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).

On November 5, 2014, American Capital, Ltd. (NASDAQ: ACAS) announced a plan to spin off its investment assets in the form of two publicly-traded business development companies (“BDCs”), with the parent company, American Capital, to retain its asset management business. The transaction is subject to final approval by the American Capital Board of Directors, filing of registration statements with the SEC, receipt of a tax opinion, refinancing of the company’s indebtedness and the establishment of credit facilities for the new BDCs, and refinancing by American Capital of portfolio companies’ third-party debt and resolution of certain co-investment issues. The transaction may also need regulatory relief from the SEC. In addition, shareholders must approve the company’s de-election to be regulated as a BDC under the Investment Company Act of 1940, as amended. A transaction timeline has not been disclosed.

The two new BDCs are anticipated to qualify and elect to be taxed as regulated investment companies with the objective of paying market rate dividends. American Capital Growth and Income, Ltd. is a tax-free spin of a (mostly) buy-out BDC focusing on one-stop buyouts, leveraged senior floating rate loans to private companies, and CLO (Collateralized Loan Obligation) equity investments. American Capital Income, Ltd., a taxable spin, is a more traditional debt BDC, focusing on second lien and mezzanine loans to middle market companies. Based on current asset composition, these businesses are presently allocated approximately $3 billion and $1 billion of equity, respectively. Both entities will target a market rate dividend, as well as provide market rate management and incentive fees and appropriate expense reimbursements. The parent company will retain its NOLs and continue as the external manager of five

public permanent capital vehicles: the two new BDCs, two mortgage REITs, American Capital Agency Corp. (NASDAQ: AGNC) and American Capital Mortgage Investment Corp. (NASDAQ: MTGE), American Capital Senior Floating Ltd. (NASDAQ: ACSF), and several non-public vehicles, including private equity funds and CLOs. The transaction leaves a remaining segment, European Capital (ECAS), which could fit in the buyout BDC, the asset manager, or sold as an externally managed fund. In conjunction with the spin-off, the company is undertaking various cost saving initiatives, which are expected to result in approximately $25 million of reduced costs annually by the end of 2015.

American Capital is a business development company (BDC) with over $5.0 billion of on-balance sheet investments, and a global asset manager, with a total of $77 billion in third party assets under management. The company is one of the largest and most actively publicly traded buyout and mezzanine lending firms, and is focused primarily on private and small and middle market companies. While originally structured as both a Registered Investment Company (an earnings pass-through tax structure similar to REIT status) and a Business Development Company (BDC), the company dropped its RIC designation in 2011 to preserve and utilize net operating loss carry-forwards (NOLs) accumulated during the recession.

The restructuring of ACAS into an asset manager and separation of the BDC assets is an important step toward closing the disparity between the company’s assets and valuation. The potential for this transaction has been featured in The Spin-Off Report Radar Screen since April 2014 and specifically highlighted in the company’s 2013 10-K. In essence, the spin-off creates a debt BDC and a (mostly) buy-out BDC, leaving the parent company, American Capital, as a pure asset manager. The purpose of the breakup is to maximize the value of the asset manager by increasing AUM. Given the shares’ 29% discount to 3Q F2014 NAV ($20.54 per share), the separation of the investment assets from the asset management businesses should unlock value as the BDC portions of the portfolio may be re-valued at a level closer to book value, and the investment manager may be valued at a higher level based on public comparisons. Today, ACAS traded at 0.7x book value prior to the spin announcement. Further, the separation will delineate investment strategies and provide greater transparency, while reducing perceived channel conflict between the buyouts and sponsor finance entities.

A valuation of the BDC spin companies can be based on publicly-traded RIC (Regulated Investment Company) BDC comparables, which include companies such as Apollo Investment Corp (NASDAQ: AINV), Ares Capital Corp. (ARCC), Gladstone Investment Corp (NASDAQ: GAIN), and Blackrock Kelso Capital Group (NASDAQ: BKCC). This group is currently trading at an average multiple of 1.0x price-to-book value, above ACAS’ current multiple of 0.7x. Applying this multiple to asset values for American Capital Growth and Income and American Capital Income, Ltd., respectively, results in equity values of $3,119 million and $1,000 million.

