The pre-spin sum-of-the-parts estimate for Air Products and Chemicals, Inc. (NYSE: APD) is revised as a result of an upward revision to our valuation assumptions for Versum Materials, Inc., the company’s Materials Business. As background, the separation is to be completed via a tax-free distribution to APD shareholders and is expected to be completed on October 1, 2016. Air Products stockholders will receive one share of Versum common stock for every two shares of Air Products common stock owned as of the September 21, 2016 record date. When-issued trading of Versum and APD shares has begun on the NYSE under the symbols “VSM WI” and “APD WI,” respectively. Regular way trading of Versum shares is expected to begin on the NYSE on October 3, 2016, under the symbol “VSM.”

APD is a global leader in the production and sale of industrial gases, with consolidated F2015 (FY end Sept.) sales of $9.9 billion, operating income of $1.9 billion, and EBITDA of $3.0 billion. The company provides atmospheric, process and specialty gases, and related equipment. End-markets include metals, food and beverage, refining and petrochemical, and natural gas liquefaction.

The Materials Technologies business, to be spun off as Versum, includes applications technology for a broad range of global industries through chemical synthesis, analytical technology, process engineering, and surface science. Key products include epoxy curing agents, polyurethane additives, and specialty additives for use in coatings, inks, adhesives, civil engineering, personal cars, cleaning/sanitizing, mining, oilfield, and other markets. The Materials Technologies segment generated almost 20% of consolidated revenue and adjusted EBITDA (including corporate costs) in 2015.

The post-spin fair value estimate for Versum has been revised to $26 (from $11.57 previously), reflecting an expanded applied multiple. While our prior analysis had valued Versum generally in line with more diversified chemicals peers such as Eastman Chemical Co. (NYSE: EMN) and Cabot Corp. (NYSE: CBT), the revised valuation reflects a comparable universe of more specialized materials technology companies including Albemarle Corp. (NYSE: ALB) and Elementis Plc. (ELM LN). Notably, the revised comparable universe is characterized by higher EBITDA margins, approaching 30%, which more closely resembles the earnings profile of the post-spin entity and argue the case for a higher applied multiple. Our valuation methodology is summarized below. Post-spin shares are estimated at 108.3 million shares outstanding, reflecting a 1:2 distribution.

The post-spin fair value estimate for APD remains unchanged at $154, based on a comparable universe of industrial gas peers, including Praxair Inc. (NYSE: PX), Air Liquide SA (AI FP), and Linde AG (LIN GY).

The pre-spin sum-of-the-parts fair value estimate for APD is revised to $167 (from $157 previously), and is comprised of $154 for pre-spin APD and $26 for Versum, respectively. With the pre-spin fair value estimate for APD representing 14% potential upside to APD’s current share price as of this writing ($147.07), the shares appear to be approaching a full valuation. Notably, APD shares have appreciated approximately 14% year-to-date (despite a 6% pullback in September), and at a consolidated 18.6x P/E multiple, the shares are currently trading close to 10-year highs. For post-spin APD, while investors may appreciate the improvements to the capital structure, margin upside appears substantially more limited following an over 900-bp expansion, and macro headwinds are likely to subdue growth prospects, in our view. For more details, please refer to The Spin-Off Report dated September 9, 2016.

Fair value increased to $13 (from $12) as monetization of JV stake unlocks optionality; we continue to expect M&M will be separated over the next 12-months; HSC shares up 36% since our initial recommendation (versus a 12% increase in the S&P 500)

• HSC sold its 26% interest in Brand Energy & Infrastructure Services Inc., a joint venture with Clayton, Dubilier & Rice, back to Brand for $145 million in cash (or $1.80 per share).
• Total consideration, including the termination of JV obligations, was ~$232 million, which represented ~8.5x 2015 adjusted EBITDA. For context, the investment’s book value was $234 million at the end of 2Q 2016 and our initial net present value estimate was $208 million.
• Notably, we highlighted the potential monetization of HSC’s stake in Brand as offering upside optionality but did not formerly include it in our valuation construct.
• The transaction does not impact HSC’s most recent guidance calling for 2016 adjusted operating income of $105 million-$120 million and free cash flow of $65-$80 million. That said, the company expects to realize a non-cash charge of $45 million (or $0.56 per share) in 3Q 2016. By our calculation, HSC’s pro forma net leverage ratio will fall to less than 2.5x (compared with ~3.0x at the end of 2Q 2016 and its 4x debt covenant).
• In our view, this deal unlocks value for shareholders as well as further dispels lingering balance sheet concerns and signals management’s commitment to reducing the complexity of its portfolio. To that end, we continue to expect HSC will unlock further value by separating its Metals & Mining business, via spin-off or sale, over the next 12-months.
• Our fair value is increased to $13 (from $12) reflecting the transactions incremental impact on HSC’s net debt position. The SOTP calculation still reflects a weighted average multiple of ~7x applied to 2017E EBITDA of $262 million.

