On March 13, 2015, the boards of directors of The E.W. Scripps Company (NYSE: SSP) and Journal Communications (NYSE: JRN) set the record dates related to the spin-offs of their respective newspaper businesses, as well as the payment of a special cash dividend for Scripps shareholders. Both Scripps and Journal shareholders of record as of the close of business on March 25, 2015, will receive shares in Journal Media Group (“JMG”), the independent newspaper company created by the spin-offs, payable upon the closing of the transactions. Separately, the Scripps board also declared a $60 million special cash dividend (which equates to $1.06 per share based on current shares outstanding), for Scripps shareholders of record as of the close of business on March 25, 2015, payable upon the closing of the transactions. The closing date of the transactions is currently scheduled for April 1, 2015. On the closing date, SSP and JRN will simultaneously spin off and merge their newspaper operations to form Journal Media Group and immediately merge their broadcast operations.

When-issued trading for Journal Media Group stock will begin on March 23, 2015. On that date, Scripps class A common shares will begin trading on an “ex-distribution” and “when issued” basis. Journal Communications shareholders who sell their shares before the closing date will be selling their right to receive the shares of Journal Media Group. Scripps shareholders who sell their shares before the closing date will be selling their right to receive the special cash dividend and the shares of Journal Media Group. As a result, from March 23, 2015, through the day prior to the closing, Scripps shares and Journal Communications shares will trade with “due bills.”
Journal Communications’ class A and class B shareholders will receive 0.5176 Scripps class A common shares and 0.1950 shares in Journal Media Group for each Journal Communications share. Scripps shareholders will receive 0.2500 shares in Journal Media Group for each Scripps class A common share and each Scripps common voting share. JRN shareholders will own approximately 31% of the merged SSP entity, with the Scripps family retaining control. SSP shareholders will own 59% of Journal Media Group, with JRN shareholders owning the remaining 41%.
For post-spin SSP, fundamentals in broadcast remain very healthy, with the company benefitting from an uptick in political advertising heading into the 2016 Presidential election season and a sizable retransmission revenue opportunity this year. Since the publication of the Scripps Spin-Off Report dated February 25, 2015, both Scripps and Journal Communications, Inc. (NYSE: JRN) have reported strong 4Q 2014 earnings results, with evidence of an early uptick in political advertising spending already in early 2015 as well as a general improvement in overall advertising spending.

Given evidence of improving broadcast fundamentals, we are revising our pre-spin SOTP fair value estimate for SSP to $29 per share, from $26 previously. This fair value estimate implies 11% upside from current levels. The pre-spin fair estimate is comprised of $24 from Scripps (from $21); and $5 from JMG. Following the transactions, Scripps and Journal Media Group can be fairly valued at $21 (from $18 previously), and $19, respectively.

For SSP, our revised target – which is based on applied comparable multiples of revenue, EBITDA, cash flow, assets, revenue, and EPS—primarily reflects the recent overall multiple expansion in the broadcast sector. Notably, our pre-spin SOTP fair value estimate of $29 for SSP implies a multiple of 10x 2015E EBITDA, a slight premium to broadcast comparable Gannett Co., Inc. (NYSE: GCI) at 8.3x, but in line with SSP’s 10-year historical average.

We remain constructive on pre-spin SSP shares and think there is incremental value associated with a more highly valued, purely broadcast stock currency and more flexibility around M&A, which is currently hampered by SSP’s newspaper exposure. We expect SSP to garner a higher multiple relative to broadcast peers due to the company’s healthy balance sheet and expected faster growth profile. With a combined company’s market share at 18% of U.S. households [well below peers such as Sinclair Broadcasting Group, Inc. (NASDAQ: SBGI) and Gannett at 39% and 31%, respectively], Scripps is one of the few broadcast companies with the cash flow and penetration potential to expand. In our view, the valuation should further expand as investors come to realize the accretive nature of this transaction, the above-average growth prospects of the company, and the financial flexibility for both internal product development and acquisition-related growth. Moreover, there are several fundamental catalysts for the post-spin parent company that could provide incremental upside beyond this fair value estimate. Scripps, as one of the last remaining broadcasters to renew retransmission rates from below-market to current rates, appears uniquely positioned to experience above-industry growth through 2016.

Given the difficult competitive environment, coupled with the significant strategic changes required to right-size the business for long-term sustainability. We expect considerable downward pressure in the post-spin shares, and would recommend liquidating post-spin positions until evidence of stability and operational improvement in the business. As the company validates the financial model, investors may come to appreciate the potential for free cash flow and the likelihood of further industry consolidation, which may support an expansion in trading multiples.

For more details, please refer to the Scripps Spin-Off Report dated February 25, 2015.

Please find an attached update to IRG’s Hidden Opportunity on LSB Industries Inc. (NASDAQ: LXU).

