On January 29, 2015, The Manitowoc Company, Inc. (NYSE: MTW) announced a plan to separate its Crane and Foodservice businesses into two independent, publicly traded companies via a tax-free spin-off, expected to be completed in the first quarter of 2016. The proposed separation is subject to effectiveness of appropriate filings with the Securities and Exchange Commission, and final approval by the Company’s Board of Directors.

In addition to the proposed spin-off, Manitowoc announced that the Board has approved amendments to the Company’s by-laws to eliminate its classified board structure on a phased-in basis commencing with the elections occurring at the Company’s 2015 Annual Meeting of Shareholders. In addition, the spin-off company will have an annually elected Board of Directors upon completion of the separation. Currently, the Manitowoc Board is divided into three classes, with each director class serving a staggered term of three years. Under the terms of the declassification, all current directors would serve the remainder of their terms and thereafter become subject to election each year by shareholders. The change would go into effect beginning with those directors whose terms expire at the 2015 Annual Meeting. As of the 2017 Annual Meeting, all Board members will be subject to annual election.

Founded in 1902, the Manitowoc Company is a multi-industry, capital goods manufacturer operating under two main segments—cranes and related products (62% of F2013 sales) and foodservice equipment (38% of F2013 sales). The Cranes business, which reported annual revenue of $2.3 billion in the twelve months ended December 31, 2014, is one of the largest providers of lifting equipment for the global construction industry, including lattice-boom cranes, tower cranes, mobile telescopic cranes, and boom trucks. The business holds leading market positions and highly recognized brands, including Manitowoc, Grove, National Crane, Potain, Shuttlelift and Crane Care brand names. The business generates nearly 60% of its revenue from non-U.S. markets. The Foodservice business, which reported annual revenue of $1.6 billion in the twelve months ended December 31, 2014, is a leading manufacturer of commercial foodservice equipment serving the ice, beverage, refrigeration, food prep, and cooking needs of restaurants, convenience stores, hotels, hospitals, and other institutions. The business has a worldwide network of 120 distributors and promotes more than 24 industry-leading brands, including Manitowoc, Garland, Convotherm, Cleveland, Lincoln, Merrychef, Frymaster, Delfield, Kolpak, Kysor Panel, Servend, Multiplex, KitchenCare, Inducs, Koolaire and Manitowoc Beverage System.

The transaction is the culmination of mounting pressure from activist investors, who have for some time suggested a separation of these two disparate (and underperforming) businesses. The Foodservice segment has suffered adverse product mix and poor execution as MTW’s consolidation and restructuring actions resulted in weaker profitability in F2014, from originally targeted operating margins of 17.5% to 12.9% in the most recently reported fourth quarter. Similarly, a demand recovery in the crane sector has been elusive, owing primarily to weak demand for Rough Terrain and Boom trucks in North America and weak recovery of non-residential construction markets (particularly utility power plants). Accordingly, in June 2014, Relational Investors disclosed an about 8.5% stake in MTW, stressing that a separation of the two businesses, which it contended had materially different operating metrics and cyclicality, would enhance capital allocation and strategic flexibility, as well as attract a more focused shareholder. Management had been resistant to the proposal, filing an 8-K presentation in late August defending the combined businesses. Subsequently, in December 2014, activist investor Carl Icahn (MTW’s second largest institutional investor) disclosed, via a 13D filing, an almost 8% stake in MTW, which similarly called for a split of the two businesses as well as indicating a willingness to seek Board representation.

For F2014, MTW’s Cranes business, which is in the midst of a cyclical downturn, declined 8% to $2.3 billion on operating margin of 7.1%. The better-performing Foodservice segment posted a 2.6% increase in revenue to $1.6 billion and a 14.8% margin, down 140 basis points from 16.2% in F2013. Total adjusted EBITDA at MTW was $403.6 million for F2014. Looking into F2015, MTW guided to total depreciation & amortization of $110 million. By segment the company targets mid single digit revenue declines and a mid single digit operating margin at Cranes and mid single digit growth and improved mid-teens margins at Foodservice. As such, it could be reasonably forecast that MTW’s Crane business can generate EBITDA of $219.4 in F2015. Peers to MTW’s Cranes business, including Terex (NYSE: TEX), Manitex (NASDAQ: MNTX), Tadano (6395 JT), Joy Global (NYSE: JOY), and Oshkosh (NYSE: OSK), trade at 6x 2015E EBITDA. Applying this peer multiple implies a segment enterprise value of $1.3 billion.

The Foodservice segment could be projected to generate 2015E EBITDA of $310.5 million. Peers to MTW’s Foodservice business, including Middleby (NASDAQ: MIDD) and John Been (NYSE: JBT), currently trade at 12x 2015E EBITDA. Applying this peer multiple yields an enterprise value of $3.7 billion.