On September 13th, esure Group Plc (Ticker: ESUR LN, Market Capitalization: GBP 1,220 million), a British insurance company, announced its intention to spin off its price comparison website Gocompare.com into a new publicly-traded company through a pro rata distribution in-specie to its shareholders. The demerger is subject to regulatory and shareholder approvals, and is expected to be completed by the end of 2016. Esure will release further details on the spin-off on or around October 11th.

The decision follows esure’s June 7th, 2016 announcement that it would undertake a strategic review of Gocompare.com. The demerger will create two more focused businesses with independent management teams that will be able to pursue their respective strategies, optimize their capital structures and better align employee incentives. Indeed, the core competencies required by each respective management team are disparate, with the spin entity comprising a technology business as opposed to its insurance parent.

Esure Group is a British insurance company with a focus on motor and home insurance products, sold through the esure and Sheilas’ Wheels brands. It was founded in 2000 by Sir Peter Wood. Mr. Wood has served as the company’s Chairman ever since, and still owns approximately 30% of esure’s shares—a stake worth approximately GBP 360 million. The company estimates that its market share at the motor and home insurance markets is 5% and 2%, respectively. Approximately three-quarters of the in-force policies and 85% of gross written premiums were attributed to the motor insurance division.

During the first six months of 2016, esure expanded its gross written premiums by 16%, to GBP 320 million, and the number of its in-force policies by 4% to 2.076 million. Based on the company’s half-year financials, it is estimated that excluding Gocompare.com’s profit contribution the insurance operations are generating run-rate after-tax net income of GBP 43.6 million. A peer group comprising British motor insurers Direct Line Insurance Group, Hastings Group Holdings Ltd and Admiral Group Plc trade at an average forward price-to-earnings multiple of 14.3x. Accordingly, post-demerger esure is valued at GBP 623 million.

Gocompare.com will be spun off into a company named Gocompare.com Group Plc, with Sir Peter Wood retaining the Chairman role. Its principal and only asset is the namesake price-comparison website. The website was founded in 2006 and offers comparison services among motor, home, pet, travel and van insurance policies as well as utilities and other financial products. Esure first acquired a 50% stake in the business in 2010, followed by the acquisition of the remaining half it did not already own in early 2015. The insurance firm paid GBP 95 million for the second transaction, implying a valuation of GBP 190 million.

The company keeps expanding its revenue, with first half 2016 sales increasing 22% on a year-on-year basis. As a standalone company, Gocompare.com has set aggressive financial targets, including doubling its EBITDA from its 2014 to GBP 50 million by 2019. In order to achieve that, the firm will keep investment in the business at a high level and continue diversifying its price-comparison offerings beyond insurance products. Indeed, with a management-estimated market share of 24% in car insurance and 18% in home insurance, the business already has a dominant position, and incremental market share gains should not come easily. To that end, the proposed spin-off will allow for more management flexibility; liberated from its highly regulated insurance parent the company will be able to operate more like the technology business that it truly is.

As part of the spin-off, Gocompare.com will issue GBP 75 million in debt that will be used to pay a dividend of GBP 63 million to esure, with the balance covering demerger expenses. Assuming a very conservative 5% interest rate on the new debt, and based on the segment’s 2016 first half financial results, Gocompare.com Group has an estimated pro forma net income of GBP 20.6 million. Based on the firm’s primary competitor Moneysupermarket.com Group Plc, which trades at a price-to-earnings multiple of 19.7x, the spin entity’s equity is valued at GBP 406 million. Esure Group’s sum-of-the-parts equity value is estimated at GBP 1,029 million.

On September 8, 2016, Johnson Controls International plc (NYSE: JCI) announced that its board of directors has approved the previously announced spin-off of Adient plc, its global automotive seating and interiors business. The distribution is expected to occur prior to the open of business on October 31, 2016. Each Johnson Controls shareholder will receive one ordinary share of Adient for every 10 ordinary shares of Johnson Controls held as of the close of business on October 19, 2016, the record date for the distribution.
The company expects “when-issued” trading for Adient shares to begin on October 17, 2016 and continue through October 28, 2016. Adient shares are expected to begin trading regular-way on the New York Stock Exchange (NYSE) on October 31, 2016 under the symbol “ADNT.”

