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Kimberly-Clark Files for Planned Spin-Off

Zacks Equity Research

Consumer products giant Kimberly-Clark Corporation (KMB) has recently filed a registration statement with the Securities and Exchange Commission for the planned spin off its health care business, which was announced in Nov 2013.

The spin-off is expected to be complete by the end of this year. The new company will be named as Halyard Health, Inc. and will be headquartered in Alpharetta, GA, near Atlanta.

Post spin-off, Halyard will become a separate publicly traded company with about $1.7 billion in annual sales, and is expected to trade on the New York Stock Exchange. It already has a market leading position in both surgical and infection prevention products and medical devices. Robert Abernathy – the president of Kimberly-Clark's Europe group – will become the CEO of the new healthcare company.

The spin-off will involve a tax-free distribution of 100% of Halyard Health's common stock to Kimberly-Clark shareholders. The distribution is expected to be complete at the end of the third quarter or in the fourth quarter of 2014, subject to market and other regulatory approvals. Prior to the spin off, Kimberly-Clark will receive a cash distribution from Halyard Health, which will be utilized to repurchase shares.

After the spin-off, Halyard Health will be able to capitalize its position in several key categories to boost its operations and set new growth targets. On the other hand, Kimberly-Clark will be able to increase focus on its consumer and K-C Professional brands.

Kimberly-Clark’s healthcare segment has been witnessing decelerated sales growth since the last few quarters, thus raising concerns. In third quarter 2013, the segment delivered positive results for the first time after four quarters of revenue decline. However, the increase was merely 2% year over year. The fourth quarter also saw an increase of 2% year over year, while sales were flat in first quarter 2014.

The company believes that this decision to spin-off would allow its healthcare business to optimize its performance and offer flexibility to pursue its own value-creation opportunities. Trimming down its operations would also boost the stock price of Kimberly-Clark.

Overall, we appreciate the company’s strong brand portfolio and an enhanced innovation and cost savings program, which helped it to offset higher input costs and unfavorable currency headwinds in the first quarter of 2014. However, flat sales signal weakness in the overall consumer spending environment. Slow recovery of the U.S. economy is denting Kimberly-Clark’s sales. Kimberly-Clark holds a Zacks Rank #3 (Hold).

Better-ranked stocks in the consumer staples sector include B&G Foods Inc. (BGS), McCormick & Company, Inc. (MKC) and Treehouse Foods, Inc. (THS). While B&G holds a Zacks Rank #1 (Strong Buy), McCormick and Treehouse sport a Zacks Rank #2 (Buy).

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