• LXU announced its Strategic Committee has concluded that management’s near-term focus should remain on executing its current operating plan. That said, the Board would continue to evaluate strategic alternatives, including a sale/spin of the Climate business as well the adoption of an MLP structure for its Chemical assets, over the next 12-18 months.

• Concurrently, LXU set 2017 financial goals. At Chemical, LXU targets 12% compound annual revenue growth (2014-2017) with operating and EBITDA margins of 20% and 30%, respectively. At Climate, the company seeks a 10% top-line CAGR with operating and EBITDA margins of 14% and 15%, respectively.

• The company also extended the deadline for the Starboard Value Fund, a 7.6% owner of LXU, to nominate directors for consideration at the 2015 Annual Meeting until March 9th.

• Given our thinking that any potential transactions were not likely to occur before the August 2016 call option on LXU’s senior secured notes this announcement does not materially change the time-horizon we had initially envisioned. That said, it does leave us incrementally more confident that the company will ultimately act to unlock significant value for shareholders. In the interim, investors stand to benefit from continued improvement in the company’s financial results through 2017.

• Considering peer group multiples and 2016E estimates, LXU’s Chemical and Climate Control segments can be valued at $52 per share and $18 per share, respectively. On a sum of the parts basis, a value of $50 per share can be derived when accounting for net debt and corporate costs of about $20 per share. (Optionalty for an additional $10 of upside exists in the event of an MLP conversion as our base case valuation assumes the Chemical business is split as a C-corp.)

Today, Atlas Energy Group, LLC (NYSE: ATLS), which consists of non-midstream assets and interests, began regular-way trading following its spin-off from Atlas Energy LP and the merger of the parent company with Targa Resources Corp. (NYSE: TRGP) and Targa Resources Partners LP (NYSE: NGLS). Atlas Energy common units have ceased trading. ATLS shares are currently trading at $9.50, slightly above the low end of our fair value estimate of $9.14-$13.55.

Based on an annual distribution of $0.75 (the midpoint of current guidance of $0.70-$0.80 per unit), ATLS shares are trading at an 8% implied yield, in-line with upstream E&P peers. As background, on February 24, 2015, Atlas announced a revised annual cash distribution of between $0.70 and $0.80 per unit, below its prior estimate of $2.20 per unit, based on a 1:2 share distribution ratio and 26.2 million shares outstanding. The reduction was driven largely by a distribution cut at the partner’s largest holding, Atlas Resource Partners, LP (NYSE: ARP). ATLS owns the General Partner (GP) and Incentive Distribution Rights (IDRs) in ARP, as well as 24.7 million Limited Partner (LP) units. ARP revised its annualized distribution to $1.30, a 45% reduction from its prior $2.36. At current prices, ARP yields approximately 13%, down from approximately 23% at the prior rate. The revised distribution, at $0.33 quarterly, is below the minimum quarterly distribution (MQD) of $0.40, rendering ATLS’ IDRs out-of-the-money.

At current prices, the valuation for post-spin ATLS essentially reflects its largest public holding, ARP, and does not assign any meaningful value to the partner’s other substantial holdings and interests. ATLS’ 24.7 million ARP LP units can be valued at $9.31 per unit, slightly below ATLS’ current price. However, the partner should also generate incremental cash flow from its other interests, including its E&P development subsidiary and its interest in Lightfoot Capital Partners, L.P and Lightfoot Capital Partners GP, LLC. As of October 31, 2014, Atlas Energy had an approximate 15.9% GP interest and 12.0% LP interest in Lightfoot.

A challenging commodity price environment and lack of near-term visibility on a crude oil price rebound make it difficult to accurately forecast distribution growth at this time. However, as a starting point, one can consider that Atlas Energy Group is expected to generate $37.5 million in revenue from its GP and LP interest in ARP. Based on an estimated 26.2 million units outstanding, the ARP distribution alone equates to a $1.23 distribution for Atlas Energy Group for 2015, before adjusting for corporate expenses (G&A, interest expense). We have previously estimated 2015 cash flows associated with ATLS’ non-ARP interests at between $5.2 million and $8.2 million on an annualized basis, or an incremental $0.20 to $0.31 per unit on an annualized basis.

At current prices, the valuation for post-spin ATLS can essentially be viewed as a derivative play on the partner’s ARP holdings. For longer-term oriented investors who can navigate the current challenging macro environment, the shares can be viewed as an option on the incremental cash flow growth associated with ATLS’ other interests. There are also several possible scenarios for ARP which could offer a positive catalyst for the shares. First, Atlas Energy could structure a purchase between some of ARP’s undeveloped oil and gas reserves and Atlas’ growth-oriented private E&P subsidiary in order to reduce ARP’s debt levels. ATLS could also elect to take ARP either private or incorporate it within Atlas Energy. For more details, please refer to the Atlas Energy LP Flash report dated February 10, 2015 and Spin-Off Report dated January 29, 2015.

