On December 4, 2014, Hawaiian Electric Industries, Inc. (NYSE: HE) announced a plan to spin off its wholly-owned subsidiary American Savings Bank via a tax-free distribution to shareholders. The spin entity will be named ASB Hawaii Inc. (ASB). The spin-off is contingent on the acquisition of HEI by NextEra Energy, Inc. (NYSE: NEE) in a transaction valued at approximately $4.7 billion, including assumed debt of $1.7 billion. Hawaiian Electric Industries shareholders as of the record date will receive 0.2413 NextEra Energy shares per Hawaiian Electric Industries share and a one-time special cash dividend payment of $0.50 per share. Management estimates that total value to HEI shareholders, excluding assumed debt and including the one-time special cash dividend, and based on an estimated value of American Savings Bank of approximately $8.00 per share, is estimated to be $3.5 billion or approximately $33.50 per HEI share. The transaction is subject to approvals from the Hawaii Public Utilities Commission (PUC), Federal Energy Regulatory Commission (FERC), Federal banking regulators, the SEC, HEI shareholders, and Hart-Scott-Rodino antitrust provisions, and is expected to close within the next 12 months.

NextEra, based in Juno Beach Florida, is one of the largest rate-regulated electric utilities in the United States. The company has multiple subsidiaries, including Florida Power & Light (FPL), one of the largest electric utilities in the United States, and NextEra Energy Resources, LLC, North America’s largest producer of renewable energy from the wind and sun. NextEra owns and operates about 17 percent of installed U.S. wind capacity, about 14 percent of installed U.S. utility-scale solar, and eight nuclear reactors. The company generated 2013 revenues of $15.1 billion, approximately 42,500 megawatts of generating capacity, and has approximately 13,900 employees in the United States and Canada. NextEra has recently been divesting assets in order to pursue a growth strategy through accretive acquisitions while improving shareholder returns, having expanded its dividend by 10% annually since 2011. In July of this year, the company completed a successful initial public offering of its wind and solar subsidiary Nextera Energy Partners LP (NYSE: NEP), raising $406.2 million. In September, NextEra withdrew an offer to acquire Oncor, the Texas electricity transmission division of bankrupt Energy Future Holdings Corp., which would have expanded its already well-established Texas operations. Hawaiian Electric is expected to be neutral to EPS within the first 12 months following completion of the transaction and accretive thereafter.

Hawaiian Electric is the state’s largest power suppliers, serving approximately 450,000 customers, or 95% of the population on Hawaii, Oahu, and Maui. The company is heavily regulated and vulnerable to the state’s energy policy changes, having been increasingly pressured to adapt its energy portfolio in order to reduce the state’s reliance on fossil fuels. Hawaii has the nation’s highest electricity prices, with approximately 75 percent of the island’s electrical power served from imported oil. Notably, the entire island chain of Hawaii has just 2,400 megawatts of generating capacity. Unlike mainland utilities, HEI is geographically isolated. Whereas typically electric utilities can purchase electricity on wholesale markets to meet fluctuations in demand, HE can only purchase power from local sources and thus, is extremely limited by on-island generating capacity.

The acquisition gives NextEra a foothold in the state’s rapidly evolving clean and renewable energy transformation. Given Hawaii has the highest utility costs nationwide, NextEra can use this revenue stream to finance a much-needed accelerated infrastructure build out, which will likely include leveraging geothermal and other renewable resources. Currently, 20% of Hawaii Electric’s production is based on renewable energy; rooftop solar serves 11% of the utility’s customer base.

American Savings Bank is one of Hawaii’s largest full-service financial institutions with over 5 billion in assets (the third largest bank in Hawaii by total deposits), and provides banking and insurance services to individual and business customers through approximately 63 branch offices and an insurance agency subsidiary. For ASB, the primary challenge going forward is navigating the state of Hawaii’s unusual and potentially weakening economy. Given the state’s high cost of imports, there is a relatively high cost of living with inflation outpacing the national average by 1-2% on average since 2003. Statewide unemployment was 4.2% in September 2014, with Honolulu at 4%, significantly below the national unemployment rate of 5.9%. ASB achieved ROE of 9.9% over the last 12 months, maintaining a fairly conservative risk profile. Year-to-date annualized loan growth was 5.9%, and is driven primarily by higher commercial real estate, home equity lines of credit, and residential loans.

In general, regional bank stocks have underperformed this year, with the KBW Regional Bank Stock Index (BKX) having increased 5% year to date versus 12% and 14% for S&P 500 and NASDAQ over the same period – but valuations may begin to improve as many companies continue to improve divided yield and further de-risk balance sheets. The regional banking sector may also be poised for further industry consolidation as companies attempt to improve operational performance through scale.

A starting point for a valuation of ASB investors may consider a broad set of regional banks, including Central Pacific Financial Corp. (NYSE: CPF), Financial Institutions Inc. (NASDAQ: FISI), Bank of the Ozarks Inc. (NASDAQ: OZRK), and IberiaBank Corp. (NASDAQ: IBKC), among others. It should be noted that this applied comparable peer group excludes regional peer Bank of Hawaii (NYSE: BOH), owing to the company’s meaningfully higher ROE of over 15% versus 9.9% for ASB. The group is trading at 1.4x book value. Applying this multiple to ASB Hawaii’s book value of $537.5 million generates an implied market capitalization of $752.5 million. Applying a peer group multiple of 15.1x to ASB’s estimated annualized net income of $52.6 million results in a market capitalization of $794.4 million. Based on an average implied market capitalization of $773.5 million and 102.6 million shares outstanding, one can arrive at an implied fair value of $7.54 per share for ASB Hawaii—essentially in line with management’s estimates.

