On November 17, 2015, after the market close, Citrix Systems Inc. (NASDAQ: CTXS) announced its intention to spin off the GoTo family of products into a separate, publicly traded company via a tax-free distribution to shareholders. The GoTo family of products includes GoToAssist, GoToMeeting, GoToMyPC, GoToTraining, GoToWebinar, Grasshopper and OpenVoice. Following the separation, Citrix, the parent company, will focus on products that securely deliver applications and data. Chris Hylen, the current senior vice president and general manager of the Citrix Mobility Apps Business Unit will assume the CEO role at the new, yet to be named company. The separation is subject to an effectiveness declaration of a Form 10 filing with the SEC and final Board approval, and is expected to be completed in 2H 2016.

In conjunction with the spin off announcement, CTXS also announced corporate restructuring plans that include the elimination of 1,000 full-time and contract employee roles, plans to focus investment resources on secure and reliable application and data delivery, including XenApp, XenDesktop, XenMobile, ShareFile and NetScaler products, and the elimination of some product platforms. The company expects to reduce operating costs in excess of $200 million by 2017. The combination of the spin and cost reductions should allow the company to return significant capital over time.

Citrix’s board of directors authorized an ongoing stock repurchase program worth up to $5.9 billion, $500 million of which was approved in September 2015. Under this program, Citrix may repurchase stock “at any time until the approved amount is exhausted” and, as of September 30, 2015, roughly $336.8 million was still available. The company expects that following the completion of the announced strategic actions that operating margins will expand to over 30% and the company can capture revenue growth of 4% – 5% in 2017 (on a consolidated basis).

The separation of the GoTo family of products has been posited since July 2015, when the company announced that it was exploring strategic alternatives for the GoTo products, as well as the ByteMobile business. On a consolidated business, the core Citrix businesses (to remain with the parent) have seen slower growth in recent years than the GoTo products due to investments being made in Mobility Apps, however the margins at the core business are greater suggesting that following the spin-off, operating margins at the parent entity should exceed 30%. Management rationale for the separation appears rooted in disposition of the non-core GoTo business and a refocusing of effort and investment on the core business of application virtualization and security.

The GoTo products are cloud-based Software-as-a-Service (SaaS) that facilitate communication and collaboration solutions primarily for small businesses. The products included in the spin company consist of most of the current applications classified within the Mobility Apps segment, and has trailing revenue of $600 million. Applying a 12% growth rate, the business can be estimated to generate $672 million in NTM sales. GoTo’s primary on-demand competitor and closest valuation comparable is LogMein, Inc. (NASDAQ: LOGM), which currently trades at a 4.7x forward EV/sales multiple. However, post-spin GoTo will likely be ascribed a discounted multiple, as LogMein has a technologically superior architecture, higher gross margin (approximately 90%, versus 80% for GoTo), and superior revenue growth profile (estimated year-over-year growth of 22%, versus approximately 12% for GoTo). GoTo’s competitive dynamics are less favorable relative to on-demand peers, and the business will likely experience secular headwinds. Accordingly, applying a more conservative, discounted 2x to 3x multiple generates an implied enterprise value of between $1,344 million and $2,016 million for the business.

The parent entity’s product portfolio focuses on desktop virtualization, enterprise mobility management, enterprise file sync and sharing, and secure application and data delivery. In this context, the spin-off refines the company’s strategic focus. The parent entity (ex-GoTo) generated approximately $2.5 billion in C2014 sales. Applying a growth assumption of 6%, the business can be expected to generate sales of $2.6 billion and $2.8 billion in C2015 and C2016 respectively. Post-spin CTXS can be compared with virtualization companies including VMWare, Inc. (NYSE: VMW), Microsoft Corp. (NASDAQ: MSFT), Oracle Corp. (NASDAQ: ORCL), and Red Hat Inc. (NYSE: RHT), as well as application security companies such as Palo Alto Networks, Inc. (NASDAQ: PANW), Imperva Inc. (NYSE: IMPV), and Fortinet, Inc. (NASDAQ: FTNT). Note that CTXS is not a pure software supplier, but a hybrid that sells both hardware and software subscriptions, which broadens the company’s comparable universe. Such companies trade, on average, at 5x sales (although the range varies widely, between 4x and 8x). Applying a peer average multiple of 5x to estimated 2016 sales generates an implied enterprise value of $12.5 billion for post-spin CTXS.