JCI is a global diversified technology and industrial company, focused on products which optimize energy and operational efficiencies of buildings; lead-acid automotive batteries and advanced batteries for hybrid and electric vehicles; and seating and interior systems for automobiles. The company has been working on a strategic re-alignment of its businesses for some time. This announcement follows JCI’s disclosure in June of this year that the company was exploring strategic alternatives for the Automotive Experience business. A spin-off of this business would appear to unlock value as JCI re-rates into a faster-growing, higher-margin multi-industrial company. The separation would allow for further strategic expansion of JCI’s other two operating segments, Building Efficiency (HVAC) and Power Solutions. Management has indicated that the company is looking to further expand its remaining HVAC and Power Solutions business through acquisitions of adjacent companies. Notably, the merger of Tyco and JCI closed on September 2, 2016. The deal is anticipated to generate $650 million in synergies ($150 million tax, $500 million operational) over three years.

The Automotive Experience segment, to be spun out as Adient plc, is one of the world’s largest automotive suppliers, providing seating and interior systems through its design and engineering expertise. The business’s technologies extend into virtually every area of an automobile’s interior, including seating, door systems, floor consoles, instrument panels, and cockpits, and its customers include most of the world’s major automakers. The business reported $20.1 billion in revenue in F2015 (ending September), or 54% of JCI’s consolidated revenue of $37.2 billion, and reported $1.2 billion in EBITDA, 32% of JCI’s consolidated EBITDA of $3.7 billion. Adient is expected to benefit from strong existing relationships with customers and well-established positions in growth markets including China, while generating strong cash flow.

Our post-spin fair value estimate for Adient has been revised to $50 (from $49 previously), reflecting updated balance sheet information for the quarter ended June 30, 2016, as well as updated share count following completion of the TYC merger (based on a 1:10 distribution ratio). Our valuation methodology is summarized below.

The revision reflects 1) the issuance of the $3,864 million cash payment to JCI shareholders in conjunction with the TYC merger; 2) an update to our 2017 EBITDA forecast for post-spin JCI, which includes deal-related synergies; 3) expansion of applied EV/EBITDA and EV/revenue multiples to suggest post-spin JCI shares re-rate to a more comparable industrial conglomerate valuation; and 4) revised post-merger share count. Post-spin, the fair value estimate for JCI is revised to $49 (from $26 previously). Note that these estimates are based on the company’s most recently disclosed pro forma balance sheet as of March 31, 2016, and as such, are subject to change as more information is disclosed.

With the pre-spin fair value estimate for JCI representing 18% potential upside to JCI’s current share price as of this writing ($45.70), we continue to recommend purchase of the shares. Over the next several quarters, there is the potential for post-spin JCI to achieve earnings growth above expectations, owing to what appear to be conservative cost synergies. A second potential catalyst for the shares is re-rating potential as the company grows into the valuation of its multi-industrial conglomerate peers. For more details, please refer to The Spin-Off Report dated August 11, 2016.

On September 7, 2016, Hewlett Packard Enterprise, Inc. (NYSE: HPE) announced that it intends to separate its non-core software assets via a tax-free distribution of shares. The business will subsequently merge with Micro Focus International Plc (LSE: MCRO) in a transaction valued at approximately $8.8 billion, including 50.1% ownership of the new combined company by HPE shareholders and a $2.5 billion cash payment to HPE. HPE expects to incur one-time after-tax separation costs of approximately $700 million, with the vast majority occurring in fiscal year 2017 (October 31 FY end). The transaction is subject to customary closing conditions, including the receipt of required regulatory approvals and the approval of the transaction by Micro Focus’ shareholders.

After years of restructuring, HPE was spun off from HP Inc. (NYSE: HPQ) in October 2015 in a separation of the company’s enterprise software and hardware business from its legacy PC and printing business. Despite a highly competitive market for enterprise networking, HPE’s turnaround effort has resulted in substantial balance sheet improvement, which has in turn afforded the business more flexibility to recapitalize and pursue acquisitions in key growth areas such as cloud, security, and mobility. The company has made progress in areas such as storage and networking, which has been reflected in the stock’s strong performance, having appreciated approximately 47% year-to-date.

The spin-off of these non-core software assets further accelerates HPE’s turnaround strategy to improve its overall margin profile and generate improved free cash flow. In May 2016, HPE announced plans for the tax-free spin-off of its $18 billion Enterprise Services business, which is expected to merge with global IT services supplier Computer Sciences Corporation (NYSE: CSC) in a Reverse Morris Trust (RMT) transaction. This transaction is expected to be completed by March 31, 2017. For more details, please refer to The Spin-Off Report FLASH dated May 25, 2016. With the spin-off of these non-core software assets, HPE will ultimately transform into a more focused enterprise networking and services company. 

HPE currently consists of two primary segments: Enterprise Group and Enterprise Services, the latter of which is to be spun off and merged with CSC. Within the Enterprise Group, the largest sub-segment is storage and servers, at approximately 40% of segment revenue, followed by Industry Standard Systems, at approximately 26% of segment revenue. The Enterprise Group generated $27.9 million in net revenue and $4.0 billion in EBITDA in F2015 (October year end).

