On August 3, 2015, Community Health Systems, Inc. (NYSE: CYH) announced its intention to separate 38 hospitals and Quorum Health Resources, LLC, a hospital management and consulting business, via a tax-free spin-off. The transaction is expected to be completed in the first quarter of 2016. The spin company, to be named Quorum Health Corporation, will include a diversified portfolio of 38 hospitals with an aggregate of 3,635 licensed beds across 16 states. The hospitals that will comprise Quorum Health Corporation have strong market positions and are primarily located in cities or counties having populations of 50,000 or less. In 84 percent of these markets, the hospital is the sole provider of acute care hospital services. Quorum Health Corporation will also include Quorum Health Resources, which provides hospital management and consulting services to 150 non-affiliated hospitals across the United States, most of which are located in similar markets as Quorum Health Corporation’s sole provider hospitals. For 2014, Quorum Health Corp. generated revenue of approximately $2.1 billion and adjusted EBITDA of approximately $255 million.

Community Health Systems, originally founded in 1986, provides healthcare services through hospitals they own and operate in selected markets throughout the United States with top market concentration in FL, PA and TX. With the recent acquisition of Health Management Associates (HMA), CYH consists of 199 affiliated hospitals geographically diversified across 29 states with approximately 31,000 licensed beds. Following the acquisition of HMA (announced July 2013, completed January 2014) and Triad Hospitals, Inc. (2007), CYH is now the largest publicly traded hospital company in the nation measured by number of hospital facilities. The company generates revenues through general and specialized hospital healthcare services and other outpatient services to patients including general acute care, emergency room, general and specialty surgery, critical care, internal medicine, obstetrics, diagnostic, psychiatric and rehabilitation. Payer mix consists of 51% managed care, 25% Medicare, 11% Medicare and 13% from other payers (e.g. self-pay).

CYH has a long history of acquiring and turning around underperforming assets. The company typically acquires two to four hospitals each year, generally in rural markets where the facility is the primary provider of acute care services. Before acquiring HMA, CYH had acquired over 115 hospitals since 1997 and had more than doubled EBITDA, in aggregate, at these facilities versus trailing twelve months pre-acquisition. As the company moves into the second year of its HMA acquisition, operating results are expected to improve toward industry EBITDA margins and potentially expand the valuation of the underperforming asset. CYH reported 2014 EBITDA margin of 14.3%, versus 18% for industry leader Universal Health Services (NYSE: UHS). CYH intends to apply best practices, standardized systems and procedures to improve HMA’s operating performance, which deteriorated in 2013 with the latter reporting only 13% of EBITDA margin compared to approximately 16% in 2010, 2011 and 2012. As background, CYH improved Triad’s EBITDA margin from approximately 12% to 16%. Given the company’s $17.3 billion in net debt, the spin-off provides a means of de-leveraging and incremental cash generation.

Comparables for both Quorum Health Corporation and post-spin CYH are fairly limited and consist of large acute care and diversified hospital systems such as Lifepoint Health, Inc. (NASDAQ: LPNT), HCA Holdings, Inc. (NYSE: HCA), Tenet Healthcare Corp. (NYSE: THC), and United Health Services (NYSE: UHS). These companies trade at an average EV/TTM EBITDA multiple of 9.5x and an EV/TTM sales multiple of 1.4x, with UHS trading at premium multiples owing to its superior earnings profile. It should be noted, however, that post-spin Quorum Health Corporation, at 38 hospitals, will operate on a substantially reduced scale relative to its peers. The post-spin company’s reduced operating scale may result in increased volatility and potential vulnerability to State based funding cuts, Medicaid expansion decisions and other market based issues relative to its larger, more diversified peers. Accordingly, one can apply discounted multiples of 7.0x EV/EBITDA and 0.8x EV/revenues, generating an implied enterprise value ranging from $1,680 million to $1,785 million. The applied 7x EV/EBITDA multiple approximates that of Tenet’s June 2013 acquisition of Vanguard Health Systems (7x transaction value to EBITDA), which comprised 28 acute-care hospitals in urban and suburban markets.

Backing out revenues and EBITDA associated with the Quorum Health operations, the post-spin parent company generated $16.5 million in 2014 revenues and $2.5 billion in EBITDA. Applying average peer multiples respectively to 2014 EBITDA and revenues generates an implied enterprise value of between $23,609 million and $23,767 million for this business. Note that this analysis excludes any potential future EBITDA upside associated with continued operational improvements at HMA.

The above analysis generates a total implied enterprise value of $25,420 million for pre-spin CYH. Factoring in for $17,346 million in net debt and 118 million shares outstanding implies a fair value estimate of $68 per share for pre-spin CYH. This sum-of-the-parts-based fair value estimate implies 15% upside to CYH’s current share price of $58 at the time of this writing, suggesting that the transaction may unlock substantial incremental value.

