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Indiscriminate Selling on Spinoff Presents Early Opportunity

In an effort to boost performance and focus on its core Healthcare and Enterprise AI businesses, Nuance Communications, Inc. (NUAN) is prepared to Spinoff its Automotive conversational AI business Cerence, Inc. (CRNC) on October 1. This is another step in a series of divestitures, which have all helped in lowering NUAN's leverage and making it a more nimble entity. Meanwhile, the Spinoff company's technicals indicate a short-term return opportunity, based on dynamics in similar prior break-ups.

What's Happening?
Nuance Communications, Inc. (NUAN) will Spinoff its Automotive conversational AI business into a new publicly listed company Cerence, Inc. (CRNC) on October 1, 2019, with their first day of trading post-Spin on October 2. This is the latest step NUAN has taken to slim down to its core Healthcare and Enterprise segments, as the company has performed divestitures of its declining Imaging business ($400m) and subscriber revenue services business (estimated to be worth around $125m). These divestitures have also helped to lower the company's leverage from 3x to 2.7x, the lowest it's been in seven years.

Meanwhile, CRNC is expected to benefit from the expected massive growth in the virtual vehicular AI market as tech companies continue to develop conversational and infotainment software for use in cars around the world. Currently, CRNC's technology is implemented in over 200m cars, and the company is the pioneer and leader in the space with a presence in 15 global markets and a market share of 30%. This leadership position in the space makes CRNC a long-term takeover target for the larger tech players looking to gain its exposure in the car AI market.

Index Dynamics (Or Lack Thereof)...
Post-Spin, CRNC will be a part of the Russell 3000 Index (RUA) like its Parent NUAN. In examining previous non-S&P Spinoff transactions, three examples emerged: Hamilton Beach Brands, Inc. (HBB) in September 2017, Frontdoor, Inc. (FTDR) in October 2018, and IAA, Inc. (IAA) in June 2019. HBB is the closest in comparable market cap ($450m on listing), and all these companies saw positive returns in their first week of trading (HBB +20%, FTDR +9% and IAA +7%). Each company also included debt from their Parents, and all had similar distribution ratios (HBB 1:1, FTDR 1:2, and IAA 1:1).

In the case of CRNC, this small-cap Spinoff may see similar dynamics in terms of initial buying patterns considering the lack of index selling, though the wider distribution ratio (1:8) will result in investors owning a smaller stake, potentially prompting indiscriminate selling on the initial day of trading. An example of how a wide distribution ratio resulted in indiscriminate selling is in Adient Plc (ADNT) in October 2016, which opened on October 31 at $47 and closed at $45.51 (a -3% drop), indicating CRNC may see this same drop on its first day of trading only to rally in the weeks following, judging by these previous similar non-S&P Spinoffs.