On June 11, 2015, after the market close, TriMas Corp. (NASDAQ: TRS) announced record and distribution dates for the spin-off of its Cequent businesses, which will be renamed Horizon Global Corporation. Shareholders of record as of June 25, 2015 will receive two shares of Horizon Global common stock for every five shares of the Company’s common stock owned. When-issued trading is expected to begin on the NYSE on or about June 23, 2015 under the symbol “HZN,” and will continue through the distribution date of June 30, 2015. Regular-way trading is expected to begin on July 1, 2015, the first trading day following the distribution date. Horizon Global Corporation is expected to list its common shares on the New York Stock Exchange (NYSE) under the symbol “HZN.”

Pre-spin fair value estimates for TriMas and Horizon Global Corporation have been adjusted to reflect updated balance sheet information for the quarter ended March 30, 2015 (debt increased slightly at both entities). The pre-spin fair value estimate for TriMas has been revised to $22 (from $23 previously) and that of Horizon Global to $9 (from $10 previously), resulting in a pre-spin sum-of-the-parts fair value estimate of $31 (versus $33 previously). The post-spin fair value estimate for Horizon Global has been revised to $22 per share, based on post-spin fully-diluted share count of approximately 18.1 million shares (reflecting a 2:5 distribution), $5 million in cash and cash equivalents, and $146 million in debt .

While TriMas has experienced strong sales growth (11.4% CAGR over the past three years), well above industrial mid-cap peers, the company’s profitability metrics (EBITDA and operating margin, and EPS and free cash flow growth) have underperformed peers. With return on invested capital (ROIC) at 7.7%, versus an almost 9% weighted average cost of capital (WACC), TriMas must make its previous acquisitions ($383 million in 2014) pay off for shareholders. Revenue and earnings growth are important components that constitute the relative valuation for a diversified industrial company, but to create value for shareholders, TriMas must sustainably earn its cost of capital over the intermediate to long term. Since the company is not currently in a position to return capital to shareholders via share repurchases, the most effective means of expanding ROIC is to exceed its WACC through a significant improvement in profitability. Accordingly, since 2014, TriMas has shifted its strategic focus from revenue growth to margin improvement, including implementing several streamlining initiatives such as manufacturing relocations and cost reduction. The spin-off of Cequent should further improve profitability metrics given the spin entity’s relatively weaker profitability (6% operating margin in 2014). From 2014 to 2018, TriMas is projecting an operating profit growth at a 14% to 16% CAGR, with 2% to 3% of this estimate potentially derived from additional acquisitions. This growth would result in TriMas’ operating profit margin increasing from 9.8% in 2014 to 15% by 2018. In particular, TriMas’ packaging business (which comprises approximately 40% of the post-spin company’s sales mix and generates operating margins of 22% to 24%) appears to be on the cusp of significant new product introductions which should greatly reduce the complexity and cost of its specialty dispensing systems. With collocated factories adjacent to its largest customers, TriMas packaging has differentiated its ability to drive value on cost, product innovation, and delivery.

TRS shares have enjoyed a strong recent run (approximately 7% since May), suggesting investors have come to appreciate the more focused product portfolio of the post-spin parent, coupled with a continued operating margin expansion story. However, with the fair value estimate suggesting 3% potential upside from the current share price ($30 at the time of this writing), the shares appear to be approaching a full valuation. At the post-spin fair value of $22, TriMas would implicitly trade at 10x estimated 2015 EBITDA of $166 million, a premium to the shares’ 5-year historical average of 8.6x, and in line with the peer average of 10x, suggesting the valuation largely reflects the company’s operational transformation. Please refer to the TriMas Spin-Off Report dated May 1, 2015, for more details.

• Today, VC completed the previously announced sale of its 70% stake in Halla Visteon Climate Control Corp. (HVCC) to Hahn & Co. and Hankook Tire Co.

• The $3.6 billion purchase price represented about 10.1x trailing 12-month EBITDA.

• Visteon continues to plan on returning $2.5-$2.75 billion of net proceeds from the sale back to shareholders via a $500 million accelerated share repurchase program to be completed by year-end 2015 as well as a special distribution in 2016, of which less than $250 million is expected to be treated as a qualified dividend.

• Following the completion of its capital return program VC expects to be both well-capitalized and well-positioned for organic and acquisitive growth.

