is that a simple press release without much notice could provide a great opportunity. And that's what The Motley Fool is about -- discussing potential stock ideas. But it doesn't stop here. It only starts here. The S-10 isn't out, and we don't even know the conversion rate yet. We'll also have to wait until the end of 2005 for that. But rest assured -- I'm marking my calendar so that I'm ready when it becomes available.

Fool contributor David Meier owns shares in GE. He does not own shares in any of the other companies mentioned. The Motley Fool has a disclosure policy.