On October 18th, Getinge AB (Ticker: GETIB SS, Market Capitalization: SEK 39,681 million), a Swedish medical equipment company, announced its decision to spin off its Patient & Post-Acute Care business through a tax-free spin-off. The plan is subject to shareholder approval at the company’s Extraordinary General Meeting that will be held in the fall of 2017. The transaction is expected to be completed by the first quarter of 2018.

The spin-off will allow Getinge to narrow its focus at a time when it is implementing a strategy of centralizing its operations. It should be noted that no further reasons for the demerger are evident; Getinge is a pure-play medical equipment and devices corporation, which is neither spinning off a division with a disparate business model nor an underperforming operation.

Currently Getinge trades at a big discount to its publicly-traded peers. However, such discount appears justified: In the past few years, the FDA has discovered major violations in the company’s quality systems in four facilities—two in the USA and two in Germany. After failing to remedy the situation even after the FDA had issued warning letters, production of certain items is these facilities ceased. At the moment, the company and the FDA have agreed—for the most part—to a course of action that includes third-party inspections to verify that the necessary changes have been implemented, and annual inspections thereafter. As a result, Getinge has set aside a significant amount of provisions for the expected costs. During the last quarter, said provisions were increased by SEK 400 million.

The new entity will comprise Getinge’s Patient & Post-Acute Care division and will offer products and solutions for safe patient handling, prevention of venous thromboembolisms, medical beds, hygiene systems and easy mobility. Its addressable market is expected to grow as population in developed countries ages. The segment’s sales and adjusted EBITA1 for the first nine months of 2016 were SEK 5,376 million and SEK 596 million, respectively. Revenue declined by 6.2 percent during that period, and top-line pressure is not expected to abate: During the same timeframe, new order intake was SEK 5,337 million, representing a 7.6% year-on-year decline. EBITA, on the other hand, increased by 10.2% on a yearly basis, as a result of Getinge’s cost-cutting effort that lead to a 100 basis point EBITA margin expansion. The division’s estimated 2016 run-rate EBITDA is SEK 965 million. The average enterprise value-to-2016 EBITDA multiple of its peer group 16.9x. Using a 15.2x multiple instead2, to incorporate the unit’s declining profitability, we arrive at an enterprise value of SEK 14,656 million.

Following the spin-off, Getinge will operate under two segments: Acute Care Therapies and Surgical Workflows. The former offers solutions for cardiac, pulmonary and vascular therapies as well as products and therapies for intensive care. The latter offers productions and solutions for infection control, equipment for surgical workplaces and advanced IT systems for hospitals.

During the first nine months of 2016, revenue for the Acute Care Therapies unit declined by 0.2 percent to SEK 8,155 million, while adjusted EBITA declined by 3.3 percent to SEK 4,103 million. The situation, however, appears to have normalized, with order intake slightly positive during that period—leading to a positive year-on-year growth during Q3 2016. Furthermore, EBITA during the same period increased by 13.4 percent, primarily as a result of lower SG&A spending. On a reported basis, EBITA for the Acute Care Therapies business was negative for that quarter, due to the SEK 400 million provision for the FDA-related issues. Sales and adjusted EBITA for the Surgical Workflows unit during the first nine months of 2016 were SEK 6,702 million and SEK 531 million, respectively. Despite a 3 percent decline in revenue, EBITA increased by 27 percent due to a reduction in overhead expenses.

2016 EBITDA for the Acute Care Therapies business is estimated at SEK 2,378 million. Due to its struggles with its quality systems, that have resulted in penalties by the FDA, the division will be valued based on the lower end enterprise value-to-2016 EBITDA multiple of its peers. At 11.6x, the Acute Care Therapies segment is valued at SEK 27,564 million. Based on an estimated 2016 EBITDA of SEK 801 million and the 16.9x average enterprise value-to-2016 EBITDA multiple of its peer group, the Surgical Workflows business is valued at SEK 13,525 million.

The resulting enterprise value of post spin-off Getinge is SEK 41,089 million, while its pre-demerger enterprise value is estimated at SEK 55,745 million. Incorporated SEK 23,293 million in net debt as well as SEK 411 million in minority interests, the resulting equity valuation is SEK 32,041 million, or SEK 134 per share.