The non-core software assets to be spun-off consist of HPE’s Application Delivery Management, Big Data, Enterprise Security, Information Management & Governance and IT operations management businesses. The merged Micro Focus is expected to generate annual revenues of approximately $4.5 billion. The combined company will have strong recurring revenue streams, global reach and be well diversified across product lines, spanning IT operations, security, information management, big data analytics, cloud, open source and development. In addition, the company will have a strong go-to-market capability with nearly 4,000 salespeople worldwide, and research and development resources to deliver best-in-class solutions. Based on MCRO’s share price on September 5, 2016, assuming 50.1% ownership of by HPE shareholders, and 1,661.7 million current HPE shares outstanding, the value of MCRO shares can be estimated at approximately $3.79 per HPE share.

The remaining Enterprise Services business (to be spun off and merged with CSC) can be forecast to generate $26 billion in F2017 revenues assuming a 7% decline from 2015 levels in 2016, following which revenue stabilizes. Assuming EBITDA margin of 7.0%, the business could reasonably generate $1.8 billion in EBITDA in F2017. Comps for the merged entity include technology consulting companies including Cognizant Technology Solutions Corp. (NASDAQ: CTSH), Accenture plc (NYSE: ACN), IBM (NYSE: IBM), Cap Gemini S.A. (Cap FP), and Infosys Ltd. (NYSE: INFY), among others. These companies currently trade at a multiple of 8.6x 2017E EBITDA. Applying a comparable multiple to the estimated F2017 EBITDA generates an implied enterprise value of $15.6 billion. Incorporating net debt of $4.0 billion (includes $1.5 billion cash dividend to HPE in conjunction with the merger), and estimated shares outstanding of 280.8 million, which takes into account 140.4 million new shares being issued to HPE shareholders, a fair value estimate of $44.29 per share is assigned to post merger CSC. Note that the post-merger CSC fair value estimate is modestly below the current share price of $47.74.

Following the spin-off of HPE’s non-core assets and the Enterprise Services business, and the subsequent spin-off of Enterprise Services (which will be merged with CSC), the post-spin parent company will consist of the remaining Enterprise Group. Given the upcoming Enterprise Services spin-off, it may be useful to assign a valuation for HPE’s Enterprise Group (ex-non-core software assets), as this analysis will more accurately represent the financial structure of the new HPE. Comparables for this business are primarily enterprise networking hardware manufacturers, including storage and enterprise networking equipment suppliers EMC Corp. (NYSE: EMC), NetApp, Inc. (NASDAQ: NTAP), Cisco Systems (NASDAQ: CSCO), Inc. and Juniper Networks, Inc. (NASDAQ: JNPR), which trade, an average at a multiple of 8.5x 2017E EBITDA and 2.1x 2017E sales. Based on a revenue decline of 1% in 2016 and flat revenue growth in 2017, respectively, and applying an in-line revenue multiple, the business can be estimated to generate an enterprise value of $33,153.5 million. Assuming 2017 EBITDA margin of 14%, it can be estimated that the business would generate $3,867.9 million in 2017 EBITDA. Applying an 8.5x multiple to estimated EBITDA would result in an enterprise value of $32,877.2 million. Averaging these two valuation methods, an enterprise value of $33,015.4 million is derived, or $18.79 per share based on net debt of $1,922 million (includes $1.5 billion and $2.5 billion cash dividends from CSC and MCRO, respectively) and 1,661.7 million shares outstanding.

The above analysis generates a pre-spin sum of the parts fair value estimate of $26.33 for HPE, comprised of $3.79 in MCRO shares receive in the newley announced software spin-off and $3.74 in CSC shares received in the Enterprise Services spin-off, and $18.79 for post-spin HPE. With the pre-spin sum-of-the-parts estimate suggesting 19% upside to HPE’s share price ($22.09 as of yesterday’s close), this analysis suggests the transaction should unlock incremental value, particularly as HPE continues its strategic transformation.

On September 7, 2016, TEGNA, Inc. (NYSE: TGNA) announced that it intends to separate its Cars.com digital publishing business from its independent broadcast station business via a tax-free distribution of shares. The company also announced that it is evaluating strategic alternatives for CareerBuilder, a global leader in human capital solutions. The spin-off is planned to be completed in the first half of 2017, subject to receipt of final Board approval, a favorable tax opinion and the effectiveness of a Form 10 registration statement. TEGNA will temporarily suspend its share repurchase program pending completion of the spin-off. Gracia C. Martore, president, chief executive officer and a member of the Board of Directors of TEGNA, will retire upon the closing of the spin-off.