On July 24, 2015, Johnson Controls, Inc. (NYSE: JCI) announced a plan to pursue a tax-free spin-off of its Automotive Experience business. The transaction is expected to close in approximately 12 months. Once the transaction is completed, Bruce McDonald, Johnson Controls vice chairman and executive vice president, will serve as the chairman and CEO of the new company. Beda Bolzenius will serve as president and chief operating officer. As part of the spin-off preparation, Johnson Controls is initiating a comprehensive cost savings program. Additional details of the transaction will be provided as the separation process develops.

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.

The Automotive Experience segment is one of the world’s largest automotive suppliers, providing seating and interior systems through its design and engineering expertise. JCI’s technologies extend into virtually every area of the interior including seating, door systems, floor consoles, instrument panels and cockpits. Customers include most of the world’s major automakers. The business reported $22 billion in revenue in 2014, or 51% of JCI’s consolidated revenue of $42.8 billion. The business reported $1.2 billion in EBITDA, 37% of JCI’s consolidated EBITDA of $3.2 billion. The new automotive company is expected to benefit from strong existing relationships with customers and well established positions in growth markets including China, while generating strong cash flow.
Comparables for JCI’s Automotive Experience business include Magna International Inc. (NYSE: MGA), Faurecia (EO FP), and Lear Corp. (NYSE: LEA). These companies currently trade at 5.2x 2016 consensus EBITDA. Through the first nine months of F2015 Automotive Experience revenue declined 5% versus the prior year period, while margins expanded to 5.2% Assuming revenue stabilizes in F2016, and operating margins of 5.5%, the segment would generate EBITDA of $1.6 billion. Applying the peer multiple generates an implied enterprise value for the Automotive Experience business of $8.4 billion.

Comparables for the post-spin parent business are more diverse. In Building Efficiency (HVAC), comparables include Ingersoll-Rand Company Limited (NYSE: IR) and Lennox International, Inc. (NYSE: LII). The HVAC business can also be compared to Watsco Inc. (NYSE: WSO), AAON Inc. (NASDAQ: AAON), and Tyco International plc (NYSE: TYC). These companies currently trade at 11.1x the 2016 consensus estimate. The Power Solutions business peers primarily consist of smaller private comps, however for the purpose of this exercise could be compared to Delphi Automotive plc (NYSE: DLPH), which trades at 9.0x 2016E EBITDA. Note, however, that JCI’s Power Solutions business could potentially garner a higher multiple given its broad range of solutions (spanning passenger cars, light trucks, and utility vehicles as well as advanced battery technologies for hybrid and electric vehicles) and more diverse end markets (both original equipment suppliers and the general vehicle battery aftermarket). Assuming Building Efficiency revenue growth of 4.7% and 8% in F2015 and F2016, respectively, with margins of 7.5% based on cost controls, the segment would generate $1.4 billion in EBITDA. Power solutions is growing at a slower rate, however enjoys far wider margins than the HVAC business. Based on modest revenue growth and 17% operating margins, the Power Solutions business is forecast to earn $1.5 billion in EBITDA Applying respective peer multiple multiples to Building Efficiency and Power Solutions 2016E EBITDA results in an implied enterprise value for the post-spin JCI (ex-Automotive) of $28.8 billion.

When accounting for approximately $400 million in equity income from joint ventures, valued at 11x (in line with Building efficiency peers), this preliminary sum-of-the-parts analysis generates a total implied enterprise value of $41.5 billion for pre-spin JCI. Factoring in for the company’s net debt of $7.5 billion (including minority interest), and based on 654.1 million shares outstanding, the above analysis generates a pre-spin sum-of-the-parts fair value estimate of $52 per share, representing approximately 12% implied upside from the current share price ($46.30 as of this writing).

On July 22, 2015, after the market close, Exterran Holdings Inc. (NYSE: EXH) announced that it had delayed the record and distribution date of the planned spin-off of its international contract manufacturing, global fabrication, and international aftermarket businesses into a standalone entity to be named Exterran Corp. The previously announced record and distribution dates were July 22, 2015, and July 31, 2015, respectively. No reason was issued for the delay. EXH did comment that it remains “committed to closing the spin-off as soon as practicable.”