• In the initial Hidden Opportunities report it was highlighted that as standalone entities VC’s businesses could attract interest from both financial and strategic buyers. While this remains true we anecdotally think that the timeline for VC’s capital return and subsequent growth plans along with the impending retirement of CEO, Timothy Leuliette, make the potential sale of the stand-alone Electronics business somewhat less likely, at least in the near-term

• With the HVCC sale completed and the shares trading near our $113 fair value the Hidden Opportunities report will cease coverage of Visteon Corp.

• VC shares returned 12.7% since the potential for a spin or sale transaction was highlighted in our initial Hidden Opportunities report on November 24, 2014 (compared with an a 0.5% gain in the S&P 500).

On June 5, 2015, after the market close, DuPont Co. (NYSE: DD) announced key dates and the distribution ratio for its spin-off of The Chemours Company (“Chemours”), its Performance Chemicals business. Shareholders as of record on the June 23, 2015 will receive one share of Chemours common stock for every five shares of DuPont common stock. “When issued” trading is expected to begin June 19, under the symbol “CC WI.” Regular-way trading is expected to begin on July 1, 2015, the distribution date. Chemours intends to apply for listing on the New York Stock Exchange under the symbol “CC.”

The pre-spin fair value estimates for DuPont and Chemours remain unchanged at $66 and $4 per share, respectively, for a pre-spin sum-of-the-parts fair value estimate of $70. The post-spin fair value estimate for Chemours has been revised to $20 (from $4), based on post-spin fully-diluted share count of 184 million shares, reflecting a 1:5 distribution, $200 million in cash and cash equivalents, and $3,923 million in debt. With the pre-spin fair value estimate approximating DuPont’s current share price, coupled with the high economic sensitivity of both the parent and spin entities and a valuation that ran up on the expectation of meaningful strategic changes, the shares appear fairly valued. Notably, a key potential catalyst for DuPont shares, the outcome of a highly publicized proxy battle led by activist shareholder Nelson Peltz and Trian Fund Management L.P., culminated in a shareholder vote in management’s favor at the company’s May 13th meeting. At the same time, fundamentals in DuPont’s core businesses remain lackluster. The near-term environment in the company’s Agriculture segment (22% of F2014 sales, 27% of F2014 operating income) remains challenged by the global shift in corn acreage to soy acreage, which has in turn resulted in lower grain prices and high inventories. Overall revenue growth is expected to decline in the high single digits on year-over-year basis, stymied by unfavorable pricing and product mix shifts and global currency headwinds. For the post-spin parent company, now that investors have voted in favor of CEO Ellen Kullman and her strategy, the focus will turn to greater transparency, the potential for incremental operating improvement associated with the Chemours spin-off, and execution of previously announced $1.3 billion in cost reductions.

The post-spin fair value for DuPont implies an EV/EBITDA multiple of 11x for FY2015E, which is a slight discount to agriculture leader Monsanto Co. (NYSE: MON) but may prove aggressive in light of DuPont’s recent market share loss. Similarly, the implied multiple also represents a premium to other large capitalization specialty chemical suppliers (KRO and DOW trade at 7.7x and 9.2x, respectively) as well as the shares’ five-year historical average of 9.9x. On this basis, the implied fair value estimate potentially represents the upper end of the shares’ valuation range, particularly given near-term fundamental risks.

For post-spin Chemours, underlying fundamentals in Performance Chemicals remain lackluster, with recently reported volumes and pricing having declined 8% year-over-year and 5% quarter-over-quarter, respectively. Despite having generated approximately $7 billion in FY2014 revenue (approximately 18.6% of DuPont’s consolidated revenue) and 15.7% of total operating income, the business has experienced consistent operating income declines since 2011 (7% in 2014). A combination of increased competition and excess inventory has lowered pricing for titanium dioxide (TiO2) and refrigerants, and has created excess inventory. While TiO2 inventory levels appear to be stabilizing, Chemours does not appear to have experienced a bottom in pricing, as evidenced by recently reported sequential declines. In fluoroproducts, higher demand for automotive air conditioning has been offset by lower refrigerant pricing and competitive pressures.