On December 1st, E.ON SE (Ticker: EOAN GR, EUR 14.75 per share, Market Capitalization: EUR 29,639 million—USD 37,004 million based on an exchange rate of USD 1 = EUR 0.80), a major German electricity producer, announced its intention to house its Power Generation, Global Commodities and Upstream businesses into a new company (“NewCo”), the majority of which will be distributed to its existing shareholders. In the medium-term, and after the initial distribution, E.ON will sell its minority stake in the capital markets. The spin-off will be preceded by a reorganization of the company’s operations in 2015, and will be completed in 2016. The demerger is subject to shareholder approval, which is expected to take place in E.ON’s 2016 annual general meeting.

At the same time, the company announced the sale of its operations in Spain and Portugal for an enterprise value of EUR 2.5 billion, impairment charges of EUR 4.5 billion for 2014 and the establishment of a EUR 0.50 per share annual dividend for the 2014 and 2015 financial years. The goal of the fixed dividend policy is to eliminate stock volatility that could arise from costs associated with the reorganization plan and the spin-off.

The focus of the new company will be on E.ON’s existing upstream and midstream assets. Its Upstream segment produces oil and gas from the North Sea and Russia. The Global Commodities business focuses on the storage and trading of commodities. NewCo’s largest segment will be Power Generation, which will have a 51 GW electricity production capacity. Its focus will be on “conventional” facilities, although it will include E.ON’s nuclear and hydro power plants. E.ON’s subsidiaries in Russia and Brazil will be spun off as well. NewCo will face a challenging environment. Government subsidies for renewable energy—especially in Germany—have suppressed electricity prices, rendering many coal and gas power plants unprofitable. Lower commodity prices continue to weigh on the results of the exploration and production and trading businesses.

Taking into account these challenges, NewCo is expected to be spun off with an investment-grade rating. To achieve that, all bonds will be kept at the parent company level. Thus, the new company will have minimal financial liabilities On the other hand, the new entity will still have substantial asset retirement obligations of approximately EUR 18.5 billion. To put that in perspective, E.ON’s aggregate debt stands at EUR 18.9 billion. With revenues and EBITDA expected to decline in the future, the new company will also focus on strong cash conversion. Capital expenditures are expected to be “significantly below” operating cash flow, allowing for a generous dividend and the preservation of an investment-grade balance sheet.

After the spin-off, E.ON will comprise its Distribution, Customer Solutions and Renewables businesses as well as the company’s Turkish subsidiary. Distribution is a relatively stable business with almost 30 million customers, that will be responsible for the majority of the company’s EBITDA. Costumer Solutions focuses on projects such as on-site energy generation, energy efficiency and sustainability. The Renewables segment, which will not include the hydroelectricity plants, will aim at rapidly expanding its wind and solar electricity generation capacity, which currently stands at 4.4 GW. In the short-term, free cash flow generation is expected to be minimal, with most operating cash flows reinvested to expand capacity. Already E.ON decided to increase 2015 capital expenditures for the businesses that will remain with the parent by EUR 0.5 billion from the initially planned EUR 4.3 billion.

The deviation between current reporting units and the reorganized company structure does not allow for a reliable estimate of both NewCo’s and post spin-off E.ON’s profitability. While the information provided may discourage an indicative valuation, investors can derive useful information from the proposed transaction. Firstly, it is evident that the new company will be primarily focused on “dirty fuel” sources, whether that is through power generation, commodities trading or exploration and production. E.ON, on the other hand, will retain its traditional client-interfacing, regulated utilities business (Distribution), and switch its focus to renewable energy.

Thus, the spin-off decision is very likely to have been influenced by the changing landscape in European energy production, with more stringent regulations for polluting plants and subsidies for clean energy. To that end, the spin-off could be an attempt to separate loss-making or low-return assets that will continue to struggle. Moreover, even though all the financial debt will remain with the parent company, the amount of asset retirement obligations that accompanies the conventional power generation business will be significant—allowing E.ON to offload what it calls “economic debt” to the troubled spin entity.

The two companies are also expected to cater to different investors. E.ON will become a growth company, investing significantly in its business with the goal of increasing its energy capacity and its revenues. That is in striking contrast to NewCo, which faces declining sales while at the same time trimming costs and investments and generating strong free cash flow. Lastly, even though the profile of a growth-oriented, renewable energy-focused company would normally create expectations of volatile financial results, the dominance of the “traditional” Distribution business will eliminate most of the earnings variability. NewCo is, in fact, the corporation that is more dependent on the price of commodities and electricity. Therefore, investors should take into account the potential variability of earnings and the resulting sustainability of any dividend.

On December 1, 2014, B/E Aerospace Inc. (NASDAQ: BEAV) held an analyst day to discuss the company’s general market and business outlook as well as provide updated financial guidance. Importantly, the company announced executive management for post-spin BEAV. Werner Lieberherr, who has served as President and Chief Operating Officer of the parent company since 2011, has been appointed as president and CEO of post-spin BEAV. Joe Lower will serve as Chief Financial Officer. Lower, formerly Vice President of business development and strategy for Boeing (NYSE: BA), has served as Vice President of Finance since November 1, 2014. Notably, BEAV’s current executive team is going to the spin company, KLX. Amin Koury, BEAV’s current Chief Executive Officer, will serve as Chief Executive Officer; Michael Senft (currently a Board member), will serve as Chief Financial Officer; and Tom McCaffrey (currently BEAV’s Chief Financial Officer), will serve as President and Chief Operating Officer.