On February 26, 2015, NorthStar Realty Finance Corp. (NYSE: NRF) announced a plan to spin off its European real estate business into a separate publicly traded real estate investment trust (REIT). The transaction, which has already received unanimous Board approval, is expected to be taxable and completed in 2H 2015. The spin entity, NorthStar Realty Europe Corp. (NRE), will be listed on the New York Stock Exchange but is evaluating a dual listing with a European exchange.

NRE’s initial $2 billion portfolio will consist of about 50 high-quality, pan-European properties in London, Paris, Amsterdam, Frankfurt, Berlin, Milan, Madrid and Brussels. Office properties comprise roughly 90% of the portfolio with two-thirds of the rental income being generated in the UK, Germany and France. The company’s almost 5 million square feet is currently 92% occupied and carries a weighted average lease term of roughly 5 years; notable tenants include, BNP Paribas, Cushman & Wakefield, Ernst & Young and Deloitte. The spin-entity will be managed by NorthStar Asset Management (NYSE: NSAM) under an agreement consistent with NRF’s existing contract with NSAM. NRE’s target leverage level will be 40%-50%. Assuming 50% leverage, $15 million of incremental G&A and management expenses and 350 million shares outstanding NRE’s trailing twelve month cash available for distribution (CAD) was about $0.20. The rationale for the transaction is seemingly for the stand-alone European business to garner a multiple more in-line with more highly valued peers. To that end, European REIT comparables, such as Derwent London Plc (LON DLN), Shaftesbury Plc (LON SHB), Land Security (LON LAND) and Hammerson Plc (LON HMSO), currently trade at almost 22x cash flow with solely U.K.-focused REITs trading at almost 30x, compared with NRF’s current cash flow multiple to about 11x (based on trailing 12-month CAD of $1.76). Applying the peer multiple to estimated CAD implies a fair value for NRE of about $4 per share. (If the higher UK-focused REIT multiple were applied the implied fair value of NRE would be about $6 per share).

The post-spin parent, NRF, will have about $16 billion of real estate assets and will continue to focus on U.S. real estate & real estate private equity as well as commercial real estate debt. Adjusted for the spin-off, NRF is expected to have generated trailing-12 month CAD of about $1.50 per share. Assuming NRF’s current multiple of about 11x remains stable an implied fair value of almost $17 can be derived.

This preliminary sum-of-parts valuation implies an approximate fair value of $21 per share, which implies about 11% upside from yesterday’s closing price of $18.88 per share.

On February 26, 2015, Barnes & Noble, Inc. (NYSE: BKS) announced a plan to spin off Barnes & Noble Education, which comprises the Barnes & Noble College business, from its Retail and NOOK Digital businesses via a tax-free spin-off. The transaction is expected to be completed by the end of August 2015 and is subject to customary closing conditions, including entry into a credit facility and other potential financing, and final approval by the Company’s Board of Directors.

Headquartered in Basking Ridge, New Jersey, Barnes & Noble Education is one of the largest contract operators of bookstores, operating 714 stores on college and university campuses in the United States. This business generated F2014 (ended May 3) sales of $1,748 million and EBITDA of $106.3 million. For 2015, Barnes and Noble Education is expected to generate $1.75 billion in sales with a 5.5% EBITDA margin or EBITDA of $95-100 million. Max J. Roberts, Chief Executive Officer of Barnes & Noble College, will become CEO of the new company, and Patrick Maloney and Barry Brover will serve as Chief Operating Officer and Chief Financial Officer, respectively.

The parent company, Barnes & Noble Inc., will contain Barnes & Noble’s retail and digital interests. Barnes & Noble Inc. is the nation’s largest bookseller, operating 649 stores in 50 states. The company’s digital interests consist of BN.com and NOOK Digital, the latter of which comprises NOOK® products as well as an expansive collection of digital reading and entertainment content through the NOOK Store®. The Retail segment generates sales of over $4 billion with an 8.4% EBITDA margin or approximately $340 million.

The separation of BKS’s NOOK business has been proposed for some time, but somewhat complicated by the segment’s lack of profitability as well as growth prospects for the book retailer’s brick-and-mortal operations. The company’s last remaining competitor, Borders Group. Inc., declared bankruptcy and liquidated its operations in 2011. In June 2014, Barnes & Noble disclosed it would separate its NOOK Media and Retail businesses into standalone companies and more recently targeted a tentative completion date by the end of August 2015.

With the company’s brick-and-mortal retail business in a state of secular decline, it was believed that cash flow from the college bookstores would finance the company’s digital (NOOK) operations until the segment could turn a profit. BKS has invested heavily in developing the technology to compete with Amazon.com Inc. (NASDAQ: AMZN) and Apple Inc. (NASDAQ: AAPL) to expand in the e-reading market. However, it has been unsuccessful in establishing the NOOK as a viable competitor thus far. Rather than proving truly disruptive in a manner similar to iPod versus CDs, e-books have become another format – like paperback or hardback. At the same time, the retail stores attractiveness as a place to visit and browse books combined with picking them up after ordering online is a key point of differentiation against Amazon. The move by Facebook (NASDAQ: FB) founder and CEO Mark Zukerberg to start publicizing a book that he reads every two weeks (modern day Oprah) also highlights that books remain highly relevant. BKS remains the only national chain and is second only to Apple stores in attractiveness to mall operators. Ultimately, however, BKS still needs an online retail strategy and is rebuilding the existing Barnes and Noble website to keep high-end book buyers who occasionally want to buy a book online.