Accounting for corporate costs not included in segment EBTIDA of about $53.4 million capitalized at 9.5x, or the blended average of segment multiples, net debt of $1.45 billion and a diluted share count of about 137 million, a total market capitalization of roughly $3.1 billion, or $22 per share, is derived.

On January 28, 2015, Atlas Energy, LP (NYSE: ATLS) announced that its Board of Directors has approved the record and distribution dates for the spin-off of its non-midstream assets and declared a distribution to ATLS unitholders of common units representing a 100% limited liability company interest in Atlas Energy Group, LLC, a wholly-owned subsidiary of ATLS that will hold ATLS’s assets and liabilities other than those related to its midstream business (“New Atlas”).

Each ATLS unitholder will receive one common unit of New Atlas for each ATLS common unit held at the close of business on Wednesday, February 25, 2015, the record date of the distribution. The distribution is expected to be effective February 28, 2015 in conjunction with the previously announced proposed mergers of ATLS and Targa Resources Corp. [(NYSE: TRGP), the “ATLS Merger”] and Atlas Pipeline Partners, L.P. (NYSE: APL) with Targa Resources Partners LP [(NYSE: NGLS), the “APL Merger]. New Atlas common units are expected to begin regular-way trading on or about March 2, 2015 on the NYSE under the symbol “ATLS.” As previously announced, the proposed mergers of Atlas Energy with TRGP and TRP will occur immediately following the spin-off. The ATLS Merger, the APL Merger, and the spin-off (including the related record date) are conditioned on each other. For more details, see The Spin-Off Report dated January 5, 2015.

Due to the merger arbitrage activity surrounding the three transactions, we have adjusted our fair value estimates to reflect current share prices for ATLS, TRGP, NGLS, and ARP. TRGP’s share and cash consideration can be valued at $15.54 and $9.12 per unit, respectively, for a total purchase price of $24.66 for Atlas’s midstream assets. This implies that the remaining non-midstream assets, or the SpinCo Atlas Energy Group, is implicitly trading at $2.97 per unit, implying a 37% yield based on projected F2015 annual distribution of $1.10. While one can acknowledge the inherent risks to the transaction as well as underlying risks to distribution growth, the current implied value for the remaining assets appears to assign negligible value to Atlas’s current cash flows or potential growth.

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 $4.49 per unit. Simply valuing the post-spin entity’s ARP holdings and net debt results in a post-spin fair value estimate of $1.80 per share, a 40% discount to the shares’ current implied value of $2.97.

That said, valuing the post-spin entity based simply on its ARP holdings does not take into consideration other cash-flow generating assets. Accordingly, a post-spin valuation should also consider Atlas’s net natural gas production of approximately 11.5 mmcf/d in the Arkoma Basin, which can be valued at an additional $0.77-$1.15 per unit. Assuming net debt of approximately $140 million, or $2.69 per unit, post-spin Atlas Energy Group can be fairly valued at $2.57-$2.95 per unit—a range, which at the high end, approximates the shares’ current implied value of $2.97. Note that our implied value assumption associated with Atlas’s gas production, which is considerably below management’s guidance—is appropriate given the recent decline in gas prices, which are trending at $3.144 per million British thermal units (BTUs) for January, having declined approximately 26% since January of 2014.

However, the above valuation methodologies are somewhat incomplete in that they fail to consider the 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 fair value range of between $3.99 and $6.78, representing a 25% 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 post-spin New Atlas of between $4.31 and $6.04 per unit , modestly below our prior estimate of between $4.66 and $6.22. 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 $1.80 per unit, representing a 39% 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.

In the short term, post-spin ATLS shares can initially be viewed as a discounted, lower-risk derivative investment in ARP. 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

On January 27th, Max India Ltd (Ticker: MAX IN, INR 498 per share, Market Capitalization: INR 132,780 million—USD 2,164 million based on an exchange rate of USD 1 = INR 61.35) announced its intention to split in three publically traded corporations, with shareholders retaining their proportionate equity interest in all of the demerged entities. The parent corporation will be renamed Max Financial Services Limited and will comprise the company’s life insurance business—Max India’s dominant segment. The second company will operate in the healthcare sector, and will be named Max India Limited. Its subsidiaries will include Max Healthcare (healthcare services), Max Bupa Health Insurance (health insurance) and Antara Senior Living (senior living communities). Max India’s specialty packaging films segment will be demerged into a Max Ventures and Industries Limited.

Shareholders will receive one new Max India share and 0.2 Max Ventures and Industries shares for each Max India share owned. The transaction is subject to shareholder, creditor and regulatory approvals and is expected to be completed within the next six to nine months.

