The Impending Spinoff of a Spinoff

Are you ready for another health-care spinoff? Investors experienced two already in 2013 -- and we're barely into the second month of the year. Get ready now for a spinoff of a spinoff. No, AbbVie (NYSE: ABBV  ) isn't about to launch another company after separating from Abbott Labs (NYSE: ABT  ) . Neither is Zoetis (NYSE: ZTS  ) preparing to form another business just days after its IPO initiated by Pfizer (NYSE: PFE  ) . 

The spinoff I'm talking about is with Covidien (NYSE: COV  ) . The company, which itself is a spinoff from Tyco, plans to launch its Mallinckrodt pharmaceuticals business as a publicly traded company in mid-2013. Could this impending spinoff of a spinoff present another great investing opportunity? 

Same kind of different
There are similarities between Covidien's plans and those of Abbott and Pfizer. Perhaps most importantly, all three parent companies shared the same motivation in making the decision to proceed with a publicly traded spinoff.

Back in July 2011, Pfizer announced its plans to explore strategic alternatives with its animal health unit to maximize shareholder value. Nearly a year later, those plans solidified with the decision to launch Zoetis as a separate entity. Likewise, Abbott cited the prospects of improving shareholder returns when it announced the spinoff of its research pharmaceuticals business in October 2011.Both Pfizer and Abbott emphasized the advantages of the separate companies being able to focus on their different business models.

Covidien echoed these sentiments with its initial announcement about the Mallinckrodt spinoff in December 2011. Like Abbott, the company plans to retain its core medical device business. Covidien will also keep its medical supply segment. Like Pfizer, Covidien will remain significantly larger than its spinoff. Based on fiscal 2012 results, net sales for the Mallinckrodt pharmaceutical segment comprised 17% of total sales for Covidien. 

Both Abbott and Covidien opted for the 100% spinoff alternative as a way to spare U.S. shareholders from having to pay taxes on the transactions. In Covidien's case, the IRS must still give its blessing, but there shouldn't be any issues on that front. 

Different kind of different
The similarities only go so far, though. AbbVie's Humira provided a strong growth engine for Abbott. Sales for Zoetis have grown at a faster pace than Pfizer's other business units.  Covidien can't make those claims for Mallinckrodt.

Source: Company 10K.

The chart above shows how sales would have looked over the past three years for the business segments that will remain with Covidien compared to what will become the new Mallinckrodt. Covidien shows a slow upward trend in sales. However, Mallinckrodt's sales have been flat.

Another key difference between the three spinoffs is size. AbbVie began its new life anticipating $18 billion in sales and with a market cap of more than $55 billion. Zoetis launched with a market cap around $13 billion and should see sales this year well over $4 billion.  

Mallinckrodt will be smaller than either of the earlier spinoffs. The company will have around $2 billion in annual sales.  I expect the new company's market cap to be no greater than $5 billion.

Opportunity knocks?
Zoetis jumped more than 20% higher than its IPO price on the first day of trading. Shares have slipped some but are still trading more than 18% higher. Don't expect that type of frenzy with Mallinckrodt. For one thing, there won't be an IPO since the shares will be distributed to current Covidien shareholders.

Abbott's spinoff of AbbVie might be more comparable to what could happen with Covidien and Mallinckrodt. Shares of both Abbott and AbbVie are up around 6% since the companies separated.  Of course, part of those gains can be attributed to the overall market's rise since the beginning of the year.

My view is that this upcoming spinoff will benefit Covidien shareholders. I'm not sure how well Mallinckrodt shares will perform in the near term. Over the long run, though, the new company could do well -- and perhaps be a target for another larger company down the road. As was the case with Abbott/AbbVie and Pfizer/Zoetis, this impending spinoff of a spinoff should be one to watch.

Still wondering about that new position in your portfolio? For some Abbott Labs shareholders, the new year brought with it a new company called AbbVie. Formerly Abbott's branded pharmaceuticals business, shares of the new stock were distributed to investors on Jan. 2. To help investors better understand the situation, The Fool has created a brand new premium report on both stocks. Inside, we outline all of the must-know opportunities and risks facing both companies, so make sure to claim this report by clicking here now.


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