3M health care spin-off: set up to fail?

Investment Analysis Clubs Macro Economic Trends and Risks
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We have discussed JNJ’s consumer products spinoff, and a suspicion that, if the company’s “Texas two-step” fails in BK court, consumer products will be stuck with the talc liability, and promptly go BK.

Last summer, the same day that 3M declared the fully consolidated division that made the ear plugs BK, in an attempt to duck liability, the company also announced the spinoff of it’s health care division, which will be loaded with debt, net leverage of 3.0-3.5 x EBITA

In the announcement, 3M said “3M will retain responsibility for non-Health Care related litigation, including those related to Combat Arms Earplugs and PFAS.”

Since then, the BK court has thrown out the purported BK of the ear plug division, laying the ear plug liability back on the mother ship. Any bets that, the final prospectus for the 3M spinoff suddenly finds it with $Billions of ear plug liability, on top of it’s already huge debt load, and goes BK?

Of course, all the liability ducking is dressed up as “creating shareholder value”

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Tie current mgmt’s pay and bonuses to the performance of both current company AND the spinoffs. They ARE “Good and valuable businesses with a long term future, RIGHT?” LOL !!!

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Somehow spinning off an asset with assets to pay off pending claims is not liability ducking. They are paying the liability.

But it does get the liability and the issue off the surviving company books. And if assets prove insufficient to cover the liability, they can still come back for more.

This is more image mending than financial ducking.

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Then it would be responsible to tie bonuses to the outcome(s).

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That would be an excellent shareholder initiative at the next shareholder meeting. But don’t hold your breath on odds of passing.

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Yup. Right up there with having the companies require the Chairman of the Board not be the CEO, and requiring the company to disclose which politicians it is buying, and why.

Steve

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I’ve owned 3M for years, so have more than a passing interest. One pundit was saying whenever the argument eventually goes to court, 3M will probably argue that they have little liability/responsibility since they made the ear plugs to the military’s specifications. However, since you can’t sue the government/military…

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The first defense of automakers is their cars meet Federal standards. Doesn’t always work tho. iirc, the thing about the earplugs is they were double ended. Putting one end in your ear provided good protection against everything. Putting the other end in your ear was supposed to protect against explosions and gunfire, but still allow you to hear conversation. It is the “conversation” end that failed to protect from gunfire, as advertised.

The thing about the spin-offs is to protect the mother ship from liability. J&J’s failing is it set up a fake company, with no products, and no revenues, to bear the liability. JNJ would fund it with some $2B, to pay claims, and wash it’s hands of the affair. The fake company declared BK the day it was formed, the intent being the $2B would be divided among the claimants, and that would be the end of it, while the mother ships sails along, booking $Billions/year of profits. That scheme was thrown out by the BK court, so JNJ sweetened the pot, to $8.9B, with the same scheme, to draw a line under it’s claims expense.

I figure the JNJ consumer products spinoff is a backup plan, if the fake company scheme is totally thrown out. Consumer products has products, and revenues, vs the totally fake company JNJ created. Baby powder is clearly a consumer product, so, if the fake company scheme fails, the liability would fall on consumer products. If consumer products goes BK in a few years, as Garrett did after Honeywell spun it off, anyone trying to put the bite on the mother ship is going to have an uphill fight. (the scheme failed in Honeywell’s case, because Garrett never made any products with asbestos, so the BK court threw out the provision that Garrett pay Honeywell’s asbestos liability)

I’m pretty confident that 3M’s health care spin is working the same plan as JNJ’s consumer products spin. If 3M’s scheme to declare the fully consolidated division that made the plugs BK, while the mother ship books $Billions in profits. fails, and it isn’t looking good, I expect the initial press release to be superseded by a new plan, appending the ear plug division to health care, a real company with products and revenues, and hearing protection can be deemed “health care”, more so that it is sticky tape.

Steve

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