The above analysis generates a total pre-spin SOTP implied enterprise value range of $13.8 billion to $14.5 billion for CTXS, with the variability largely dependent on the applied multiple for the GoTo business. Based on cash and equivalents of $1,073 million, total debt of $1,317 million, and approximately 154 million shares outstanding, CTXS shares can be fairly valued at between $88 and $93, which represents approximately 12% to 18% potential upside to the current price ($78.42 as of yesterday’s close). It is important to note, however that as of September 30, 2015, $1.52 billion of the company’s $1.87 billion of cash, cash equivalents and investments was held by foreign subsidiaries, suggesting that the company may need to raise additional debt to appropriately fund the spin entity, which could in turn, impact the valuation. The board may also use proceeds from the spin-off to accelerate the company’s post-spin share repurchase program.

On November 18, 2015, ConAgra Foods, Inc. (NYSE: CAG) announced its intention to spin off its Lamb Weston business, into a separate, publicly traded company via a tax-free distribution to shareholders. Lamb Weston, the company’s frozen specialty potato business, generated $2.9 billion in fiscal 2015 revenues, and will operate under this name following the separation. The Company’s interests in several joint ventures, including Lamb Weston / Meijer in Europe will remain with the business following separation. The Lamb Weston management team and capital structure will be announced at a later date. The spin-off is expected to be completed in the fall of 2016.

The post-spin parent company, to be renamed ConAgra Brands, Inc. will be led by CEO Sean Connolly, and will be comprised primarily of the operations currently reported as the Company’s Consumer Foods segment. This business, which generated approximately $7.2 billion in fiscal 2015 revenues, consists of popular leading brands such as Marie Callender’s, Hunt’s, RO*TEL, Reddi-wip, Slim Jim, PAM, Chef Boyardee, Orville Redenbacher’s, P.F. Chang’s and Healthy Choice. Conagra Brands is also expected to include several businesses currently reported within the Commercial Foods segment, including the traditional foodservice business, Spicetec Flavors & Seasonings and JM Swank, as well as certain private label operations which were moved to the Consumer Foods reporting segment in the first quarter of fiscal 2016. These businesses generated approximately $1.8 billion in fiscal 2015 revenues. Conagra Brands is also expected to retain the Company’s stake in the Ardent Mills joint venture. The post-spin parent is expected to maintain an attractive dividend (currently 2.5% for the consolidated company), while continuing to optimize operational efficiency, invest in the business, and pursue strategic acquisitions.

Separately, in connection with the company’s pending sale of its private label business to Treehouse Foods, Inc. (NYSE: THS) CAG announced an expectation to have a capital loss carry-forward of approximately $4.2 billion (which translates to an approximate tax value of $1.6 billion), which can be used to offset potential future capital gains over the next 5 years. As such, it appears that there may be dual-track process at work, which would support the case for continued industry consolidation that is currently being led by The Kraft Heinz Company (NASDAQ: KHC). Management has noted that it plans to use the proceeds from the private label sale ($2.7 billion) for debt reduction, as well as its intention to focus on business performance, including a $300 million efficiency plan.

As a starting point for valuing the spin company, it can be estimated that F2016 revenue will total $3.0 billion based on F2015 revenue of $2.9 billion and growth of 5.0%, in line with the most recent quarters’ reported growth for the frozen potato business. The commercial food business operated with a 19.7% operating margin in F2015. Assuming the Lamb Weston business margins are roughly in line with the segment as a whole, and a slight margin expansion on increased sales, while assigning proportionate depreciation and corporate expenses, Lamb Weston could be expected to generate $596.1 million in EBITDA. As a standalone company, Lamb Weston should be compared to other food service companies with a narrower focus than the current CAG. Competitors could include Campbell Soup Co. (NYSE: CPB), TreeHouse Foods Inc. (NYSE: THS), and B&G Foods Inc. (NYSE: BGS), among others, which currently trade at an average of approximately 11.5x 2016 consensus EBITDA. Applying this peer group multiple to forecasted Lamb Weston EBITDA results in an enterprise value estimate of $6.9 billion.

The parent company, ex-Lamb Weston, will have revenue of approximately $9 billion. The consumer foods segment has seen minimal sales growth in recent years. As such it could be forecast to generate flat revenue next year. Based on historical operating margins (14.6% in F2015) and anticipated efficiency improvements planned by management, slight margin expansion to 15% appears a reasonable assumption. Incorporating historical depreciation expenses and proportionate corporate expenses, following the separation the parent entity can be forecast to generate $1.3 billion in EBITDA. Peers to the parent include larger consumer food companies including Pinnacle Foods Inc. (NYSE: PF) and General Mills Inc. (NYSE: GIS), among others, that trade roughly in line with the current CAG valuation (12.5x for this peer group versus CAG’s current multiple of 12.8x). Applying a 12.5x multiple to estimated post-spin EBITDA derives an enterprise value of $16.4 billion.