The pre-spin sum-of-the-parts estimate for Alcoa Inc. (NYSE: AA) is revised as a result of incremental adjustments to our 2017 EBITDA and net debt estimates relating to the company’s pension and post-retirement benefits plan. Given the magnitude of the companies’ retirement plan, it is useful to analyze the impact of these liabilities on earnings. Accordingly, our revised estimates are based on comparable multiples applied to EBITDAP (calculated as EBITDA plus net periodic pension costs less service cost), as opposed to EBITDA. Net periodic pension costs include interest cost and expected return on plan assets, while service cost is a largely a component of compensation expense. In addition, a tax shield of 30% is applied to total pension liabilities for each company.

Accordingly, the pre-spin sum-of-the-parts fair value estimate for AA is adjusted to $49 (from $34 previously), and is comprised of $39 and $11 for ARNC and AA, respectively. Post-spin, ARNC can be fairly valued at $41 (versus $26 previously). Post-spin AA can be fairly valued at $32 (versus $30 previously), reflecting a 19.9% ownership interest by ARNC. With the pre-spin sum-of-the-parts estimate reflecting 87% upside to AA’s current share price ($26.35 as of this writing), the pre-spin shares are recommended for purchase.
Given early trading indications in the when-issued market, it appears investors are not ascribing any incremental value to the pension component of the capital structure. When-issued trading is expected to begin today, however has yet to begin. Moreover, given the current macro environment and negative cyclical market pressures, which have resulted in downward adjustments to forecasted earnings, investors may likely continue to discount normalized earnings. As a basis of comparison, the above analysis, based solely on EBITDA without any pension-related adjustments, would generate a pre-spin fair value estimate of $36 for AA, which represents 27% upside to the current share price.

As background, Alcoa is a global leader in bauxite, mining, aluminum refining, and aluminum production, with 64 facilities worldwide and approximately 17,000 employees. The company generated consolidated 2015 revenue and EBITDA of $22.5 billion and $3.9 billion, respectively. Alcoa’s products, which include aluminum, titanium, and nickel, are used worldwide in aerospace, automotive, commercial transportation, packaging, building and construction, oil and gas, defense, consumer electronics, and industrial applications. The company is the largest aluminum producer in the United States and the fourth largest globally.

Post-spin Arconic, which comprises the company’s downstream operations, is a differentiated supplier to the high-growth aerospace industry, with leading positions on every major aircraft and jet engine platform. The company is also leveraged to rising demand for aluminum-intensive vehicles through its recent rolling mill capacity expansions and the commercialization of new technologies. Pro forma revenue for 2015 totaled $12.6 billion, with $1.9 billion in pro forma EBITDA. Notably, EBITDA margins for Alcoa’s value-added portfolio have increased from 8% in 2008 to 15% in 2015. For more details, please refer to The Spin Off Report dated October 13, 2016.

On October 17, 2016, after the market close, Liberty Interactive Corp. (NASDAQ: QVC, QVCB, LVNTA, LVNTB) announced that the company will complete the previously announced split-off of the 15.8% ownership in Expedia Inc. (NASDAQ: EXPE) and Bodybuilding.com into a standalone company. The separation will be completed via a mandatory redemption of a portion of outstanding Liberty Ventures Series A (LVNTA) and Series B (LVNTB) common stock in exchange for shares of Liberty Expedia Holdings Inc. (Liberty Expedia). Ventures shareholders will redeem 0.4 of each share outstanding of Liberty Ventures in exchange for 0.4 of a share of Liberty Expedia’s respective share class. Liberty Expedia series A and series B common stock are expected to trade on the NASDAQ under the symbols “LEXEA” and “LEXEB”, respectively.

Liberty Ventures (NASDAQ: LVNTA, LVNTB) (Ventures) is a tracking stock that has been attributed some of the assets and liabilities of Liberty Interactive, including the assets to be spun off into Liberty Expedia. Ventures had previously spun-off CommerceHub (NASDAQ: CHUBA, CHUBK, CHUBB), a cloud-based e-commerce fulfillment and marketing software platform of integrated supply, demand and delivery solutions for large retailers, online marketplaces and digital marketing channels, as well as consumer brands, manufacturers, distributors and other market participants. CommerceHub’s software essentially creates a virtual hub that facilitates e-commerce transactions in the consumer and business-to-business markets.