As noted in the Exterran Holdings Inc. Spin-Off Report, dated July 21, 2015, separation of Exterran Corp. would allow the parent company to be rerated as investor focus on the parent company (to be renamed Archrock Inc.) turns to the distributable cash flow received from MLP Exterran Partners LP (NASDAQ: EXLP) (to be renamed Archrock Partners LP). While the fair value estimates derived in the initial report remain intact, $35 per-spin EXH, $19 per share for Archrock and $32 for Exterran Corp. (following the one for two share distribution), the lack of available information merits caution pending further clarity on the rationale for the delay and ultimate timing of the spin-off. For further information, please see the Exterran Holdings Inc. Spin-Off Report.

Last night aftermarket, Danaher Corp. (NYSE: DHR) announced the final exchange ratio for the split off of its communications business, which is to be acquired by NetScout Systems, Inc. (NASDAQ: NTCT) in a Reverse Morris Trust (RMT) transaction. Danaher shareholders will own approximately 59.5% of the merged Netscout entity. For more details, please refer to The Spin-Off Report dated March 26, 2015, as well as The Spin-Off Report FLASH dated May 15, 2015.

Danaher shareholders have the option to exchange some, all or none of their shares of Danaher common stock for common units of Potomac Holding LLC, a Danaher subsidiary formed to hold Danaher’s Communications business (which will convert into shares of NetScout common stock) at an exchange ratio of 2.4000 common units of Potomac Holding LLC for each share of Danaher common stock tendered in the exchange offer. This 2.4000 ratio represents the upper limit of the previously announced range (announced on June 29, 2015 and adjusted downward from 2.2522 previously).

Based on the final exchange ratio, Danaher expects to accept for exchange approximately 26.0 million shares of its common stock if the exchange offer is fully subscribed (62.5 million Potomac shares divided by the exchange ratio of 2.4), which implies that tendering shareholders will receive approximately $100.83 of NetScout common stock for each $100 of Danaher common stock accepted for exchange.

Because the upper limit is in effect, the exchange offer has been automatically extended until 12:00 midnight, New York City time, on July 13, 2015. As of 4:00 p.m., New York City time, on July 9, 2015, approximately 14.3 million shares of Danaher common stock have been validly tendered for exchange and not validly withdrawn, including shares tendered pursuant to guaranteed delivery procedures (55% subscribed).
 
In addition to this upcoming split-off of its Communications business, Danaher announced on May 13 its intention to separate its science & technology and diversified industrials businesses into two independent, publicly traded companies via a tax-free spin-off to shareholders. Danaher also announced its intent to acquire Pall Corporation (NYSE: PLL). The PLL acquisition is expected to be completed by year end 2015, while the spin-off transaction is expected to be completed around the end of calendar year 2016.

If fully subscribed, Danaher shares will decrease by 26 million shares to 682 million from 708.4 million currently. If the split-off is not fully subscribed, Danaher’s share count would decrease by an amount equal to the fraction of 62.5 million that is subscribed, and the remainder of the 62.5 million NTCT shares would be distributed ratably among Danaher shareholders as a dividend, similar to a spin-off.

Our fair value estimates remain unchanged, as we had previously been modeling for a fully-subscribed exchange based on the upper limit exchange ratio. Our fair value estimate for Danaher of $104 represents the current composite Danaher (ex-Communications plus the Pall acquisition) and implies 20% potential upside to the shares’ current price of $85.74. Danaher, ex-Communications can be fairly valued at $100 per share. The fair value estimate for NetScout is unchanged at $49 per share and represents 26% upside to the shares’ current price of $36.00.

On July 9, 2015, The Proctor & Gamble Co. (NYSE: PG) announced that the company has signed a definitive agreement to merge 43 of its beauty brands with Coty Inc. (NYSE: COTY). PG expects to complete the transaction via a tax-free spin- or split-off of the beauty brands, which would immediately merge with COTY in a Reverse Morris Trust (RMT) transaction. Management’s preference is for the transaction to be completed via split-off. The brands included in the in the transaction include P&G’s global salon professional hair care and color, retail hair color, cosmetics and fine fragrance businesses, along with select hair styling brands. As a condition of the RMT, JAB Cosmetics B.V., which controls all of COTY Class B shares, has agreed to convert all Class B shares into Class A common stock. The transaction is expected to be completed in 2H 2016.

Assuming a split-off, at the close of the transaction, shareholders electing to exchange shares will control 52% of the newly merged COTY, valued at $13.1 billion assuming the assumption of $1.9 billion of debt by the RMT brands. The actual level of debt will vary between $3.9 billion and $1.9 billion depending on COTY’s share price prior to the closing of the transaction, subject to a collar on COTY shares of $22.06-$27.06.

