3M to spin off healthcare business, earplugs unit seeks bankruptcy protection

3M Co (MMM.N) on Tuesday disclosed plans to spin off its healthcare business into a listed company, joining a raft of U.S. manufacturers looking to simplify their business and boost investor returns.

The industrial giant also sought bankruptcy protection for its unit that makes earplugs for the U.S. military, hoping to draw a line under litigations that have weighed on its shares this year.

3M is facing claims from more than 290,000 former and active military members who say the earplugs are defective and damaged their hearing.

Out of the 16 trials to date involving 19 service members, plaintiffs have won in 10, with about $265 million in combined awards to 13 plaintiffs.

The plaintiffs’ lead attorneys, Bryan Aylstock and Christopher Seeger, said in a statement they would fight to dismiss the bankruptcy case.

Aearo Technologies, the unit that made the earplugs, had started Chapter 11 proceedings in the Southern District of Indiana, 3M said.

The Post-it maker has committed $1 billion to fund a trust to resolve claims determined to be entitled to compensation and will provide additional funding if required.

It booked a pre-tax charge of $1.2 billion in the second quarter related to the funding agreement and case expenses.

Shares climbed 5.7% on the news. They have tumbled about 25% this year.

“We view MMM’s announcement to ring-fence its Combat Arms Earplugs litigation as a long-term positive (if contained to $1bn),” Citi Research analyst Andrew Kaplowitz said.

JOINS SPIN-OFF BANDWAGON
3M will spin off its healthcare unit – which accounted for about 25% of $35.35 billion in sales last year – into a public company.

U.S. companies have been breaking up their businesses amid a growing consensus that they perform best when the focus is streamlined, as well as increasing pressure from activist investors to boost shareholder returns.

The healthcare business, in which 3M will retain a stake of 19.9%, will focus on wound care, oral care and healthcare technology. The company expects to complete the spinoff by the end of 2023.

Second-quarter adjusted profit fell to $2.48 per share, but beat analysts’ average estimate of $2.42.