On June 5, 2015, after the market close, Baxter International Inc. (NYSE: BAX) announced that the company’s Board of Directors has approved the spin-off of Baxalta Inc. Baxalta will control BAX’s current biopharmaceuticals business. Shares of Baxalta will be distributed on July 1, 2015, before the market open, to BAX shareholders of record as of June 17, 2015. BAX shareholders of record will receive one share of Baxalta for every share of BAX owned. Baxalta shares will begin regular way trading on July 1, 2015, on the NYSE under the symbol “BXLT”. Following the distribution, current BAX shareholders will own 80.5% of BXLT, with BAX retaining a 19.5% ownership stake in BXLT. “When-issued” trading for both Baxter and Baxalta is expected to begin on June 15, 2015, under the symbols “BAX WI” and “BXLT WI”, respectively.

Baxalta Inc., will control a variety of pharmaceutical products used in the treatment of bleeding disorders, burns, shock, and of other acute blood-related conditions. The parent company, which will retain the Baxter corporate moniker and focus on medical devices, offers products for drug delivery and inhalation anesthetics, among others.

Ultimately management’s decision to separate the two businesses is most likely an attempt to increase the company’s share price. Shares of Baxter have significantly underperformed the S&P 500 and the S&P 500 Health Care Index over the past five years. Creating two focused businesses with separate managements and capital allocation strategies appears to be a reasonable undertaking. However, increased competition for BAX’s largest hemophilia franchise and a mounting drag from currency (BAX and BXLT each have significant international sales) appear likely to keep earnings growth muted for the foreseeable future.

Management held dual investor conferences focusing on the post-spin entities strategic and financial goals. Baxter is targeting revenue growth of 4% annually through 2020, operating and EBITDA margin expansion of 100 basis points annually, with 2020 operating margin of 14% and adjusted EBITDA margin of 20%. Widening margins are expected to significantly improve operating cash flow to over $2 billion in 2020 versus projected operating cash flow of $1.3 billion in 2016. 2H 2015 results are expected to be below the long term projections, as revenue is impacted by currency headwinds. The company expects to pay a regular dividend representing 35% of adjusted net income.

Baxalta management expects revenue growth of 6% – 8% annually through 2020 with EBITDA margins of 35% – 36%. Sales growth will be focused on increasing oncology related product sales to a portfolio of $500 million in 2020 and immunology sales growth of 8% annually, while legacy sales of hematology focused products are expected increase annually at 3% – 5%. The fair value estimate for Baxalta has been revised to $32 per share (previously $31 per share) as valuation is moved out to 2016, incorporating management’s long-term financial outlook, and current revenue and margin trends.

The fair value estimate for post spin Baxter has been adjusted to $34 per share (previously $40 per share), and includes $7.80 per share in value derived from the 19.5% ownership stake in BXLT that will be retained in the near term. The change in the post spin BAX fair value is a result of moving valuation out to 2016 and incorporating lower expected revenue base due to significant currency headwinds that are now expected to lower 2015 revenue. Assuming 9% revenue decline in 2015, before returning to 2% growth in 2016, the company would generate sales of $9.9 billion in 2016. The 2% sales growth is at the low end of management’s guidance.

On a sum-of-the-parts basis, BAX can be valued at $66 per share, versus the current share price of $65 per share. Given the lack of upside to the fair value, shares are not recommended for purchase prior to the transaction. Please see the Baxter International Inc. Spin-Off Report, dated March 31, 2015, for further details.

On June 8, 2015, after the market close, Masco Corp. (NYSE: MAS) announced that the company’s Board of Directors had approved the spin-off of TopBuild Corp. TopBuild will hold the assets and operations of MAS’s Installation and Other Services businesses. Shares of TopBuild will be distributed after the market close on June 30, 2015, to MAS shareholders of record as of June 19, 2015. MAS shareholders of record will receive one share of TopBuild for every nine shares owned of MAS. TopBuild shares will begin regular way trading on July 1, 2015, on the NYSE under the symbol “BLD”. “When-issued” trading for TopBuild is expected to begin on or about June 17, 2015, under the symbol “BLD WI”.

Masco’s Installation and Other Services segment, which includes Masco Contractor Services, the leading installer of insulation in the U.S., and Service Partners, a distributor of residential insulation products and related accessories in the U.S., reported revenue of $1.5 billion in 2014. The business, which comprises over 190 branch locations and over 70 distribution centers, sells installed building products and distributes building products, primarily for new home construction, to contractors and dealers, and, to a lesser extent, retrofit and commercial construction, throughout the U.S. In addition to insulation, this segment sells installed gutters, after-paint products, garage doors, and fireplaces. This segment primarily competes with regional and local contractors and lumber yards.