Max India is an owner-operated company, with Chairman Analjit Singh controlling approximately 40 percent of shares outstanding. For the six months ending on September 30th, 2014—the company’s fiscal year ends on March 31st—Max India’s consolidated revenue, including investment gains on the insurance portfolios, were INR 69.7 billion compared to INR 45.7 billion for the year ago period. EBITDA and pre-tax profit stood at INR 3.3 billion (30 percent year-on-year increase) and INR 1.9 billion (43 percent year-on-year increase), respectively.

Max India’s flagship business, generating more than 80 percent of consolidated revenue, is life insurance. The company is active in the sector through its 72 percent holding in Max Life, a joint venture with Japan’s MS & AD Insurance Group Holding Inc (8725 JP)—the successor of Mitsui Sumitomo Insurance Company. For the six months ending on September 30th, 2014, Max Life generated gross written premium income of INR 33.9 billion, a 13 percent year-on-year increase.

Max Ventures and Industries will consist of the wholly-owned subsidiary Max Specialty Films. The company produces packaging films used in tobacco packaging and beverage labels, among others. For the first half of the 2015 fiscal year, the company generated INR 3.9 billion in revenue (10 percent year-on-year increase) and INR 380 million in EBITDA (36 percent year-on-year increase). The company will be the smallest of the post-demerger entities. It will also have just INR 100 million in cash—just over USD 1.5 million.

The healthcare-focused company will comprise the company’s interest in Max Healthcare, Max Bupa Health Insurance and Antara Senior Living. Antara Senior Living developed its first senior living community in 2013. Max Healthcare owns and operates 12 hospitals in North India and is 46 percent owned by Max India. The parent company’s ownership amounted to almost 70 percent until November 2014, when its partner, South African Life Healthcare Group Holdings Ltd (LHC SJ) announced that it will acquire a 13 percent stake from Max India and invest INR 3.8 billion directly in the operating company. Lastly, Max India offers health insurance services through its 74 percent owned subsidiary, Max Bupa Health Insurance. The remaining 26 percent is owned by Britain’s Bupa Finance Plc. Following the recent decree by Indian Prime Minister Narendra Modi that increases the foreign direct investment limit in insurance companies to 49 percent from 26 percent, Bupa Finance announced its plan to raise its interest in the Indian health insurance firm to the maximum allowable level.

The liberalization of the healthcare market is one of the most important considerations with regard to Max India’s split: the company foresees a unique opportunity to expand. Thus, the new Max India will benefit from increased management focus as well as substantially higher foreign investment that will allow for rapid growth. Management’s intention and focus on expansion is further strengthened by the fact that the healthcare spinco will receive more than INR 4 billion out of the company’s estimated INR 6 billion in cash1. Thus, despite the corporation’s limited revenue—with fiscal half year sales at Max Healthcare of INR 8.5 billion and INR 1.6 billion in gross written premium income at Max Bupa Health Insurance2—new Max India could start trading at very high profit-based multiples3, care of its growth potential and substantial cash balance that amounts to approximately a quarter of its yearly sales.

On January 27, 2015, Yahoo! Inc. (NASDAQ: YHOO) announced a plan to spin off its 15.4% ownership stake in Alibaba Group Holding Limited (NYSE: BABA). BABA is an online and mobile commerce company based in China. Shares in the new company will be distributed via a tax-free distribution of shares to YHOO shareholders. The new company has yet to be named, is currently being referred to as SpinCo and will be led by a newly elected management team. SpinCo will be structured as a registered investment company (RIC) under the Investment Company Act of 1940, a structure not typically employed in spin-offs. The RIC structure was chosen in an effort to minimize taxes versus an outright sale of BABA shares or a spin-off of into a corporation (taxes were estimated to be $16 billion in the event of a sale of the BABA shares). The new company is expected to be spun off debt free while Yahoo will retain its cash position.

Also included in SpinCo will be an unspecified ancillary business (to meet IRS requirements of a spin-off) that is expected to generate approximately $50 million in adjusted EBITDA. YHOO owns 15.4% of BABA following the company selling 140 million shares of BABA’s in the September 2014 Alibaba IPO. Yahoo’s stake in BABA is valued at roughly $40 billion, while YHOO’s market capitalization totals $45.5 billion, based on yesterday’s closing prices. The transaction is subject to final board approval, an effectiveness declaration of the company’s registration filings with the SEC, and receipt of an opinion on the tax free nature of the transaction. The spin-off is expected to be completed in 4Q 2015.

