We Have No Plans to Participate in 3M's Food Safety Separation as Stock Remains Under Review for Sale
Earlier this month, 3M provided more details about the separation of the company's food safety business – an operating unit that accounts for just 1% of the company's net sales.
If you own shares of 3M, you likely received a notice from your broker stating you are eligible to participate in an exchange offer related to this upcoming transaction.
We reviewed this divestiture when it was announced last December and can reaffirm that the food safety separation will have no impact on 3M's dividend policy.
It's worth noting that this transaction is unrelated to the more significant plan to spin off the healthcare business next year, which we will provide updates on as more details emerge.
The food safety transaction that will take place at the end of this month will essentially be a tax-free merger with the complimentary food and animal product safety company, Neogen (NEOG).
If you own shares of 3M, you likely received a notice from your broker stating you are eligible to participate in an exchange offer related to this upcoming transaction.
We reviewed this divestiture when it was announced last December and can reaffirm that the food safety separation will have no impact on 3M's dividend policy.
It's worth noting that this transaction is unrelated to the more significant plan to spin off the healthcare business next year, which we will provide updates on as more details emerge.
The food safety transaction that will take place at the end of this month will essentially be a tax-free merger with the complimentary food and animal product safety company, Neogen (NEOG).
As part of the transaction, shareholders have been offered an opportunity to exchange 3M shares for stock in Neogen. If interested, investors can exchange some or all of their 3M shares for Neogen stock by notifying their broker by late August.
Or, investors can choose to do nothing and simply retain all of their 3M shares and forgo receiving stock in Neogen. This option requires no action from investors and is the default outcome.
Or, investors can choose to do nothing and simply retain all of their 3M shares and forgo receiving stock in Neogen. This option requires no action from investors and is the default outcome.
There is a modest benefit for investors who take advantage of the exchange, with every $100 in 3M units expected to be exchanged for roughly $107 of Neogen shares, representing a 7% discount.
However, Neogen will have a lot to digest as the merger effectively doubles the company's size. Neogen will also pay 3M a one-time dividend, putting moderate leverage on its BB+ rated balance sheet for the first time in at least a decade.
While Neogen runs a fast-growing, high-margin business, these new challenges and the firm's concentration in a few niche markets make the stock less appropriate for conservative investors.
Additionally, in its 40-year history, Neogen has never paid a dividend and has no plans to adopt a payout policy after combining the two businesses. So investors relying on the income provided by 3M may want to pass on the opportunity to trade for Neogen shares.
As 3M shareholders ourselves, we are choosing to do nothing and maintain our existing position.
Although we have 3M under review for a potential sale in our Top 20 Dividend Stocks portfolio due to the firm's legal woes, we are not interested in owning Neogen which, as noted, has no intention to pay a dividend.
Transaction details aside, 3M's long-term outlook remains unchanged from our update earlier this month.
We'll continue to keep a close eye on 3M and its many moving pieces, providing updates as needed.