Liberty Expedia will primarily be a holding company for the 15.8% ownership stake (52.4% voting interest due to voting agreements) in EXPE. As such, the valuation and trading of Liberty Expedia will largely track EXPE. Based on the current share ownership in EXPE, and assigning $220 million in value to Bodybuilding.com (based on a multiple of EBITDA), $300 million in net debt, and 56.9 million shares of Liberty Expedia outstanding, a fair value estimate of $49 per share is assigned to Liberty Expedia. Similar holding company stocks typically trade at varying discounts to the underlying holdings. As a point of reference $45 per share is derived from the EXPE stake; as such, trading below $45 per share would assign zero value to the Bodybuilding.com franchise. Trading at discounts approximating 10% or greater to the value of the EXPE ownership stake would present an attractive entry point, in our view.

Liberty Ventures will remain a holding company, with its post-spin primary holding attributable to Charter Communications Inc. (NASDAQ: CHTR) through its direct ownership of 5.4 million shares, and indirect ownership via a 42.7 million share stake in Liberty Broadband Corp. (NASDAQ: LBRDK). Other minority interests include Time Warner (TWX), ILG Inc. (NASDAQ: ILG), which was formerly known as Interval Leisure Group, Lending Tree Inc. (NASDAQ: TREE), and FTD Companies Inc. (NASDAQ: FTD). Based on current market value of the underlying holdings, valuing the companies green investments at cost, the $300 million cash distribution from Liberty Expedia, and 85.4 million shares outstanding (following the 40% redemption) results in a fair value estimate for post-spin Liberty Ventures of $50 per share.

On a pre-spin basis, shares of Liberty Ventures can be fairly valued at $49 per share, representing 25% upside from yesterday’s closing price of $39.41 per share of LVNTA. Given the discount to estimated net asset value, shares of LVNTA are recommended for purchase prior to the spin-off of Liberty Expedia.

On October 17, 2016, after the market close, Sealed Air Corporation (NYSE: SEE) announced a plan to spin-off of its Diversey Care division and the food hygiene and cleaning business within its Food Care division (together “New Diversey”) from its remaining Sealed Air business (“New Sealed Air”). The transaction is expected to be completed in 2H 2017, subject to final approval by SEE’s Board of Directors, as well as filings with the U.S. Securities and Exchange Commission. The spin-off is expected to be tax-free for U.S. federal income tax purposes and the company expects to file a Form 10 early in 1Q 2017.

The spin entity, New Diversey, to be led by Dr. Ilham Kadri, President of Diversey Care, will be a pure-play, hygiene and cleaning solutions company leveraging an integrated product offering comprised of floor care machines, tools, chemicals and services. The food care portion of the business provides integrated solutions, including chemicals, project engineering, remote data monitoring and predictive analytics, focused on food safety maximization, water and energy conservation and overall productivity improvement. On a pro forma basis for the twelve months ended June 30, 2016, New Diversey, a low capital intensity business, generated $2.6 billion in sales and adjusted EBITDA of $305 million (11.8% margin).

The post-spin parent is a leading provider of food, product and medical packaging solutions, focusing on waste reduction, resource conservation and product security. On a pro forma basis for the twelve months ended June 30, 2016, New Sealed Air (excluding New Diversey) generated $4.2 billion in sales and adjusted EBITDA of $826 million (19.5% margin).

The spin-off appears to be the culmination of the company’s recent steps to expand earnings through product rationalization and divestitures, particularly as volumes have declined. Over the 2014 to 2015 timeframe, SEE’s volume growth averaged a little less than 0.5% on a year-over-year basis, while volumes expanded 0.9% in 1Q16 and 0.5% in 2Q16. That said, the company expects a meaningful pickup in volumes and projects a 4% rate (less a 1% offset from rationalizations) for volume growth as achievable going forward. Volumes should be helped by accelerating North America beef production rates, growing e-commerce sales, new wins in Diversey, and the introduction of new products. On a consolidated basis, SEE has expanded adjusted EBITDA margin by approximately 320 bp to 16.7% in 2015. The company has generated over $500 million in free cash flow in each of the last three fiscal years.

