On September 22, 2015, Ashland Inc. (NYSE: ASH) announced its intention to separate the company’s Valvoline business into a separate, stand-alone publicly-traded company. The separation is to be completed via a tax-free distribution to ASH shareholders and is expected to be completed as soon as possible, but not less than a year from the announcement date. William A. Wulfsohn, ASH’s current CEO, will remain in that role at the parent company following the separation, while Sam Mitchell, ASH’s current president of Valvoline, will assume the CEO role at Valvoline.

ASH is a specialty chemicals company that generated $5.6 billion in trailing twelve month revenue, and adjusted EBITDA of $1.1 million over the same time period. The spin-off of Valvoline is the final step in what has been an over ten year transformation from an oil refiner and marketer to a specialty chemicals business. In 2014, the company sold its Water Technologies business and exited a joint venture relating to casting solutions. The company currently operates under three segments: Specialty Ingredients, Performance Materials, and Valvoline. Specialty ingredients sells synthetic and semisynthetic polymers for consumer and industrial applications in pharmaceutical, personal and home care, food and beverage applications as well as to manufactures of paint, coatings and construction materials, among others. Performance Materials produces resin technologies providing for stronger, lighter, and more resistant options to traditional materials used in construction, transportation, infrastructure, and boatbuilding, and styrene butadiene rubber used primarily in the replacement tire market. Additionally, within performance materials the company sells intermediate materials and solvents to the chemical process and plastics manufacturing industries, amongst others.

The Valvoline business primarily sells lubricants for use in the automotive maintenance business and markets through four primary channels: do-it-yourself (DIY), installers, Valvoline instant oil change (retail stores), and international. The separation of the business seems logical in the fact that the end markets differ from those of the specialty chemicals businesses. Valvoline’s business is more retail focused, and includes the retail store instant oil change shops– which is the second largest quick-lube chain– and the Valvoline brand is the third ranked passenger car motor oil brand in the US. Valvoline comparables include niche-focused chemicals companies such as Chemtura Corporation (NYSE: CHMT) as well as automotive retailers including Pep Boys – Many, Moe & Jack (NYSE: PBY), which on a blended basis traded at approximately 10x. Valvoline generated trailing revenue of $2 billion and adjusted EBITDA of $401 million, representing 20% margins. Assuming 2% revenue growth, the post-spin company can be expected to generate $2 billion in sales in F2016. At 21% EBITDA margin, the business can be expected to generate $429 million in EBITDA. Applying a 10x EV/EBITDA multiple generates an implied enterprise value of $4.3 billion.

Following the separation, new Ashland, as the company is currently being referred to, will control the Specialty Ingredients and Performance Materials segments, representing $3.6 billion in sales and $689 million in adjusted EBITDA. Specialty ingredients represent the majority of the new company (65% of sales and 79% of adjusted EBITDA), with margins of 23.1% over the trailing twelve months– double that of the Performance Materials business. Comparables include specialty chemicals suppliers such as Albemarle Corporation (NYSE: ALB) and E.I. du Pont de Nemours and Company (NYSE: DD), among others. Assuming 5% revenue growth, new Ashland revenues can be estimated at $3.8 billion in F2016. Assuming a 20% EBITDA margin, the business can be expected to generate $765 million in F2016 EBITDA. Applying a peer EV/EBITDA multiple of 9x, an implied enterprise value of $6.9 billion can be derived.

Based on the above analysis, we arrive at a pre-spin sum-of-the-parts enterprise value of $11.2 billion for Ashland. Factoring in for $2.6 billion in net debt and based on 67.6 million shares outstanding, we arrive at a pre-spin fair value estimate of $127 per share. Based on the current price (~$107 per share), the fair value estimate implies 19% upside. Note that the above analysis does not account for the company’s unfunded pension obligation, which totaled $1.2 billion at fiscal year-end 2014.

On September 16, 2015, after the market close, Air Products & Chemicals Inc. (NYSE: APD) announced its intention to separate the company’s Material Technologies business into a separate, stand-alone publicly-traded company. The separation is to be completed via a tax-free distribution to APD shareholders and is expected to be completed before September 2016. Guillermo Novo, the current executive vice president of the Materials Technologies business will assume the CEO role at the yet to be named spin company; Seifi Ghasmei, APD’s current CEO will maintain that role, and will also hold the non-executive chairman role at the new company. The potential for this transaction to be announced has been highlighted in The Spin-Off Report Radar Screen since July 2015.