The above analysis generates a total pre-spin SOTP implied enterprise value of $25.9 billion for CAG (including $2.7 billion in sale proceeds from the private label business). Based on the current net debt $7.8 billion, and 432.9 million shares outstanding, the above exercises result in a preliminary, pre-spin sum-of-the-parts fair value of $42 per share for ConAgra, which is roughly in-line with the current share price of $40.97. The lack of upside shown in the previous exercises may be a function of the current market valuations placed on consumer food brands versus the historical averages. As a point of reference, CAG’s 10-year historical average forward EV/EBITDA multiple is just 9.0x. The inflated industry multiples are likely due to the current premium being paid for consolidation, which may suggest moderate upside to the fair value derived in the event of a sale of either select divisions or the company as a whole.

· Today, FOR announced it has engaged bankers to sell both non-core oil & gas as well as non-residential real estate assets.

· To that end, FOR has retained Tudor, Pickering, Holt & Co. to sell O&G assets in the Bakken/Three Forks formation along with Eastdil Secured to shop the Radisson Hotel & Suites in Austin, Texas.

· Additionally, earlier this week, Carlson Capital filed a 13D disclosing a 5.85% stake in FOR, which along with the existing holdings of Cove St./Spring Owl (~8%) and JCP Investments (1.3%) bring the total percentage of FOR’s shares held by activist investors to ~15.1%.

· In our view, this move represents the new management team’s more aggressive stance toward value creation and is likely a pre-cursor to additional divestitures, including remaining non-core oil & gas assets as well as timberland/water assets, that should help simplify FOR’s business, provide accretive capital allocation options and narrow the stock’s discount to net asset value.

· To that end, our fair value remains $20 per share, which ascribes ~$22 per share to the real estate business and $2 to the Oil & Gas segment while accounting for net debt of about $4 per share. With more than 50% of implied upside FOR remains among our most compelling investment ideas.

• In his first conference call since assuming the helm in September 2015, incoming CEO, Mr. Philip Weber, indicated that FOR is conducting a review of its entire portfolio of assets as well as its capital structure. The company declined to provide specifics on the potential range of future actions but stressed that “everything is on the table” to unlock value. (Anecdotally, the company indicated it continued to work with outside advisors to evaluate options.)

• While it remains our view that the non-core oil & gas business is very likely to be divested as energy fundamentals improve, management’s commentary implicitly suggests that to the degree any of FOR’s assets would be more valuable to a third-party it would be considered for monetization. (Notably, management indicates that deferred tax assets could be utilized to offset leakage on gains associated with an asset sale.)

• Mr. Weber also indicated that FOR would continue to aggressively reduce its cost structure as well as evaluate implementing more robust financial disclosures to help investors better value/understand its portfolio of assets.

• The recent wholesale changes in management (along with the on-going shift in strategic focus toward real-estate and an improving corporate governance paradigm) leave us incrementally more optimistic about the prospects for shareholder value creation at FOR in 2015-2016.

• Our fair value remains $20 per share based on updated asset values and balance sheet items. To that end, we ascribe ~$22 per share to the real estate business and $2 to the Oil & Gas segment while accounting for net debt of about $4 per share.

Attached, please find the Hidden Opportunities update on Nationstar Mortgage (NYSE: NSM).

• On the 3Q 2015 conference call, NSM indicated that it remained engaged with multiple investors in late-stage negotiations for a minority investment Xome, its real estate services business.

• Anecdotally, management expects a deal could be reached in 4Q 2015 (or 1Q 2016) and that indications from prospective investors suggest an initial valuation around $1 billion.

• In 3Q 2015, Xome grew revenue 37% year-over-year to $109 million and generated adjusted pre-tax income of ~$27 million.

• In our view, Xome can sustain solid double-digit top-line growth over the next several years and could see pre-tax margins expand toward 35% as the business gains scale.

• While the business generates solid cash flow we think the potential investment will not only secure capital for expansion but also provide a third-party valuation for the business and likely be a pre-cursor to an ultimate separation of the business, via spin-off, sale or initial public offering (IPO).

• With a current total market capitalization of ~$1.4 billion we think a roughly $1 billion initial valuation for Xome (or more than $9 per share) will serve to highlight the substantial undervaluation of NSM as a whole. To that end, by implication NSM’s core mortgage servicing & originations business is trading at about 20% of tangible net worth (or less than $4 per share).