As a starting point for valuation, it can be projected that, assuming flat revenue, New Diversey would generate $2,576 million in 2017 revenues. Assuming 12.5% EBITDA margin, a 70bp expansion from trailing levels, the post-spin company could generate approximately $322 million in EBITDA. Comparables for New Diversey include a diverse range of specialized manufacturers of food care, hygiene and cleaning solutions, including Ecolab Inc. (NYSE: ECL), as well as more service oriented peers such as Cintas Corporation (NASDAQ: CTAS), and G&K Services Inc. (NASDAQ: GK), among others, which trade at a wide range of valuations from 8x to 13x estimated 2017 EBITDA. However, the business is most comparable with, and likely to trade in line with ECL given similar end market focus. As such, applying a 13x multiple (in line with ECL) generates an implied enterprise value of $4,186.0 million for post-spin New Diversey.

For post-spin SEE, assuming 5% revenue growth, the company could be reasonably expected to generate $4,454.1 million in 2017 revenues. Applying a 20% EBITDA margin, a 50 bp expansion from trailing levels, the post-spin company would generate $890.8 million in EBITDA. Comparables for post-spin SEE include other food, product and medical packaging companies including AEP Industries Inc. (NASDAQ: AEPI), Ball Corporation (NYSE: BLL), and Bemis Company, Inc. (NYSE: BMS), among others. This peer group trades at 10.5x estimated 2017 EBITDA, in line with SEE’s current multiple. Applying a comparable multiple to estimated 2017 EBITDA results in an estimated enterprise value of $9,353.6 million for post-spin SEE.

The above preliminary analysis generates a pre-spin sum-of-the-parts valuation of $46.87 per share for SEE, based on net debt of $4,319.2 million (balance sheet as of June 30, 2016) and 196.7 million shares outstanding. With this preliminary valuation representing 4.8% upside to the current share price ($44.72 as of this writing), shares of SEE appear to be fully valued, particularly given risks to volume growth and what can be viewed as historically high sector valuation multiples. As a point of reference, on a forward basis shares of SEE have traded on average 8.2x EBITDA over the past 10 years.

HSC re-affirms full-year EBIT and FCF guidance; seeks new credit facilities amid markedly improved financial condition; will report formal results Nov. 3rd; fair value remains $13 implying 35% upside

• HSC expects 3Q 2016 operating income to be $29 million (in-line with previous guidance of $27-$32 million) and re-affirmed its full-year EBIT guidance of $105-$120 million.
• The company also indicated it generated $60 million of free cash flow in 3Q 2016 and expects full-year FCF at the high-end of its $65-$80 million guidance. Moreover, including the recent monetization of its stake in the Brand JV, HSC reduced net debt by ~$200 million in the September-quarter and improved its net leverage ratio to ~2.2x (from ~3.0x at the end of 2Q 2016 and our previous estimation of ~2.4x at quarter-end)
• Amid its markedly improved financial condition, HSC is seeking to raise a new senior secured credit facility, ideally comprised of a $300 million revolver credit facility and a $550 million term loan B facility, which will be used to amend/extend its current $350 million revolver due 2019 and redeem its 5.75% Senior Notes due May 15, 2018. (Per the Lender Meeting’s agenda, the company is seeking maturities of 7-years and 5-years for the term loan and revolver, respectively)
• The company expects to report formal 3Q 2016 results before the market open on November 3rd with a conference call at 9 a.m.; call-in at (800) 611-4920.
• In our view, HSC remains substantially undervalued on a sum of the parts basis given improving operational performance and financial liquidity as well as the optionality presented by the potential separation of its Metals & Mining business in 2017.
• To that end, our fair value, which already incorporated the impact of the JV monetization, remains $13, reflecting a weighted average multiple of ~7x applied to 2017E EBITDA of $262 million and implying more than 35% of potential upside.
• For context, incremental upside comes on top of the 46% HSC share have gained since our initial recommendation (versus a 12% increase in the S&P and a 19% increase in the Russell).

FRGI is reportedly prepping itself for sale; our base case fair value remains $30 per share but we could envision upside to $34 per share in an auction scenario.