Given the lack of relevant public comparables for the Education business, investors may reference Borders trading prior to its declaring bankruptcy. Shares of Borders averaged 3.5x EV to estimated EBITDA over the two years prior to the declaration of bankruptcy. However, the Education business is likely to garner a higher multiple (as well as higher multiple relative to the parent’s retail operations) given growth opportunity from the software and rental business, as well as a play on lifetime value of its younger demographics. Applying a 5.0x multiple to estimated 2015 EBITDA of $100 million results in an implied enterprise value of $500 million for this business.

For Barnes & Noble Inc.’s retail operations, applying the pre-bankruptcy Borders multiple to estimated Retail EBITDA of $337 million would result in a value of approximately $1.2 billion. Valuation of the NOOK business could be based on the recent purchase by BN of the 17% stake that Microsoft (NASDAQ: MSFT) had owned for $125 million. MSFT originally purchased the ownership position in NOOK for $300 million in 2012. Based on the MSFT repurchase price, an enterprise value of $735 million is derived for the NOOK business. This NOOK valuation implies an 8.2x estimated EBITDA of $90 million for digital content (ex hardware), which is roughly in line with online retailers. However, it can be argued that given the early stage of NOOK’s digital business and uncertain future, it would warrant a discount to more mature online retailers. Valuing the NOOK at 5.0x implies an enterprise value of $450 million, while noting that the 5.0x multiple is subjective. Based on this rough preliminary exercise, the parent entity would have an enterprise value of $1.6 billion.

On a pre-spin basis, shares can be valued at $29 per share, when accounting for 60.2 million shares outstanding, cash of $285 million, preferred equity of $580 million, and $64 million in debt. This preliminary sum-of-parts valuation implies 13% upside from the current BKS share price.

On February 23, 2015, Armstrong World Industries Inc. (NYSE: AWI) announced a plan to spin off its Flooring business from its Ceilings (Building Products) business via a tax-free spin-off. The transaction is expected to be completed by 1Q 2016 and is subject to customary closing conditions, including execution of intercompany agreements, the effectiveness of a Form 10 registration statement filing with the Securities and Exchange Commission, and final approval by the Company’s Board of Directors.

Based in Lancaster, Pennsylvania, the post spin-parent company, Armstrong World Industries, Inc. will be comprised of the Armstrong Building Products unit, which is the global leader in suspended ceiling solutions for use in renovation and new construction, both in commercial and residential spaces. The Building Products division generated approximately $1.3 billion of revenue in 2014 and consists of 22 manufacturing plants in eight countries. Following the spin-off, Armstrong Building Products CEO Vic Grizzle will serve as CEO of Armstrong World Industries.

The spin entity, Armstrong Flooring, which will also remain headquartered in Lancaster, is a leader in residential vinyl, laminate and hardwood products for the North American and Asian markets. The Flooring business, which consists of Resilient Flooring and Wood Flooring sub-segments, generated approximately $1.2 billion of revenue in 2014. AWI’s North American and international commercial segments provide high performance resilient flooring products including vinyl sheet, linoleum, vinyl composition and luxury vinyl tile, with significant ongoing investments focused on Luxury Vinyl Tile (LVT) products. Armstrong Flooring will pursue these markets under its existing brands, which include Armstrong and Bruce, and a network consisting of 17 manufacturing plants in three countries. AWI has made significant investments in the Flooring business, working with distributors to provide marketing and promotional support as well as to ramp the LVT business. Armstrong Flooring Products CEO Don Maier will be CEO of Armstrong Flooring.

The spin-off announcement follows months of investor speculation surrounding a potential sale of the company’s lower-margin flooring business, given lackluster performance in the segment– exacerbated by extremely competitive pricing in the wood category. In the company’s most recently reported 4Q 2014, operating margins were 9.6% and -17.1% for Resilient Flooring and Wood Flooring segments, respectively—well below the 17.8% operating margin reported for Building Products. Mohawk Industries (NYSE: MHK) had historically been viewed as the most likely buyer for the Flooring business; however, following the company’s announcement of its plan to purchase Belgian vinyl flooring company IVC Group, it became clear that this scenario was no longer likely. In recent months, Armstrong has strengthened its market share position in key domestic and international flooring end markets primarily by leveraging recently completed investments in expanded sales and manufacturing capabilities.