The spin-off of TopBuild makes sense for Masco for a several reasons. First, separating the lower-margin business should immediately improve the financial profile of the parent company. The separation makes the parent company look like a better investment as the lower-margin installation and other services business is jettisoned; EBITDA margins at the parent are expected to improve by over 100 basis points. Second, the parent company appears positioned to benefit from both macro tailwinds and the recent restructuring of the struggling cabinets business. New home construction is forecast to remain above 1 million annual starts over the next several years, providing ample opportunities for TopBuild, while contractor confidence in the remodeling market appears bullish for Masco’s prospects. Lastly, TopBuild and post-spin Masco serve differing end markets. TopBuild’s products are primarily sold for use in new residential construction, whereas the remainder of Masco is focused on repair and remodeling of existing homes. Spinning off the services and installation business creates a less cyclical business at the parent entity with more exposure to the repair and remodeling market versus new home construction. For its part, TopBuild has increased its exposure to commercial construction in an attempt to diversify its revenue away from residential construction.

Masco currently trades at a discount to most peers across its diversified portfolio. Separating the installation services business should help alleviate some of the discount, as, optically speaking, the company’s margins improve if the lowest-margin business is jettisoned. The discount may also be related to the struggling performance of the company’s Cabinets business. While the business has struggled to achieve profitability in recent years, management has right-sized costs for profitable operations in the current housing environment. Any improvement in sales could provide additional upside to projected earnings and fair value.

The fair value estimate for TopBuild has been adjusted to $17 per share (from $1.93 per share) to account for the one for nine share distribution ratio, and is based on a peer multiple of 15.7x 2016E EPS of $1.10. The fair value estimate for post-spin Masco is revised to $28 per share (previously $29 per share) to account for a higher than previously forecasted net debt position ($2.1 billion versus $1.7 billion). Upside exists to $30 per share for MAS post-spin from share repurchases and the realization of $35 million in planned cost cuts.

Pre-spin shares of Masco Corp. are valued at $32 per share ($1.93 from TopBuild and $30 from Masco) and are recommended for purchase prior to the spin-off of TopBuild. Shares of MAS closed at $27.06 last night. Following the separation it may be expected that shares of TopBuild would be sold by existing holders as the larger, higher-margin, more stable business is preferred to TopBuild. For further information, please see the Masco Corp. Spin-Off Report publish on May 18, 2015.

On June 8, 2015, after the market close, The Babcock & Wilcox Company (NYSE: BWC) announced that its Board of Directors has formally approved the spin-off of Babcock & Wilcox Enterprises (“New B&W”), the company’s Power Generation business. The parent entity, to be renamed BWX Technologies, Inc. (“BWXT”) after the spin-off, will retain the company’s nuclear and government operations. Shareholders of record as of June 18, 2015 will receive one share of New B&W common stock for every two shares of the Company’s common stock owned. Regular-way trading is expected to begin on July 1, 2015, the distribution date. New B&W will trade on the New York Stock Exchange (NYSE) using the symbol “BW” and will continue to use the Babcock & Wilcox name. BWXT will trade on the NYSE under the ticker symbol “BWXT.”

The pre-spin fair value estimates for BWXT and New B&W remain unchanged at $29 and $11 per share, respectively, for a pre-spin sum-of-the-parts fair value estimate of $40. The post-spin fair value estimate for New B&W has been revised to $23, based on post-spin fully-diluted share count of approximately 54 million shares, reflecting a 1:2 distribution, $249 million in cash and cash equivalents, no outstanding debt, and approximately $282 million in pension liabilities, which represents 50% of BWC’s reported F2014 year-end total expense of $564 million.