• The New York Post is reporting this afternoon that Fiesta Restaurant Group (FRGI) is preparing itself for sale.
• As readers of the Hidden Opportunities Report will recall it has been our contention that the likelihood of a take-out had materially increased following the disclosure of a 6% stake by JCP Investments on September 19, 2016, particularly given the current leadership vacuum at FRGI.
• To that end, while not a widely known activist, JCP has pushed for sales at Morgan Foods (bought by Apex Restaurant in 5/14), the Pantry (bought by Couche-Tard in 3/15), CST Brands (received a bid from Couche-Tard in 8/16) and Casella (still an on-going campaign), as well as non-core asset sales at Forestar (FOR), Condor Hospitality (CDOR) and Jamba Juice (JMBA).
• Moreover, there has been no shortage of M&A activity in the restaurant space, from both strategic and financial players, over the last few years with deal valuations averaging roughly 9.5x, albeit in a wide range of 7x-15x (see Exhibit #1). For its part, FRGI trades at about 7.5x 2017E EV/EBITDA (versus the peer group at 8.5x).
• Notably, our $30 fair value estimate reflects a blended multiple of ~8.5x 2017E EBITDA, which could prove conservative in the event of an auction process (see Exhibit #2).
• For context, at a blended multiple of 9.5x additional upside to $34 per share could be derived (see Exhibit #2), which is a valuation that our LBO model suggests could support a better than 20% IRR (based on relatively conservative assumptions).
• FRGI shares have appreciated 23% since our initial report (versus a 2% gain in the S&P and a 5% gain in the Russell 2000) with an additional upside of 11% to our base case valuation (and more than 25% appreciation potential in our bull case).

SWK to buy NWL’s tools business for $1.95 billion; see divestiture of mechanical locks business as most likely outcome of the on-going strategic review; fair value revised to $125 per share

• SWK is acquiring the Tools business of Newell Brands’s (NYSE: NWL), which includes brands such as Irwin and Lenox, for $1.95 billion. The deal is expected to close in 1H 2017.

• The business generated $760 million of trailing-twelve month sales and has posted annual growth of around 3% since 2011.

• The deal is valued at about 13x EBITDA, implying annual EBITDA of ~$150 million (and a 19.7% margin). SWK views the valuation as closer to 8x, including the estimated $80-$90 million of potential synergies to be realized over three years.

• The acquisition is expected to be $0.15 accretive to EPS in year-one and $0.50 by year-three.

• By our calculation, the transaction will increase SWK’s pro forma leverage ratio to around 2.75x.

• On the potential divestiture front, we continue to think SWK will reach a conclusion on the strategic fit of its Security business by year-end and that the most likely outcome is a partial divestiture, specifically of the mechanical locks portion of the business. In our estimation, that piece of the business generates roughly $50 million of annual EBITDA on a sales base of ~$300 million. Assuming a valuation of ~15x, in-line with peers, the business could be worth ~$750 million, which in the event of a monetization could be returned to shareholders or re-deployed toward other accretive acquisition opportunities.

• Based on an average segment multiple of ~11x and forecasted 2017 EBITDA of ~$2.07 billion, which assumes the Newell deal closes on 6/30, as well as projected net debt a sum of the parts fair value for SWK’s Tools & Storage, Industrial and Security segments could be estimated at $125 per share.

• SWK shares have returned a total of about 45% since being initially highlighted by The Hidden Opportunities Report (versus a 16% increase in the S&P 500).

On October 5, 2016, MetLife Inc. (NYSE: MET) filed a Form 10 registration statement with the SEC to spin-off its domestic life insurance and annuity product provider into a standalone public company to be called Brighthouse Financial Inc. MetLife plans on distributing at least 80.1% of Brighthouse to shareholders via a pro rata distribution of shares, with the transaction expected to be completed in 1H 2017. The distribution of shares is expected to be tax free to MET shareholders, and is subject to final board approval, favorable IRS and tax advisor opinions, and an effectiveness declaration of the company’s Form 10 filing by the SEC.

MetLife is a global provider of life insurance, annuities, employee benefits and asset management. The company is organized under six segments, four of which broadly fall under the Americas geographic region: Retail; Group, Voluntary & Worksite Benefits; Corporate Benefits Funding; and Latin America. Asia and Europe, the Middle East and Africa (EMEA) represent separate segments. Brighthouse will represent a substantial portion of MetLife’s Retail segment, as well as certain portions of the company’s Corporate Benefit Funding segment. The spin company will have approximately $240 billion in total assets with 2.6 million insurance policies and annuity contracts in-force as of June 30, 2016.