APD is an industrial gases company providing atmospheric, process and specialty gases, and related equipment. End markets include metals, food and beverage, refining and petro chemical, and natural gas liquefaction. Under the company’s current operating structure, results are reported in seven segments: Industrial Gases – Americas, Industrial Gases – EMEA, Industrial Gases – Asia, Industrial Gases Global, Materials Technologies, Energy-from-Waste, and Corporate. The materials technologies business 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 car, cleaning/sanitizing, mining, oilfield, and other markets, The Materials Technologies segment generated almost 20% of consolidated revenue and adjusted EBITDA (including corporate costs) in 2014.

The announcement looks to be another step in the company’s “five-point plan,” a restructuring plan aimed at focusing on the company’s core business, industrial gases, while targeting more effective capital allocation. At an investor day in April 2015, APD fleshed out specific goals, which, among other things, targeted 600 basis points of overall EBITDA margin improvement and more prudent capital allocation. In specific regard to the Materials Technology (MT) business, which was described as “high-quality” but “non-core,” management’s anecdotal margin goal was ~30%. Subsequently, in May 2015, it was reported in the media that APD had lined up buyers for an imminent sale of the Material Technologies business; management described the reports as “totally inaccurate.” In light of the spin announcement, it seems that the MT business’s low tax basis made a spin-off the significantly more compelling option versus a sale.

In 2014, the Materials Technologies segment posted revenue growth of 10% to $2.1 billion, with EBITDA of $480 million (or a 23.3% margin, which was up from 20.9% in 2013). Based on industry trends, management commentary, and current consensus forecasts, which on a consolidated basis stand at $10.6 billion and $3.5 billion, respectively, it could be reasonably projected that the MT segment would generate 2016E revenue and EBITDA of $2.45 billion and $660 million, respectively. It could be reasonably assumed that the MT business, which generates modestly lower margins and is somewhat more cyclical than the core Gases business, trades at a discount to the multiple awarded APD and its industrial gas peers, including Praxair (NYSE: PX) and L’Air Liquide (AI FP). That said, it should be noted that OM Group (NYSE: OMG) recently sold its electronics chemicals business, which generated EBITDA margins of just 16%-17%, to Platform Specialty Products (NYSE: PAH) for $365 million or about 13x EBITDA. Materials peers include a basket of companies such as Eastman Chemical Co. (NYSE: EMN), Cabot Corp. (NYSE: CBT), and Celanese Corp. (NYSE: CE), amongst other intermediary materials peers, which trade on average at 7.5x consensus 2016 EBITDA. Applying this 7.5x multiple to MT segment EBITDA of $660 million implies an enterprise value of about $4.9 billion.

The post-spin entity can be most directly compared to Praxair (NYSE: PX), which has recently traded around 12x estimated 2016 EBITDA, however have pulled back over the past three months (APD currently trades at 10.9x 2016 consensus EBITDA). Applying a 12x multiple to the remaining segment EBITDA of $2.73 billion results in a fair enterprise value estimate of $32.8 billion.

Subtracting corporate & other costs of about $64 million, capitalized at 11.1x, as well as net debt of $6.1 billion, yields a total sum-of-the-parts market capitalization of about $30.9 billion, or $144 per share (based on a diluted share count of approximately 215 million). This fair value estimate represents 3.7% upside to the last night’s closing share price of $138.68, implying the transaction does not appear to unlock meaningful incremental value. It should be noted that valuations appear to be stretched, with the peer group–especially that of the parent company– currently trading at multi-year highs.

On September 11, 2015, after the market close, The Madison Square Garden Co. (NYSE: MSG) announced that the company’s Board of Directors had approved the spin-off of the company’s sports and entertainment division from its regional sports network. The spin-off will be completed via a tax-free distribution of shares on September 30, 2015, to shareholders of record as of September 21, 2015. Shareholders of record will receive one share of new MSG for every three shares of MSG held. Following the separation, the parent entity will change its name to MSG Networks, and the spin entity will operate under The Madison Square Garden Co. corporate moniker. MSG and MSG Networks will continue to be controlled by Charles F. Dolan and members of his family. The spin entity will trade on the NYSE under the symbol “MSG”, while the parent company will also trade on the NYSE under the symbol “MSGN”. When-issued trading is expected to begin on September 17, 2015, with regular way trading set to begin October 1, 2015.