Management provided a general outlook for its commercial aircraft manufacturing, consumables, and energy services businesses which is essentially unchanged from prior commentary, and offered updated guidance for both the parent and spin entities. For 2015, post-spin BEAV is expected to generate revenue growth of approximately 10% to $2.8 billion to $2.9 billion, approximately 3% below our $2,936 million estimate at the midpoint, and in line with prior commentary of ‘double-digit’ growth. 2015 EBITDA guidance of $525 million (22% margin) is 17% below our $637 million estimate. For the 2015-2017 period, management guidance calls for annual revenue growth in the high single-digits and EBITDA margin of approximately 22%, consistent with consensus and our view. Post-spin BEAV will also initiate an annual dividend of $0.76 per share, representing a payout ratio of approximately 25%, with annual increases targeted in the 10% range.

For KLX, 2015 guidance calls for revenues between $1,800 million to $1,900 million, in line with our $1,848 million estimate. 2015 EBITDA guidance was modestly above expectations, at $460 million, versus our $380 million estimate. Going forward, KLX is expected to growth revenues in the high single digits and targets EBITDA margin of approximately 22%, consistent with previous expectations.

The downward revision to EBITDA guidance for post-spin BEAV as well as updated dividend policy information results in a modest downward revision to our average implied EV estimate to $6,409 million from $6,680 million and in turn, a downward revision to our fair value estimate to $53 (from $55). The fair value estimate for KLX remains unchanged at $51 per share (reflecting a 1:2 share distribution ratio). Fair value estimates are based on average values derived from EV/EBITDA, EV/Sales, EV/Assets, and M&A multiples.

While constructive on the long-term outlook for both companies, we believe the shares are likely to experience volatility leading into and following the spin-off. Today’s analyst event underscores the vastly different investment profiles of the two companies. Post-spin BEAV is an operationally mature company tied to a well-understood aircraft manufacturing cycle– focused largely on cash flow generation, expanding ROIC metrics, and healthy dividend yield. KLX, in contrast, is a smaller, more cyclical emerging growth story, with reduced visibility and limited discretionary free cash flow. Whereas post-spin BEAV may be perceived as a more defensive investment holding, given flattening growth, substantial backlog and ROIC characteristics, KLX is clearly a growth vehicle as the company aims to address a fragmented, $15 billion addressable market in energy services. That said, this strategy carries both operational and execution risk, relying largely on an ongoing M&A strategy to drive near-term growth amidst a challenging energy services macro-environment. In addition, post-spin KLX is likely to generate a market capitalization below $3 billion, which may cause large-cap, growth investors currently invested in BEAV to sell KLX on the spin-off.

Shares of KLX Inc. will begin when-issued trading under the symbol “KLXIV” on December 3, 2014. Shares of KLX Inc. will be distributed on December 16, 2014, after the market close to shareholders of record as of December 5, 2014. KLX Inc. will begin regular way trading on December 17, 2014, on the NASDAQ under the symbol “KLXI”. Shareholders of record will receive one share of KLXI for every two shares of BEAV owned.

Please see the B/E Aerospace Inc. Spin-Off Report (November 24, 2014) for further details.

On November 28, 2014, B/E Aerospace Inc. (NASDAQ: BEAV) announced that shares of KLX Inc. will begin when-issued trading under the symbol “”KLXIV”” on December 3, 2014. Shares of KLX Inc. will be distributed on December 16, 2014, after the market close to shareholders of record as of December 5, 2014. KLX Inc. will begin regular way trading on December 17, 2014, on the NASDAQ under the symbol “”KLXI””. Shareholders of record will receive one share of KLXI for every two shares of BEAV owned.

Following the transaction, KLX will be comprised of BEAV’s Consumables Management Segment (CMS) and focus on distribution, logistics, and technical services for the aerospace and energy services markets. The timing of the spin-off appears opportune considering that aircraft manufacturers are consolidating their supply chains as they reduce costs and accelerate production. The fair value for KLX Inc. has been revised to $51 per share (previously $26 per share) reflecting the 1:2 share distribution ratio. KLX’s fair value is based on average values derived from EV/EBITDA, EV/Sales, EV/Assets, and M&A multiples. The fair value estimate of $55 per share for post-spin BEAV remains intact. B/E Aerospace will host an investor meeting on December 1, 2014, to review 2015 guidance and the outlook for post-spin BEAV and KLXI. The fair value estimates may be revised following the investor meeting. Please see the B/E Aerospace Inc. Spin-Off Report (November 24, 2014) for further details.

On November 17, 2014, Exterran Holdings, Inc. (NYSE: EXH) announced plans to spin off the company’s international contract operations, international aftermarket services, and global fabrication businesses into a standalone public company via a tax-free distribution of shares to EXH shareholders. The post-spin parent company will be a pure-play U.S. compression services business (the largest independent provider of compression in the United States). The company holds the sole general partner (GP) interest and a limited partner interest in the MLP (Master Limited Partnership) Exterran Partners L.P. (NASDAQ: EXLP), which together represent a 37 percent ownership position, as well as all of the incentive distribution rights. The parent company will also own and operate the remaining U.S. contract operations and U.S. aftermarket services businesses currently owned by Exterran Holdings.

In the Parent, the separation offers investors a pure-play yield investment with exposure to U.S. energy infrastructure redevelopment while the SpinCo could appeal to investors interested in leverage to international infrastructure and fabrication expansion. The transaction is expected to be completed during 2H15, and is subject to market conditions, the receipt of an opinion of counsel as to the tax-free nature of the transaction, completion of a review by the U.S. Securities and Exchange Commission of a Form 10 to be filed by SpinCo, the execution of separation and intercompany agreements and final approval of the Exterran Holdings board of directors.