Yahoo operates the third most popular internet search engine with an estimated 300 million unique monthly visitors, behind leader Google Inc.’s (NASDAQ: GOOG) 1.1 billion unique monthly visitors and Bing!’s (subsidiary of Microsoft Corp. [NASDAQ: MSFT]) 245 million unique monthly visitors. Yahoo’s investment in Alibaba, China’s largest Internet company, and to a lesser extent the company’s 35.5% ownership of Yahoo Japan Corp. (4689 JP) , have been the primary drivers of the shares’ performance in the two and a half years since Marissa Mayer assumed her role as CEO. The strong performance of Alibaba shares since its IPO have essentially provided Mayer with a comfortable position from which to attempt a turnaround of the company, whose competitive position has been deteriorating as its core advertising business continues its secular decline. With the spin-off, Yahoo’s stock will no longer be linked to its Alibaba stake and should trade on its core businesses performance. YHOO will retain control of its Yahoo Japan stake.

The handling of Yahoo’s Alibaba stake has been of significance to investors—particularly activist investor Starboard Value, whose opinions have been widely documented. Starboard, which owns 0.8% of YHOO, has threatened to oust Mayer if she fails to adopt a strategy that minimizes taxes, and has openly pressured management to commit to returning the value of the company’s Alibaba stake to shareholders, as opposed to investing in other acquisitions. Notably, Yahoo’s roughly $2 billion in acquisitions under Mayer’s tenure as CEO (the most notable of which was the social blogging platform Tumblr, acquired for $1.1 billion in 2013), have failed to generate a material impact on revenues. Starboard has also called for Yahoo to merge with rival AOL, Inc. (NYSE: AOL). The idea of a YHOO AOL merger has been largely dismissed by Mayer.

Following the separation it should be expected that SpinCo will trade either in line with the value of the underlying BABA holdings, or at a slight discount to the market value to account for the fact that the BABA shares will essentially trade in two different stocks. A slight discount to underlying holdings is a trait that typically arises in company’s whose primary value is derived from a large ownership stake in another publicly traded entity. Based on 384 million BABA shares that Yahoo owns, at the current BABA share price of $102.94, SpinCo.’s BABA stake is valued at $39.5 billion. If the ancillary business were to be valued at 0.5x EBITDA, SpinCo shares could be valued at $41 per share (assuming a one for one share distribution).

Yahoo generated revenue of $4.6 billion and EBITDA of $1.3 billion in 2014 (excluding the ancillary business), representing a decline of 1% and 13%, respectively. Moving forward, the parent company’s business prospects rely on the company’s increased focus on Yahoo’s mobile, video, native, and social platforms. The company expects these platforms growth to offset the decline in the core desktop display advertising business. YHOO could be compared to a variety of companies given that its businesses encompass a wide array of platforms including internet search, video content, and social networking, among others. However, the core display-based advertising business is most comparable to the likes of GOOG and AOL. GOOG trades at approximately 10x EV to EBITDA, while AOL, which has experienced similar business trends to YHOO, trades at approximately 6x EV to EBITDA. Applying 6.0x to the parent entity’s EBITDA of $1.3 billion, and valuing the Yahoo Japan stake at market value, post-spin YHOO’s fair enterprise value can be estimated at $15.1 billion. If the Yahoo Japan stake were to be adjusted for taxes in the event of a sale, the enterprise value would decline to $12.6 billion. On a sum-of-the-parts basis, a $62 per share fair value can be derived for YHOO, or $60 per share when incorporating taxes on Yahoo Japan.

· The sum-of-the-parts (SOTP) fair value for Visteon Corp. (NYSE: VC) is revised to $113 (from $120) following the release of an updated investor presentation regarding the sale of its interest in HVCC as well as initial 2015 expectations for the stand-alone Electronics division.

· VC expects net proceeds (after taxes and fees) of $3.1-$3.2 billion from the HVCC transaction, of which it expects to return $2.5-$2.75 billion to shareholders, most likely via buybacks and a special dividend.

· The transaction is still expected to close in 1H15.

· In terms of 2015 guidance, VC expects the stand-alone Electronics division to generate about $3.3 billion in sales and EBTIDA of about $280-$300 million. Corporate costs are expected to be $45-$55 million, implying total 2015E EBITDA of about $240 million.

· The company also set 2018 goals, which at the mid-point, target revenue of $3.7 billion, segment EBITDA of $375 million, total EBITDA of $335 million and free cash flow of $105 million.

· The potential for a transaction was initially highlighted in a Hidden Opportunities report on November 24, 2014 (see the dated report for more details) and ultimately materialized on December 17, 2014 (see dated report for more details). Since the initial write-up, VC shares are up about 4.5% versus an about 2% decline in the S&P 500.