TEGNA, based in Mclean, Virginia, was separated from publisher Gannett in June 2015. At that time, the spin-off of Gannett’s publishing business represented the culmination of a strategy that had been in place at Gannett for several years, to protect the company’s broadcast and digital businesses from the decline in print advertising. Today, TEGNA is the largest independent broadcaster among major network affiliates in the top 25 markets, operating 46 television stations and spanning 36 million households. The company is the largest group owner of stations affiliated with NBC and CBS. In 2015, the broadcast business generated $1,682.1 million in sales (-0.6% year-over-year) and $787.2 million in EBITDA. Following the spin-off and sale of its digital assets, the company should bolster its balance sheet to pursue investment in organic growth, opportunistic acquisitions and maintain its dividend (currently a 2.7% yield). While last quarter, TGNA shares faced investor scrutiny owing to lighter political advertising spending, management has stated that the company is ‘on track’ for a ‘record year’ of political spending with 80-85% of sales expected following Labor Day. The broadcast outlook also appears generally favorable given that approximately 40% of digital subscribers are scheduled for renewal this year.

Launched in 1998, Cars.com claims to be the largest automotive classified website for consumers (as measured by revenue). The site serves dealers and OEMs (Original Equipment Manufacturers), and averages 35 million monthly visits. The closest peer is AutoTrader Group, PLC (AUTO LN), which operates AutoTrader.com. In 2015, Cars.com (excluding the Careerbuilder assets) generated $597 million in revenues (19.4% CAGR for 2013-2015) and $239 million in EBITDA. The consolidated digital business generated $1,368.8 million in revenues (+46% year-over-year growth owing primarily to the 2014 acquisition of the 73% of Cars.com that TGNA did not own at the time) and $379.9 million in EBITDA for the same period. The market outlook for automotive digital advertising spending appears robust, with growth expected from the forecasted $9.9 billion in 2017 (12.8% of total digital advertising spending) to $14.1 billion in 2020 (13.4% of total). In July 2016, Cars.com acquired DealerRater, the industry’s largest automotive consumer review website. While Cars.com underperformed last quarter (estimated 6% year-over-year growth, below its high-single-digit/low-double-digit long-term growth rate), better performance is expected following the ramp-up of direct sales initiatives and higher growth from affiliates, lower investment spend on digital in general, and the DealerRater acquisition.

Comparables for Cars.com include digital media properties focused in the automotive space including CDK Global Inc. (NASDAQ: CDK), carsales.com.au (CAR AU), and AutoTrader Group PLC, amongst others. This peer group trades, on average, at about 15x, 2017 consensus EBITDA, although the group trades in a wide range of 8.0x to 21.8x. It is reasonable to assign a base case valuation for cars.com using an in-line trading multiple of 15x, while noting that given the company’s healthy revenue and earnings growth and a robust automotive digital advertising spending market this may underestimate the company’s value as a standalone entity. Based on revenue growth 7% and 8% in 2016 and 2017, respectively, and assuming EBITDA margin of 35% (below 2015 levels to account for standalone corporate costs), it can be estimated that Cars.com would generate $241.5 million in 2017 EBITDA. Applying a 15x multiple to estimated EBITDA would result in an enterprise value of $3.6 billion. Note that recent M&A transactions (e.g. TRADER Corp. acquisition by Thoma Bravo, XO Group by JD Power) support a favorable valuation for the business, with EBITDA acquisitions ranging from the mid-teens to 20x range.

Comparables for post-spin TEGNA include independent broadcasters such as Nexstar Broadcasting Group, Inc. (NASDAQ: NXST), Sinclair Broadcast Group, Inc. (NASDAQ: SBGI), and Gray Television, Inc. (NYSE: GTN), among others. This peer group trades, on average, at 7.7x and 7.9x 2016 and 2017 consensus EBITDA, respectively. Assuming 15% revenue growth in 2016, with margins widening to 51% (from 50% in 2014), the company would generate $986.5 million in EBITDA on the back of strong political spending. It can be assumed that revenue normalizes in 2017 given the absence of political and Olympic spending, resulting in a revenue decline of 10%, EBITDA margins of 46% (roughly in-line with 2105 margins), and EBITDA of $800.8 million. Applying a blended two year EV/EBITDA multiple to TGNA’s media segment results in an average enterprise value estimate of $6,961.2 million.

Lastly, the remaining digital properties following the spin should be considered. The primary digital asset that will remain post-spin is the company’s 53% ownership stake in Careerbuilder.com. Assuming all remaining revenue and profit is associated with Careerbuilder, it can be assumed that the business generates approximately $115 million in annual EBITDA. Comparing the business to peer Monster Worldwide Inc. (NYSE: MWW), which trades at 6.0x forward estimates, results in a enterprise value for Careerbuilder of $692 million, or $367 million when accounting for TGNA’s 53% ownership.

On a sum-of-the-parts basis, this preliminary valuation exercise results in a pre-spin fair value estimate of $30 per share when accounting for $4.5 billion in net debt (includes $311 million in minority interest) and 214.3 million shares outstanding. Given upside from the current share price ($21.18 per share as of this writing), this preliminary valuation exercise suggests meaningful value can be unlocked from the completion of this transaction.