Comparable valuations for both the parent and spin entities are limited, owing to the consolidation within both the ceiling and flooring industries. In the case of Armstrong Flooring, the company’s closest comparable is Mohawk Industries, which is currently trading at 11.5x 2015E EBITDA. Management has guided for 2015 flooring EBITDA of $80-$100 million. Applying an 11.5x multiple to the midpoint of EBITDA guidance for Armstrong Flooring results in an implied enterprise value of $1,035.0 million for the business. Notably, 2015E EBITDA is expected to be below 2014 levels of $114 million owing to significant investments in the business as the company works with distributors to provide marketing and promotional support, as well as to ramp the LVT business with a new plant coming online this year.

Given the consolidation in the ceilings industry, a comparable valuation analysis for Armstrong’s Building Products business is largely limited to USG Corporation (NYSE: USG). Combined, AWI and USG represent a significant portion of the total ceiling market. USG trades at 10.3x 2015E EBITDA. Applying this multiple to estimated 2015E EBITDA of $347.5 million (the midpoint of management’s 2015 guidance of $335-$360 million) results in an enterprise value of $3,579.3 million for the Building Products business.

On a pre-spin basis, AWI shares can be valued at $68 per share, when accounting for 55.1million shares outstanding and $857.3 million in net debt. This preliminary sum-of-parts valuation implies approximately 23% upside from the current AWI share price of $55.64 per share (February 24, 2015 close).

On February 10th, FirstService Corporation (Ticker: FSV CN, CAD 66.41 per share, Market Capitalization: CAD 2,378 million—USD 1,889 million based on an exchange rate of USD 1 = CAD 1.26) announced its intention to separate into two publicly-traded companies. The parent company will be renamed Colliers International Group, Inc and will focus on commercial real estate, while the new entity will take the FirstService Corporation moniker and offer residential property management and services. The rationale for the demerger is that it will lead to increased management focus, allow investors to opt whether they want to be exposed to commercial or residential real estate and enable both entities to optimize their capital structure. The spin-off is subject to shareholder and regulatory approvals, as well as a confirmation of the tax-free nature of the transaction. The transaction is expected to be completed within the second quarter of 2015.

Upon the consummation of the spin-off, FirstService’s CEO and founder Jay Hennick will take over the role of Executive Chairman at Colliers International and of Chairman at the new FirstService Corporation. Colliers International’s divisional CEO will remain at his post. Scott Patterson, currently President and COO, will succeed Jay Hennick as CEO of the newly created entity.

Colliers International is a global leader in commercial real estate services and one of the fastest growing companies in the sector. Its service offerings include brokerage, valuation, project management and leasing. It has a global presence and a diverse revenue base; for 2014 Colliers generated 50 percent of its revenue from the Americas, 24 percent from EMEA and 26 percent from Asia Pacific. 2014 sales were USD 1,582 million—USD 1,664 million on a pro forma basis factoring in the annualized contribution of acquisitions—and 2014 EBITDA was USD 145 million—or USD 157 million including the effect of acquisitions.

The commercial real estate segment has experienced impressive growth since 2010, when revenue and EBITDA were USD 851 million and USD 27 million, respectively. Going forward, Colliers International intends to aggressively expand through acquisitions. To achieve that, the company will have a pro forma leverage—defined as net debt-to-EBITDA—of 1x to 1.5x. Additionally, Colliers anticipates to distribute an annual dividend of 8 US cents per share.

The new corporation will offer residential real estate property management and services. It will comprise the FirstService Residential and FirstService Brands businesses of the existing structure. FirstService Residential is North America’s largest manager of residential properties, such as master-planned communities, condominiums and single family homes. Among its offerings are vendor management systems, preventive maintenance and financial management. FirstService Brands owns a portfolio of companies that provide property services including maintenance, painting, home inspection, home storage, window cleaning and floor products. 2014 revenue and EBITDA were USD 1,132 million and USD 74 million, respectively—or USD 1,144 million and USD 85 million including the annualized contribution of acquisitions.

New FirstService Corporation has also managed to expand significantly since 2010; Revenue and EBITDA for that year were USD 755 million and USD 63 million, respectively. Unlike Colliers International though—which has experienced a threefold increase in its EBITDA margin—the residential segment’s EBITDA margin has shrunk by 280 basis points over the same period. The new FirstService Corporation will also put less emphasis on acquisitions. Its operating model, based on limited capital expenditure requirements and a very high degree of recurring revenue, allows the newco to amplify its shareholder returns by increasing its leverage. Indeed, new FirstService has a target leverage ratio of 2x to 2.5x. At the same time, it intends to declare an annual dividend of 40 US cents, an amount equal to the current corporation’s distribution.

Following the completion of the spin-off, Colliers International could be valued at par with its main commercial real estate services competitors Jones Lang La Salle Inc (JLL US), CBRE Group Inc (CBG US), Realogy Holdings Corp (RLGY US) and Altus Group Ltd (AIF CN). Using the average enterprise value-to-EBITDA of 11.6x on the company’s expected 2015 EBITDA of USD 157 million, one arrives at an enterprise value of USD 1,822 million for the commercial real estate services firm.