The SpinCo is expected to be distributed with an amount of long-term debt equivalent to the amount of long-term debt held at Exterran Holdings parent level immediately prior to the transaction, and SpinCo will distribute these funds to Exterran Holdings on or before the closing. The parent company will then pay off its long-term debt at closing with those funds, resulting in no leverage post the spin-off. As of September 30, Exterran Holdings had $737.7 million of long-term debt while receivables totaling $159 million from the sale of Venezuelan assets, due in quarterly installments over the next two years, will remain with Spin Co. The transaction will not impact the $1.22 billion of long-term debt outstanding at Exterran Partners.

The parent company will become a pure-play U.S. compression services business, with stable cash flows from its fee-based contracts and MLP interests. The company will also have limited capital requirements allowing the return of a significant portion of cash flow to shareholders via a recurring dividend as well as the potential acquisition of additional U.S. contract operation assets. EXH currently pays a quarterly dividend of $0.15 per share (or an about 1.8% yield) but the distribution policies of each entity will be determined prior to the completion of the transaction. The spin-entity will similarly enjoy stable cash flows and limited capital spending, which can be deployed toward dividends and investments in internal contract operations projects. As well, the separation will allow SpinCo to expand its fabricated compressor customer base to include U.S. based businesses, which have heretofore been competitors of Exterran Holdings.

The SpinCo generated $1,933 million in TTM sales and can be compared to oil and gas services companies such as Enerflex Ltd. (EFX.CN), Superior Energy Services, Inc. (NYSE:SPN), and Halliburton (NYSE: HAL). These companies trade at an average of 1.0x sales. Valuations in this business have been negatively impacted by a reduction in natural gas prices and drilling activity. Applying the current peer multiple to TTM sales of $1,933 million results in an enterprise value of $1,933 million. However, growing demand for compression services for unconventional natural gas sources such as shale plays (which are growing as a percentage of revenue) may improve the valuation of the SpinCo over time.

The parent U.S. services company can be compared with U.S.-based compression services companies such as USA Compression Partners. L.P. (NYSE: USAC), Regency Energy Partners, L.P. (NYSE:RGP), Access Midstream Partners, L.P. (NYSE:ACMP), and Natural Gas Services Group, Inc. (NYSE: NGS). Many of these companies perform natural gas compression in addition to offering Midstream and other services. In addition, many of these companies operate as MLPs, and, the stable cash flows generated from these businesses– coupled with the lack of direct short-term exposure to commodity prices– results in significantly higher valuations, averaging 2.2x sales. Applying the current average peer multiple to TTM sales of $913 million results in an enterprise value of $2,018 million. On a sum-of-the-parts basis, a fair value estimate for pre-spin EXH of $48.40 per share can be derived when considering the company’s net debt position of $543 million. However, this fair value estimate does not include the company’s 37% interest in Exterran Partners (NASDAQ: EXLP), which is worth approximately $562 million based on the shares’ closing price of $27.28 on November 14, 2014. Including the company’s MLP ownership position results in a fair value estimate of $56.40 per share.

On November 13, 2014, after the market close, Graham Holdings Co. (NYSE: GHC) announced plans to spin off the company’s Cable ONE subsidiary into a standalone public company via a tax-free distribution of shares to GHC shareholders. The new standalone company, Cable ONE, is the 13th largest cable service provider in the United States as measured by coverage area, serving small-city subscribers in 19 midwestern, western and southern states. The parent entity is a diversified education and media company whose principal operations include education services, online, print, and local TV news, with approximately 14,000 employees. Notably, Graham Holdings owns Kaplan, a leading provider of educational services, and Graham Media Group, which owns several local television broadcasting stations. The separation is expected to be completed in 2015, and is subject to SEC review of required filings, other applicable regulatory approvals, and final approval by the company’s Board of Directors.

Cable is GHC’s second largest business segment, generating $807.3 million in F2013 sales (23% of total), representing 3% year-over-year growth. Operating income was $169.7 million, representing 10% year-over-year growth from $154.6 million in 2012. Operating margin at the cable division was 21% in 2013 and 20% in 2012. Cable ONE offers HD programming, wireless Internet service, and telephony service to business and consumer customers. The company provides cable television packages, Internet, home phone, and bundle services for households. In addition, it offers cable and music, internet and data, business phone, and advertising sales. Cable ONE customers totaled 694,236 as of September 30, 2014. The company continues to focus on growing high margin high-speed data and business sales, with 70% of its customers currently subscribing to high-speed data services. Like many independent cable operators, however, Cable ONE has been experiencing steady erosion of its video subscriber base owing to exorbitant retransmission fees on the part of programmers. Cable ONE continues to adopt an aggressive stance in order to reduce content costs, but its subscriber base has suffered accordingly. In the company’s most recently reported quarter, subscriber churn was 14,100 (essentially flat year-over-year), representing approximately 15% erosion of its subscriber base over the past 12 months. A highly publicized transmission battle with content provider Viacom (NASDAQ: VIA) is primarily to blame. In April of this year, Cable ONE dropped Viacom’s 15-network bundle, rather than pay higher carriage fees.

For Cable ONE and other smaller cable operators, the challenge is to profitably offer TV services at attractive price points for consumers given they lack bargaining power with content providers. Unable to garner the volume discounts enjoyed by dominant incumbent providers such as Comcast Corp (NASDAQ: CMCSA), Time Warner Cable (NYSE: TWX), DirecTV (NASDAQ: DTV), Charter (NASDAQ: CHTR), Cablevision (NYSE: CVC) (NASDAQ:CHTR), etc. most of these companies have gradually reduced their focus on video and have instead turned to high-speed Internet services in order to garner a competitive advantage. Not only are several transformational mega-mergers already underway (e.g. Comcast-Time Warner, AT&T-DirecTV), but the rise of dominant content providers with tremendous negotiating power over network providers and corporate advertisers will further exacerbate the problem of scale for smaller operators. A sluggish advertising market, coupled with the rise of Netflix (NASDAQ:NFLX), Google (NASDAQ: GOOG) and Amazon (NASDAQ:AMZN) into original programming also presents a long-term competitive threat.