The transaction is valued at approximately $15 billion, based on current share prices, while P&G expects to recognize a one-time gain of $5-$7 billion depending on the final deal value. PG expects that through share count reduction (including shares retired through the Duracell sale transaction) and cost savings measures, this transaction will be neutral to earnings. In conjunction with the RMT announcement, PG also disclosed that it is targeting $70 billion in value return to shareholders through F2019 (June year end). The return of capital will be accomplished via dividends, share eliminations from the RMT and Duracell transaction, and continued discretionary share repurchases and dividend payments. In November 2014, PG announced it would sell its Duracell battery business to Berkshire Hathaway Inc. (NYSE: BRK-A) in a transaction that involved BRK exchanging PG shares worth approximately $4.7 billion in exchange for the battery business and $1.8 billion in cash.

This RMT transaction is the final step in what has been a significant portfolio restructuring for PG, the company had previously announced the sale of pet food brands, including Iams, the Duracell battery business, and other small beauty and overseas laundry brands. Following portfolio restructuring, the company will focus on 10 categories and 65 brands, which have historically provided higher margin results than products that are being divested. In terms of creating a smaller, more focused, and profitable company, the asset divestitures over the past year and a half make sense. The company has struggled to drive revenue and earnings growth over the past five years. While revenue has increased 9.6% since F2010, sales have increased just 1.3% since F2012 while operating income has remained flat over the same time periods. The focus on fewer brands, while retaining approximately 85% of sales, should allow the company to return to growth. Further, cost reductions and the jettisoning of less profitable brands will improve profitability metrics and may foster earnings expansion.

The RMT transaction appears to be fairly valued if one considers the current trading multiples of beauty product peers, which trade at 2.4x revenue. Management states the brands to merge with COTY have annual revenue of approximately $5.9 billion, and EBITDA of $700 million, implying a value for the 43 brands of $14.1 billion based on a multiple of sales. Peers to the RMT portfolio include Avon Products Inc. (NYSE: AVP), Revlon Inc. (NYSE: REV) and The Estee Lauder Companies Inc. (NYSE: EL).

Following the completion of the transaction, it can be estimated that PG will have revenue and EBITDA of $77.2 billion and $13.7 billion. Peers to the parent entity include Church & Dwight Co. Inc. (NYSE: CHD), Colgate-Palmolive Co. (NYSE: CL) and Reckitt Benckiser Group plc (RB LN), which trade at 16.5x trailing EBITDA. Applying the peer multiple results in an enterprise value of $226 billion. Incorporating the $1.8 billion cash payment made for the Duracell sale, and an expected $1.9 billion in cash received from debt placement with the RMT brands, net debt will total $20.9 billion, implying a market capitalization of $205 billion for post spin PG. Based on the current share prices, and those electing to split-off controlling 52% of new Coty, PG would be able to retire 149 million shares, in addition to 52.5 million shares that will be retired from the Duracell exchange, resulting in post-spin shares outstanding of 2.5 billion, implying a post-spin fair value estimate of $82 per share, in line with the current share price of $81.92.

On July 6th, China Overseas Land & Investment Ltd (Ticker: 688 HK, Market Capitalization: HKD 250.9 billion—USD 32.4 billion) announced that it submitted an application (Form A1) with regard to the separate listing of its property management business. The spin-off will be effected with a pro rata in-specie distribution of shares in China Overseas Property Holdings Limited (COPL) to China Overseas Land & Investment Ltd (COLI) shareholders. The spin-off—the timeline of which has not been disclosed by the parent company—is not subject to shareholder approval.

China Overseas Land & Investment is a subsidiary of China State Construction Engineering Corporation. Its primary activities comprise property development and property investment. Other activities, including property management and planning and construction design, are responsible for approximately 0.3 percent of 2014 operating income. The plan to monetize COLI’s property management operations may be an attempt to increase the value of the enterprise; indeed, COLI, as a real estate developer, is typically valued on a book value/NAV basis, whereas property management is an asset-light business, with little value depicted on the company’s balance sheet. Therefore, a separation could reasonably be expected to lead to a COPL earnings-based valuation that has not been, until now, part of COLI’s NAV. That said, with operating income comprising less than 0.3 percent of COLI’s EBIT, COPL’s spin-off is unlikely to move the needle for COLI’s shareholders.

COLI’s property management division offers community security management, building automation, maintenance and management, garden landscaping and community activities organization, among others. It is currently involved in 199 projects in Mainland China, managing approximately 45.5 million square meters (approximately 490 million square feet) in 29 cities. Including Hong Kong and Macau, COPL manages approximately 50 million square meters, compared to 22.8 million square meters in 2010 and 40 million square meters in 2013. Managed properties go beyond traditional residential and commercial buildings, and include government properties and industrial parks.