On November 4, 2015, after the market close, Computer Sciences Corp. (NYSE: CSC) announced key dates associated with the spin-off of its U.S. Public Sector business into a standalone company named CSRA Inc. As background, CSRA, which will be listed New York Stock Exchange under the symbol “CSRA,” represents the combination of CSC’s public sector business with SRA International (privately held), a provider of IT Services to the U.S. government. In conjunction with the spin-off, CSC has declared a special cash distribution of $10.50 in the aggregate per CSC share (the “Special Dividend”), of which $2.25 will be paid by CSC and $8.25 will be paid by CSRA. CSC shareholders will own approximately 85% of CSRA.

CSC shareholders will receive one share of CSRA common stock for every share of CSC common stock held at the close of business on the record date of November 18, 2015. Subject to the satisfaction of the conditions to closing, the distribution is expected to occur on November 27, 2015, after market close. CSRA’s merger with SRA is expected to be completed on November 30, 2015, which is also the expected payment date of the $10.50 Special Dividend. When-issued trading is expected to begin on or about the record date. In the when-issued market, shares of CSRA common stock will trade under the symbol “CSRA.WI,” and shares of CSC will trade under the symbol “CSC.WI.”

Over the last few years the IT services industry has increasingly looked to separate commercial and government-focused IT assets, as the former trade at almost 12% premiums to the latter, given higher margin and growth profiles. The spin-off should enhance business focus for each post-spin entity, as the commercial end-market and the government-focused end-market are significantly different, with little operating/marketing/distribution leverage in the combination. Management has noted that the spin-off transaction does not prevent acquisition of either company, which implies that strategic alternatives may still be under consideration. Potential buyers of the government business would include pure-play government services firms as well as large defense contractors looking to grow the services portion of their activities. Potential buyers for the commercial piece would include Asia- and Europe-based firms seeking more U.S. presence or other services firms seeking scale. Additionally, commercially focused businesses are less susceptible to variability in government spending and decision-making. The separation should also eliminate any perceived conflicts of interest in bidding on government contracts.

Following the spinoff and merger with SRA, CSRA is the largest pure-play IT services provider to the U.S. government based on revenue, generating EBITDA margins in the 17% range. The combination should bring additional exposure in the faster-growing healthcare industry and a diversified portfolio of contracts. This further supports the story to re-value the two resulting businesses (commercial and government) following the spin-off. The new company will have $3 billion debt (leverage of 3x debt to equity) after paying CSC’s special dividend of $10.50 per share, making a $390 million payout to SRA shareholders, and refinancing SRA’s $1.1 billion in debt.

CSC has missed consensus revenue expectations in the last four consecutive quarters. Still, the stock has traded within a range of $63-$70 in the last 12 months. While the company has exceeded expectations on the bottom line, due largely to cost cuts, valuation multiples appear to be limited on the downside, as the company trades at a 50% discount to peers on an EV/EBITDA basis (CSC shares trade at 4.7x EV/EBITDA relative to a range of 7x-10x for the commercial and government sectors). CSC has a five-year forward P/E average of 13x (range of 8x-18x) and a five-year forward EV/EBITDA average of 5x (range of 3x-6x).

CSC’s 2QF2016 results (reported yesterday aftermarket) were below expectations. Revenue of $2.71 billion represented an 11.9% year-over-year decline (approximately 7% on a constant currency basis), owing largely to continued weakness in the Commercial business. While management continues to make progress on improving the company’s cost structure and margin profile, consensus estimates have been meaningfully reduced, reflecting incremental caution on the timing of a return to revenue growth. Accordingly, the sum-of-the parts fair value estimate for pre-spin CSC has been reduced to $74 (from $75 previously) to reflect lower revenue, EBITDA, and cash flow assumptions for post-spin CSC (the Commercial business), as well as updated balance sheet information. Post-spin, the fair value estimate for CSC is $32. The post-spin fair value estimate for CSRA has been revised to $31 from $22 per share, primarily on updated valuation multiples in the Public Sector Services comparable group. The fair value estimates represent implied EV/EBITDA multiples of 3.8x for post-spin CSC and 8.3x-8.8x for CSRA (depending on whether acquisition-related synergies are included in the EBITDA calculation). Note that the implied EV/EBITDA multiple for post-spin CSRA represents the upper end of the current peer valuation range of 7x to 10x, which correlates with the improving margin profile of the business following the combination with SRA.