Valuing the new FirstService Corporation is a more challenging task, as there are no publicly-traded pure-play property management firms in North America. One could simply use the same peer group as for Colliers; however this approach does not appear appropriate given newco’s lower profit margins and limited growth rate. Another simplistic, indicative approach would be to capitalize FirstService’s free cash flow at a 5 to 7.5 percent rate (a 15x to 20x multiple). The 2015 estimated EBITDA for the company is USD 94 million. The pre-spin corporation’s 2014 capital expenditures were USD 161 million. However, such a high number is an outlier, and seems to be based on Colliers’ recent acquisition spree. The average capital expenditures from 2011 to 2013 amounted to USD 65 million. To err on the side of caution, one may assume that the residential business was responsible for half of that amount. Thus, the 2015 free cash flow generation stands at USD 61 million, resulting in an enterprise value between USD 911 million and USD 1,215 million.

The sum-of-the-parts enterprise value of the existing FirstService Corporation ranges from USD 2,166 million to USD 2,470 million. Including USD 231 million in non-controlling interests and USD 337 million in net debt, one arrives at an equity valuation range between USD 59.9 (CAD 75.4) and USD 62.3 (CAD 85.9) per share.

On February 9, 2015, Atlas Energy, L.P. (NYSE: ATLS) announced a revised distribution ratio for the spin-off of Atlas Energy Group, LLC (“New Atlas”), a wholly-owned subsidiary of ATLS that will hold ATLS’s assets and liabilities other than those related to its midstream business. Atlas Energy will distribute one common unit of New Atlas for every two Atlas Energy common units held as of February 25, 2015, the previously-disclosed record date for the transaction. When-issued trading for Atlas Energy Group is expected to begin on the NYSE on approximately February 24, 2015 under the symbol “ATLS.wi.” The distribution of Atlas Energy Group units is expected to be effective on Saturday, February 28, 2015 in conjunction with the previously announced proposed mergers of Atlas Energy and Atlas Pipeline Partners, L.P. (NYSE: APL) with Targa Resources Corp. (NYSE: TRGP) and Targa Resources Partners LP (NYSE: NGLS), respectively. Regular-way trading is expected to begin on or about March 2, 2015 under the ticker symbol “ATLS” at which point Atlas Energy common units will cease trading.

The fair value for New Atlas has been revised to $9.14- $13.55 per unit (previously $4.31-$6.04 per unit, based on a 1:1 distribution ratio) reflecting the revised 1:2 share distribution ratio as well as current share prices for ATLS, TRGP, NGLS, and ARP.

As a starting point for valuing ATLS, one can consider that the vast majority of the asset value relates to its public holdings—that is, its LP interest in Atlas Resource Partners, LP (NYSE: ARP). Atlas owns 24.7 million LP units of ARP, which at current prices can be valued at $5.07 per unit on a pre-spin basis. Simply valuing New Atlas’ ARP holdings and net debt results in a pre-spin fair value estimate of $2.38 per share, a 20% discount to the current stub value of $2.97. Note that this discount has narrowed considerably from 40% on January 29, 2015.

That said, valuing New Atlas based simply on its ARP holdings does not take into consideration other cash-flow generating assets. Accordingly, a valuation should also consider Atlas’s net natural gas production of approximately 11.5 mmcf/d in the Arkoma Basin, as well as potential cash flows associated with 1) Atlas’s GP and IDR interest in ARP; 2) GP and LP interest in its E&P subsidiary; and 3) LP interest in ARP. Applying multiples of between 5x and 7x on these respective cash flows, and adjusting for net debt, one can arrive at a pre-spin fair value range of between $4.57 and $6.78 per unit, representing a 35% to 56% premium to the shares’ current implicit value (Please refer to the full Spin-Off Report dated January 5, 2015 for a detailed valuation methodology).

Based on the above valuation methods, as well as an applied discounted peer multiple on estimated 2015 EBITDA and targeted distribution yield (see the full report for more details), one can arrive at a fair value for pre-spin ATLS of $4.57-$6.78, modestly above our previous estimate of $4.31 – $6.04. On a post-spin basis, the shares can be fairly valued at $9.14-$13.55. This valuation range suggests meaningful potential upside to the shares’ current implied value for more speculative, risk-tolerant investors able to navigate the potential near-term volatility and negative sentiment. Notably, our analysis considers the partner’s ownership of ARP as well as the potential cash flows associated with its GP and IDR interests in Lightfoot and its E&P subsidiary. However, given the difficult macro-environment and potential risk to cash flows (and accordingly, distributions) among upstream E&Ps, the market may choose to value the post-spin entity based exclusively on its ownership of ARP, which, based on current prices, and adjusting for net debt, equates to $2.38 per unit on a pre-spin basis ($4.76 post-spin), representing a 20% discount to the shares’ current implied value of $2.97. Such a valuation would assign essentially no value to cash flows associated with post-spin Atlas’ GP and IDR interest in ARP, and its GP and LP interests in Lightfoot and its E&P subsidiary.

