2 Spinoffs to Watch This Year

National Oilwell Varco and Kimberly-Clark plan to spin off underperforming divisions. This is the plan.

Feb 6, 2014 at 6:46PM

At the moment, it is all the rage for a company's management teams to spin off underperforming divisions as a tax-efficient way of returning cash to investors and improving margins...plus improve performance for the rest of the business. Both National Oilwell Varco (NYSE:NOV) and Kimberly Clark (NYSE:KMB) have chosen to go down this route.

Low margin
With the recently announced spinoff of its low-margin, world class oil and gas equipment-distribution business, National Oilwell Varco is setting itself up for a serious margin boost over the next year or so.

The newly-created distribution group would have more than 415 locations and operations in 26 countries. Initial figures suggest that the new entity's size will be equal to approximately 85% of the revenue of National Oilwell Varco's distribution and transmission segment for the six months ending June 30, 2013.

So, according to full-year 2013 figures, this new company will have annualized revenue of $4.3 billion. Unfortunately, National Oilwell Varco's distribution and transmission segment has the lowest operating margin of all the divisions under the company's umbrella. In particular, the distribution division reported an operating margin of 5.4% for full-year 2013. In comparison, the company's largest segment by revenue, rig technology, chalked up an operating margin of 21%.

Overall, this indicates that National Oilwell Varco's spinoff will be a low-margin business. However, these numbers also indicate that after the spinoff, National Oilwell Varco will be able to achieve higher margins overall. What's more, although National Oilwell Varco's operating profit will drop by an amount equal to 85% of the company's distribution and transmission segment's operating profit, I estimate this will only be about $60 million per quarter, or 7% of total second-quarter operating profit. All in all, the spinoff should see National Oilwell Varco's operating profit margin expand from 15% currently to 17%.

Following in the footsteps
It's not just National Oilwell that is spinning off its low-margin division. Kimberly Clark is planning to spin off its health-care business this year as well.

Kimberly's health-care unit makes products such as sterile wraps, surgical face masks, and catheters, with about 70% of sales in North America. Unfortunately, this unit's earnings have been more unstable than the rest of Kimberly Clark's business, and management want to refocus on consumer and professional brands. For example, the health-care business posted a 4% increase in sales in the fiscal third quarter, lagging the company's wider sales which expanded 5%.

This spinoff comes at a time when Kimberly Clark is restructuring its global operations. A year ago, Kimberly Clark's European unit announced a restructuring that included exiting most of its diaper business there along with some lower-margin businesses such as consumer tissues, and paring its European manufacturing and administration operations. However, this restructuring also comes at a time when Kimberly Clark's peers are seeking to increase their exposure to the health-care market.

Specifically, peer Clorox (NYSE:CLX) has recently made acquisitions of infection-control products it sells to hospitals and other institutions. Another peer, Newell Rubbermaid, sells telemedicine systems that let doctors consult with patients hundreds of miles away. Actually, Kimberly Clark's health-care division could slot well into Clorox's long-term growth plan.

Clorox is aiming for net sales growth of 3% to 5% annually through 2020, while pushing earnings-before-interest-and-taxes margins higher by 0.2% to 0.5% annually. Clorox's management has actually indicated the way it aims to achieve this growth is to

...pursue strategic opportunities to expand in markets with strong profit potential... include categories that are adjacent to the company's core businesses in which its brands can be successful, new sales channels such as health care facilities, or countries where Clorox can expand its product offerings ...

Still, the performance of both National Oilwell's and Kimberly Clark's spinoffs depends on how the companies structure the deals. Details on the deals are currently thin on the ground, so investors will have to wait to get a better idea of how they are going to benefit. Details should come to light over the next few quarters.

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Rupert Hargreaves has no position in any stocks mentioned. The Motley Fool recommends Kimberly Clark and National Oilwell Varco. The Motley Fool owns shares of National Oilwell Varco. Try any of our Foolish newsletter services free for 30 days. 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.

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