The parent company has $13 billion of earnings assets under management and generated $65 million in operating income in 2013. A valuation can be based on publicly-traded Alternative Asset Managers, which include companies such as Blackstone Group (NYSE: BX), Carlyle Group, L.P. (NYSE: CG), Fortress Investment Group (NYSE: FIG), and KKR & Co. L.P. (NASDAQ: KKR). On an earnings basis, the group tends to trade at a wider range, with alternative asset managers at the lower end (10x to 12x) and traditional asset managers at the higher end of the range (12x to 18x). ACAM should probably garner a multiple slightly above most alternative asset managers given its higher liquidity and composition, with 80% of AUM in permanent investment vehicles (Mortgage REITs and BDCs). Applying this 14x multiple to operating income of $65 million results in an equity value of $910 million.

Applying these respective peer multiples to the two BDCs and the parent asset manager results in a total implied equity value of $5,707 million for the company, resulting in a pre-spin fair value estimate of $20.39 per share. This fair value estimate represents 39% upside based on yesterday’s closing price.

On October 29, 2014, SPX Corp. (NYSE: SPW) announced a plan to spin off the company’s Flow business via a tax-free distribution of shares. The standalone flow business will be comprised of the current Flow segment and hydraulic technologies business. The flow business sells a variety of pumps, valves, filtration equipment, mixers and hydraulic technologies. The parent entity (currently referred to as Future Infrastructure Co.) will retain the power equipment, heating, ventilation, and air conditioning (HVAC) businesses. Infrastructure Co. will be led by Gene Lowe, who currently serves as SPW’s Thermal Equipment and Services segment President. Chris Kearney, the current SPW CEO, will serve as the CEO of the yet to be named Flow company following the transaction. The separation is expected to be completed within twelve months from the announcement, and the company anticipates transaction costs to total $60-$80 million. The spin-off is subject to an effectiveness declaration of a Form 10 filing with the SEC.

The potential for SPW to separate the flow business has been highlighted in The Spin-Off Report Radar Screen (October 2014) as activist investor Relational Investors reported an increased stake of 15% in SPW. Relational has reportedly pushed for SPW to consider divesting certain underperforming assets. Relational was also involved with Illinois Tool Works Inc. (NYSE: ITW), which announced in September 2013 that it was commencing the process of selling its Industrial Packaging segment.

SPW has divested non-core businesses and made several acquisitions in recent years as it focuses operations on the Flow Technology segment, which includes pumps and valves. The company sold its automotive-service equipment business in January 2012 for $1.15 billion. Since that sale, there has been some discussion in the press that SPX has been trying to sell the Thermal Equipment and Services business.

The Thermal segment manufactures and services thermal heat transfer products such as cooling towers, heat exchangers, and pollution control systems for the HVAC and power generation markets. In 2013, the Thermal business experienced a revenue decline of about 10% to $1.3 billion (about 27% of total revenue) and EBITDA of $87.1 million (down from $111.9 million in 2012). Through 3Q 2014, the thermal business’ revenue declined 3.5% to $946 million and operating income declined 15.5% to $41.9 million. Industrial Products and Service’s increased revenue by 8.8% while segment income declined 3.6%. The declines in the thermal business can largely be attributed to ongoing weakness in the South African power markets, which is currently an unprofitable geography. Through 3Q 2014, Flow revenue was essentially flat versus the prior year at $1.9 billion, while segment income increased 23%.

Flow Company is expected to have annual revenue of approximately $3 billion. Infrastructure Co. is expected to generate approximately $2 billion in annual revenue derived from its products that include power transformers, heat exchangers, residential and commercial boilers, and communication technologies. The spin-off will separate the better performing, higher margin flow business from the struggling thermal and services business. It could be expected that following the transaction the flow business would receive a higher valuation multiple absent the declining margin thermal business. Additionally, given previous reports that SPW may have been looking to sell the thermal business, structuring the spin-off with Thermal as the legal parent entity may facilitate a sale of the business post spin off.

The Infrastructure Company can be compared to peers such as Shanghai Electric Group (2727 HK), Dongfang Electric Corp. (1072 HK), and Alstom (ALO FP), which on average trade at about 0.7x sales and 5.2x EBITDA. Applying these multiples to estimated 2014 sales of $2,150 million and estimated 2014 EBITDA of $170 million, respectively, results in an average implied enterprise value of $1,280 million for this business. Note that estimated 2014 EBITDA represents a 5.0% margin for the thermal equipment segment and a 13.3% margin for industrial products, consistent with management’s guidance of 5.8% and 13.6% respectively, for these segments.