On August 24th, Svenska Cellulosa AB CSA (Ticker: SCAB SS, Market Capitalization: SEK 189,579 million), a Swedish hygiene and forest products company, announced its decision to spin off its hygiene business through a tax-free spin-off. The plan is subject to customary approvals, including shareholder approval—with the vote taking place at the 2017 Annual General Meeting. The transaction is expected to be completed by the end of that year.

The appointment of a new CEO in early 2015 opened the possibility of a spin-off. CSA’s previous CEO, Jan Johansson, had repeatedly dismissed the idea. In August 2015, Magnus Groth—the company’s new top executive—announced the reorganization of its operations with the creation of two divisions, Hygiene and Forest Products. Despite Hygiene being responsible for the majority of CSA’s revenue and profitability, it will be demerged, while the smaller Forest Products segment will remain with the parent company and keep the Svenska Cellulosa moniker. However, CSA’s CEO will take over the same post at the spin entity.

The rationale for the demerger is that it will allow shareholders to choose in which company they want to be invested. It is true that the characteristics of the two standalone entities are significantly different: Firstly, they operate in different industries—with one being a household products business and the other a commodity/industrial corporation. Secondly, the Hygiene segment has been experiencing significantly higher revenue growth over the past five years, compared to the Forest Products business that generated 2015 revenue below the 2012 level. The spin-off would also allow for increased management focus. In fact, the two businesses require distinct skillsets to be managed.

One may also consider a further strategic rationale behind the proposed breakup. CSA’s largest shareholder is Swedish investment company Industrivärden—which as part of the spin-off announcement declared its support for the transaction. Industrivärden’s largest shareholder is another Swedish publicly-traded investment firm, L E Lundbergföretagen AB, controlled by billionaire Fredrik Lundberg. The same company also owns a controlling stake at CSA’s primary Forest Products competitor, Holmen AB. Thus, it is likely that the parent company may opt to merge with its peer following the spin-off.

The new company will comprise CSA’s Hygiene segment, which in turn consists of the Personal Care and Tissue divisions. The former controls a portfolio of personal care brands in the areas of baby diapers, feminine care and incontinence products. Incontinence products were responsible for the majority of the division’s 2015 sales (52%), followed by diapers (29%) and feminine care products (19%). SCA’s products are distributed all over the world, with Europe being the primary market—generating 58% of 2015 revenue. On a trailing-twelve-month basis, the Personal Care division generated EBITDA of SEK 5,189 million from sales of SEK 33,927 million—for a 15% margin.

The Tissue division manufactures and sells both consumer tissue, i.e. products sold under CSA’s brands to retailers, and away-from-home tissue, meaning a complete set of hygiene products found in locations such as hospitals and restaurants. Consumer tissue generated 64% of 2015 sales, with the balance coming from the other category. 60% of sales are made in Europe, followed by 16% in Asia and 14% in North America. During the last twelve months, the Tissue division generated revenue and EBITDA of SEK 65,286 million and SEK 11,230 million, respectively, for a 17% EBITDA margin.

On a combined basis, the new Hygiene company generated SEK 16,419 million in EBITDA and SEK 99,213 million in sales over the last year. Based on the 14.3x average enterprise value-to-EBITDA multiple of similar household product competitors such as Procter & Gamble, Kimberly-Clark and Unicharm, the spinco’s enterprise value is estimated at SEK 234,680 million.

Following the spin-off, SCA will be an integrated forest products company, manufacturing and selling pulp, paper, solid wood products and renewable energy. In addition to its pulp and paper manufacturing facilities, SCA is also Europe’s largest private forest owner, with 2.6 million hectares of forest land. 85% of the company’s sales are within Europe, with the rest generated from Asia, Africa and North America.

On a trailing-twelve month basis, the Forest Products segment generated SEK 16,693 million in sales and SEK 3,042 million in EBITDA—for an EBITDA margin of 18%. Based on the 7.8x average enterprise value-to-EBITDA multiple of its peer group, post spin-off SCA’s enterprise is valued at SEK 23,834 million. SCA’s sum-of-the-parts enterprise value is estimated at SEK 258,514 million. Incorporating SEK 40,035 million in net debt and SEK 6,021 million in minority interests, the company is valued at SEK 212,458 million, or SEK 301 per share.

On August 16, 2016, Lockheed Martin Corporation (NYSE: LMT) announced the completion of the split-off of its Information Systems and Global Solutions (IS&GS) business and merger with Leidos Holdings, Inc. (NYSE: LDOS) in a Reverse Morris Trust (RMT) transaction.