COLI does not provide detailed operating income for its “other” segment. It does, however, break down the segment’s revenues. In 2014, property management generated revenues of HKD 2,006 million, compared with HKD 1,768 million for 2013. Total “other” revenues and operating income were HKD 2,558 million and HKD 111 million, respectively. Assuming that COLI’s property management operating income and EBITDA were proportionate to its share of revenues as a percentage of “other” sales, COPL would have 2014 EBIT and EBITDA of HKD 87 million (4.3% margin) and 144 million (7.2% margin), respectively.

Publicly-traded, pure-play property management firms are not common. In China and Hong Kong, property management services are offered by real estate developers. On a global basis, FirstService Corporation (FSV CN) comes to mind. FirstService is a Canadian pure-play residential property management company that was recently spun off from Colliers International Group (CIG CN). FirstService’s EBITDA margin has historically ranged between 6 and 8 percent—compared with China Overseas Property Holdings’ implied margin of 7.2 percent. The Canadian corporation trades at 15x enterprise value-to-EBITDA, and 1.1x enterprise value-to-revenue. Applying the two multiples to COPL’s 2014 sales and estimated EBITDA, one arrives at an enterprise value between HKD 2,155 and HKD 2,207 million. It should be noted that the spin entity could be valued at richer multiples, as it offers investors exposure to Mainland China’s real estate sector without the significant risks and challenges traditional real estate developers face. Furthermore, with only 199 assets/properties under management, COPL has plenty of room to expand.

Given the small size and earnings contribution of China Overseas Property Holdings, China Overseas Land & Investment’s valuation will likely remain unchanged. At a 20 percent premium to book value, the company has market and enterprise values of HKD 250,952 million and HKD 297,743 million, respectively. Therefore, COPL’s estimated enterprise value comprises less than 0.7 percent of COLI’s firmwide valuation, making it unlikely that the parent company’s market capitalization will be affected by the spin-off.

On June 30, 2015, Emerson Electric Co. (NYSE: EMR) announced plans to spin off its Network Power business via tax-free distribution to shareholders. The yet to be named company, currently being referred to as Network Power, will control EMR’s current Network Power segment, which will become a stand-alone provider of thermal management, A/C and D/C power, transfer switches, services and infrastructure management systems for the data center and telecommunications industries. The company also announced that it will explore strategic alternatives for other businesses including motors and drives, power generation, and remaining storage businesses. Lastly the company stated it will review the current corporate services and structure to better align costs with the smaller scale business that will eventually emerge. All transactions are expected to be substantially completed by September 30, 2016.

The Network Power segment has experienced more difficulty in growing revenues and profitability than EMR’s remaining segments in recent years, and has been the subject of a potential divestiture for some time. The business is in need of further restructuring and inventory correction, and suffers from a more length book to bill cycle relative to Emerson’s other segments. Additionally the Network Power segment boasts margins well below other segments. In F2014 Network Power operated with a 9.0% operating margins, while the remaining businesses generated operating margins between 16.1% and 22.0%. The lower margin business could be a drag on the company’s valuation, as prior to the announcement shares were trading near a 52-week low. Separating the lower growth, lower margin Network Power business would allow Emerson to focus on its more profitable Process Management business.

Network Power generated $5.1 billion in revenue and $459 million in operating income in F2014 (September year end). F2014 sales decreased 18% while operating income decreased $95 million versus F2013 due to the sale of the company’s of majority control of its embedded computing & power business to Platinum Equity for $300 in August 2013. EMR retained a 49% non-controlling stake in the business. Underlying sales for Network Power increased 1% as higher volume was offset by lower price and negative foreign exchange rates. Through the 1H F2015 revenue has decreased 1% (excluding divestitures) U.S sales of particular note decreasing 5%, Asia decreasing 3%, while European sales increased 8%. Management commented during its latest earnings conference call that the remainder of 2015 will be challenging from a macro perspective from lower oil prices, strength of the US dollar and a broad slowdown in industrial spending, particularly in North America and China, would pressure sales across EMR’s business lines.

Following the separation of Network Power, EMR will initially continue to operate its remaining segments: Process Management (measurement, control and diagnostics for automated industrial processes with end markets of fuel, chemicals, foods and power), Industrial Automation (integrated manufacturing solutions), Climate Technologies (heating, ventilation, and air conditioning [HVAC], and refrigeration for residential and commercial end markets), and Commercial & Residential Solutions (professional and do-it-yourself tools and storage solutions).

On a pro forma basis the parent company revenue of $19.5 billion and operating income of $3.9 billion (19.9% margin) in F2014. Revenue growth of 5.1% was a result of continued strong growth at Process Management from energy and chemicals end markets (7% growth), and Climate Technologies on demand for air condition and refrigeration products (6%), with slightly lower growth at commercial and residential (3%) and Industrial Automation (2%).

