I'm relatively new to spinoffs, so I wanted to learn what would happen when one came to life in the marketplace. My wish came true today.
This morning, TreeHouse Foods (NYSE:THS), which makes pickles, non-dairy creamer, and sauces, started trading at $30.55. I thought $26 a share seemed reasonable given the company's past performance and prospects, but the market thought otherwise.
TreeHouse spun off from Dean Foods (NYSE:DF); the producer of dairy and soy-based products started trading at $34.45 a share this morning after closing at $40.36 yesterday. Given TreeHouse's opening price, the roughly $6 drop stems from investors receiving one TreeHouse share for every five Dean Foods shares they owned.
TreeHouse made its first SEC filing on March 30, 2005, giving investors an initial chance to evaluate its financials on a pro forma basis. At the time, Dean Foods shares were trading around $34. From March 30 to the beginning of May, you could buy Dean Foods shares between $34 and $36, implying a spinoff value of $25.70 - $27.25 per share. Multiply that by 30.1 million TreeHouse shares, and you get $775 - $820 million in market cap. (While the conversion factor wasn't known then, using a price-to-sales ratio near 1 got you in the ballpark.)
Since May, Dean Foods' stock price increased another 15%. Given that Dean Foods is a very mature company with slow sales growth, I think that aggressive investors, hungry for returns, bid up Dean Foods shares in hopes of gaining from TreeHouse's spinoff. The new company's estimated market cap would be large enough not to require funds and institutions to automatically sell it off.
I'm not saying that my valuation skills are better than those of professional spinoff analysts. Nor will I claim, based on my original estimate, that the market paid $4 more than it should have for TreeHouse shares. All the same, this has been a great learning experience, and I look forward to seeing how TreeHouse performs on its own. Who knows? Maybe early buyers will lock in their gains by selling off the stock -- and create another buying opportunity.
Spin off into further Foolishness:
Fool contributor David Meier holds no financial position in any of the companies mentioned.