The separation of the domestic retail business does not come as a surprise considering that in January 2016 the company announced its intention to separate the business, although the ultimate structure (sale, IPO, or spin) of the separation was not determined at the time. The separation is part of a management’s plan, under CEO Steve Kandarian, to make the company smaller amidst tighter government oversight in relation to the December 2014 designation of the company as a non-bank systemically important financial institution (SIFI). In March 2016, MET challenged the Financial Stability Oversight Council’s (FSOC) designation in Federal Court, which overturned the original ruling. The department of Justice (on behalf of the FSOC) has appealed that decision and the case is now in the U.S. Court of Appeals. Designated as a non-bank-SIFI, the retail business, which will become Brighthouse Financial, would face higher capital requirements that would place the business at a competitive disadvantage, according to the company. For its part, management does not believe that any part of the current company structure is systemic.

The decision to file for a spin-off comes after it was widely thought that the separation would be via a sale or an IPO. It appears that the decision to spin rather than IPO may be a factor of management’s views on the current equity markets; to that end, CFO John Hele noted in September that a spin can “generally occur even if the IPO markets are a bit choppy”.

Brighthouse generated $8.9 billion in revenue and $1.1 billion of net income in 2015, representing 5.9% and 3.5% declines, respectively. The company has total assets of $240 billion with shareholders equity of $15.8 billion, which excludes accumulated other comprehensive income (AOCI) and $630 billion of life insurance face amount in-force. A peer group of other life insurance providers, including Lincoln National Corp. (NYSE: LNC), Prudential Financial Inc. (NYSE: PRU), and Unum Group (NYSE: UNM), amongst others, currently trades at an average of about 1.0x book value, net of AOCI. It should be noted that PRU trades at a premium multiple of 1.2x. It could be expected that Brighthouse will trade at a discount to peers, and in line with the current MET multiple of 0.8x given the expectation of higher volatility due to the variable annuity business as well as the lower returns & long cash payback of the individual life product, combined with the current SIFI overhang. Brighthouse increased shareholders’ investment (net of AOCI) by 3.4% and 2.4% in 2015 and 2014, respectively, and has grown shareholder’s net investment by 3.3% through 1H 2016. Assuming 1.5% annual growth, shareholders’ net investment would total $15.8 billion at year end 2017. Applying a 0.8x multiple to year end 2017 shareholders equity results in an implied market capitalization of $12.6 billion.

Following the spin-off, the parent company’s ROE should increase while the cost of capital could be reduced over the longer term. As such the parent entity should experience a degree of multiple expansion. Assuming a 2.5% annual growth rate of book value post-spin, MET’s shareholders equity, excluding AOCI, would total $50.3 billion. Assuming the parent company’s multiple expands to 0.9x book value, post spin MET’s market capitalization is estimated at $45.3 billion. Based on this preliminary exercise, a pre-spin sum-of-the-parts fair value estimate of $52 per share is derived based on 1.1 billion shares outstanding.

On September 21st, NKT Holding A/S (Ticker: NKT DC, Market Capitalization: DKK 10,396 million), announced its plan to separate into two publicly-traded companies following the acquisition of ABB Ltd’s high-voltage cables business—with one entity focusing on power cables and the other on professional cleaning equipment. NKT has not disclosed whether the spin-off is subject to the closing of the ABB acquisition or not, although it does not expect the tie-up to face any hurdles. Following the completion of the acquisition during the first quarter of 2017, the Danish firm will announce further details regarding the structure of the demerger.

NKT has been reorganizing its operations over the past couple of years in order to shift towards a holding company structure operating under three diverse segments. During that course a lot of costs have been reallocated or eliminated, demonstrating how the firm has been planning the recently announced split for a long time. With the acquisition of ABB’s high-voltage cables business, NKT’s cables subsidiary—NKT Cables—will become large enough to operate as a standalone entity, thus enabling the spin-off.

The company is paying EUR 712 million for ABB’s high-voltage cables business—including debt—or EUR 836 million including the payment for a new cable-laying vessel that will be delivered in the first quarter of 2017. That amount represents approximately 9x the acquired business’ average EBITDA from 2014 through 2016, or 6.5x the same amount including estimated synergies of EUR 30 million. For 2015, the unit generated revenues and EBITDA of EUR 472 million and EUR 71 million, respectively. It should be noted that the high-voltage cables division sold by ABB was part of its Power Grids segment which is under strategic review and may be eventually spun off.