While peers for Emerson’s Network Power segment include network power generation suppliers such as Hitachi (6501 JT), ABB Limited (ABBN SW), and Siemens AG (SIE GR), a direct comparison is somewhat challenged by the substantially higher growth and profitability of these companies, which generate EBITDA margins in the low to mid teens. Accordingly, applying a discounted revenue multiple of 0.6x (versus a peer average of 0.8x) to estimated F2015 revenues of $5.022 million generates an implied enterprise value of $3,013 million for this business (see attachment). Note that this F2015 revenue estimate assumes a more normalized revenue decline for this business of 1%. Based on a 13% EBITDA margin, the Network Power business can be expected to generate $653 million in EBITDA in F2015. It should be noted that the 13% margin assumption is a 50 basis point decline from F2014 pro forma results. The margin assumption could prove aggressive if macro trends worsen. Applying a discounted multiple of 5x to 6x EBITDA, below the peer average of 8x (which reflects the turnaround nature of this business) to estimated F2015 EBITDA generates an implied enterprise value of between $3,264 million and $3,917 million (see attachment).

The post-spin parent company (ex-Power) reported revenues of $19,734 million in F2014. Assuming a 2% revenue decline, one can estimate that the business will generate $19,339 million in F2015 sales. Applying a 16% operating margin assumption, and factoring in $578 million in depreciation, one can arrive at estimated EBITDA of $3,672 million for the post-spin parent company in F2015. Comparables for Emerson (ex-Power) include broad-based processing and automation companies such as Eaton (NYSE: ETN), Schneider Electric (SU FP), and Mitsubishi Electric (6503 JP). These companies currently trade at approximately 11.1x forward EBITDA. Applying this comparable multiple to Emerson (ex-Power) generates an implied enterprise value of $40,762 million (see attachment).

The above exercises generate a pre-spin SOTP implied enterprise value of $43,901 million for EMR. Factoring in for cash and equivalents of $3,256 million and debt of $6,630 million, and based on 668 million shares outstanding, this analysis results in a fair value estimate of $60.57 for EMR. The pre-spin SOTP fair value estimate implies 7% potential upside to EMR’s current share price (see attachment), which suggests that the spin-off may unlock modest incremental value in the near term.

Danaher Corp. (NYSE: DHR) has announced an amendment to its exchange offer related to the split off of its communications business, which is to be acquired by NetScout Systems, Inc. (NASDAQ: NTCT) in a Reverse Morris Trust (RMT) transaction. Danaher shareholders will own approximately 59.5% of the merged Netscout entity. For more details, please refer to The Spin-Off Report dated March 26, 2015, as well as The Spin-Off Report FLASH dated May 13, 2015.

Danaher shareholders have the option to exchange some, all or none of their shares of Danaher common stock for common units of Potomac Holding LLC, a Danaher subsidiary formed to hold Danaher’s Communications business (which will convert into shares of NetScout common stock) at an exchange ratio subject to an upper limit of 2.400 Potomac Holding LLC common units for each share of Danaher common stock tendered in the exchange offer (adjusted from 2.2522 previously). Danaher expects to issue approximately 62.5 million common units of Potomac Holding LLC, resulting in Danaher shareholders owning approximately 59.5% of NetScout following the merger. The exchange expires at 12:00 midnight, New York City time, on July 9, 2015, from July 8, 2015 previously.

In addition to this upcoming split-off of its Communications business, Danaher announced on May 13 its intention to separate its science & technology and diversified industrials businesses into two independent, publicly traded companies via a tax-free spin-off to shareholders. Danaher also announced its intent to acquire Pall Corporation (NYSE: PLL). The PLL acquisition is expected to be completed by year end 2015, while the spin-off transaction is expected to be completed around the end of calendar year 2016.

The split off implies participating DHR shareholders will receive 2.40 shares (the upper limit) of NTCT in exchange for each DHR share. If fully subscribed, Danaher shares will decrease by 26 million shares to 682 million from 708.4 million currently (62.5 million Potomac shares divided by the exchange ratio of 2.4). If the split-off is not fully subscribed, Danaher’s share count would decrease by an amount equal to the fraction of 62.5 million that is subscribed, and the remainder of the 62.5 million NTCT shares would be distributed ratably among Danaher shareholders as a dividend, similar to a spin-off.

We have updated our fair value estimates for Danaher and NetScout to account for a fully-subscribed exchange. Notably, our revised fair value estimate for Danaher represents the current composite Danaher (ex-Communications plus the Pall acquisition). Our fair value estimate has been revised to $104 (from $103) and implies 19% potential upside to the shares’ current price of $84.96. Danaher, ex-Communications can be fairly valued at $100 per share (versus $99 previously).The fair value estimate for NetScout is unchanged at $49 per share. Our revised estimate reflects 103 million Netscout shares outstanding (40.76 million current NTCT shares plus 62.5 million), as well as the company’s most recently reported balance sheet for the quarter ended March 31, 2015. The revised valuation for NTCT represents 25% upside to the shares’ current price of $36.52.