With the pre-spin sum-of-the-parts estimate of $74 suggesting 10% upside to CSC’s current stock price at the time of this writing ($67), the shares appear to be approaching a full valuation. Despite a solid margin profile, post-spin CSC still faces difficult growth prospects in the commercial end markets. Note that CSC shares have appreciated approximately 14% since the end of September. Please refer to The Spin-Off Report on Computer Sciences Corp. dated October 29, 2015 for more details.

On October 20, 2015, Yum! Brands Inc. (NYSE: YUM) announced its intention to spin off its China operations from its global franchise operations. The separation is to be completed via a tax-free distribution to YUM shareholders and is expected to be completed by the end of 2016. Yum! China will be led by Micky Pant, who was named Chief Executive Officer of the company’s China operations in August, while Yum! Brands will be led by Greg Creed, current YUM Chief Executive Officer.

Yum! Brands, based in Louisville, Kentucky, is the largest restaurant company in the world in terms of system-wide restaurants, with over 40,000 restaurants in more than 120 countries and territories. The company operates three primary restaurant brands: KFC, Pizza Hut and Taco Bell. Yum! China, headquartered in Shanghai, is currently the leading restaurant developer in China, with approximately 6,900 restaurants in over 1,000 cities. The business is expected to open about 700 new locations in 2015 and is targeting expansion to over 20,000 restaurants in China. The company will have exclusive rights to the company’s three category-leading brands: KFC, China’s leading quick-service restaurant concept; Pizza Hut, the leading Chinese casual dining brand; and Taco Bell, which is expanding globally but is not yet in China. YUM China is expected to have no significant debt, with substantial financial capacity to invest in its business. The business also has significant sales and profit growth potential in its existing restaurants, which the Company plans to capture over time by growing its core offerings and expanding further into new initiatives such as home delivery.

YUM will become one of the world’s largest restaurant companies, consisting of three brands: KFC, Pizza Hut and Taco Bell, which are also three of the top ten U.S. and global Quick Service Restaurant (QSR) concepts. The Company is expected to generate stable earnings, high profit margins, low capital intensity, and strong cash flow conversion. YUM Brands will become more of a “”pure play”” franchisor over time, and is targeting having at least 95% of its restaurants owned and operated by franchisees by the end of 2017. It currently has a global base of over 41,000 restaurants, with approximately 2,000 new units being opened each year.

The spin-off announcement is the culmination of the company’s ongoing strategic reorganization in an attempt to maximize value. In particular, the volatile China market has underperformed expectations—the result of increasing competition and macro weakness—resulting in a recently lowered 2015 outlook on this segment (comparable forecasts were reduced to zero to -4% from low single digits previously). Longer term, with China’s consuming class expected to double from 300 million in 2012 to more than 600 million people by 2020, the business should return to sustainable growth. In response to weaker China division performance, YUM announced earlier this month the completion its strategic review and the appointment of Keith Meister, the Founder and Managing Partner of Corvex, (the company’s largest activist investor, with a 3.5% ownership stake), to the board of directors. Effective January 2016, the India business will be integrated into the global KFC, Pizza Hut and Taco Bell divisions of Yum! Brands, as the Company moves to an organizational alignment by brand, rather than by geographic location.

Yum! Brands, with its quick service restaurant (QSR) format and near-term (2017) goal of transforming to a 95% franchised system (currently 77%) can be most directly compared to other highly franchised QSR brands including Domino’s Pizza Inc. (NYSE: DPZ), Popeyes Louisiana Kitchen Inc. (NASDAQ: PLKI) and Papa John’s International Inc. (NASDAQ: PZZA). The peer group trades on average at 15.1x 2016 consensus EBITDA. As a basis for an earnings estimate for post-spin YUM, it can be assumed that revenue remains stable in 2015, before returning to modest 2% growth in 2016. Operating margins of approximately 19%, and the inclusion of a royalty fee from Yum! China (~5% of sales assumed) and a slight decrease in depreciation due to refranchising efforts results in EBITDA of $1.9 billion in 2016. Applying the peer multiple results in an enterprise value of $28.5 billion for post-spin YUM.

Yum! China will be a primarily company operated restaurant model, paying an ongoing franchise royalty fee to the YUM parent company. Quick service chains with a lower percentage of franchised restaurants include Jack in the Box Inc. (NASDAQ: JACK), The Wendy’s Co. (NASDAQ: WEN), among others, which trade at 10.4x consensus 2016 EBITDA. It is worth considering that Darden Restaurants Inc. (NYSE: DRI) operates a 100% company owned model, and trades at 9.6x 2016 EBITDA estimates while noting that the company’s restaurants are primarily full service versus Yum!’s quick service model. Assuming China sales decrease 3% in 2015 and 2% in 2016 (incorporating comparable store sales declines partially offset by new unit openings), 13.6% operating margins and the previously mentioned royalty to YUM, the company can be forecast to earn $987 million in EBITDA in 2016. Applying a 10.4x multiple to estimated earnings, Yum! China’s enterprise value can be estimated at $10.3 billion.