· The $113 SOTP fair value of VC, post HVCC sale, is based on a 7.4x peer multiple applied to estimated 2015E EBITDA for the stand-alone Electronics business of $295 less $55 million of corporate costs plus VC’s expected cash surplus of almost $2.8 billion.

On January 9th, Cheung Kong Holdings Ltd (Ticker: 1 HK, HKD 124.8 per share, Market Capitalization: HKD 289,057 million—USD 37,271 million based on an exchange rate of USD 1 = HKD 7.76) announced its intention to merge with its publically-traded subsidiary Hutchison Whampoa Ltd (13 HK) and subsequently spin off the property operations of the combined entity through a distribution in specie.

Prior to the demerger, Cheung Kong Holdings shareholders will exchange their stock for shares of a new company, CKH Holdings (the “Reorganization”). Following the first stage of the restructuring, Hutchison Whampoa shareholders will receive 0.684 CKH Holdings shares for each Hutchison Whampoa share owned. The exchange ratio does not offer any premium to the latter company’s investors. Subsequently, CKH Holdings will spin off its property assets into CK Property and distribute the shares as a dividend in specie on a one to one basis.

The spin-off is contingent upon customary conditions, such as listing approval, as well as the Cheung Kong Holdings Reorganization and the Hutchison Whampoa merger. The transaction will be executed immediately after the merger, and it is expected to be completed by the end of the first half of 2015.

Both pre-spin entities are held by Asia’s richest person, Li Ka-shing. Mr. Li Ka-shing, along with members of his family, own approximately 43 percent of Cheung Kong Holdings, a company that owns 50 percent of Hutchinson Whampoa. They also own 2.5 percent of Hutchison Whampoa directly.

Cheung Kong Holdings is a Hong Kong-based conglomerate with interests in real estate, aircraft leasing, infrastructure and biotechnology. Additionally, it owns half of the shares of publically-listed Hutchison Whampoa, thus being exposed to a much wider array of industries. Hutchison Whampoa is another conglomerate with a more diversified portfolio. It invests in real estate, port services, retail, infrastructure, energy, telecommunications and media. Most of its holdings are in publically-traded companies, such as Husky Energy (HSE CN), Hutchison Port Holdings Trust (HPHT SP), Hutchison Telecommunications Hong Kong Holdings Limited (215 HK) and Cheung Kong Infrastructure Holdings Limited (1038 HK). As part of the reorganization plan, a Trust controlled by Mr. Li Ka-shing will sell a 6.24 percent interest in Husky Energy—still retaining a 29 percent stake—to Hutchison Whampoa in exchange for 84.4 million CKH Holdings shares.

The spin-off will simplify Cheung Kong Holdings’ layered structure, since the company is invested in a wide array of companies both directly and through, or sometimes alongside, Hutchison Whampoa. The ownership structure of both corporations will also be simplified. Li Ka-shing’s holdings will be merged, and he, his family and his trusts will control 30 percent of each new entity.

Moreover, the spin-off will created two more focused companies; CKH Holdings, a traditional investment conglomerate and CK Property, a real estate company. Thus, investors will be able to elect whether they would like be invested in Li Ka-shing’s property empire, an option that is not available under the current structure, as both Cheung Kong Holdings and Hutchison Whampoa have significant real estate assets. Additionally, the complicated structure of the two conglomerates is one of the reasons both companies trade at very low price-to-earnings and price-to-book multiples. The proposed demerger is likely to reduce the deep holding company discount at CKH Holdings and perhaps eliminate it altogether at pure-play real estate corporation CK Property. It is indicative that Cheung Kong Holdings and Hutchison Whampoa trade at a 25 percent and 10 percent discount to their NAV, respectively. The potential shareholder gains from closing the gap between the market and the book value of equity could be substantial, especially since one could reasonably argue that such owner-operated companies, led by one of the world’s most successful businessmen, should trade at a premium to their net asset value.

It should be noted that the proposed transactions, including the Reorganization and the spin-off, could be part of Li Ka-shing’s plan to reshuffle his holdings. In years past, the billionaire has seen a lack of opportunities in his native Hong Kong. For example, the city-nation’s property prices have appreciated to levels that do not appear sustainable. The billionaire’s recent transactions seem to verify that thesis; in 2014, publically-traded subsidiary Power Assets Holdings Ltd (6 HK), a global power generation company owned through Hutchison Whampoa’s Cheung Kong Infrastructure Holdings, spun off through an IPO its Hong Kong utility arm HK Electric Investments Ltd (2638 HK). Additionally, it has long been speculated that A.S. Watson Group, Hutchison Whampoa’s retailing business, will pursue an initial public offering. The result of all these transactions is the reduced, diluted stake of Li Ka-shing and his conglomerates’ in Hong Kong subsidiaries. On the other hand, his companies have been expanding in other areas, such as European telecommunications and aircraft leasing.