Under the terms of the split-off, Lockheed Martin offered its stockholders the option to exchange some, all or none of their shares of Lockheed Martin common stock for common units of Abacus Innovations Corporation (Splitco), an LMT subsidiary formed to hold LMT’s IS&GS business (which will convert into shares of LDOS common stock). LMT issued 76.959 million Splitco common units. Based on the final exchange ratio of 8.2136, LMT’s share count was reduced by approximately 9.37 million shares (76.959 million shares divided by 8.2136), or approximately 3% of the outstanding common shares. Also as part of the transaction, LMT received a $1.8 billion special cash payment, which will be used to repay debt, pay dividends, and/or repurchase stock. LMT stockholders who participated in the exchange offer received an approximately 50.5 percent stake in Leidos (approximately 77 million shares of Leidos common stock). The special cash payment, plus the shares of Leidos common stock received by participating LMT stockholders results in an aggregate transaction value of approximately $4.6 billion.

We have adjusted our fair value estimates to account for the final exchange ratio, which results in a modest adjustment to our previous share count assumptions. The post-spin fair value estimate for LMT remains unchanged at $251 (share count adjusted modestly to 295.1 million from 294.9 million). The post-spin fair value estimate for LDOS is adjusted to $47 (from $60 previously) to reflect for the $13.64 special dividend which was paid to shareholders in conjunction with the merger.

With the fair value estimate for LDOS suggesting 18% upside to the current share price, we continue to recommend LDOS shares for purchase and expect the transaction to unlock considerable incremental value for the combined company. For Leidos, the combination with IS&GS is consistent with the company’s strategy of refocusing its business on national security, health, and engineering, and investing in growth. IS&GS brings considerable incremental scale, with approximately $5 billion in revenue. The acquisition adds experience in large, complex IT system implementation and operation, and brings additional federal and international IT solutions and services work to the Leidos portfolio, providing more avenues to sell value-added services such as cybersecurity and analytics. We view shares of LMT as fairly valued at current levels. For more details, please refer to the Lockheed Martin Spin-Off Report dated July 20, 2016.

On June 17th, Grupo Clarin SA (Ticker: GCLA LI, Market Capitalization: US$2,874 million), an Argentinian telecom and media conglomerate, announced its decision to spin off its interest in Cablevisión SA into a new entity. Cablevisión is 60% owned by Grupo Clarin and houses its cable, internet, data transition and telecom operations. The new company will be named Cablevisión Holding SA and will be listed on the Buenos Aires Stock Market—Grupo Clarin’s primary stock exchange—as well as a foreign market. As the parent company currently maintains an active listing in the London Stock Exchange—with its GDRs trading in US Dollars—it is reasonable to assume that the LSE will be the exchange of choice for the spin entity, an action that would facilitate GDR holders.
The spin-off is subject to shareholder and regulatory approvals. Grupo Clarin’s shareholders will vote on the reorganization at its extraordinary meeting that will take place on September 28th, 2016. The company aims to complete the spin-off—which is expected to be tax-free—during the first quarter of 2017.

Grupo Clarin has been executing on its ambitious plans since Argentinian President Mauricio Macri removed numerous regulatory hurdles that impeded and restricted its operations. By early 2016, the firm—through Cablevisión—acquired local wireless carrier Nextel Argentina. Controlling the nation’s fourth largest telecommunications provider, the company expanded beyond its traditional cable TV and internet operations, and is now a direct competitor of telecom behemoths Telefonica and America Movil. The creation of a standalone company will allow for greater focus in competing for Argentinians connectivity needs.

Cablevisión Holding’s shareholder base is expected to mirror that of Grupo Clarin. The company’s main asset will be the 60% interest in Cablevisión. The new company will offer cable TV, internet and telecommunication services. During the first half of 2016—a period that included the almost full contribution of the Nextel Argentina acquisition—the Cablevisión segment generated ARS 14,243 million in sales and ANR 5,722 million in EBITDA. Video subscription was the biggest contributor to revenue (62% of sales), followed by internet (23%) and the new telecom sub-segment (11%).

Based on the average enterprise value-to-sales and enterprise value-to-EBITDA multiples of Cablevisión’s three telecom competitors1 and its run-rate 2016 revenue and EBITDA, the new firm should have an enterprise value between ARS 48,615 million and ARS 63,289 million. Adjusting for an estimated net debt2 of ANR 3,609 million, we arrive at an equity value between ANR 45,006 am ANR 59,679 million. That translates into an equity valuation between ANR 27,004 million (US$1,825 million) and ANR 35,808 million (US$2,419) for the publicly-traded entity Cablevisión Holdings.