Incorporating current net debt of $2.4 billion, and based on approximately 431.2 million shares outstanding, this preliminary sum-of-the-parts valuation implies a pre-spin fair value estimate of $84 per share, or 13% upside from the current share price of $74.41. Further details will be discussed at the Company’s Analyst/Investor Day on December 10, 2015.

On October 19, 2015, after the market close, Exterran Holdings Inc. (NYSE: EXH) announced key dates associated with the spin-off of its international services and global fabrication business into a standalone company named Exterran Corporation. Exterran Corporation has applied to list its common stock on the New York Stock Exchange under the symbol “”EXTN.”” Upon the completion of the spin-off, Exterran Holdings, which will continue to own and operate its contract operations and aftermarket services businesses in the United States, will be renamed Archrock Inc. and will trade on the New York Stock Exchange under the symbol “”AROC.”” Exterran Partners, L.P., a publicly traded master limited partnership controlled and partially owned by Exterran Holdings, will be renamed Archrock Partners, L.P. and will trade on the NASDAQ under the symbol “”APLP.””

Exterran Holdings shareholders will receive one share of EXTN common stock for every two shares of EXH common stock held at the close of business on the record date of October 27, 2015. Subject to the satisfaction of the conditions to closing, the distribution is expected to occur on November 3, 2015. When-issued trading is expected to begin on or shortly before the record date. In the when-issued market, shares of Exterran Holdings common stock will trade under the symbol “”EXH WI””.

Post-spin AROC, which will consist of the North America Contract Operations and North American Aftermarket Services businesses (approximately 60% of total Aftermarket sales), is the largest independent provider of compression services in the U.S. The post-spin parent company will also hold the sole general partner (GP) interest and a limited partner interest in the master limited partnership (MLP) Exterran Partners L.P. (NASDAQ: EXLP), which together represent a 37% ownership position, as well as all of the incentive distribution rights (IDRs). Ownership of the GP and IDRs of APLP with a lower cost of capital (owing to a relatively stable fee-based revenue structure) will allow for greater pass-through of dividend payments from the MLP to Archrock shareholders.

Over time it is expected that Archrock will continue to drop down compression assets into Archrock Partners. Currently 75% of EXH’s compression fleet is owned by the publicly-traded MLP, EXLP, of which EXH owns 100% of the GP and 37% of the LP. As post-spin Archrock drops down its remaining compression assets (25% of total) into APLP, it will assume a midstream C-Corp structure in which the company will be able to dividend its LP and GP distributions—a structure which the market has clearly rewarded in companies such as The Williams Companies (NYSE: WMB), Targa Resources Corp. (NYSE: TRGP), and Teekay Corp. (NYSE:TK).

Exterran Corp., the spin entity, will consist of International Contract Operations, Aftermarket Repair & Service, and Fabrication. It will similarly enjoy stable cash flows that, with limited capital spending, can be deployed toward investments in internal contract operations projects. The separation will allow the company to expand its fabricated compressor customer base to include U.S.-based businesses, which have previously been competitors of Exterran Holdings. Driven by global energy infrastructure build-out, Exterran Corp. is likely to exhibit greater variability in revenue and earnings, as international projects tend to be delayed and Fabrication bookings can vary from quarter to quarter. Going forward, the company will continue to grow the contract operation business internationally, but this may prove more difficult than in the past due to project delays and variability in bookings in the Fabrication segment.

The fair value estimate for AROC has been revised to $17 (from $19 previously), largely a function of the recent decline in EXLP’s share price and slight post-spin net debt position (versus a zero net debt assumption previously). For the core contract and aftermarket operations, applying a comparable EV/EBITDA multiple of 7x to estimated 2016 EBITDA of $67 million generates an implied enterprise value of $469 million for the business. Note that the applied multiple represents a modest premium to EXH’s current EV/EBITDA multiple of 6.0x and 10-year average of 6.6x as well as to oil services comparables, at approximately 6.0x. The latter is appropriate given the company’s reduced sensitivity to commodity price fluctuations. For the GP and IDR distributions, one can apply a 20x multiple, representing the midpoint of the current C-corp GP multiple range, to estimated distributions of $21.5 million, generating an implied enterprise value of $430 million. The LP assets can be valued at $451 million based on 23.6 million shares at the current price of $19. Assuming $183 million in net debt ($707 million at 2Q15 minus $539 million transfer from Spinco plus $15 million financing expense), post-spin AROC can be fairly valued at $17 per share.