The spin entity will control MSG’s current Sports and Entertainment divisions. Sports’ primary assets are the New York Knicks (NBA) and New York Rangers (NHL) teams but also include the New York Liberty (WNBA) and Westchester Knicks (NBADL), as well as the Hartford Wolf Pack (AHL). MSG Entertainment primarily owns or leases iconic venues such as Madison Square Garden, Radio City Music Hall, The Beacon Theatre, The Chicago Theatre, the Wang Theatre, and the Forum, for the purpose of promoting live events. The parent company, MSG Networks, will control the regional sports networks MSG and MSG+.

Rationale for the separation is likely two fold. First, the nature of the company’s assets, which primarily arise from the value of the sports franchises and owned property, are undervalued in the current corporate structure. Separating the sports and entertainment businesses may allow the Knicks and Rangers franchises to be rerated and valued more in line with recent private market transactions – most notably the highly publicized sale of the Los Angeles Clippers in 2014. Secondly, the structure of the transaction is such that the regional sports networks company will be the legal parent entity, which positions the company to be more easily acquired than if MSG Networks is the legal spin company. Regional sports networks have shown the ability to generate high margin revenue from increasing affiliate fees in recent years, as such may garner a premium valuation in a takeout scenario. The cash flow generation potential of a dominant regional sports network could be an attractive asset to larger media conglomerates who own arrays of broadcast stations.

The fair value estimate for new MSG has been adjusted to $249 per share (previously $82 per share) to account for the one for three share distribution ratio, and is based estimated values for the company’s sports team franchises, entertainment venues, and a peer multiple of forecasted earnings from the core entertainment business. The fair value estimate of $17 for MSG Networks remains intact and is based on peer multiple of earnings and cash flow generation ability. Please refer to the Madison Square Garden Co. Spin-Off Report, dated September 8, 2015 for additional details.

The Blackstone Group (NYSE: BX) will distribute shares of PJT Partners Inc., the combination of its Financial Advisory business and PJT Capital, to shareholders of record as of September 22, 2015, on October 1, 2015, before the market open. Immediately following the distribution, PJT Partners will be an independent, public company trading on the NYSE under the symbol “PJT”. BX common unit holders will receive one share of Class A common stock of PJT for every 40 common BX units held on the Record Date. “When issued” trading is expected to being at least two trading days prior to the Record date of September 22, 2015, with “Regular way” trading expected to begin on October 1, 2015. Blackstone units will continue to be listed on NYSE under the ticker “BX”.

The two-fold rationale for the spin transaction remains focused on improving the growth and valuation profile of the Financial Advisory business, which is often overlooked being embedded within Blackstone. First, the separation could eliminate perceived conflicts of interest with BX’s core asset management business and improve growth by expanding its addressable market, particularly among BX’s asset management and financial sponsor competitors. Second, independently publically traded advisory firms, such as Moelis (NYSE: MC) and Greenhill (NYSE: GHL) garner multiples that are substantially higher than those awarded BX and its alternative asset management peers, such as Apollo Global Management (NYSE: APO) and Fortress Investment Group (NYSE: FIG). Adjusting for the updated distribution ratio as well as the expected post-spin diluted share count detailed in the most recent Form 10, the post-spin fair value of PJT, based on earnings, assets, equity as well as a projected dividend yield, is revised to about $36 per share (previously about $40 per share based on the updated 40:1 distribution ratio and the old BX unit count projection).

While near-term market volatility has impacted BX shares, which are down about 12% over the last month versus an about 7% decline in the S&P 500 Index, the post-spin parent remains well-positioned to further grow its AUM base and continue posting above-market investment returns over the long-term. On the former, BX fundraising efforts should continue to benefit from what increasingly appears to be a secular (as opposed to cyclical) trend in capital allocation toward higher-yielding alternative investments, which is an industry with high barriers to entry where BX is a dominant player. On the latter, the diversity and scale of BX business model, which allows the company to identify market opportunities, both public and private, across a wide range of asset classes, industries and geographies uniquely positions the company to take advantage of current market volatility and other potential dislocations to drive industry-leading/above-market investment returns. Recently, BX has highlighted energy as well as distressed European credit and real estate as potential areas of investment for the $82 billion of dry-powder it has at the end of 2Q 2015. Accounting for an updated unit count projection of about 1.207 billion (previously 1.190 million), the post-spin fair value of BX is revised to $44 (from $45), based on earnings, equity, cash flow and asset under management (AUM).