Longer term, ATLS offers an option on incremental growth from the partner’s other LP and GP interests and funds (which are currently being assigned no value). Arbitrage-oriented investors may also consider hedging the transaction risk in the short term.

For more details, please see the Atlas Energy, LP Spin-Off Report dated January 5, 2015, and the Flash report dated January 29, 2015.

On February 10, 2015, Starwood Hotels & Resorts Worldwide Inc. (NYSE: HOT) announced a plan to spin off its vacation ownership business, Starwood Vacation Ownership (SVO), via a tax-free spin-off. The transaction is expected to be completed by year-end 2015 and is subject to customary closing conditions, including final approval by HOT’s Board of Directors, and an effectiveness declaration of the company’s Form 10 registration statement by the SEC. Starwood Hotels is a leading hotel and leisure company with over 1,200 properties in 100 countries underneath the company’s brands. The company is an integrated owner, operator and franchisor of hotels resorts and residences operating under well known brands including St. Regis, W, Westin, Le Meridien, Sheraton, and Four Points by Sheraton, amongst others. Starwood Vacation Ownership Inc. provides “upper upscale” timeshare resorts under the Sheraton and Westin brands.

Matthew Avirl will assume the CEO role at the yet to be named new company. Avril previously held the position of President of Starwood’s Hotel Group, retiring in 2012. The spin-off announcement comes as the company continues to pursue an asset-light business model, whereby the company has been selling its owned properties, entering into long-term agreements to franchise and/or manage the sold properties. In terms of an asset light business model, the transaction appears to make sense as the company focuses on a fee-based business model through management and franchise agreements. SVO primarily engages in the acquisition, development and operation of vacation ownership resorts (timeshare) and the marketing and selling of vacation ownership interests (VOI). The company also provides financing to customers for purchase of VOIs. HOT owned 56% of its hotel properties in 2004, the company currently owns or leases 36 hotels with a total of 13,500 rooms (including consolidated joint ventures), representing approximately 3% of the HOT system.

HOT’s proposed transaction is reminiscent of 2011 spin-off of Marriott Vacations Worldwide Corp. (NYSE: VAC) from Marriott International Inc. (NASDAQ: MAR). Following an initial period of being viewed as out of favor due to a cyclical downturn in the timeshare industry, shares of VAC increased 185% over the first two years of regular way trading; the S&P 500 increased 52% over the same time period. Notably, MAR also outperformed the S&P 500, although to a lesser degree, increasing 62.5% over the initial two year period following the spin-off of VAC.

For the year ended 2014, SVO generated revenue of $674 million and EBITDA of $177 million, representing respective declines of 17.1% and 39.4%. Revenue and earnings at SVO can exhibit lumpiness based on the timing of new property sales. In 2013, the company was selling ownership interest in its residential project St. Regis Bal Harbour Resort in Florida. Management expects earnings from the vacation ownership business of approximately $140 million to $150 million in 2015. The only true publicly traded peer is VAC, which currently trades at 12x 2015E EBITDA. VAC currently trades at a multiple well in excess of historic timeshare acquisition multiples. In 2013, BFC Financial Corp. acquired troubled timeshare operator Bluegreen Corp. for 6.3x trailing twelve-month EBITDA, while in 2011 Cerberus Capital Management acquired Silverleaf Resorts Inc. for about 9.1x trailing twelve-month EBITDA. Valuing shares at VAC’s current multiple derives an enterprise value range of $1.7 – $1.8 billion for SVO.

In contrast to the performance of SVO, the hotels-based business appears to have performed better through 2014. Revenue per available room (REVPAR) at HOT owned hotels increased 5.0% in 2014, revenue declined 4.4%, and EBITDA increased 3.1% on lower expenses. HOT’s hotels are generally considered premium brands, commanding higher average daily rates and generating above industry average REVPAR. Recent decreases in revenue can be attributed to lost revenue on properties sold in pursuit of an asset-light business model. Management’s guidance implies hotel EBITDA of $1,025 million. Peers include other hotel operators such as Hilton Worldwide (NYSE: HLT), Hyatt Hotels (NYSE: H), Marriott International (NASDAQ: MAR), and Wyndham Worldwide (NYSE: WYM), among others. The peer group trades at an average of 12.7x 2015E EBITDA. Applying the peer multiple results in an enterprise value of $13 billion. However, HOT’s high REVPAR likely deserves a premium multiple to lower revenue generating peers. Valuing post spin hotel operations in line with Marriott at 14.1x, due to comparable REVPAR, results in an enterprise value of $14.5 billion.

On a pre-spin basis, shares can be valued at $84 per share, when accounting for 172.7 million shares outstanding and $1.7 billion in net debt. This preliminary sum-of-parts valuation implies limited upside from the current HOT, which is trading at approximately $77 per share.