Following the spin-off, one entity will be named NKT Cables and will comprise the current NKT Cables and NKT Photonics divisions. The former unit designs, manufactures and sells power cables in Europe and China and the latter manufactures lasers, photonic crystal fibers and distributed temperature systems to various industrial clients. The acquired ABB business produces high-voltage cables, adding the production of DC high-voltage cable systems to NKT’s capabilities. NKT Cables, prior to the acquisition, has been overly reliant to the sale of cable products (comprising 65% of 2015 EBITDA), a lower margin business compared to projects such as cable installations (27% of 2015 EBITDA). The addition of ABB’s business will shift the mix; EBITDA from the sale of products and the execution of projects will be evenly split. NKT has estimated that its 2015 pro forma EBITDA margin would have been 11.4% compared to the actual 9%.

NKT Cables (the division) has managed to increase its revenue from EUR 756 million in 2011 to EUR 858 million in 20151. EBITDA increased even more, from EUR 25 million to EUR 77 million, as margins expanded from 3.2% to 9%. NKT Photonics has seen even more impressive growth—even though its financial contribution is very limited: Sales have expanded from EUR 28 million in 2011 to EUR 41 million in 2015. EBITDA last year was EUR 3.7 million, compared to just EUR 0.1 million five years ago. On a pro forma basis for 2015—incorporating the ABB acquisition—NKT Cables would have generated EUR 152 million in EBITDA on EUR 1,388 million in sales.

Based on the company’s 2016 guidance, and assuming no change in the acquired unit’s financial performance, NKT Cables is expected to generate EBITDA of EUR 152 million. Merger synergies are expected to reach EUR 30 million by 2018; discounting them two years forward at a 10% rate would increase 2016 EBITDA by EUR 25 million. A group of electrical component peers trades at an average enterprise value-to-EBITDA multiple of 9.5x. The resulting enterprise value for NKT Cables is EUR 1,675 million.

Nilfisk is NKT’s third subsidiary, and will become a standalone business after the separation of NKT Cables. It is a manufacturer of professional cleaning equipment catering to commercial and industrial companies, primarily. 63% of the division’s sales are generated in the EMEA region, followed by the Americas with 26%. Revenue has increased from EUR 847 million in 2011 to EUR 972 million in 2015. However, EBITDA has not followed suit: At EUR 97.9 million, it is EUR 0.3 million below its 2011 level and at the lowest point during the past five years. Indeed, Nilfisk’s EBITDA margin, at 10.1%, has contracted by 150 basis points since 2011. For 2016, the firm expects sales to increase by 1% to 3%, while EBITDA margin should remain below 10.5%. Therefore, Nilfisk’s projected 2016 EBITDA stands at EUR 102 million. Based on the 8.3x average enterprise value-to-EBITDA multiple of its peers, Nilfisk should have an enterprise value of EUR 844 million.

As of June 30th, 2016, NKT had EUR 188 million in net debt. That amount should increase as a result of the high-voltage cables business acquisition. Total outflow should reach EUR 876 million, comprising EUR 836 million as a payment to ABB and up to EUR 40 million in integration and transaction costs. However, the firm intends to finance a portion of the acquisition consideration with equity. More specifically, NKT intends to sell its treasury shares (3.86% of shares outstanding) as well as new equity up to 9.99% of shares outstanding to finance the acquisition. The new share issuance, if executed at the current stock price, would raise EUR 139 million. It should be assumed that the Danish firm will issue the maximum share amount, as it has said that its net debt-to-EBITDA ratio should approximate 3x following the acquisition. Based on our estimates, a net leverage target of 3x would require the sale of 3.1 million shares on top of the treasury stock, or 11% of shares outstanding. Consequently, on a pro forma basis, NKT’s net debt is EUR 925 million. Based on its sum-of-the-parts enterprise value of EUR 2,520 million, the company’s estimated equity value is EUR 1,593 million (DKK 11,890 million), or DKK 443 per share based on a pro forma share count of 26.8 million shares.

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.