The post-spin parent company consists of three primary business segments: Education, Television Broadcasting, and Other. The Education division, Graham’s largest business, generated $2,177 million in 2013(Dec), representing 62% of consolidated sales, and operating income of $51.3 million. This segment, which is represented by the company’s Kaplan subsidiary, provides educational services (test preparation, certificate, diploma and degree programs) both domestically and outside the United States. GHC has struggled with this business. While posting flat revenue growth over the past two years, Education has declined approximately 24% from 2010 levels, owing to structural headwinds facing the for-profit education sector. Enrollment declines (total student counts have declined in the high single digits) and increased competition from online test prep providers have forced GHC to restructure the business, closing and consolidating facilities and reducing workforce. Television broadcasting (11% of sales) is the company’s best performing businesses, generating $374.6 million in 2013 revenues (6% growth), and consists of five local television broadcast stations (KPRC, in Houston, WDIV in Detroit, WKMG in Orlando, KSAT in San Antonio, and WJXT in Jacksonville). The segment is benefiting more recently from increased political advertising and increased retransmission. While having experienced an 11% decline in operating income to $171.3 million broadcasting generates the highest segment operating margin at 46% and 48% in 2013 and 2012, respectively. Graham’s “Other businesses” category, which generated $188.4 million, or 5% of 2013 sales, has largely grown through acquisitions (11 since 2012), and includes The Slate Group and Foreign Policy Group, which publish online and print magazine and websites; SocialCode, a marketing solutions provider helping companies with marketing on social-media platforms; Celtic Healthcare, a provider of home health and hospice services; Forney, a global supplier of products and systems that control and monitor combustion processes in electric utility and industrial applications; and Trove, a digital innovation team that builds news-related products and technologies.

Following the spin-off, CableOne may benefit from increased flexibility to focus on network and marketing-related capital expenditures in order to retain and grow high-speed Internet and business subscribers and potentially reduce churn. In particular, post-spin CableOne may invest more significantly in less competitive, suburban and rural markets in an effort to establish economies of scale. By deploying services in local markets where it already owns infrastructure, CableOne can profitably price services at low enough price points that are prohibitive for potential competitors. Over time, the company may be able to grow its Internet subscriber base, offsetting recent video declines. Further, with scale being essential to survival, the industry may also consolidate smaller independents over time.

Cable ONE’s business could be compared to the likes of other publicly-traded comparable providers such as Comcast, Charter Communications, Cablevision and Time Warner Cable, which currently trade at 7.8x the 2015 consensus EBITDA estimate. If Cable ONE were to be valued in line with peers, assuming modest 4% annual EBITDA growth, as a standalone company Cable ONE’s enterprise value could be estimated at $2.5 billion. It should be noted that the peer group used in deriving this estimate is far larger in size and scale, which may warrant a discounted multiple on Cable ONE upon separation.

Post-spin GHC will likely effect strategic changes given its Kaplan business appears to be in structural decline. Additionally, continued economic recovery may have an adverse effect, as Kaplan has benefited from increasing demand for technical degrees among displaced workers. As a result, the post-spin parent is likely to further invest in its broadcasting business, its most attractive asset. While a mature business, it enjoys healthy profitability and cash flow, as well as an essentially oligopolistic position in its local markets. Conceivably GHC may further growth this segment through acquisitions. Based on the recent earnings decline at Kaplan, 2015 EBITDA could be estimated at approximately $91 million.

Other for-profit education companies, including Apollo Education Group Inc. (NYSE: APOL), Corinthian Colleges Inc. (NASDAQ: COCO) and ITT Educational Services Inc. (NYSE: ESI), among others, trade at 3.5x 2015 EBITDA estimates. Applying this multiple to GHC’s educational segment derives an estimated enterprise value of $320 million. The broadcasting segments earnings are cyclical due to increased advertising in years containing elections and the Olympic games, as such broadcasters are usually valued on a blended two year EV/EBITDA multiple. GHC’s Broadcasting operations could be estimated to increase EBITDA by 15% in 2014, in line with the rate of increase through 3Q 2014, before declining 10% in 2015. Peers Gray Television Inc. (NYSE: GTN) and Lin Media LLC (NYSE: LIN) trade at 9.3x 2014 EBITDA and 10.5x 2015 EBITDA, which applied to GHC’s estimated EBITDA results in an average enterprise value of almost $2 billion. On a sum-of-the-parts basis, a fair value estimate for pre spin GHC of $858 per share can be derived.

On November 11th, Cosan SA Industria e Comercio (Ticker: CSAN3 BZ, Market Capitalization: BRL 12,420 million—USD 4,853 million based on an exchange rate of USD 1 = BRL 2.56) announced it is seeking to spin off of its gas distribution business, Companhia de Gás de São Paulo (“Comgás”, CGAS3 BZ), by transferring its publically-traded shares to a new company, named Distribuicão de Gás Participações. The spin entity might also be assigned a portion of Cosan SA’s corporate level debt. The transaction is subject to approval by Cosan SA’s shareholders and creditors, as well as the São Paulo State Sanitation and Energy Regulatory Agency.

Given that the spin entity’s only asset will be the stock of a publically-traded entity, it will resemble a tracking stock, although that is not management’s intention. Rather, Distribuicão de Gás Participações is likely to expand its natural gas distribution network, either organically or through acquisitions. In that context, the full acquisition of Comgás cannot be ruled out. It also remains to be seen whether the spin-off will lead to a better understanding of the value of Cosan SA, or simply be perceived by investors as another level of complexity.