Comparables for the standalone flow business include Xylem Inc. (NYSE: XYL), Colfax Corp. (NYSE: CFX), IDEX Corp. (NYSE: IEX), and Flowserve Corp. (NYSE: FLS), which currently trade at 1.7x sales and 12.8x EBITDA. Applying these multiples to estimated 2014 sales of $2,600 million and estimated 2014 EBITDA of $355 million results in an average implied enterprise value of $4,226 million for this business. Note that estimated 2014 EBITDA represents a 13.6% margin for this business, consistent with management’s segment margin guidance.

Based on a total implied enterprise value of $5,723 million for the combined businesses, net debt of $973 million, and an estimated share count of 41.5 million, one can arrive at a pre-spin valuation of $114 per share for SPW.

The fair value estimate for Keysight (NYSE: KEYS) has been revised to $31 (from $49) to reflect considerable multiple compression and demand softness across the communications technology sector. As noted in the initial Agilent Technologies Inc. Spin-Off Report (September 16, 2014), fair value calculations would be adjusted based on the finalized distribution ratio, capital structure, dividend policy and changes in company/industry fundamentals. Shares of Keysight will be distributed on November 1, 2014. KEYS began trading on a when-issued basis on October 20, 2014.

Recent negative quarterly earnings announcements from companies such as Juniper Networks (NYSE: JNPR), Microchip Technology (NASDAQ: MCHP) and Spirent (SPM.LON) signal meaningful end market weakness across multiple points of the communications supply and demand chain. Given Keysight’s significant exposure to the communications and semiconductor end markets (40% of sales), it would not be surprising to see new management take the opportunity to re-calibrate expectations and issue more conservative initial formal F2015 financial guidance on the company’s upcoming November 17th earnings call. Note that current consensus forecasts imply revenue growth of +3 to +4% for KEYS (consistent with management’s long-term market growth forecast)– above expected market growth of +2% to +3%. These expectations may prove optimistic given the aforementioned macro backdrop. Accordingly, we expect KEYS to face considerable valuation headwinds following the spin-off, which may also be exacerbated by potential selling by healthcare-focused Agilent holders, who may have differing investment mandates and objectives (approximately 70% of Agilent’s current investor base is healthcare focused).

Approximately 1.3 million KEYS shares have traded in the when-issued market. Shares closed yesterday at $30.10 per share. Considering an estimated 167 million shares for the post-spin entity, current when-issued activity represents a negligible portion of future volume, but provides an indicator into what appears to be bearish market sentiment.

KEYS comparables, which are communications-oriented test and measurement suppliers such as JDS Uniphase (NYSE: JDSU), FEIC Company (NASDAQ: FEIC), and Teradyne (NYSE:TER), currently trade at an average EV/EBITDA, P/E, and P/S multiples of 8.2x, 15x, and 2.5x, respectively—reflecting a pullback of approximately 20% to 25% from September levels. Applying updated peer multiples to estimated EBITDA, earnings and sales estimates, and factoring in for a potential 10% shortfall to estimated F2015 revenues (reflecting demand weakness) results in a downward revision of the KEYS fair value estimate to $31 (from $49). It is important to note the sensitivity of this relative valuation analysis on implied fair value. For example, each 1x turn in the applied EV/EBITDA multiple has an almost $4 impact on estimated fair value. From a revenue perspective, the applied 2.0x forward multiple to estimated F2015 revenue represents a discount to the valuation of the recent acquisition of Danaher’s (NYSE: DHR) test and measurement communications business by Netscout (NASDAQ: NCTC), which received a 3x multiple (see the Spin-Off Report Flash dated October 13, 2014 for more details). Similarly, on a P/E basis, the applied multiple of 12x (versus peer average of 15x) may be more appropriate considering the increased risk associated with forward estimates, coupled with the KEYS’ recent share losses and exposure to lower-margin handset testing.

Fair value for New Agilent remains unchanged at about $40 per share. Given the ongoing fundamental risk and sector volatility associated with KEYS, shares are not recommended for purchase at this time. Please see the Agilent Technologies Inc. Spin-Off Report dated September 16, 2014 for further details.

