Abacus Property Group (ABP) is a real-estate investment trust (REIT), listed on the ASX. Held within ABP is a bunch of east-coast office buildings, retail centres and, most importantly, Storage King, Australia’s second largest owner-operator of self-storage centres.
ABP intends to partially spin-off its Storage King assets in August, pending shareholder approval, into a separate listed entity, called Abacus Storage King (ASK). ABP will retain a 19.9% stake in the new entity, while existing shareholders in ABP will own the remaining shares via an in-specie distribution.
Firstly, what is a spin-off?
A spin-off is when a company takes a subsidiary, division, or part of its business and separates it from the parent company by creating a new, independent, free-standing company.
In most cases, shares in the new “spinoff” company are distributed or sold to the parent company’s existing shareholders.
What is a partial spin-off?
In a partial spinoff transaction, such as this one, a company decides to spinoff or sell only a portion of one of its divisions.
Why should you care about spin-offs?
Spinoffs are a fertile area to look for opportunities.
Management of companies don’t usually cut their empire in half or get rid of assets they control. They are usually trying to add to their kingdom. Divesting assets is usually a selfless act that benefits a company’s shareholders and is a good indicator that potential value is going to be unlocked.
Source: Kroll Australia
Why would a company decide to separate a part of itself other than to think that shareholders will be better off?
Perhaps, the two businesses will perform better as separate entities due to having a singular focus, leaner cost structures and more aligned incentives for its managers. The separate businesses may also gain a better appreciation by the market, having their true values properly reflected rather than being obscured as a combined entity.
There are plenty of reasons why spinoffs make sense and why value is usually created in a spinoff transaction.
The opportunity to profit from spinoff transactions exist because these are now two companies that have never traded by themselves, and no one has previously looked at them as standalone entities. The shareholder of the combined companies is probably getting one of the companies they didn’t want. And therefore, there are likely to be indiscriminate sellers.
Unlike in an IPO, you are receiving shares in a new company that is not hyped, is likely to be underfollowed and undervalued.
On a recent podcast, Joel Greenblatt, author of You Can Be A Stock Market Genius, explained why spinoffs often create value for shareholders:
“If there was a law that said that every time you bought a house in New York you also had to buy one in Cleveland and [vice versa]. The combined value of those two houses would be at one price. If suddenly, the law was repealed and now the highest and best buyer for the house in New York could just go and buy the house in New York and the highest and best buyer for the house in Cleveland [could simply just buy the house in Cleveland]. The combined value of those two houses would go up, right? Because you’re not forced to buy something you don’t want. And that’s really one of the great things that happens in a spin-off. The highest and best buyer for each one of those businesses can come in and buy it.”
Why do we own Abacus Property Group?
If you back-out the value of ASK from its parent company, ABP’s commercial and retail assets trade on an implied cap rate considerably higher than its peers and at a discount to NTA above 50%. We believe this is unwarranted given that ABP has a stronger balance sheet, larger funds management business and higher quality property portfolio compared to most of its peers.
We believe that due to the markets pessimistic outlook on commercial office buildings, a present opportunity exists which likely yields an attractive risk-adjusted return on the parent’s stub equity.