This will be the second spin-off by Cosan SA Industria e Comercio in a short time frame. In early October, the company spun off its 75 percent interest in its logistics subsidiary, Rumo, into a publically-traded company named Cosan Logística SA (RLOG3 BZ). The transaction, which was announced on February 24th, 2014, was covered by The Global Spin-Off Report on a report published on October 2nd, 2014.

Cosan SA Indústria e Comércio is one of Brazil’s largest corporations, with interests in businesses operating in the infrastructure and energy sectors. Cosan SA operates under a holding company structure. Its main wholly or partially owned subsidiaries and joint ventures include Raízen Combustíveis, Raízen Energia, Comgás, Radar and Cosan Lubrificantes. The company was created when its Chairman, Rubens Ometto Silveira Mello, consolidated his family’s sugar mills. It has expanded rapidly, particularly since 2000, and has partnered with major oil corporations, such as Royal Dutch Shell Plc (RDSA LN). Approximately 60 percent of the firm is owned by Cosan Ltd (Ticker: CZZ US), a company traded in the USA and Brazil, and whose only asset is Cosan SA’s shares. It was created a few years ago by Rubens Ometto Silveira Mello for the purpose of raising outside capital with minimal dilution. Ometto owns all of the Class B shares—approximately a third of Cosan Ltd’s outstanding shares—that offer 10 votes each.

Since our October valuation, the company has issued an updated guidance for 2014 that forecasts lower EBITDA for its two consolidated subsidiaries, Radar and Cosan Lubrificantes. However, given that the bulk Cosan SA’s value is derived from its two joint ventures, Raízen Energia and Raízen Combustíveis, the overall valuation is only slightly affected. By valuing each of the subsidiaries and joint ventures separately, and assuming that all corporate level net debt remains with the parent company, Cosan SA Industria e Comercio’s post spin-off equity could be valued at BRL 14,008 million.

Comgás is a natural gas distributor in the state of São Paulo. Its pipeline network spans nine thousands kilometers and it is Brazil’s largest piped natural gas distributor, with an estimated 22 percent of volume sold. The company has approximately one million customers in over 70 cities, located in an area that generates approximately 27 percent of the country’s GDP. Cosan SA acquired its 60.1 percent interest from the company’s former controlling shareholder, BG Group. Shell is Cosan SA’s partner; it owns 18.2 percent of the shares, allowing for a free float of just 21.7 percent. Additionally, the British oil major has the option to convert its 21.8 million shares of Comgás into 30.9 million shares of Cosan SA at pre-specified time periods between 2015 and 2017. It is not clear how this agreement will be affected by the spin-off.

While an enterprise value could simply be derived from the current stock price, uncertainty over the 2014 full year EBITDA—estimated between BRL 1,300 million and BRL 1,550 million by Cosan SA—would make the market approach more volatile. Rather, one can simply take the Bloomberg consensus 2014 enterprise value-to-EBITDA multiple of 5.4x and use the expected EBITDA result. In the midpoint of the guidance, Comgás’ enterprise value is estimated at BRL 7,652 million and its equity value at BRL 5,589. Consequently, Distribuicão de Gás Participações’ 60 percent stake would be valued at BRL 3,356 million.

With a sum-of-the-parts equity valuation of BRL 17,364 million prior to the spin-off, the fair value of Cosan SA Industria e Comercio’s stock price is BRL 42.6.

On November 6th, OCI NV (Ticker: OCI NA, EUR 28.78 per share, Market Capitalization: EUR 5,927 million—USD 7,365 million based on an exchange rate of USD 1 = EUR 1.24) announced its intention to pursue a dual listing of its engineering and construction business in Egypt and the United Arab Emirates. The demerger is expected to be completed by way of distribution of shares in specie—although an initial public offering cannot be excluded—and take place in the first quarter of 2015. The spin entity will be named Orascom Construction Limited. A comprehensive report covering the spin-off, originally announced on December 21st, 2011, was published on July 26th, 20131. Additionally, it was announced on August 27th, 2014, that OCI’s Board of Directors approved the demerger. The spin-off has been delayed numerous times due to political turmoil in Egypt as well as the need for OCI NV to establish itself in the major Netherlands indexes.

In light of the time that has passed form the original report, it is useful to briefly review the valuation—although the pro forma capital structure is no longer relevant. OCI’s main source of income is its fertilizer business, which produces nitrogen-based fertilizers and industrial chemicals from natural gas. Its plants are located in North Africa—Algeria, Egypt—the Netherlands and the USA. Additionally, the company is planning to increase its output by approximately a third. New projects include a greenfield nitrogen fertilizer plant in Iowa, a greenfield methanol plant in Beaumont, Texas and a debottlenecking project in its existing Beaumont, Texas facility—that is owned by its OCI Partners LP Subsidiary (OCIP US).

Since our initial valuation, the company has restarted its Sorfert plant in Algeria that was temporarily shut down due to a dispute with the Algerian government over the price of natural gas. Furthermore, the company completed the sale of its stake in Gavilon Group LLC to Marubeni Corporation, as well as the initial public offering of its MLP subsidiary OCI Partners LP. Perhaps the most important update was the November 4th, 2014 ruling of the Egyptian Tax Authority’s Independent Appeals Committee in favor of the company with regards to the 2012 tax dispute.

The fertilizer market is also changing; the prices of various nitrogen-based products such as urea, ammonia and UAN have declined significantly from their 2012 peak. Consequently, the average enterprise value-to-EBITDA trading multiples of OCI’s two main peers, Yara International ASA and CF Industries Holdings Inc, have increased substantially. Thus, the current multiples—as opposed to historical averages—can be used.