With the fair value estimate suggesting 21% potential upside from the current share price ($33 at the time of this writing), we continue to recommend BWC shares for purchase ahead of the spin-off, which should create meaningful incremental value. Historically, BWC shares have been somewhat overlooked by investors owing to the company’s unusual composition, misrepresentation as an E&C (engineering and construction) company (which overlooks the significant value of the Nuclear business), and exposure to challenging government, coal, and nuclear end-markets. That said, there has been considerable speculation that the post-spin parent company, BWXT (likely to garner a higher multiple), could be a potential acquisition target. Notably, BWXT enjoys considerable scarcity value as the sole provider of core reactors and fuel processing for the U.S. Navy as well as one of only a few operators that can enrich uranium and provide services relative to either the commissioning or decommissioning of nuclear weapons. As such, the post-spin company could draw interest from a number of defense companies or larger diversified E&C peers. In particular, the two most likely acquirers appear to be Huntington Ingalls Industries, Inc. (NYSE: HII) and Lockheed Martin Corporation (NYSE: LMT), given their involvement in other U.S. Navy programs.

Following the spin-off, we expect New BWC to continue to build on recent momentum, with revenue and margin expansion increasing throughout the year. There is some fundamental risk to the story, given the uncertain growth profile of the international coal business, coupled with continued deterioration in the domestic coal power market and headwinds associated with lower oil prices and currency. However, revenue guidance of 15% appears conservative in light of strong backlog (which at $2.5 billion stands at the highest levels since early 2012) resulting from an expanding international coal and waste-to-energy (WTE) project pipeline. Moreover, with margins likely to improve progressively throughout the year, EBITDA margin guidance of 9%-10% appears low, considering the potential for incremental restructuring benefits from the company’s Global Competitiveness Initiative (GCI) to streamline operations, revenue leverage from a growing pipeline, and $7.5 million of non-recurring costs in the 2014 base.

The company is scheduled to hold an Investor Day on June 17, 2015, which is expected to provide incremental detail on the outlook for both companies and represents a potential catalyst for the shares.

Please refer to the Babcock & Wilcox Spin-Off Report dated May 20, 2015, for more details.

On June 4, 2015, after the market close, Graham Holdings Co. (NYSE: GHC) announced that the company’s Board of Directors has approved the spin-off of Cable ONE. Cable ONE will become the tenth-largest cable system operator in the U.S based on customers and revenues in 2014. Shares of Cable ONE will be distributed before the market open on July 1, 2015, to shareholders of record as of June 15, 2015. GHC class A and class B shareholders will receive one share of Cable ONE for every share of GHC Class A or Class B held as of the record date. Cable ONE will trade under the symbol “CABO” on the NYSE, with “regular way” trading scheduled to begin on July 1, 2015. When-issued trading is expected to begin on June 11, 2015, under the ticker “CABO WI”. CABO expects to pay an annual dividend of $1.50 per share.

Graham is in the midst of a major transformation. The flagship Washington Post business was sold in 2013 (with the company subsequently changing its name from The Washington Post Co.), and GHC management is in the early stages of deploying capital into new business lines, such as healthcare and manufacturing, among other businesses, including marketing focused on social networks. The decision to separate the Cable ONE business makes sense given that the relatively small company (as measured by subscribers) has struggled to contain costs and has had to make programming decisions that have resulted in loss of customers. The cable industry is going through a period of consolidation in an attempt to gain size and scale to more effectively negotiate content contracts. Through a spin-off, GHC could monetize its cable holdings in a tax-free manner while setting up Cable ONE to potentially be acquired.

Following the separation, Graham Holdings’ television broadcast business will become the company’s primary source of profits while management attempts to right the Education business. Through the ownership of five television stations (all in top-50 designated market areas, or DMAs), GHC is poised to benefit from strong industry trends resulting in increased high-margin revenue. Broadcast stations in general are receiving increasing amounts of retransmission fees and should benefit from the cyclical nature of advertising spending. Four of GHC’s five stations are affiliated with major networks that will see increased advertising spending tied to the next election cycle, while two are NBC affiliates that will experience increased Olympics-related advertising spending.

For-profit education institutions, such as Kaplan, have come under increased government scrutiny that has resulted in sharply reduced enrollment and profits. The once cash-flow-rich business is not likely to return to its former glory anytime in the near future. However, over the last two years GHC’s education business appears to have stabilized its revenue while aggressively reducing its cost structure to allow the Kaplan business to operate profitably in the new environment of reduced enrollment.