On a pre-spin sum of the parts basis, accounting for Blackstone unit holder’s revised 44% stake in PJT (previously assumed to be ~65%), BX’s can be valued at roughly $45 per share (previously $46 per share), which implies more than 30% upside from the current quote of about $33.50 per share and should be considered an attractive investment opportunity. An alternative way to think about the transaction/potential investment could be that given the relative size of the spin entity compared to the parent it is logical to presume that the valuation of PJT, whatever it may be, is currently not reflected in the share price of BX and has little impact whatsoever on the stock. As such, if the price of BX remained constant, which is not likely to be the case, it could be asserted that shareholders are receiving, at least, a value added dividend of a company with some real worth (as well as upside optionality from potential future growth). Please refer to the Blackstone Group Spin-Off Report, dated August 14, 2015 for additional details.

· Last night, Con-way (NYSE: CNW) announced a definitive agreement to be acquired by XPO Logistics (NYSE: XPO) for about $3.0 billion or $47.60 per share, which represents a 34% premium to last night’s closing price (and an about 23% premium to CNW’s average trading price over the last 90 days).

· The purchase price represents about 5.7x 2015E EBITDA consensus of $528 million (and 5.4x our initial 2015E EBITDA forecast of $560.5). Post-synergies, XPO looks to be paying 4.3x EBITDA.

· Per the agreement, which was approved unanimously by both Boards, XPO will launch a tender offer for all of CNW’s outstanding shares; assuming a successful tender, the transaction is expected to close in October 2015.

· Notably, XPO was highlighted in our initial Hidden Opportunities report as an obvious potential acquirer for CNW’s asset-light division, Menlo Logistics. To that end, while XPO’s most recent deal for Norbert Dentressangle (in June 2015) brought on some asset ownership in Europe we are somewhat surprised by the proposed deal for all of CNW as it ushers XPO further away from its asset-light/logistics core into the capital intensive/asset-based arena of truckload (TL) and less-than-truckload (LTL) trucking.

· As well, while we think the purchase price somewhat underestimates CNW’s break-up value on a sum of the parts basis it seems likely, all things considered, that XPO’s tender is successful despite the apparent lack of a competitive bidding process. To that end, the agreement includes termination fees, we see no obvious strategic buyer to make a competing bid (or any significant regulatory hurdles) and we discern a CNW shareholder base that is frustrated with years of underperformance at the trucking conglomerate.

· For context, CNW shares have returned ~11% since our initial Hidden Opportunities report on November 3, 2014 (compared with an almost 4% decline in the S&P 500).

On September 8, 2015, Capital Southwest Corporation (NASDAQ: CSWC) announced that its Board of Directors has approved the spin-off of its industrial products, coatings, sealants and adhesives and specialty chemicals businesses into CSW Industrials, Inc. (“CSWI”). CSWC is a business development company (BDC) with 25 current holdings, including a controlling interest in seven businesses (industrials and specialty chemicals), which are to be spun-off into a standalone company, CSWI.

The distribution will be made to Capital Southwest shareholders of record as of 5:00 p.m. Eastern time on September 18, 2015, the Record Date of the transaction. On September 30, 2015, after the market close, CSWC shareholders will receive one share of CSWI common stock for every share of Capital Southwest common stock held as of the Record Date. Capital Southwest’s common stock will continue to be listed on NASDAQ under the symbol “CSWC.” CSWI’s common stock will be listed on NASDAQ under the symbol “CSWI. “When issued” trading is expected to begin on or shortly before the record date of September 18, 2015. Regular way trading is expected to begin on October 1, 2015.

Following the spin-off, CSWC will look more like a traditional BDC, with a credit focus, allowing the company to leverage interest-related cash flows and grow its dividend in line with the industry. For CSWI, the spin-off should unlock incremental value as the shares become valued in line with industrial and specialty chemical peers. Accordingly, the separation should allow the BDC to be re-rated more closely to other BDCs at approximately NAV, while CSWI should receive a multiple more in line with industry peers.

The fair value estimates for CSWC and CSWI remain unchanged. On a pre-spin sum-of-the-parts basis, CSWC can be fairly valued at $52 per share. Post spin, CSWC and CSWI can be fairly valued at $20 and $32, respectively. The $52 fair value estimate for pre-spin CSWC suggests approximately 13% potential upside from current levels. The $32 fair value estimate for post-spin CSWI suggests 22% upside to the current stub valuation, assuming CSWC continues to be valued at NAV. Please refer to the Capital Southwest Corp. Spin-Off Repot, dated September 8, 2015 for more details.