The fertilizer segment generated a trailing-twelve-month EBITDA of USD 950 million. The capacity coming online in the end of 2015 (Iowa and OCI Partners) and 2016 (Beaumont) will increase OCI’s output by more than 30 percent. Thus, one can reasonably assume that EBITDA could increase by approximately 25% once the expansion is complete—to USD 1,188 million. Using an average enterprise value-to-EBITDA multiple of 6.6x, one arrives at an enterprise value of USD 7,799 million. Due to OCI’s production of industrial chemicals and its exposure to low-cost Middle Eastern natural gas, another competitor can be included in the peer group; Saudi Arabian Fertilizer Co, a corporation that trades at a significant premium to “traditional” fertilizer producers. Including SAFCO, the average enterprise value-to-EBITDA stands at 9.7x, leading to an enterprise value of USD 11,547 million. The average of the two approaches results in a firmwide valuation of USD 9,673 million.

Orascom Construction Limited will comprise the group’s construction assets. The company offers construction materials and services through various subsidiaries such as Orascom Construction, Contrack International, The Weitz Company and BESIX Group (50 percent owned), with a focus on infrastructure construction. The segment’s results tend to be very volatile; a pre-tax loss of USD 59 million was recorded for the past twelve months. Additionally, Orascom Construction’s backlog stands at USD 5 billion, compared to USD 6.8 billion in the end of Q1 2013. The difference is partially explained by a change in accounting standards, though; as of the end of the following quarter—Q2 2013—backlog stood at a mere USD 4.2 billion. Almost half of the backlog consists of projects in Saudi Arabia and Egypt.

A group of similar companies that compete with OCI NV for projects in the Middle East and the US are Fluor Corporation, Drake & Scull International, Daewoo Engineering and Construction, Hyundai Engineering and Construction, Skansa AB and Kajima Corporation. The average enterprise value-to-EBITDA is 9.7x. OCI’s construction and engineering business generated EBITDA of USD 184 million in the past year. The resulting enterprise value of Orascom Construction Limited stands at USD 1,788 million.

As of June 30th, 2014, OCI NV had USD 4,235 million in net debt and USD 381 million in non-controlling interest. Thus, the company’s equity value is estimated at USD 6,846 million. A fair value for OCI NV’s stock—that trades in Euro—is EUR 26.8.

On November 5, 2014, after the market close, The Babcock & Wilcox Company (NYSE: BWC) announced plans to spin-off the company’s Power Generation business into a standalone public company via a tax-free distribution of shares to BWC shareholders. The new standalone company, which will retain the Babcock & Wilcox corporate name, provides fossil and renewable power generation equipment for power and industrial uses. The spin entity is project-driven and includes aftermarket services revenues. The parent entity will be renamed BWX Technologies and will control the Government & Nuclear Operations business, consisting of Nuclear Operations, Technical Services, Nuclear Energy and the mPower businesses. BWX Technologies is a supplier of nuclear components and fuel to the US government. The company will also provide site services to government facilities and environmental remediation activities, as well as supplying components to the commercial nuclear power industry.

The separation is expected to be completed by mid-summer 2015, and is subject to an effectiveness declaration of the company’s Form 10 filing with the SEC, regulatory review by the Nuclear Regulatory Commission, and final Board approval. E. James Ferland, the current CEO of BWC, will assume the CEO role at the spin company (new Babcock & Wilcox), John A. Fees, BWC’s current Chairman, will become Chairman of BWX Technologies, and Peyton Baker, President of the current Government & Nuclear Operations group, will assume the CEO role at BWX Technologies.

BWC’s announcement of a spin-off is not surprising; the potential for this transaction was highlighted in the November publication of The Spin-Off Report Radar Screen. Babcock & Wilcox, which itself was spun off from McDermott International (NYSE: MDR) in July 2010, indicated on October 1, 2014 that it was evaluating a separation of its Power Generation business from its Government & Nuclear operations. This move followed the May 1 filing of a 13D by activist investor Blue Harbor, indicating it held about a 6% stake; among other things, the investor called for a separation of the underperforming Power Generation business from the core nuclear assets as well as improvements in capital allocation policies. Other large, but passive, investors in BWC include T. Rowe Price, Starboard Value, Glenview Capital, and Greenlight Capital.

Rationale for the spin appears to be rooted in the separation of two stagnant (in terms of revenue and profit growth) businesses that exhibit differing margin profiles. The nuclear related business is the dominant player in the market, and has what appear to be good relationships with the U.S. government. In fact, there does not appear to be a significant competitor to BWC’s nuclear and government operations, making relative comparisons difficult and resulting in a discounted valuation under the current corporate structure. Absent acquisitions, the power generation business has shown minimal growth in recent years. However, it competes with a variety of engineering and construction (E&C) companies in a business environment that is more competitive than the Nuclear related businesses. The separation in theory would result in an increased valuation multiple being awarded to the higher margin nuclear business. Additionally, as separate entities, the business could choose optimal capital structures based on specific cash flow characteristics. The company has historically operated with a net cash position. Blue Harbor had previously suggested that the company increase its debt levels and use the proceeds to reduce the number of shares outstanding, it was estimated by Blue Harbor that one turn of leverage could reduce outstanding shares by 20%.

New BWC is expected to generate sales of $1.7 billion in 2015. Through 3Q 2014, revenue and EBITDA at the Power Generation segment, which primarily makes boilers and filters for coal-fired power plants and has been hurt by its fossil fuel exposure, fell 23% and 31% to $1.04 billion and $82.2 million, respectively (about a 8% margin). The business does experience a degree of seasonality, with wider margins in the 3Q and 4Q since 2012. Assuming margins were to reach 10.7% in 2015, the annual average in 2012 and 2013, New BWC would generate EBITDA of $182 million in 2015. While no pure-play comparisons exist, one could look to a peer group of E&C companies, including Alstom S.A (ALO FP), Jacobs Engineering (NYSE: JEC), Hitachi Ltd. (6501 JP) and Foster Wheeler (NASDAQ: FWLT), which trade at about 7.6x 2015E EBITDA. Applying a 7.6x multiple to New BWC’s estimated 2015 EBITDA of $182 results in an estimated enterprise value of $1.4 billion. It is expected that New BWC will be spun out debt free resulting in a post-spin estimated fair value of $13 per share.