On June 23, 2015, Darden Restaurants, Inc. (NYSE: DRI) announced that its Board of Directors has formally approved a strategic plan to separate a portion of the company’s real estate assets. The separation would be achieved by a combination of selected sale leaseback transactions and the transfer of a portion of its remaining real estate assets to a new real estate investment trust (“REIT”) that will be separated by a spin-off or split-off.

Darden will transfer approximately 430 of its owned restaurant properties to the REIT, with substantially all of the REIT’s initial assets being leased back to Darden. The leased properties are expected to have attractive rent coverage ratios, fixed rent escalations and multiple renewal options at Darden’s discretion. In addition, the company has been marketing selected properties for individual sale leasebacks. To date, the company has listed 75 properties, and over 30 of these properties have been sold or are under contract. The Company expects an average cash capitalization rate of approximately 5.5% for all 75 properties, and expects to close most of these transactions by the end of August. In addition, Darden is seeking to sell and lease back its Orlando Restaurant Support Center property and buildings under a long-term contract with multiple renewal options at the Company’s discretion. After receiving proceeds from the completion of the strategic real estate plan, the Company expects to retire approximately $1 billion of its debt over time. The transaction is subject to several conditions, including satisfaction of various tax conditions, negotiation and execution of leases between the REIT and Darden, debt financing transactions, and completion of SEC filings related to the REIT transaction.

With Darden in the midst of a significant operational turnaround, the potential unlocking of value from the monetization of the company’s real estate portfolio has been contemplated for some time. Activist investor Starboard Value, which owns 9.25% of DRI shares outstanding, called for Darden to create a separate company for its Red Lobster and Olive Garden chains. Instead, Darden sold Red Lobster in May 2014 for $2.1 billion to Golden Gate Capital. In October 2014, following intense public criticism of Darden’s leadership and overall strategy, Starboard won shareholder support in a highly contested proxy contest to replace the company’s entire 12-person board of directors and appoint Starboard CEO Jeff Smith as Chairman.

More recently, Darden has made some progress on its restructuring, having largely focused on improving operations at its Olive Garden restaurants, reducing its overall expense structure, and increasing asset efficiency. The spin-off of a portion of Darden’s real estate assets to a REIT entity will allow the latter to distribute the majority of its annual taxable income as dividends while pursuing additional real estate transactions to diversify its income base. These attributes, coupled with the fact that REITs do not pay corporate taxes, have historically resulted in premium valuations for REITs relative to restaurant stocks – approximately 15x-16x EV/EBITDA versus 10x-11x for casual dining restaurant peers.

As a starting point for valuing Darden’s real estate portfolio, one can evaluate the potential rental income generated by the REIT properties. Darden owns approximately 425 Olive Garden locations, 138 Longhorn Steakhouse locations, and 21 Specialty locations, totaling approximately 584 locations and 4.56 million square feet. Assuming that the majority of the REIT properties are representative of the Olive Garden restaurants in terms of location and square footage characteristics, one can assume an average square footage of 8,400 square feet, comprising a total of 3.6 million square feet for the 430 units. Based on an estimated $30 to $35 in rental income per square foot, one can arrive at an annual rental income of $108.1 million to $126.1 million. Assuming a baseline of $10 million in expenses, one can arrive at estimated F2016 EBITDA of between $98.1 million and $116.1 million for the REIT. Applying a comparable multiple of 15.7x EV to estimated 2016 EBITDA, which represents the average multiple of triple net lease and retail REITS including American Realty Capital (NASDAQ: ARCP), Chambers Street Properties (NYSE: CSG), National Retail Properties (NYSE: NNN), and Realty Income Corp. (NYSE: O), one can arrive at an implied enterprise value of between $1,539.6 million and $1,822.4 million for the REIT entity (see attachment).

As a supplement to the above exercise, assuming a capitalization rate of between 5.5% and 6.0% on the previously generated rental income assumptions, one arrive an enterprise value range of between $1,801.1 million and $2,292.2 million for the post-spin REIT entity (see attachment).