On August 6, 2015, Emergent BioSolutions Inc. (NYSE: EBS) announced its intention to separate the company’s Biosciences business into a separate, stand-alone publicly-traded company. The separation is to be completed via a tax-free distribution to EBS shareholders and is expected to be completed by mid 2016, subject to favorable opinion by tax counsel, private letter ruling from the Internal Revenue Service, execution of inter-company agreements by Emergent and the new Biosciences company, the effectiveness of the Form 10 registration statement, and final approval of the transaction by Emergent’s board of directors. Emergent expects to provide the Biosciences company with a fixed cash contribution of $50 million to $70 million. Additional sources of cash to support R&D investment will include commercial product sales and partnership funding. Obligations under the company’s 2.875% Convertible Senior Notes due 2021 will remain with the parent company following completion of the transaction.

EBS is a global specialty biopharmaceutical company whose core business is focused on providing specialty products for civilian and military populations that address intentional and naturally emerging public health threats. The company has two operating divisions: biodefense and biosciences. The biodefense division is directed to government-sponsored development and procurement of countermeasures against potential agents of bioterror or biowarfare and targets the infectious disease anthrax. The main product in biodefense is BioThrax, the only vaccine approved by the FDA for the prevention of anthrax. Operations in this division include biologics manufacturing, regulatory and quality affairs, marketing and sales in support of BioThrax, and a product development infrastructure in support of investigational product candidates. BioThrax product revenues were, $450 million in 2014, $313 million in 2013 and $282 million in 2012, with BioThrax representing 55%, 79%, and 77% of sales in those years respectively.

The SpinCo, which will be named at a later date, is a biopharmaceutical company focused on novel oncology and hematology therapeutics and is comprised primarily of products acquired in the company’s 2010 acquisition of Trubion Pharmaceuticals Inc. The SpinCo will consist of certain assets currently in Emergent’s Biosciences division, including the ADAPTIR (modular protein technology) platform including bi-specific therapeutics based on Redirected T-cell Cytotoxicity (RTCC), a new approach within immuno-oncology; MOR209/ES414, a bi-specific therapeutic for metastatic castration resistant prostate cancer currently in Phase 1 clinical development in partnership with MorphoSys AG; and a commercial product portfolio consisting of IXINITY, WinRho, HepaGam B, and VARIZIG.

Following the spin-off, the parent company, which will maintain the Emergent BioSolutions name and continue to trade on the NYSE as “EBH,” will remain its medical countermeasure focus. Notably, the company’s largest product, BioThrax, had sales of $246 million in 2014, but is expected to grow to almost $500 million by 2018, primarily through a new manufacturing facility, which is expected to triple capacity in 2016. In total, the post-spin parent company generated 2014 sales of $370.5 million and EBITDA of $114.7 million. Publicly-traded comparables include specialty pharmaceuticals companies with a focus on vaccines and antibody therapies and more niche disorders, including Valeant Pharmaceuticals (NYSE: VRX), Endo International Plc (NASDAQ: ENDP), Shire Plc (SHP LN), and Recordati Spa. (REM IM). These companies trade at a wide range of multiples, ranging from 3x to 7x TTM sales and 12x to 16x TTM EBITDA, depending on the target application of drugs and addressable market size. However, it can reasonably be expected that post-spin EBS will garner a discounted multiple owing its more targeted customer base and addressable market, mainly the US Government. Applying discounted multiples of 3.5x and 10x to TTM sales and EBITDA, respectively, generates an average implied enterprise value of $1,222 million for post-spin EBS.

SpinCo generated 2014 sales of $79.6 million and an EBITDA loss of approximately $46.2 million. SpinCo’s publicly-traded comparables include the same group of specialty pharmaceuticals companies. SpinCo can be expected to garner a more in-line comparable multiple. Applying a multiple of 4.5x to TTM sales generates an implied enterprise value of $358 million for this business.

The above analysis generates an implied sum-of-the-parts enterprise value of $1,580 million for pre-spin EBS. Accounting for net debt of $35 million and 38.3 million shares currently outstanding generates a pre-spin fair value estimate of $40 per share for EBS. This fair value estimate represents 20% upside to the current (intraday) share price of $33.55, implying the transaction may unlock incremental value.