Following the spin-off, the parent company will comprise the printing & publishing, broadcasting & programming and digital content operations. While revenues have been increasing—likely due to inflation—profitability has been suffering. During the first six months of 2016, only the broadcasting & programming division achieved an EBITDA expansion. The other two divisions in fact generated negative EBITDA. Amid a negative sentiment towards publishing globally, there is a silver lining: the broadcasting operations benefit from high profitability margins, such that even with the negative performance of the other two devisions, Grupo Clarin’s pro forma EBITDA increased on a year-on-year basis.

During the first half of 2016, Grupo Clarin’s remaining segments generated revenue and EBITDA of ARS 3,916 million and ANR 382 million, respectively. Based on the average enterprise value-to-sales and enterprise value-to-EBITDA multiples of Latin American publishing and broadcasting companies, and its run-rate 2016 revenue and EBITDA, post-spin Grupo Clarin’s enterprise value is estimated between ARS 7,984 million and ARS 11,474 million. Taking into account our estimated net debt of ARS 2,923 million, we arrive at an equity value between ARS 5,061 million (US$342 million) and ARS 8,551 million (US$578million).

On a pre-spin basis, Grupo Clarin’s equity is valued between ARS 35,555 million (US$2,402 million) and ARS 40,869 million (US$2,761 million). It should be noted that while Grupo Clarin appears to be trading at a discount to both its publishing & broadcasting and cable & telecom peers, that is partly due to the undervaluation of the minority interest in Cablevisión. The non-controlling interest is valued at below ARS 3 billion, compared to our estimate of more than ARS 18 billion. Therefore, the use of consolidated EBITDA will lead to a very high enterprise value, while the adjustment by a mere ARS 3 billion for minority interests will result in the overvaluation of Grupo Clarin’s equity.

On August 9, 2016 Herc Holdings Inc. (NYSE: HRI) reported 2Q 2016 results including revenue and adjusted EBITDA of $380.4 million and $131.1 million, respectively. Revenue declined 6.5% year-over-year (adjusted to exclude the impact from the sale of France and Spain operations) primarily due to lower sales of used equipment and HRI’s exposure to the oil and gas industry. At $329.8 million, core equipment rental revenue was flat versus the 2Q 2015 result of $329.4 million. Equipment rental revenue experienced increases in what management defines as “key markets”, which account for 84% of total rental revenue, however those were more than offset by continued declines in upstream oil and gas markets (representing 16% of total rental revenue), lower gains on the sale of used equipment, and reduced revenue from the sale of new equipment as the company exited some dealerships. EBITDA declined 7.8% as increased operating leverage in key markets was more than offset by lower used equipment gains and weakness in oil and gas related markets.

In addition, HRI revised 2016E EBITDA guidance to a range of $520 to $560 million reflecting continued oil and gas weakness, lower than previously expected sales in certain key markets, and the exit of certain markets related to new equipment sales distributors (at the midpoint, previous guidance was $585 million). The lowered guidance reflects management’s updated view on the current equipment rental industry and the still struggling oil and gas markets. Oil and gas related revenue declined 27% in 2Q 2016. Absent this exposure, the equipment rental market is stable and industry trends, as illustrated by industry forecasts for non residential construction data and the architectural billings index, all appear positive for growth moving forward. The second half of the year should see easing comparisons, in terms of oil and gas exposure, due to sales declines experienced in 2H 2015. While the cyclical nature of the oil and gas industry is weighing on operations, at this point, with the median price forecast around $50 per barrel of oil for 2017, it could be expected that those markets experience a modest rebound from the current depressed levels.

Our fair value estimate has been adjusted to reflect current business trends, with a still positive outlook across HRI’s business units into 2017. We now forecast 2017E EBITDA of $630 million (previously $660 million). The revised estimate assumes a slowing in the revenue declines through 2H 2016 before a 5.0% increase in 2017 (roughly in line with longer term equipment rental market projections), and margin expansion based on increased operating leverage.

Valuing HRI shares at 5.0x [based on average peer multiple of United Rentals Inc. (NYSE: URI) and H&E Equipment Services Inc. (NASDAQ: HEES)], while incorporating net debt of $2.1 billion (previously $2.0 billion) and 28.3 million shares outstanding, results in a revised fair value estimate of $37 per share (previously $45 per share). Shares of HRI are down 12% to $32.22 in early trading this morning, which presents a buying opportunity for investors with the ability to weather volatility from HRI’s oil and gas exposure and a longer term investment time horizon as the operating trends of the equipment rental business remain favorable.

At the current share price, based on our revised estimates, shares are trading at 4.8x 2017 estimates, a slight premium to HEES’s 4.6x multiple, which represents a margin of safety for investors, in our view. Longer term we still believe that the equipment rental business, with its large domestic retail network and international exposure, may become an attractive asset for a strategic buyer. The equipment rental business is highly fragmented and going through a period of consolidation. In a takeout scenario, HRI shares could warrant a multiple inline with URI, which currently trades at 5.4x forward estimates. In that scenario shares of HRI would be valued at $43 per share.