Based on current Bloomberg consensus EBITAR of $883.4 million, less estimated rent expense of between $108 million and $126 million, estimated 2016 EBITDA for post-spin Darden (parent restaurant company) can be estimated at between $757.3 million and $775.3 million. Darden’s peers in the casual dining restaurant segment include The Cheesecake Factory Inc. (NASDAQ: CAKE), DineEquity, Inc. (NYSE: DIN), Cracker Barrel Old Country Store, Inc. (NASDAQ: CBRL), and Bob Evans Farms (NASDAQ: BOBE). These companies currently trade between 10x and 11x estimated 2016 EV to EBITDA, with DRI trading at the higher end of the range. Assuming DRI’s 11.1x multiple remains intact following the separation, an implied enterprise value of $8,406 million to $8,606 million for post-spin Darden is derived (see attachment).

The above exercises generate an implied enterprise value range of between $8,406 million and $8,606 million for post-spin Darden and between $1,681 million and $2,040 million for the REIT entity. Assuming $436.2 million in cash and equivalents, $1,526.8 million in debt, and 125.8 million shares outstanding generates a SOTP fair value estimate of $71.52 to $75.96 for DRI (see attachment). This fair value estimate represents 7% potential upside from last night’s closing price of approximately $69. Note that DRI shares have appreciated approximately 43% since October 2014, suggesting that the market may be pricing in most of the benefits telegraphed by the new board.

On June 17, 2015, Capital Southwest Corp. (NASDAQ: CSWC) filed an initial Form-10 with the SEC, confirming details of the spin-off of its controlled industrial growth companies. CSWC originally announced the intention to separate its diversified industrial holdings from the equity investment business in December, 2014, at which time details surrounding the ability to receive exemptive relief from the SEC cast some uncertainty around management’s ability to execute the transaction. The company has since determined that it will not require exemptive relief to complete the separation through a spin-off. The new entity, to be named CSW Industrials, is expected to trade on the NASDAQ under the symbol “CSWI”. Shares of CSWI will be distributed to CSWC shareholders via a tax-free distribution, which is expected to be completed by the end of 3Q 2015. The parent company, CSWC will remain a business development company (BDC), with a focus on investing in debt securities in middle market companies, with investments ranging from $5 – $20 million.

CSWI will report under three segments: Industrial Products; Coatings, Sealants and Adhesives; and Specialty Chemicals. The Industrial Products segment produces specialty mechanical products, fire and smoke protections systems, building products, and application equipment for use with other CSWI products. End markets for the industrial segment include plumbing, HVAC, refrigeration, and electrical. Coatings, Sealants, and Adhesives manufactures coatings and penetrants, pipe thread sealants, fire stopping sealants and adhesives used in rail car and locomotive, oil and gas, construction, plumbing and HVAC applications. Lastly, the specialty chemical segment produces lubricants, drilling compounds, and degreasers and cleaners that are sold into the oil and gas, drilling, mining, rail car and steel end markets, among others.

The separation makes sense in the fact that CSCW is largely viewed as a BDC, and as such has historically traded at a multiple consistent with other investment focused companies. This structure discounts the growth prospects of the subsidiary operating companies which CSWC has grown over time. BDCs typically trade at a multiple of book value or net asset value (NAV) while industrial growth companies may trade on other factors that would allow for value to be unlocked through this transaction. Prior to the December announcement, CSWC shares largely traded below 5x trailing EBITDA, and traded at a discount to net asset value. On December 31, 2014, shares traded at a 21% discount to NAV of $47.17 per share. As of March 31, 2015, CSWC reported a NAV per share of $49.30, in line with the current share price of $49.25. Assets being spun off will comprise roughly 60% of the company’s NAV.

CSW Industries generated revenue of $261.8 million and $44 million in operating income in F2015 (March year end). Revenue increased 13% year-over-year, primarily the result of growth in the industrial products HVAC end markets. As a diversified industrial company, CSWI can be compared to diversified and specialty chemicals suppliers and broad-based industrial manufacturers such as E.I. du Pont de Nemours and Co (NYSE: DD), Worthington Industries Inc. (NYSE: WOR), Team Inc. (NYSE: TISI) and TriMas Corp. (NASDAQ: TRS) among others. The peer group trades at approximately 1.4x forward sales and 7.0x forward EV/EBITDA. Assuming 10% revenue growth and stable operating margins, it can be estimated that CSWI would earn $58 million of EBITDA in F2016. Applying peer group multiples results in an average enterprise value of $406 million. Assuming cash of $150 million and debt of $27 million (based on subsidiaries RectorSeal, JetLube and Whitmore’s balance sheets as of March 31, 2015) and a one for one share distribution, a preliminary fair value estimate of $35 per share is derived. It should be noted that the capital structure and pro forma adjustments for CSWI have not been finalized; as such this fair value estimate is subject to revision.

Following the separation, the parent company will have a NAV of approximately $19.52, which appears reasonable as an initial estimated fair value.