The above fair value estimate for AROC correlates with our dividend yield analysis, which generates a fair value range of $18 to $21 per share based on a target yield of 4.5%, versus a peer average of 3.9% for other general partner MLPs. Applying this target yield to the estimated 2016 distribution range of $0.80 to $0.96 (the latter based on the FCF model above) generates a fair value estimate of $18 to $21 per share.

Exterran Corp.’s post-spin fair value estimate is revised to $24 per share, from $32 per share (incorporating the one for two share distribution ratio). The lower estimate is a result of reduced earnings expectations from the company’s operating divisions, particularly a result of lower than previously forecast revenue across contract operations, aftermarket services, and product sales, and an associated reduction in gross margin. The lower earnings forecast of $219 million in EBITDA in 2016 (previously $256 million) was partially offset by a slight increase in valuation multiple (6.5x versus 6.4x) and lower than previously forecasted net debt position ($530 million versus $656 million). The fair value estimate is based on an average value generated from a multiple of EBITDA and an estimated free cash flow yield, both using peer multiples. The prior fair value estimate incorporated a potential price per horsepower for the company’s compression assets, which has been excluded from the revised fair value as it appears less relevant in the current environment than previously thought.

The above analysis generates a pre-spin SOTP estimate of $29 for EXH (versus $35 previously), comprised of $17 and $12 for AROC and EXTN, respectively. Post-spin, AROC and EXTN can be fairly valued at $17 and $24 respectively, based on a one for two distribution ratio. The pre-spin SOTP fair value estimate represents a 27% premium to EXH’s current share price ($22.80 as of this writing), implying the transaction should unlock some incremental value. Please refer to The Spin-Off Report on Exterran Holdings dated July 21, 2015 for more details.

On October 12, 2015, NorthStar Realty Finance Corp. (NYSE: NRF) announced that its Board of Directors has approved the spin-off of its European real estate business into NorthStar Realty Europe Corp. (“NRE”). On October 31, 2015, NRF shareholders will receive one share of NRE common stock for every six shares of NRF common stock held as of October 22, 2015, the record date for the transaction. Immediately following the Distribution, NRF expects to conduct a one-for-two reverse stock split. As a result of the reverse stock split, the number of outstanding shares of NorthStar Realty’s common stock will be reduced from approximately 382.2 million to 191.1 million (based upon the total number of common shares, Long Term Incentive Plans and Restricted Stock Units not subject to performance hurdles, expected to be outstanding on the Distribution Date).

NorthStar Realty Europe Corp. shares will be listed on the NYSE under the symbol “NRE”. NRF’s common stock will continue to be listed on the NYSE under the symbol “NRF.” “When issued” trading for NRE shares is expected to begin on or about October 20, 2015 on the NYSE under the symbol “NRE WI.” Regular-way trading for NRE is expected to begin on November 1, 2015.

For NRF, the spin-off of the European REIT results in a company with over 80% of assets (and over 70% of revenue) in physical real estate, focused on assets in the healthcare, hospitality, and other sub-sectors. Over the past two years, NRF has effectively transformed its investment portfolio from commercial real estate (CRE) debt into owned CRE properties. Accordingly, given the company’s investment portfolio makeup and the sources of its earnings streams, it can be argued that post-spin NRF shares should revalue from a mortgage REIT to an equity REIT—a transformation that represents a significant potential catalyst for the shares.

For NRE, the spin-off of the European business appears to be a way to achieve scale in a product that has a different return and leverage profile from NRF’s U.S. business. In addition, the company should benefit from existing economies of scale, having already built a sizable staff in London and Luxembourg. Economic indicators remain attractive, with quantitative easing in Europe having made financing rates in the company’s respective local currencies very appealing. With valuations of European REITs having expanded considerably (approximately 22x cash flow, with solely-U.K.-focused REITs trading at almost 30x, versus NRF’s current cash flow multiple of 8x, based on TTM CAD of $1.60), the spin-off of a standalone European business should immediately unlock value as it garners a multiple more consistent with peers.