The fair value for CABO has been adjusted to $326 per share (previously $343 per share). The adjustment is made to account for lower than previously forecasted revenue and subscriber counts at the cable television segment. Revenue is now forecasted to decline 2% in 2015 (previously increase 4%), partially offset by an increase in the peer valuation multiples to 8.2x from 7.7x based on EV/EBITDA and 5,570.5x EV/Subscribers (previously 5,504.3x). The decreased revenue assumption is a result of revenue and subscriber declines reported in 1Q 2015 subsequent to the initial publication. The increased valuation multiples are due to increase comparable peer valuations. Video subscribers at the end of 1Q 2105 were approximately 421,300 versus 451,200 used previously. Upside to the fair value exists if the company were to be an acquisition target. Recently, Charter Communications Inc. (NYSE: CHTR) announced its intentions to acquire Time Warner Cable Inc. (NYSE: TWC) at a price equivalent to 9.8x EBITDA, which would imply a fair value of $409 per share in a takeout scenario. It should be noted that CABO’s current subscriber losses and lack of scale would likely prevent a full takeout multiple comparable to that of TWC.

The fair value estimate for post spin GHC of has been reduced to $680 per share (previously $710 per share) due to lower expected post-spin net cash balance of $805 million (previously $971 million). Pre-spin shares can be valued at $1,007 per share on a sum-of-the-parts basis, or $1,090 if a premium multiple is awarded to CABO. The current share price of $1,072.00 implies that if post-spin GHC were to trade at the fair value estimate of $680, CABO would implicitly be trading at around the premium takeout multiple of 9.8x suggesting that upside is limited from current levels. Please see the Graham Holdings Co. Spin-Off Report (April 22, 2015) for further details.

On May 19, 2015, Computer Sciences Corp. (NYSE: CSC) announced a plan to separate its global commercial and U.S. Public Sector businesses into two independent, publicly traded companies via a tax-free spin-off. It was not disclosed which entity will be the spin company and which will be designated as the parent entity in the transaction. The two companies are currently being referred to as CSC – Global Commercial and CSC – U.S. Public Services. The Global Commercial business, consisting of CSC’s current Global Business Services (GBS) and Global Infrastructure Services (GIS) segments, will provide information technology services and solutions to commercial and non-U.S. government clients worldwide, and had F2015 (March end) revenues of $8.1 billion.

The U.S. Public Sector company, to be comprised of the existing North American Public Sector (NPS) segment, serving U.S federal, state and defense agencies, will be a top three provider of mission-specific IT, infrastructure, and business services. NPS revenues totaled $4.1 billion in FY 2015. In conjunction with announcing the planned separation, CSC also announced that the company intends to pay a special cash dividend of $10.50 per share at the closing of the spin off. The transaction does not require a shareholder vote and is expected to be completed by October 25, 2015. Management expects both companies to have an investment grade credit profile. The potential for CSC to separate into two companies has been highlighted in The Spin-Off Report Radar Screen since October 2013, when the price approximated $51.75. CSC shares traded around $70.50 in afterhours trading last night.

The IT services industry has increasingly looked to separate commercial and government-focused IT assets over the last few years, as the former trade at almost 12% premiums to the latter, given higher margin and growth profiles. As well, commercially focused businesses are less susceptible to variability in government spending/decision-making. Separations have also aimed to sharpen management focus as well as eliminate any perceived conflicts of interest in bidding on government contracts. In recent years L-3 Communications (NYSE: LLL), Science Applications International Corp. (formerly SAIC Inc.) (NYSE: SAIC), and Exelis Inc. (NYSE: XLS) all completed tax-free spin-offs of IT services assets.

In terms of the relevant near-term history, CSC is emerging from a difficult period in 2011-2012, when it experienced a more than 50% decline in its stock price and market capitalization. In short, CSC was slow to react to the gradual commoditization of the IT infrastructure business over the preceding decade while also seemingly losing internal discipline in its contracting, leading to, among other things, a proliferation of large, complex/custom contracts that were largely on a fixed-cost (as opposed to cost-plus) basis. The result was a low-margin revenue mix and a bloated cost structure, which exacerbated the negative impact of a sluggish recovery in IT consulting and outsourcing work as well as increased pressure on federal budgets.

In March 2012, CSC named Michael Lawrie as the new CEO, and over the next several months the company embarked on a wholesale change in management and laid out a comprehensive five-year turnaround plan aimed at generating $5-plus of EPS in FY2017 (versus an adjusted $0.67 in FY2012). Lawrie is known as turnaround specialist with prior experience at UK-based Misys Pls. as well as IBM. Lawrie will remain the CEO of CSC – Global Commercial and the Executive Chairman of CSC – U.S. Public Services following the separation.