On August 4, 2015, RR Donnelley & Sons Co. (NASDAQ: RRD) announced its intention to separate into three standalone, publicly traded companies: a financial communications and data services company (FinancialCo), publishing and retail-centric print services (PRSCo), and a customized multichannel communications management company (CMCo). The separation is to be completed via a tax-free distribution of FinancialCo and PRSCo share to RRD shareholders and is expected to be completed before the end of 2016.

RRD is the largest commercial printing company in North America and counts 88% of the Fortune 100 companies as its customers. The company reports four operating segments: Publishing and Retail Services, Variable Print, Strategic Services, and International. In 2014, RRD generated revenue and EBITDA of $11.6 billion and $1.1 billion, respectively. Over the past 15 years the company has transformed from being primarily a publishing and retail services focused entity (print and ship) to a more diversified provider of communications services including data analytics, content optimization, and multi-channel marketing primarily through acquisitions in the highly fragmented industry. Acquisitions have been particularly focused in the area of variable print services which has grown to almost 1/3 of revenue in 2014 from just 4% in 2000. At the same time the Publishing and Retail segment has become less of a focus as the industry has experienced secular decline in demand. Publishing and retail generated $2.6 billion in revenue in 2014, representing 23% of total sales versus 64% of sales in 2000 (~$3.3 billion). The separation appears to be the next step in the company’s plan to diversify away from the shrinking legacy business and create three distinct entities that have differing growth profiles.

PRSCo represents the company’s legacy business, publishing books, directories, magazines and catalogs. The business has shown organic declines in revenue approximating 3.1% annually since 2012. PRSCo sales total $3.5 billion and exhibits low double digit EBITDA margins. While revenue is expected to decline over the next several years, the company will likely be managed for cash flow with low incremental capital requirements. PRSCo will likely look to continue being a consolidator within the industry. In 2015 the company completed the acquisition of Courier Corp. for $294 million, 1.1x trailing sales and 7.7x trailing EBITDA, well above the current RRD valuation of 0.6x trailing revenue. The company’s most direct competitor in this segment is Quad Graphics Inc. (NASDAQ: QUAD), which currently trades at an EV/ TTM sales multiple of 0.5x. Applying this multiple to TTM sales of $3.5 billion generates an implied enterprise value of $1.75 billion for this business.

FinancialCo focuses on transaction support, compliance, investor communications and analytics for the financial services and investor relations industry. FinancialCo’s revenue totaled $1 billion on a trailing basis, having grown at 1.4% annually on a compounded basis since 2012. Clients include large investment banks for regulatory filings (IPO docs, proxies, etc.) and corporate filers for regulatory filings (10K, 10Q, etc.). FinancialCo is expected to exhibit high teens to low 20% EBITDA margin, and is also expect to have strong cash flow generation. The fragmented nature of this niche business renders a comparison with publicly traded financial services companies somewhat ineffective. Financial information services and publishing comparables such as Dun & Bradstreet Corp. (NYSE DNB) and Markit Ltd. (NASDAQ: MRKT) trade at TTM EV/sales multiples of approximately 3.0x. Applying a 1x multiple to TTM sales, a two-turns discount to the peer average, owing to the company’s reduced distribution and scale relative to peers, generates an implied enterprise value of $1 billion for this business. As a point of reference in support of a 1x multiple, the financial service business is a function of the acquisition of Edgar Online and Bowne & Co. Inc. Edgar was acquired at 1.16x trailing revenue while Bowne’s purchase price equated to 1.4x trailing sales.

The parent company (CMCo) will control product promotion and logistics (direct mail, packaging, logistics, business process outsourcing) and variable print (commercial and digital print, labels, and forms) businesses. The business is characterized by deep customer relations ships and has tailing sales of $7 billion and EBITDA margins in the high single digits. Comparables include customer management solutions and business process outsourcing (BPO) suppliers such as Convergys Corporation (NYSE: CVG), Amdocs Limited (NASDAQ: DOX) and Sykes Enterprises, Inc. (NASDAQ: SYKE), which trade at an EV/TTM sales multiple of 0.8x. Applying this multiple to TTM sales of $7 billion generates an implied enterprise value of $5.6 billion for this business.

The above analysis generates an implied sum-of-the-parts enterprise value of $8.35 billion for pre-spin RRD. Accounting for net debt of $4,058.3 million (which includes $677 million in unfunded pension liabilities) and 208.6 million shares currently outstanding generates a pre-spin fair value estimate of $20.57 per share for RRD. This fair value estimate represents 13% upside to the current share price of $18.23, implying the transaction may unlock incremental value.

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).