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Replies to post #105823 on Vapor Group Inc (VPOR)
12/12/17 10:22 PM
CashBowski Member Level Wednesday, 06/14/17 09:56:35 AM
Re: rushmann post# 98343
Post # of 105823
The idea behind a spin-off is very simple...
Either a unit or operation of a company does not fit in with the broad effort, or the aim is to unlock value for shareholders. Investors like focused companies to diversified ones.
For instance, if a portion of a business has different priorities, a spin-off will allow this portion to operate independently and can unlock tremendous value...In this case we have a vape and grinder business (Total Vapor) operating within the combination technology/tobacco/marijuana segment with a ~22 - 40 point PE ratio, and then we have Simple Cork within an entirely different sector. With a wide range of 30 point (or higher) ratio difference, you can see where it's more beneficial for each to be trading independently, so that one doesn't diminish the other in regards to proper valuation once they're both on track with a steady revenue stream.
In a typical spin-off, a diverse parent company like Vapor Group ( VPOR ) distributes to its shareholders new shares in a stand-alone unit. The idea is that the division’s value, in this case the Simple Cork segment due to its patent applications, and Total Vapor due to massive Easy Grinder sales is not fully reflected in the parent valuation, so splitting the businesses allows the market to properly value each part. It also allows each segment to more broadly explore mergers and acquisitions that are more focused within the appropriate sector.
The mechanics often mean that the spun-off company is orphaned at first, and handed to investors who for some, never intended to own shares and would prefer to sell the spin portion. At the same time, there are investors that are more interested in the spin-off portion and opt to invest in the parent ( VPOR ) just to be able to receive the free divi shares, and what I consider as BOGO. In short, the type of buying/selling can create excellent opportunities for savvy investors to uncover good businesses at favorable prices.
Often, post spin, the entrepreneurial forces motivates management of the subsidiary to run the business more efficiently. It's like a fresh start and management is often more incentivized to do things differently by avoiding previous pitfalls -- especially with an independent stock price that should reflect the market’s assessment of management's performance. The combination of accountability, responsibility, and more incentives to expand, all typically show up in the operating performance once liberated. It's my opinion that management will likely split the segments before announcing any major contracts with Simple Cork, or if they do so prior to the separation -- then it's a good sign that the spin-off isn't far behind.
Spin-offs are very attractive to investors and viewed as a win-win, especially on the OTC where it's quite a rarity. In the overall market the outsized returns from owning spin-offs have been so attractive and consistent over the years that, in theory, they should not exist.
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