On February 5, 2015, W.R. Grace & Co. (NYSE: GRA) announced a plan to spin off its Construction Products and Packaging business via a tax-free spin-off. The transaction is expected to be completed in approximately 12-months and is subject to customary closing conditions, including final approval by Grace’s Board of Directors. The companies, to be named prior to closing, will be “”New Grace,”” which will consist of Grace’s Catalysts Technologies and Materials Technologies business segments (excluding the Darex packaging business) and “”New GCP”” which will consist of Grace’s Construction Products business segment and the Darex packaging business. Fred Festa, Chairman and Chief Executive Officer, and Hudson La Force, Senior Vice President and Chief Financial Officer will remain with New Grace. Greg Poling, currently President and Chief Operating Officer of Grace, will become President and Chief Executive Officer of New GCP.

W.R. Grace & Co. is a specialty chemicals and materials company, headquartered in Columbia, Maryland, which emerged from Chapter 11 bankruptcy protection in February 2014 after more than 12 years. In 2000, the company had nearly 130,000 personal injury and property damage claims relating to its former ZONOLITE Attic Insulation product, which was discontinued in the 1980s. Grace generated 2013 revenues of $3.047 billion, with more than two-thirds outside the United States. The company operates through three business segments: 1) Grace Catalyst Technologies; 2) Grace Materials Technologies; and 3) Grace Construction Products. Grace Catalyst Technologies is the largest segment, accounting for about 40% of revenues.

New Grace is primarily focused on process catalysts and specialty silicas, and includes the Materials Technologies business, which consists of silica-based engineered products as well as sealants and coatings. The company has an estimated 10% share of the $16 billion global catalyst market and is the world’s largest provider of FCC (Fluid Catalytic Cracking) catalysts, resid hydroprocessing catalysts, and independent polyethylene catalysts. Post-separation, sales are expected at approximately $1.8 billion. The company also operates a Joint Venture (JV) with Chevron Corp. (NYSE: CVX) called ART (Advanced Refining Technologies, LLC), which supplies a portfolio of hydroprocessing catalysts. Including this JV, revenues are expected to be $2.2 billion post-separation.

Post-spin, New Grace is expected to make strategic acquisitions in its core segments to expand its high-margin, specialty chemicals and performance materials portfolio. Accordingly, net leverage is expected to be between 2.0 x and 2.5x adjusted-EBITDA. Importantly, the Catalyst business is driven by end-user demand for transportation fuel and plastics, and weaker oil prices have no significant impact on this business. New Grace should capitalize on strong secular trends—most notably, trends in heavy crude oil processing (oils are heavier and dirtier, requiring new treating solutions), as well as improved clean air mandates which require increased use of hydro-treating.

New GCP is a leader in cement and concrete chemicals, specialty building materials as well as can sealants and coatings. The company’s Construction Products include cement additives, concrete admixtures, and waterproofing products. The Darex packaging business supplies can sealants, closure sealants, and can and closure coatings to the packaged food and beverage industry. Post separation, New GCP sales are expected at approximately $1.5 billion, with net leverage between 3.0x and 3.5x adjusted EBITDA. Despite being in the early stages of the construction recovery in North America and emerging markets, Grace has improved operating margin from trough levels of approximately 10% to over 14%, with the potential to approach the company’s mid-cycle range of 16% to 18%.

New Grace operates in a fairly oligopolistic industry with strong barriers to entry and few competitors. The business can be compared to diversified chemicals companies such as Albemarle Corp. (NYSE: ALB), Johnson Matthey plc (LSE: JMAT) and The Dow Chemical Company (NYSE: DOW). These diversified suppliers tend to trade at higher multiples than more volatile sub-segments such as commodity and agricultural chemicals. These companies currently trade at a 2014 EV/EBITDA multiple range of 10x to 12x. New Grace will likely garner a multiple at the high end of the range, given its market leadership position and above-industry growth profile. Applying the upper end of this peer multiple range to estimated EBITDA of $504 million (28% margin), an implied enterprise value of $6,048 million for New Grace can be derived. Factoring in for net debt of $1,134 million and assuming 73.8 million shares outstanding, a fair value of $66.57 per share can be derived.

New GCP comparables include chemicals producer BASF SE (FWB: BAS) and construction materials manufacturer Sika AG (VX: SIK), which trade at an average EV/ 2014 EBITDA multiple of between 8x and 11x. Applying the upper end of this range to estimated EBITDA of $255 million (17% margin), an implied enterprise value of $2,805 million for New GCP can be derived. Factoring in for net debt and assuming 73.8 million shares outstanding results in a fair value estimate of $26.77 per share.

Based on the above analysis, a pre-spin sum of the parts estimate of $93 can be derived, which represents a 6% premium to GRA’s current share price (pre-open). While this analysis implies a full valuation, notably, it fails to accurately capture the growth potential for both companies, particularly as a return to revenue growth should result in margin expansion toward historical levels.