Consequently, a standalone real estate company could simplify the owner-operator’s task of reorganizing his property holdings, by selling Hong Kong assets and either reinvesting the proceeds abroad or distributing them as dividends. One could also speculate that the spin-off could allow Li Ka-shing to divest his real estate holdings by simply selling CK Property shares. Another owner-operator, Frank Lowy, followed that path by selling his shares in the spin entity in 2010, when Westfield Group divested a 50 percent interest in its Australian malls to Westfield Retail Trust, thus effectively reducing his exposure to the region’s real estate. However, Mr. Li Ka-shing has historically been perceived as shareholder friendly. Moreover, his 30 percent interest in each of the two reorganized companies makes a full divestment almost impossible without news of the disposal becoming public and the stock price collapsing.

On January 8, 2015, MeadWestvaco Corp. (NYSE: MWV) announced a plan to spin off its Specialty Chemicals business via a tax-free distribution to shareholders. The issuance of new debt by MWV Specialty Chemicals will finance a cash dividend to the parent, MWV Packaging. The transaction is subject to customary closing conditions and legal opinion, and is expected to be completed by the end of 2015. MWV’s current executive team will remain with the parent company.

MeadWestvaco, based in Richmond, Virginia, is a global specialty chemicals and packaging company. The Specialty Chemicals business, based in Charleston, South Carolina, generated trailing 12 month (TTM) revenue of $1.03 billion and EBITDA margin of 26.5% and consists of asphalt paving chemicals, activated carbon technologies, adhesive and ink resins, and oilfield and agricultural chemicals. Performance Chemicals represented 76% of total TTM segment sales, with activated carbon comprising the remaining 24%. The Packaging business is primarily focused on the food, beverage, tobacco, beauty and personal care, healthcare, and home and garden markets, having generated trailing 12 months revenue of $4.5 billion and EBITDA margin of 17.0%. Products include consumer paperboard, beauty and personal care pumps and dispensers, healthcare dispensers, home and garden trigger sprayers, and corrugated solutions. Food and beverage represented 72% of TTM segment sales; home, health and beauty 17%; and industrial 11%. Approximately a third of the company’s packaging revenue comes from high growth emerging markets such as Brazil, China, and India.

The transaction is the culmination of a long debate between management and shareholders over the merits of a separation of these disparate businesses. For nearly 15 years, MWV has been steadily transitioning toward becoming more of a packaging company, although this business has generally underperformed investor expectations. MWV paid full market value for its packaging acquisitions, yet the company’s margins remain well below peers. Many of the company’s acquired operations were subsequently written down, sold, or discontinued. At the same time, the company’s SG&A levels of approximately 11% are high relative to peers. A recent position by activist shareholder Starboard Value (5.5% stake) raised hopes of an accelerated turnaround in this underperforming business and/or further restructuring. MWV has announced two major cost-cutting initiatives since the start of 2013 totaling $175 to $205 million, or approximately 23% of annual EBITDA. In contrast, the Specialty Chemicals business has performed very well over the past five years, with EBITDA growing from $84 million in 2009 (16.7% margin) to $262 million in 2013 (26.7% margin). With the 2012 acquisition of Norit NV, a specialty chemicals company, by Cabot Corp. (NYSE: CBT) for 11.5x EBITDA, investor concerns over the rationale for maintaining a higher multiple non-core business amidst MWV’s packaging portfolio began to surface. Within this context of an underperforming core business, the spin-off should not come as a surprise to investors. Moreover, the transaction underscores what appears to be a broader trend within the Specialty Chemicals industry. A highly volatile commodity pricing environment, particularly for crude oil, has forced diversified petrochemicals companies to refine their business in order to focus on more stable, higher-margin businesses—potentially accelerating merger and acquisition activity in 2015. Notably, this transaction follows on the heels of the planned spin-off of Dupont’s (NYSE: DD) performance chemicals segment (announced October 2013).

While the spin-off of the Specialty Chemicals business will result in a consumer-focused global packaging company, MWV has substantial work ahead in improving overall operational performance. In conjunction with the spin-off, the company plans a comprehensive organization redesign to further refine its strategy and improve margins. In addition, MWV will use the cash from the spinoff primarily to pay down debt in order to maintain an investment grade credit rating. Management commentary suggests that MWV Specialty Chemicals will carry leverage of approximately 2.0x EBITDA. The post-spin company expects to continue to pay a dividend (currently 2.3%), with the final rate to be determined post-separation.