On October 17th, C.P. Pokphand Co. Ltd (Ticker: 43 HK, HKD 0.87 per share, Market Capitalization: HKD 20,943 million—USD 2,670 million based on an exchange rate of USD 1 = HKD 7.76) announced that it has submitted an application (Form A1) with regard to the separate listing of its biochemical and industrial business on the Hong Kong Stock Exchange. C.P. Pokphand Co. Ltd. had been covered in The Global Spin-Off Radar Screen since August 2014 as a result of its June 30th, 2014, press release stating that its Board was assessing the feasibility of a spin-off of its non-core businesses. The spin entity will be named CTEI Group. The parent company intends to fully distribute shares of the new entity to existing shareholders, and does not intend to raise any capital. The transaction is subject to customary approvals, and the timing has yet to be determined.

C.P. Pokphand Co. Ltd. is a holding company primarily engaged in the agri-food business in China and Vietnam. It operates under five segments; China agri-food, Vietnam agri-food, biochemical, industrial, and investment & property holding—with the last unit having a de minimus impact on the company’s performance. The first two segments, responsible for the vast majority of the company’s revenues, manufacture and distribute animal feed and food products. The biochemical business focuses on producing chlortetracycline (“CTC”), an antibiotic that is used in the veterinary industry and as an animal feed additive, among others. Lastly, the industrial segment produces motorcycles under the “Dayang” brand and automobile accessories. Additionally, it operates as the sole sales agent for Caterpillar in western China.

The Company is part of the Charoen Pokphand Group, one of Asia’s largest conglomerates. Its owner, and C.P. Pokphand’s Chairman, Dhanin Chearavanont, is Thailand’s second richest man with an estimated net worth in excess of USD 11 billion. His vast empire includes one of China’s largest insurance companies, Ping An Insurance (2318 HK), as well as Charoen Pokphand Foods Plc (CPF TB). The latter company is C.P. Pokphand’s majority owner, with a stake of approximately 50 percent—reduced from 72 percent after the sale of 24 percent of the company to ITOCHU Corporation that was announced on July 24th, 2014.

Based on a group of Asian competitors that trade at an enterprise value-to-EBITDA multiple of 9.3x, the company’s food manufacturing business could have an enterprise value of USD 3,241 million. The biochemical business, while primarily providing antibiotics used in animal feedstock, should be classified as a specialty pharmaceuticals company. Indeed, its operating margin for 2013 was 16.5 percent, significantly above the 4.7 percent achieved by the two agri-food segments. Therefore, a higher EBITDA multiple, at par with other Asian specialty pharmaceutical companies, is warranted—resulting in an enterprise value of USD 263 million. Lastly, the industrial segment can be compared to other automobile manufacturers and distributors, and valued at USD 145 million. Thus, a spin entity comprising C.P. Pokphand’s non-core assets could be valued at USD 408 million. Factoring in USD 476 million in net debt, an equity valuation of USD 3,173 billion—or HKD 24,623 million—is derived.

On October 13th, Israel Corporation Ltd (Ticker: ILCO IT, ILs 194,100 per share, Market Capitalization: ILS 14,943 million—USD 3,995 million based on an exchange rate of USD 1 = ILS 3.74) announced that its Board of Directors approved the separation of several of its subsidiaries into a Singapore incorporated entity, Kenon Holdings Ltd, that will subsequently be distributed to the company’s existing shareholders. Israel Corporation had been covered in The Global Spin-Off Radar Screen since July 2013, in anticipation of the recently announced spin-off. Kenon Holdings will own IC Power Ltd, Quantum LLC, Zim Integrated Shipping Services Ltd, IC Green Energy Ltd and Tower Semiconductor Ltd (TSEM IT). The parent company will be comprised of a 37 percent interest in Oil Refineries Ltd (ORL IT) and an almost 50 percent stake in Israel Chemicals Ltd (ICL IT). The demerger’s main driver is the creation of value through the unwinding of ILCO’s complex holding company structure. The new entity will be listed both on the Tel Aviv Stock Exchange and the New York Stock Exchange. Details regarding the timeline for the transaction will be published in the future. The spin-off is subject to customary conditions, such as shareholder approval.

