IPOs are out of fashion. Here's what companies are doing instead.

By Steve Gelsi

After Kellogg's separation into two companies, Intel and BlackBerry are planning their own deals

While the current deal landscape on Wall Street remains low on M&A, initial public offerings (IPOs), and other transactions, corporate spinoffs are chugging along.

With companies under pressure to focus on their core business, a mini-flurry of spinoff stock debuts and new proposals have emerged in the past week.

"Spinoffs today are just more visible, given the paucity of IPOs," said Jay Ritter, a finance professor at University of Florida who tracks the new issues market.

In good times, Wall Street is hungry for any new stock and spinoffs are cheered as a way to unlock the value hidden in a neglected part of a conglomerate.

Right now, however, the uncertainty about value, combined with market volatility around the debt ceiling, a spike in bond prices and turmoil in Congress, has translated to some bruising losses of late in freshly spun off stocks.

Veralto Corp. VLTO, an environmental solutions business that was spun out of Danaher Corp. DHR, has fallen 12% in the past five days. It officially joined the S&P 500 SPX on Monday.Vestis Corp. VSTS, which started trading late in September as a uniform services business from Aramark ARMK, has fallen about 19% in the past five days. The company joined the S&P MidCap 400 on Monday.Cereal giant WK Kellogg Co. KLG started trading this week in a separation from its former parent Kellogg, which was renamed Kellanova K with a focus on salty snacks. The stock is down about 31% in the past five days.Johnson & Johnson's JNJ consumer-health unit spinoff Kenvue Inc. KVUE has fallen 1.6% in the past five days. It joined the S&P 500 on Aug. 25, two days after it became a fully independent company.Mobileye Global Inc. MBLY, the autonomous driving business spun out of Intel INTC last year, has fallen 2.3% in the past five days. The stock is up by 15.7% so far in 2023, which is a solid performance but below the 26.3% year-to-date gain by the tech-heavy Nasdaq

Unlike the IPOs of companies with little or no profit, spinoffs carved out of a larger parent are often viewed as safer if less exciting, because their businesses are typically more stable with a longer track record than the younger companies that typically go public.

On the down side, it can be more difficult for analysts and investors to figure out the actual value of a spinoff, since it's taking a new form as a stand-alone business instead of a division of a diversified corporation.

Spinoffs may also appear to be a bit like a banged-up used car, spun off to shareholders because the parent companies couldn't get a good price from a corporate buyer or private equity firm.

Natalie Hwang, founding managing partner of Apeira Capital, a firm that invests in later-stage startups before they go public, said she expects any upcoming economic challenges to keep interest levels high for spinoffs even in a weak stock market.

"These [spinoff] opportunities may be getting more attention due to the lack of IPO alternatives and the strong preference on the part of many investors for focused, pure play companies," Hwang said.

KPMG has tracked 16 spinoffs in 2023, compared with 51 in 2022, including OTC-traded stocks.

As the fourth quarter gets under way, several have been announced in recent days:

Intel INTC is planning an IPO of its programmable solutions group in the next few years, after taking Mobileye Global public last October. BlackBerry Ltd. BB said late Wednesday it plans to break out its IoT unit and float the business in an initial public offering in 2024. Vista Outdoor Inc. VSTO said Thursday the name of its outdoor products unit spinoff will be Revelyst Inc. to trade under the symbol "GEAR" on the New York Stock Exchange.Howard Hughes Holdings Inc. HHH on Thursday launched a new division of the company called Seaport Entertainment to hold assets in New York City and Las Vegas, with plans to spin off the unit to shareholders by the end of 2024.

And more are being considered as talk of spinoffs reverberates on Wall Street. But not all ideas are being embraced.

Citi analyst Jon Tower said in a research note that a handful of investors have asked him whether a spinoff of the China business of Starbucks Corp. (SBUX) would unlock value, but he doesn't think so.

"We don't believe a stand-alone China business would be self-funding in its current state, and that would have implications for how the business would need to be capitalized, which would impact valuation," Tower said as he reiterated a neutral rating on Starbucks.

Tomi Kilgore contributed to this report.

Also read: IPO market shows fatigue as trio of big tech deals languish in second week of trading

-Steve Gelsi

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10-06-23 1139ET

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