A starting point for a valuation may consider a broad set of comparable companies. In the packaging segment, comparables include Packaging Corporation of America (NYSE: PKG), Klabin SA (KLBN11: BZ), AptarGroup Inc. (NYSE: ATR), International Paper Company (NYSE: IP), and Rock-Tenn Company (NYSE: RKT), among others. This group currently trades at 8.2x estimated 2015 EBITDA. Packaging 2015 EBITDA can be estimated using current 2015 MWV consensus revenue, assuming stable segment revenue contribution, and Packaging EBITDA margins of 16.9%. Applying 8.2x to MWV Packaging 2015 estimated EBITDA of $798 million generates an implied enterprise value of $6,543.9 million for this business.

For the Specialty Chemicals segment, comparable companies include Cabot Corp. (NYSE: CBT), Calgon Carbon Corp. (NYSE: CCC), Albemarle Corp. (NYSE: ALB), Westlake Chemical Corp. (NYSE: WLK), and Rockwood Holdings, Inc. (NYSE: ROC), among others. This group has historically traded at a premium to the Packaging Segment, owing to higher growth rates and margins. That said, multiples in this group have compressed in recent months, largely owing to the decline in crude oil pricing; comparable peers currently trade at 9x estimated 2015 EBITDA, below a 10x multiple approximately one year ago and the 2012 take-out multiple by Cabot of 11x. Specialty Chemical’s EBITDA can be estimated assuming the segment generates $1,089.1 million in revenue and operates with a 29% operating margin. Applying the current peer multiple to MWV Specialty Chemicals estimated EBITDA of $294 million results in an implied enterprise value of $2,646.5 million for this business.

Accounting for $1,645 million in net debt results in an implied equity value of $45 for pre-spin MWV– essentially approximating the current share price. The lack of implied upside is largely attributable to the recent multiple compression in the Specialty Chemicals segment. However, applying a 10x and 11x multiple for this business (more consistent with historical and M&A transaction multiples) would suggest between 4% and 9% upside to the implied equity value– to $47 and $49, respectively. Moreover, the spin-off of this historically higher-performance business may signal management’s increased confidence in the rest of the packaging portfolio, with potential upside stemming from margin and dividend expansion and new growth opportunities in emerging markets.

On January 6, 2015, Alliant Techsystems Inc. (NYSE: ATK) announced that the company expects to complete the spin-off of Vista Outdoor on February 9, 2015, subject to approval by both ATK and ORB shareholders at separate special meetings scheduled for January 27, 2015. Assuming scheduled approval, Vista Outdoor is expected to begin trading “when issued” on the NYSE January 29, with “regular way” trading scheduled to begin February 10, 2015 under the ticker symbol “VSTO”. ATK shareholders will receive two shares of Vista Outdoor for every one share of ATK common stock held at the record date, which will be determined at a later date. As previously announced, immediately following the spin-off of Vista, ATK’s Aerospace and Defense groups will merge with Orbital Sciences (NYSE: ORB) to form Orbital ATK (NYSE: OA).

The fair value estimate for Vista Outdoor is revised modestly downward to reflect the on-going correction in the recreational ammunition market, which appears to have seen a cyclical peak in early 2014, as well as the revised distribution ratio. In a recent conference call, ATK management noted that the average sporting industry correction typically lasts about 18 months and that organic sporting revenue could be expected to experience a mid-single digit decline in F2015 (March end) but that total revenue growth, bolstered by recent acquisitions, could climb at a double digit rate. Vista has indicated the expectation that organic growth would resume in 2H F2016 resulting in low single digit growth for full-year F2016. Organic top-line growth is projected in the mid-single digits for F2017 and Vista’s long-term goal is for organic growth of 6%-8%. On the margin front, Vista’s adjusted EBITDA margin is expected to be in the mid-teens in F2016 with improvement in F2017. The company’s long-term goal is for adjusted EBITDA margins of 16%-18%. In the spirit of conservatism, Vista’s revenue can be projected to grow 5% in F2015 and remain flat in F2016. As well, it can be reasonably forecasted that the EBITDA margin declines roughly 200 basis points from current levels to about 14.5% in F2016. Based on these modestly lowered estimates and peer multiples, the post-spin fair value of Vista Outdoor is revised to $30 per share (from $35 based on a 64.0 million diluted share count).

Despite the recent maintenance of initial post-merger financial guidance, which called for C2015-C2017 revenue and EPS CAGRs of 4%-5% and 12%-15%, respectively, the fair value for Orbital ATK (OA) is revised lower to reflect uncertainty in the wake of the recent Antares launch failure at ORB. Given ORB’s insurance coverage and comprehensive contingency plans the financial impact is expected to be relatively minimal (i.e. ~$10 million); that said, the potential longer-term impact, if any, of the incident on contract awards/pricing is more difficult to quantify at this time, which presents a degree of risk to an investment thesis. Based on peer multiples and tempered expectations for EBITDA, EPS and free cash flow as well OA’s expected asset base the fair value for Orbital ATK is revised to $66 per share (previously $74 per share).