On a pre-spin sum-of-the-parts basis, the fair value estimate for NRF remains has been revised to $14 per share (from $15 previously), comprised of $3.12 for NRE and $11 for NRF, based on an estimated 382.2 million NRF shares, versus our prior estimate of 364.8 million (the updated share count reflects additional shares expected to be issued prior to the record date). Post-spin fair value estimates have been adjusted to reflect the 1:6 distribution ratio and NRF’s 1:2 reverse stock split. The fair value estimate for post-spin NRE has been adjusted to $17 (from $3.12 previously), based on an estimated 63 million post-spin shares outstanding. The fair value estimate for post-spin/reverse split-adjusted NRF has been revised to $23 (from $12 previously).

The pre-spin sum-of-the-parts fair value estimate of $14 represents 11% upside to NRF’s share price at the time of this writing ($12.60). Despite the implied upside, however, it is important to note that the shares have been under significant selling pressure (an approximate 20% decline since mid-August), suggesting that investors may anticipate reductions to post-spin CAD. Given likelihood for significant volatility and uncertainty relating to post-spin dividend policy, coupled with the potential dilutive impact of NRE’s recently-completed stock settleable notes offering, shares are not recommended for purchase at this time. We would await more clarity on CAD and dividend policy in terms of payout on CAD, before getting more constructive on the shares. Note that the fair value estimate for NRE represents a 6% yield, which is a slight discount to comparable European REIT peers. Fair value estimates are based on an analysis of comparable dividend yields, price to CAD and AFFO multiples, capitalization rates, and estimated NAV. Please refer to the NorthStar Realty Corp. Spin-Off Report, dated September 29, 2015 for more details.

On October 1, 2015, Hewlett Packard Company (“HP”) (NASDAQ: HPQ) announced that its Board of Directors has approved the spin-off of its Enterprise business into HP Enterprise Company (“Hewlett Packard Enterprise”). Hewlett Packard Enterprise provides enterprise networking products and services in such areas as data center infrastructure, security, managed services, mobility, and cloud computing. Post-spin, HP will be renamed “HP Inc.” and will own and operate the company’s printing and personal systems businesses.

The distribution will be made to HP shareholders of record as of 5:00 p.m. Eastern time on October 21, 2015, the Record Date of the transaction. On November 1, 2015, HP shareholders will receive one share of Hewlett Packard Enterprise common stock for every share of HP common stock held as of the Record Date. HP’s common stock will continue to be listed on the NYSE under the symbol “HPQ.” Hewlett Packard Enterprise shares will be listed on the NYSE under the symbol “HPE”. “When issued” trading for Hewlett Packard Enterprise shares is expected to begin on or about October 19, 2015 on the NYSE under the symbol “HPE WI.” Regular way trading is expected to begin on November 2, 2015.

Separately, HP announced yesterday aftermarket the pricing of $14.6 billion in senior unsecured notes by HP Enterprise. As previously disclosed, HP Enterprise intends to distribute the net proceeds from this offering to HP.

Ultimately, the goal is for the separate companies to improve resource allocation and flexibility while attracting different investors. HP Inc. will largely be a capital return story; a mature, cash-generating vehicle with stable margins, high return on invested capital (ROIC), and dividends from recurring revenue from ink and toner supplies. HP Enterprise hopes to be more dynamic, acquisitive, and growth-oriented, although the business will require continued investment and product development amidst intense competitive challenges.
The fair value estimate for HPE has been adjusted to $19 (from $18 previously), reflecting a modest upward adjustment to the company’s post-spin cash position to $11.5 billion, based on balance sheet information as of July 31, 2015 (our previous cash estimate of $10 billion was based on the company’s balance sheet as of April 29, 2015).

The fair value estimate for post-spin HPQ remains unchanged at $10. On a pre-spin sum-of-the-parts basis, HPQ can be fairly valued at $29 per share (versus $28 previously). While the pre-spin SOTP fair value estimate suggests approximately 14% potential upside from current levels, we do not recommend the shares at this time, as we do not see meaningful incremental value in the split. Note that HPQ’s share price has declined approximately 16% since the beginning of August. Importantly, we see the potential for execution risk, coupled with a muted IT spending environment to pose downside risk to both companies over the next year. The shares will likely remain under pressure, owing to sizable dis-synergy and separation costs, potential channel disruptions as the company switches IT systems, unpredictable currency fluctuations (approximately 35% EMEA exposure), and mixed industry fundamentals across PCs and storage. Importantly, a key caveat to this sum-of-the-parts analysis is that much of HP’s value and competitive advantage, ironically, comes from the interconnection and leverage of its parts. Specifically, HP Inc. revenue could be at risk from loss of cross-selling and channel leverage, while HP Enterprise could lose several percentage points of margin without the benefits of PC leverage.

Please refer to the Hewlett Packard Company Spin-Off Report, dated August 12, 2015 for more details.