Israel Corporation is Israel’s largest conglomerate, whose major shareholder is the Ofer family, one of the wealthiest in Israel. In light of persistent losses in Zim due to the condition of the shipping industry, as well as the bankruptcy of Better Place (in which ILCO held a significant stake), the Board of Directors announced on June 26, 2013 that it was considering a spin-off of the company’s holdings. The original time horizon for such a move was 6-12 months, but the spin-off was deferred, probably due to Zim’s restructuring. The approval of the shipping company’s reorganization plan—which included the conversion of USD 1.4 billion in debt into a 68 percent equity stake as well as a USD 200 million equity infusion by Israel Corporation—hinted that a spin-off decision was approaching. Furthermore, on September 2014, Israel Corporation offered approximately 6 percent of Israel Chemicals in an initial public offering in the US stock market, reducing its ownership of the fertilizer and chemical producer to slightly below 50 percent.

Following the demerger of Kenon Holdings, a separation of Israel Corporation’s two remaining companies, Israel Chemicals and Oil Refineries, is possible according to the company. Given that both companies are publically traded, the distribution of shares of one or both subsidiaries to shareholders could be the most tax-efficient method. From a valuation perspective, a post spin-off Israel Corporation will have two assets— its equity holdings in the aforementioned companies—and approximately ILS 4.19 billion in net debt—as the parent company will retain all the debt. ILCO’s equity interest in Israel Chemicals is valued at ILS 14.98 billion and in Oil Refineries at ILS 1.89 billion. The resulting equity valuation for a post spin Israel Corporation is ILS 12.37 billion.

With regards to Kenon Holdings, Zim had trailing-twelve-month sales of USD 3.79 billion. A peer group of container liner companies trade at an average enterprise value-to-Sales multiple of 0.9x. IC Power generated EBITDA of USD 200 million in the past year. A group of similar companies trade at an enterprise value-to-EBITDA multiple of 7.8x. Tower Semiconductor is a publically traded company; Kenon Holdings’ stake is currently valued at ILS 593 million. The remaining of Kenon Holdings’ ventures, such as Quantum, are in a very early stage operationally and generate little revenue. As a result, one may choose to exclude them from an initial valuation. The spin entity will hold approximately USD 2 billion in debt related to ZIM’s containerships. It will also have access to a line of credit extended by Israel Corporation, which, however, will not initially impact the net debt level. Thus, Kenon Holdings could have an equity value of ILS 2.73 billion. The resulting valuation for a pre spin-off Israel Corporation stands at ILS 15.1 billion.

On October 13, 2014, Danaher Corp. (NYSE: DHR) announced a plan to spin off or split off a portion of the company’s Communications business into a separate company, which is to be merged with NetScout Systems (NASDAQ: NTCT) in a Reverse Morris Trust transaction. Danaher will create a wholly-owned subsidiary for the Communications business and will subsequently distribute ownership of that subsidiary to Danaher shareholders, which will be followed by a merger of the Communications subsidiary with NetScout. If Danaher elects a spin-off, all Danaher shareholders would participate pro-rata. If Danaher elects a split-off, Danaher shareholders would have the opportunity to exchange their Danaher shares for shares of the Communications subsidiary. Danaher will determine which approach it will take prior to closing the transaction; no decision has been made at this time. Following the merger, DHR shareholders will own approximately 60% of the merged NetScout entity.

If a spin-off is elected, the dilution impact to Danaher’s net earnings per diluted share would be approximately 2-3% on an annual basis. In a split-off, the impact to net earnings per diluted share would be immaterial, assuming full take-up of the split-off shares. The transaction is expected to be completed in 2015 and is subject obtaining regulatory approvals, as well as final approval by Netscout shareholders and receipt by Danaher of confirmation of the tax treatment of certain matters. Based on a closing price of $41.91 on October 10, 2014, the transaction values Danaher’s Communications business at $2.6 billion, or 1.2x trailing twelve months’ sales of $836 million (FY end Dec), consistent with test and measurement comparables. The business includes the brands of Tektronix Communications, Fluke Networks, and Arbor Networks. The data cabling tools business and carrier service provider tools business of Fluke Networks will be excluded from this transaction.

