Back when I first started diving into the world of spinoffs, I came across an interesting concept: rights offerings. It wasn’t something we talked about much in business school, but it intrigued me because it presented a unique way for investors to benefit when a company decides to spin off a part of its business. Let me share some of what I’ve learned about rights offerings in spinoffs and how they can be powerful tools for investors who know how to leverage them.
For those unfamiliar, a rights offering is essentially a way for companies to raise additional capital by giving existing shareholders the right, but not the obligation, to buy additional shares at a discount. In the context of a spinoff, it becomes particularly interesting. When a company spins off a segment, it might use a rights offering to help finance the new entity, or to offer existing shareholders a stake in the newly spun-off company. It’s like getting an invitation to an exclusive event that the general public doesn’t have access to. You’re being offered shares at a discounted price, with the potential for substantial future gains.
Let’s bring this concept to life with a real-world example. In 2020, IAC/InterActiveCorp decided to spin off its holding in Match Group, the company behind Tinder, OkCupid, and other dating platforms. As part of the transaction, shareholders of IAC were given rights to purchase additional shares in the new Match Group entity at a set price. This was a great opportunity for existing investors to increase their stake in what became one of the hottest growth companies in the digital dating market. The result? Match Group has performed exceptionally well since the spinoff, and those who took advantage of the rights offering ended up with substantial gains.
One of the reasons I find rights offerings in spinoffs so fascinating is because of the built-in advantages they provide to existing shareholders. First, you’re often getting shares at a discount, which means you have an immediate margin of safety. Imagine being offered shares at a 15% discount compared to the market value. If the market price doesn’t change, you’ve already gained value. And more often than not, these newly spun-off companies are priced conservatively, which means there’s room for significant appreciation as the business proves itself.
Another great example is the Liberty Media spinoff of its Formula One division in 2016. Liberty Media used a rights offering to allow its shareholders to buy into Liberty Formula One Group at an attractive price. This wasn’t just a move to raise capital; it was a strategic decision to give their existing investors a chance to own a piece of an exciting and potentially lucrative new venture. Since then, Formula One has seen tremendous growth, partly fueled by increased global viewership and the popular Netflix series "Drive to Survive." The shareholders who participated in the rights offering were able to benefit from this surge.
Why are rights offerings valuable in spinoffs? There are a few reasons that make them a great opportunity for investors, especially those with a bit of patience and a willingness to dig into the details:
Exclusive Access: Rights offerings are often only available to current shareholders. This exclusivity provides a chance to invest at more favorable terms before the broader market can react. It’s a form of preferential treatment that rewards those who have already shown their support for the company.
Discounted Price: Buying shares at a discount gives you an immediate advantage. You’re starting with built-in equity, which reduces risk. Plus, if the spinoff is well-executed, the potential upside is considerable.
Skin in the Game: Rights offerings also show that the parent company wants to reward its loyal shareholders. Often, company insiders and institutional investors participate heavily in these offerings, which is a strong vote of confidence. When I see high participation from management, it reassures me that they believe in the success of the new entity.
Potential for Undervaluation: Newly spun-off companies tend to be under the radar initially. Many institutional investors are restricted from buying small-cap or newly independent companies, which can lead to initial undervaluation. This is where the advantage lies—getting in before everyone else catches on.
In my experience, the key to making the most out of rights offerings in spinoffs is due diligence. Not every spinoff is going to be successful, and not every rights offering will be worth your while. The most important question to ask is: Does the new company have the potential to thrive on its own? Look at the fundamentals, the industry, and whether the new entity has a strong management team and a clear growth strategy.
Take the case of Warner Bros. Discovery, which was formed when AT&T spun off WarnerMedia and merged it with Discovery, Inc. in 2022. This spinoff allowed the newly created media giant to focus on streaming and content production, while existing AT&T shareholders were given the opportunity to buy additional shares through a rights offering. Since becoming independent, Warner Bros. Discovery has streamlined its operations and made strategic moves in the highly competitive entertainment industry, positioning itself for future growth.
Rights offerings in spinoffs are a fantastic example of how capitalism rewards those who are paying attention. They offer investors a rare chance to get in on the ground floor of a newly independent company, often with favorable terms. For those of us who enjoy finding opportunities others overlook, rights offerings can be a powerful tool to add to your investing arsenal.
I’ve found over the years that investing isn’t just about spotting value; it’s about understanding how value is created. Spinoffs, coupled with rights offerings, create value by unleashing the potential of businesses that were previously overshadowed by larger corporate priorities. If you’re willing to do the work and take a calculated risk, the rewards can be substantial.
So, the next time you hear about a company spinning off a division, take a closer look. See if there’s a rights offering involved, and consider whether the newly created entity is poised for success. You might just find your next great investment opportunity.