Automatic Data Processing Inc. (ADP) recently announced that its board has set Sep 30, as the date for the spin-off of its Dealer Services business segment, which was recently renamed “CDK Global”. The spinoff proposal was first made in Apr 2014.
The two companies will be separated through a distribution of CDK Global shares after the market close on Sep 30, 2014. ADP shareholders of record till Sep 24, will receive one share of CDK Global common stock for every three shares of ADP common stock held.
Per ADP, the new company will start trading on the Nasdaq stock exchange with the ticker name “CDKVV”, on its issuance on Sep 22, 2014.The name of the new company was derived from the three of the businesses’ core operations namely, Cobalt Digital Marketing, the core Dealer Services and global technology business Kerridge Computer Co.
Automatic Data Processing expects to receive at least a sum of $700 million tax-free from the spinoff, which it expects to use fully in making share repurchases.
We believe that the spinoff will enable both ADP as well as CDK Global to focus on their core operations. ADP will remain focused on enhancing its position as a leading global provider of HCM solutions, while CDK Global will focus on providing leading global technology solutions to help dealers and manufacturers perform better over the long term.
ADP is expected to perform better on the back of improved execution and higher client retention. Moreover, recovery in the job market will help the company. However, volatile macroeconomic environment and increasing competition from Paychex Inc. (PAYX) and Equifax Inc. (EFX) are the near-term headwinds.
However, we believe that the Dealer Services spinoff will remain an overhang on the stock in the near term. Although the plan is shareholder friendly, it did not go down well with credit rating agencies.
Following the announcement, Standard & Poor’s lowered ADP’s credit rating from AAA to AA, primarily due to the company’s plan of using the proceeds to buy back shares. Moody’s (MCO) Investor service also decreased its rating to Aa1, citing lower scale and variety of ADP’s product portfolio.
Currently, ADP has a Zacks Rank #3 (Hold).
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