The transaction further underscores the increasing activity in the electronic measurement industry and potential for renewed growth. In recent months, both Agilent Technologies (NYSE: A) and JDS Uniphase (NASDAQ: JDSU) have announced plans to spin-off their Communications test related businesses. For Netscout, which provides end-to-end network and application assurance solutions, the acquisition of Danaher’s communications test business gives the company considerable scale and customer penetration. Following the acquisition, Netscout will have $1.2 billion in revenues. The company’s traditional revenue base has been Enterprise customers, which represent approximately 50% of sales, but more recently, Netscout has seen increased penetration among service providers as the company strategically transforms its business toward applications performance management. The requirement for more sophisticated, real-time view of the applications running over the network has quickly become an emerging growth portion of communications spending. As enterprises and service providers deploy an increasing wide range of applications and services, each with unique requirements for bandwidth, timing, and delay sensitivity, Quality of Experience (QoE) is becoming increasingly important in order to maintain both consistent performance and business continuity. The deployment of new technologies such as 4G networks and Voice-over-LTE( VoLTE) has also complicated network performance, requiring these customers to turn to application assurance solutions.

Danaher, a medical and industrial conglomerate, has a long history of acquisitions, but more recently has been looking to consolidate its life sciences business, which represented approximately 36% of 2013 revenues. This emphasis was further confirmed by the company’s appointment of a more life-sciences focused CEO, Tom Joyce, in September of this year. Danaher acquired Swiss dental prosthetics and implant maker Nobel Biocare for approximately $2.2 billion in September, and the microbiology business of Siemens (SIE GY) in July. The company’s largest deal to date has been Beckman Coulter in the life sciences space, which has acquired for $6.8 billion in 2011. Danaher has been speculated to be pursuing larger and more numerous M&A transactions, with an emphasis on less cyclical end markets with more consistent earnings growth, as well as business models characterized by high margin, recurring revenue streams. In this context, a spin-off of a more volatile and highly cyclical test and measurement business makes sense.

Following the acquisition of Danaher’s communications business, Netscout will have revenues of $1.2 billion, growing at approximately 10% year-over-year, and estimated EBITDA of $319.2 million (23.5% EBITDA margin). The company competes with a wide range of communications test companies including Agilent Technologies (NYSE: A), JDS Uniphase (NASDAQ: JDSU), Ixia (NASDAQ: XXIA), and Riverbed Technologies (NASDAQ: RVBD), which currently trade on average at 12.2x EV-to-EBITDA and 2.6 x EV-to-sales. Applying these peer group multiples to Netscout’s estimated EBITDA of $319.2 million and revenue of $1.2 billion respectively results in an average enterprise value estimate of $3.7 billion for new NetScout, versus $1.5 billion for the current company. Assuming 60% ownership by DHR shareholders values the spun off communications business at $2.2 billion.

On October 13, 2014, Atlas Energy L.P. (NYSE: ATLS) announced a plan to spin off non-midstream related assets. The announcement came as part of the announcement that Targa Resources Corp. (NYSE: TRGP) was acquiring ATLS’ midstream general partner (GP) and limited partner interests for $1.9 billion in cash and shares. Additionally, Atlas Pipeline Partners L.P. (NYSE: APL) will be acquired by Targa Resource Partners LP (NYSE: NGLS). The combined transactions are valued at approximately $7.7 billion. Prior to the acquisition of ATLS by TRGP, ATLS will distribute to ATLS unit holders shares in a new publicly traded company that will hold all of ATLS’ non-midstream assets. The transactions are expected to be completed in 1Q 2015, and are subject to approval of APL, ATLS limited partners, TRGP shareholders, and regulatory clearance related to the Hart-Scott-Rodino Antitrust Improvements Act.

ATLS’ non-midstream assets to be spun off include 100% general partner (GP) interest and incentive distribution rights (IDR) in ATLS’ E&P subsidiary Atlas Resource Partners L.P. (NYSE: ARP); 25 million ARP units (includes 3.75 million Class C Preferred Units in ARP); 80% GP and IDR rights as well as 8% limited partner interest in ATLS’ E&P Development subsidiary; 16% GP interest and 12% LP interest in Lightfoot Capital Partners (which has 40% LP interest in Arch Logistics Partners LP(NYSE: ARCX); and Net production of approximately 11.5 million cubic feet per day of natural gas production located in the Arkoma basin. Management states that in total all non-midstream assets would initially distribute $1.25 per unit.

ARP is an exploration and production (E&P) focused master limited partnership (MLP) with active production in the Barnet Shale Appalachian Basin, the Black Warrior Basin, and the Mississippi Lime formation. The company has ownership interest in over 14,500 oil and gas wells with approximately 1.4 Tcfe in net proved developed reserves.