The turnaround plan focused on five key areas: (1) cost control; (2) improving the revenue mix by rationalizing verticals and improving the clarity of its offerings; (3) moving up the value chain to garner faster-growing/higher-margin work; (4) improving internal accountability/discipline by better aligning internal drivers, such as compensation; and (5) reducing capital intensity and improving the capital allocation strategy. Within CSC’s 4Q F2015 earnings release (also announced on May 19, 2015), management disclosed F2016 non-GAAP EPS from continuing operations guidance of $4.75 – $5.05.

Management highlighted on last night’s conference call that the cost cutting phase of the company’s turnaround has largely been successful, and that the markets for the two businesses has shifted in recent years, indicating that customers prefer more specialized solutions providers, as such the timing appeared right to separate the operations, according to management.

Commercially focused IT services equities trade at premium multiples to government-focused concerns (as well as to commercially focused infrastructure companies). GBS peers currently trade on average at 10.5x C2016E EBITDA, while NPS peers currently trade on average at 9.4x C2015E EBITDA (and 14.8x C2015E EPS). GIS peers trade at 5.2x C2016E EBITDA. As such, it appears that CSC separating into two businesses via a spin-off could prove to be a value-creating catalyst, as the businesses would likely be revalued. Moreover, to the extent increased management focus and/or the removal of any perceived conflicts of interest improves CSC’s top- and bottom-line growth, that could help narrow its valuation discount to peers.

Global Business Services peers, such as Accenture (NYSE: CAN), Cognizant Technology Solutions (NASDAQ: CTSH), IBM (NYSE: IBM), Infosys Ltd. (NYSE: INFY), Leidos (NYSE: LDOS), and L-3 Communications (NYSE: LLL), on average currently trade at 10.5x 2015E EBITDA. GBS generated revenue of $4.4 billion in revenue in F2015. Assuming GBS revenue declines 1.0%, operating margins of 14.5%, $125 million in depreciation and amortization, and allocating corporate costs based on segment EBITDA contribution, the segment can be expected to generate EBITDA of $704 million. Applying the peer multiple of 10.5x, GBS can be valued at $6.3 billion.

Global Infrastructure Services’ comparable peer group includes AtoS Global (ATO-FR) and Hewlett Packard (NYSE: HPQ), which currently trade at 5.2x FY2016E EBITDA. Assuming 6% segment revenue decline, 6.5% operating margins, $583 million in depreciation, and corporate cost allocation, the segment can be forecast to generate $704 million in EBITDA. Applying the peer multiple of 5.2x to the GIS segment, a fair enterprise value of $3.7 billion can be derived. On a sum-of-the-parts basis, CSC – Global Commercial enterprise valued would total $9.9 billion. Accounting for net debt of $650 million (0.5x net debt to EBITDA post spin capital structure) and other liabilities of $665 million (unfunded pension and operating leases allocated based on EBITDA contribution) a fair value estimate for post spin CSC- Global Commercial of $60 per share is derived.

Comparable peers for the North American Public Sector business include Booz Allen (NYSE: BAH), CACI (NYSE: CACI), Engility (NYSE: EGL), ICF International (NASDAQ: ICFI), ManTech (NASDAQ: MANT), Maximus Inc. (NYSE: MMS), and SAIC (NYSE: SAIC), which currently trade at 9.4x 2016 estimated EBITDA. It can be assumed that NPS would generate flat revenue versus F2015 ($4.1 billion), and operating margins of 14.0%. Incorporating depreciation and corporate costs, U.S. Public Services would generate $579 million of EBITDA in F2016. While the NPS segment is currently generating margins in excess of peers and historical levels, the current over earning is not expected to continue as the company’s cost savings are passed back to customers with cost-plus contracts. As such, it can be expected that the U.S. Public Services company would trade at a discount to peers. Applying a 7.0x multiple to NPS EBITDA derives an enterprise value of $4.1 billion. Accounting for net debt of $1.2 billion (2.0x net debt to EBITDA based on management commentary for the post spin entities capital structure) and $296 million in other liabilities (unfunded pension and operating leases) results in a fair value estimate of $18 per share for post-spin CSC- U.S. Public Services company. Based on this preliminary analysis, on a pre-spin basis, CSC’s fair value estimate is $78 per share, versus pre-market trading of approximately $70.50.