Based on the projected market capitalization of Vista Outdoor and the expected 53.8% interest ATK shareholders will have in post-merger Orbital ATK, the implied pre-spin fair value for current ATK shares is about $128 per share (versus the current price of $113.42). Based on the expected 46.2% interest that ORB shareholders will have in Orbital ATK, the implied pre-merger fair value of current ORB shares is about $30 (versus the current share price of $25.46).

Post-spin, the standalone Vista entity, which, based on ORB’s current share price of $25.46, the 0.449 expected exchange ratio and a post-spin diluted share count of 64 million (given the 2 for 1 distribution), is implicitly trading around $28.50 per share (versus our post-spin fair value of $30). Nevertheless, the stock could experience a degree of initial selling pressure as the shareholder base churns and investors grapple with concerns about Vista’s results in a cyclical trough. That said, a sell-off would likely present an attractive longer-term buying opportunity if the company can come even close to achieving management’s target of double-digit top- and bottom-line growth, including both internal and acquisitive expansion, over the long term. In that context, the prospects for M&A at Vista look particularly attractive given underlying market fragmentation and the company’s expected financial flexibility (i.e. leverage ratio less than 1.0x). Vista has also indicated that while M&A prospects remain bright it would likely also seek board authorization for an “opportunistic” share repurchase program.

On December 23, 2014, Vornado Realty Trust (NYSE: VNO) announced that shares of Urban Edge Properties will be distributed on January 15, 2015, after the market close, to shareholders of record as of January 7, 2015. Urban Edge Properties will begin regular way trading on January 16, 2015, on the NYSE under the symbol “UE”. Shareholders of record will receive one share of UE for every two shares of VNO owned as of the record date. The separation still requires an effectiveness declaration of the company’s Form 10 filing by the SEC. Urban Edge Properties is expected to begin trading in the when-issued market on or about January 7, 2015. Urban Edge Properties, to be structured as a REIT, will consist of 79 strip centers and 3 malls (previously 81 strip centers and 4 malls), while Vornado will become a more focused property owner with office and retail space primarily located in the New York and Washington DC metro areas.

The fair value estimate for UE is revised to $25 per share (previously $26 per share) as the number of properties included in Urban Edge’s portfolio has decreased slightly, resulting in lower estimates for funds from operations (FFO) and net operating income (NOI). UE’s fair value estimate is derived by using an average of price to 2015E FFO, 2014E NOI, and an assumed dividend yield.

The fair value for VNO following the spin increases to $108 per share (previously $101 per share). The fair value for post spin VNO is derived using an average of the price to 2015E FFO and peer dividend yield. The increase in the VNO fair value is primarily attributed to an increase in the peer group multiple from 20.7x to 23.4x. Boston Properties Inc. (NYSE: BXP) trades at 25.3x 2015E FFO. Based on the revised fair value estimates, the pre-spin fair value of VNO is $120 per share. Please see the Vornado Realty Trust Spin-Off Report (October 20, 2014) for further details.

• Gannett Co. Inc. (NYSE: GCI) announced plans to spinoff the company’s publishing assets into a separately traded public entity via a tax-free spin-off.

• GCI concurrently announced the purchase of the 73% interest in Cars.com it currently does not own for $1.8 billion. The acquisition price is 11.7x pro forma 2014 estimated incremental EBITDA (or 9.2x 2015, including expected synergies.)

• The closing of the Cars.com acquisition is expected in 4Q 2014 while the spin transaction is expected to be completed in mid-2015.

• The SOTP calculation is revised to $38 per share (from $36) to adjust for the spin, acquisition and added debt load.

• GCI is latest media conglomerate to separate publishing from broadcasting assets, following the E.W Scripps/Journal Communications deal announcement as well as other recent spin-offs by News Corp, TimeWarner and Tribune Media.

• A potential transaction at Gannett was highlighted in the Hidden Opportunities report on November 1, 2013 and January 3, 2014 (see the dated reports for more details). Since the initial write-up, GCI shares are up 25% versus an about 10% rise in the S&P 500.

• The valuation of stand-alone Publishing entity, which is expected to debt free up separation, is $14 based on a estimated 2014 EBITDA of $392 million and a peer multiple of 7.8x.

• The valuation of the post-spin Broadcasting and Digital business is $38 per share, and includes $32 for Broadcasting, $10 for Digital, $3 for investments, and incorporates an expected $20 per share in net debt.