Rationale for the transaction appears to be a byproduct of the TRGP and NGLS respective acquisitions of ATLS and APL. The transaction helps Targa expand its market for processing and exporting natural gas liquids (NGLs), and is among more than a dozen pipeline similar deals announced this year amidst industry consolidation– particularly in the liquids-rich Permian Basin, Eagle Ford, and Bakken formations, where hydraulic fracturing and horizontal wells have unlocked significant oil and natural gas resources. The acquisitions are primarily focused on combining complimentary midstream pipeline assets. The E&P focus of Atlas Resource Partners was likely not desired by the pipeline focused entities that will result from the acquisitions given the higher risk and less stable cash flows that typically are associated with E&Ps versus pipelines.

Following the spin-off, the standalone non-midstream SpinCo could be compared to other publicly traded upstream MLPs. Peers include Mid-Con Energy Partners LP (NASDAQ: MCEP), New Source Energy Partners L.P. (NYSE: NSLP), Vanguard Natural Resources LLC (NASDAQ: VNR), and EV Energy Partners LP (NASDAQ: EVEP). This peer group trades on average at with an 11% distribution yield. Applying an 11% to expected cash distribution of $1.25 per unit (assuming 1:1 distribution) results in an estimate of $11 per unit, implying a market capitalization of $590 million.

On October 10, 2014, The Blackstone Group LP (NYSE: BX) announced a plan to spin off the financial and strategic advisory services, restructuring and reorganization advisory services, and its Park Hill fund placement business into a separately traded public company. The spin company will be combined with PJT Partners, an independent advisory firm. The transaction is expected to be completed in 2015, and is subject to an effectiveness declaration of the company’s Form 10 filing with the SEC and the receipt of an affirmative opinion on the tax-free status of the transaction from counsel. PJT is an independent advisory firm founded by Paul J. Taubman, who will assume the CEO role of the new publicly traded company. Following the transaction BX unit holders will own approximately 65% of the yet to be named spin entity, PJT will own the remaining 35%.

BX was founded in 1985 as a boutique advisory firm focusing on mergers and acquisitions. The firm has since morphed into one of the largest private equity firms with total assets under management of $278.9 billion as of 2Q 2013, representing 195% growth since 2009. The company operates under five segments: Private Equity, Real Estate, Hedge Fund Solutions, Credit, and Financial Advisory.

The spin-off of the advisory business makes sense in terms of a differentiation in the business models of the advisory business from the other lines of business. The financial advisory business generates fees from investment banking services and advice, as well as a from the Park Hill business that assists in raising funds for other private equity funds. The remainder of the business generates fees from management fees and investment returns on assets under management. Despite representing the firms’ legacy business line, the advisory business has largely remained flat on a revenue basis, generating $420 million in 2013, representing 6% of total revenue. As a comparison, the advisory business generated $397 million in 2009 and contributed 22% total revenue. Combining the advisory business with PTJ Partners likely gives the standalone company added scale. Further, the current structure of BX presents potential conflicts of interest for the advisory business when dealing with companies within Blackstone’s portfolio. Separating the business and merging it with PTJ will reduce the potential for conflicts of interest, allowing the company to more aggressively pursue new business clients.

In an attempt to value the post spin entities, one approach is to use a price to sales multiple. The advisory business being spun out has trailing revenue of $382 million. The business could be compared to large investment banks such as Citigroup Inc. (NYSE: C) and The Goldman Sachs Group Inc. (NYSE: GS) which currently trade at 11.8x trailing sales. Applying that multiple to the spin company results in an estimated enterprise value of $4.5 billion. The parent company would have generated approximately $6.3 billion in sales on a trailing basis. One can compare the remaining businesses to other publicly traded private equity companies The Carlyle Group (NASDAQ: CG), Kohlberg Kravis Roberts & Co. L.P. (NYSE: KKR), and Oaktree Capital Group LLC (NYSE: OAK), which currently trade at 7.0x trailing sales. Applying 7.0x to BX’s remaining businesses revenue results in an enterprise value of $43.6 billion. Through this rough, preliminary exercise a pre-spin enterprise value of $48.1 billion can be derived, which is slightly below the current enterprise value. The fact that this exercise finds the shares to be fairly valued should not be surprising given that the rationale for the transaction is rooted more in eliminating potential conflicts of interest than presenting a true unlocking of value.