• Last night, CSC announced a plan to separate its commercial (GBS & GIS) and government (NPS) businesses into two independent, publically traded companies via a tax free spin-off.

• Concurrent with the transaction, which is expected to close by October 25, 2015, CSC will issue a $10.50 special dividend.

• It appears that with the cost-control/margin expansion portion of CSC’s 5-year turnaround plan having successfully (but largely) played out management concluded that a more focused approach was necessary to re-accelerate growth (as well as optimize capital allocation).

• The company also reported 4QF15 results and provided broad F2016 guidance. The company indicated that the post-spin Commercial and Government businesses would likely carry net debt to EBITDA of 0.5x and 2.0x, respectively.

• Based on this framework and peer multiples a revised fair value of $78 per share can be derived, which assigns value of about $60 to Commercial and $18 to Government.

• Given yesterday’s announcement of a tax-free separation transaction the Hidden Opportunities report will cease coverage of Computer Sciences (CSC). That said, in-depth coverage of the impending transaction will be continued by our colleagues at The Spin-Off Report.

• CSC shares returned a total of 19.5% since the potential for a spin-off was highlighted in our initial Hidden Opportunities report published September 3, 2014 (compared to an about 6.5% gain in the S&P 500).

Shares of Talen Energy Corporation (“Talen Energy”) began when-issued trading under the symbol “TLN WI” on May 18, 2015. Shares of Talen Energy will be distributed on June 1, 2015, after the market close to shareholders of record as of March 31, 2015. As background, Talen Energy is the combination of the spin-off of PPL’s competitive power generation businesses, PPL Energy Supply, LLC and the competitive power business owned by affiliates of Riverstone Holdings, LLC (“RJS Power”). PPL shareholders will own 65% of Talen Energy’s outstanding common stock and affiliates of Riverstone will own the remaining 35%.

Based on shares of PPL common stock outstanding as of March 31, 2015, the distribution ratio is expected to be approximately 0.125 shares of Talen Energy common stock for each share of PPL common stock. PPL shareholders will receive approximately 83.5 million shares of Talen Energy Holdings, Inc. (“HoldCo”) common stock, which will immediately convert to Talen Energy stock upon distribution. This 83.5 million shares represents 65% of Talen ownership (the remaining 35%, or approximately 45 million shares, will be owned by affiliates of Riverstone), resulting in a total post-spin share count of approximately 128.5 million for Talen Energy. Regular-way trading will begin on June 2, 2015 under the ticker “TLN.”

Our comparable EPS, revenue, EBITDA and asset-based valuation analysis remains unchanged. We have adjusted the post-spin share count for Talen to reflect the total outstanding share count of 128.5 million shares. As a result, the post-spin fair value estimate for Talen Energy has been revised to $35 per share (previously $54 per share). The fair value estimate of $33 per share for post-spin PPL remains intact, resulting in a pre-spin sum-of-the-parts fair value estimate of $37.

With TLN-W currently trading at $23.50, this analysis suggests approximately 30% potential upside from current levels. Note that Talen will not pay a dividend and will not initially be included in any significant benchmark indices. With a considerable portion of PPL’s current shareholder base likely to be focused on yield or index benchmarking as a primary investment factor, one can anticipate some early selling pressure. That said, with PPL shares currently trading at approximately $35, Talen is implicitly trading at approximately $3 per PPL share based on an estimated $33 in value for PPL ex-Supply. This implies an EV/EBITDA multiple of 2.3x (excluding potential merger-related synergies), well below Independent Power Producer (IPP) peers such as Calpine Corp (NYSE: CPN), Dynegy Inc. (NYSE: DYN) and NRG Energy, Inc. (NYSE: NRG), which trade at 8x-10x EBITDA. This implied valuation likely reflects the company’s lower free cash flow to EBITDA (owing to high levels of interest and CAPEX, and lack of deferred tax assets), and perhaps more importantly, the company’s relatively uncertain growth strategy. Unlike peers, Talen lacks a large retail or renewable platform and will be competing with private equity firms and other IPPs for acquisitions.