Management estimates that BWX Technologies will generate $1.4 billion in revenue in 2015. Through 3Q 2014, revenue and EBITDA at the Government & Nuclear related segments, which produces precision nuclear components and technical services for government and utility customers, declined 6% and 19%, respectively, to $1.06 billion and $173.2 million, respectively (about a 16% margin). The year-over-year decline was largely due to increased investments/losses at mPower, a joint venture project to develop small modular reactors (SMRs); management has recently indicated a desire to sell its majority interest in mPower, reducing it to 10%-20%. Given the reduction in mPower, it is reasonable to assume that the company’s margins would widen to historic levels. The nuclear related businesses operated with EBITDA margins of 17.2% and 17.3% in 2013 and 2012, respectively, which included significant losses from mPower. If margins were to reach 17.5% in 2015, as a standalone entity the company could earn $245 million in EBITDA. As a standalone company, BWX Technologies could be compared to other companies with exposure to the power generation industries, including nuclear exposure, including Doosan Heavy Industries (304020 KS), Areva (AREVA FP), and Warsila OYJ ABP (WRT1V FH), which on average trade at 10.3x 2105E EBITDA. Applying a 10.3x multiple to estimated 2015 EBITDA of $245 derives an estimated enterprise value of $2.5 billion. Assuming BWC’s current net debt of $64 million, a post-spin fair value estimate of $23 per share of BWX Technologies is derived.

Based on the above preliminary exercise, a pre-spin sum-of-the-parts valuation of $36 per share can be derived, representing 25% price appreciation potential from last night’s closing price. Note that this exercise does not take into account increased standalone costs that will be incurred upon separation.

On November 6, 2014, before the market open, Pinnacle Entertainment Inc. (NYSE: PNK), a regional casino operator, announced plans to spin-off its real estate assets into a stand-alone, publicly traded, real estate investment trust (REIT) via a tax-free distribution of shares to PNK shareholders. Under the current plan, “Prop Co” will initially own all of PNK’s real estate assets, consisting of 14 gaming properties and two racetracks located in CO, IN, IA, LS, MS, MI, NV and OH. The properties will be leased back to “Op Co” through triple net lease agreements, of which the rent structure and coverage ratios have yet to be determined. Subsequently, “Op Co” is expected to deliver annual dividend distributions as well as pursue expansion of its portfolio within the broad gaming, leisure and entertainment industries.

The transaction is expected to close in 2016 but still requires the receipt of a private letter ruling from the IRS, approval from gaming regulators, requisite SEC filings, the selection of an executive leadership team for the REIT, the negotiation of a Master Lease Agreement between “Prop Co” and “Op Co”. Concurrently, the company will seek, in a separate SEC filing process, approximately $1 billion of equity financing to reduce leverage and fund general corporate purposes. In connection with Prop Co electing REIT status, the company expects to distribute previous earnings and profits attributed to the real estate properties (commonly referred to as an E&P Purge) to shareholders. It is currently anticipated that the purging distribution will be less than $100 million. The company expects all net operating loss carry-forwards (NOL) and tax deductible goodwill, which currently stand in aggregate at around $1 billion, to remain with “Op Co”.

PNK’s announcement of a spin-off is not unexpected; indeed, the potential for this action was highlighted in the November publication of The Spin Off Report Radar Screen and it follows a similar transaction executed by Penn national Gaming Inc., which spun out Gaming and Leisure Properties Inc. (NASDAQ: GLPI) in November 2013. Moreover, the company had been urged by activist shareholder, Orange Capital, to pursue a REIT strategy in a 13D filed April 16, 2014. REIT’s do not pay federal income tax but are required to return 90% of earnings to shareholders as dividends. The beneficial tax rules and high payout rates have made REIT’s particularly popular avenue to satisfy yield-hungry investors in recent years; notably, the concept of casino-based REIT’s as a way to unlock value was floated by hedge fund, Land & Buildings, in a presentation regarding Las Vegas Sands (NYSE: LVS), back in September 2012.

Limited information is currently available but current consensus estimates and the PENN-GLPI transaction can be used as a guide in a rough preliminary valuation exercise. In 2013, PNK generated EBITDA of $370.6 million and the current 2014 consensus forecast, which includes the August 2013 acquisition of Ameristar Casino, projects consolidated EBITDA of $595.6 million. Assuming a EBITDAR/rent coverage ratio of 1.8x, which is consistent with the PENN-GLPI deal, implies rent expense of $331 million and Op Co EBITDA of $264.7 million. Applying PENN’s 6.9x 2014E EV/EBITDA multiple yields a Prop Co enterprise value of $1.8 billion (see attachment).

For the spin company, using implied rent expense of $331 and assuming incremental corporate operating expenses of $20 million, implies 2014E EBITDA of $311 million. Applying GLPI’s 2014E EV/EBITDA multiple of 13.9x yields a Prop Co enterprise value of $4.3 billion (see attachment). Assuming $1 billion of equity is issued at $25 per share and fully deployed toward debt reduction as well as transaction costs of about $50 million, consolidated market capitalization for PNK could be $3.3 billion or $32 per share (based on a diluted share count of 101.8 million, which assumes the issuance of an incremental 40 million shares).