The Impending Spinoff of a Spinoff: Covidien plc (COV), Pfizer Inc. (PFE), Abbott Laboratories (ABT)

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Are you ready for another health-care spinoff? Investors experienced two already in 2013 — and we’re barely into the second month of the year. Get ready now for a spinoff of a spinoff. No, AbbVie Inc (NYSE:ABBV) isn’t about to launch another company after separating from Abbott Laboratories (NYSE:ABT). Neither is Zoetis Inc (NYSE:ZTS) preparing to form another business just days after its IPO initiated by Pfizer Inc. (NYSE:PFE) .

The spinoff I’m talking about is with Covidien plc (NYSE:COV). The company, which itself is a spinoff from Tyco International Ltd. (NYSE:TYC), plans to launch its Mallinckrodt pharmaceuticals business as a publicly traded company in mid-2013. Could this impending spinoff of a spinoff present another great investing opportunity?

Covidien plc (NYSE:COV)Same kind of different
There are similarities between Covidien’s plans and those of Abbott and Pfizer. Perhaps most importantly, all three parent companies shared the same motivation in making the decision to proceed with a publicly traded spinoff.

Back in July 2011, Pfizer announced its plans to explore strategic alternatives with its animal health unit to maximize shareholder value. Nearly a year later, those plans solidified with the decision to launch Zoetis as a separate entity. Likewise, Abbott cited the prospects of improving shareholder returns when it announced the spinoff of its research pharmaceuticals business in October 2011.Both Pfizer and Abbott emphasized the advantages of the separate companies being able to focus on their different business models.

Covidien echoed these sentiments with its initial announcement about the Mallinckrodt spinoff in December 2011. Like Abbott, the company plans to retain its core medical device business. Covidien will also keep its medical supply segment. Like Pfizer, Covidien will remain significantly larger than its spinoff. Based on fiscal 2012 results, net sales for the Mallinckrodt pharmaceutical segment comprised 17% of total sales for Covidien.

Both Abbott and Covidien opted for the 100% spinoff alternative as a way to spare U.S. shareholders from having to pay taxes on the transactions. In Covidien’s case, the IRS must still give its blessing, but there shouldn’t be any issues on that front.

Different kind of different
The similarities only go so far, though. AbbVie’s Humira provided a strong growth engine for Abbott. Sales for Zoetis have grown at a faster pace than Pfizer’s other business units.  Covidien can’t make those claims for Mallinckrodt.

Source: Company 10K.

The chart above shows how sales would have looked over the past three years for the business segments that will remain with Covidien compared to what will become the new Mallinckrodt. Covidien shows a slow upward trend in sales. However, Mallinckrodt’s sales have been flat.

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