On October 6, 2014, Hewlett Packard Corp. (NASDAQ: HPQ) announced a plan to spin off the company’s Enterprise business from the PC and printing business via a tax-free distribution of shares. Hewlett-Packard Enterprise will operate the current enterprise segment, while HP Inc. will control the personal systems and printing businesses. The transaction is expected to be completed by the end of fiscal year 2015 (October End) and is subject to required regulatory approvals. Concurrent with the announcement, the company reiterated its fiscal 2014 guidance of non-GAAP earnings per share outlook of $3.70 to $3.74 and provided full year fiscal 2015 non-GAAP diluted net earnings guidance of $3.83 to $4.03. Meg Whitman, current Chief Executive Officer of Hewlett Packard, will be President and Chief Executive Officer of Hewlett-Packard Enterprise. Dion Weisler, currently Executive Vice President of HP’s Printing and Personal Systems, will be President and Chief Executive Officer of HP Inc.

The enterprise segment achieved trailing twelve months’ revenues of $58.4 billion, operating profit of $6.0 billion and operating margin of 10.2%. The product line includes servers, storage, networking, converged systems, services and software as well as the company’s OpenStack Helion cloud platform. HP, Inc., which achieved trailing twelve months’ revenues of $57.2 billion, operating profit of $5.4 billion and operating margin of 9.4%, is essentially the legacy side of the business, consisting of personal computers (PCs) and printing (59% and 41% of sales, respectively).

A separation of these two disparate businesses has been speculated for some time—particularly given the long-term challenges in managing a company the size of HP, the negative, long-term secular trends in the PC market, and the need to increasingly focus the company’s growth strategy on the cloud (particularly as the IT market becomes increasingly competitive). Importantly, the separation of the PC and printing business from enterprise IT could also provide flexibility for the sale of one or both businesses. Recent media reports have suggested that HP and EMC (NYSE: EMC) may have been in discussions to merge. That said, it may have been difficult for EMC shareholders to accept and integrate a PC and Printer business. A more focused HP may also benefit from reduced complexity and better resource allocation, with HP Inc. being more mature, with stable margins and cash flow and Enterprise being an area needing more growth, investment and continued product development.

The spin-off comes at a time when Hewlett Packard’s ongoing transformation appears to be hitting its stride. The company is currently in the fourth year of a five-year turnaround plan. The company continues to reduce headcount, and currently expects a total of 55,000 reductions (36,000 have been completed to date), independent of the separation transaction. With margins on the PC side of the business having stabilized, services margins expanding, and marked improvements in overall financial performance, a separation may accelerate strategic focus and continued performance of both companies. On the enterprise side, HP has, in recent years, reinvigorated its product pipeline with an emphasis on data center infrastructure, security, managed services, and cloud computing. That said, there is considerable more product development, sales force and go-to-market realignment work necessary to capture an increasingly competitive market in data center virtualization, big data, and security. Recent balance sheet improvement may give Enterprise more flexibility to recapitalize as well as pursue acquisitions in key areas such as cloud, security, and mobility.

Through 3Q F2014 Enterprise sales declined of 2.2% and operating income declined of 9.6%. If those trends were maintained through 4Q, Enterprise could be estimated to have generated $54.3 billion in revenue and $5.4 billion in operating income in F2014. Competitors to the new Enterprise business include International Business Machines Corp. (NYSE: IBM), Cisco Systems (NYSE: CSCO), Juniper Networks (NASDAQ: JNPR), and Oracle Corp. (NYSE: ORCL), which currently trade at 7.3x 2014E EBITDA. Applying the peer group multiple to Enterprise F2104E EBITDA (allocating depreciation based on assets) derives an enterprise value of $63.8 billion.

HP Inc.’s business will compete with a wide range of PC and printer manufacturers that include Lenovo Group ltd (992 HK), Acer Inc (2353 TT), Asustek Computer Inc. (2357 TT), and Toshiba Corp. (6502 JT), which currently trade on average at 0.3x trailing sales. Applying this peer group multiple results in an enterprise value estimate of $17.2 billion. Based on this preliminary exercise, a pre spin sum of the parts estimate of $40 per share is derived.

On October 1st, Cosan SA Indústria e Comércio (Ticker: CSAN3 BZ) announced that the spin-off of Cosan Logística (RLOG3 BZ) was approved at its shareholders’ meeting. Shareholders as of the same day, October 1st, were entitled to one share of Cosan Logística for each share of Cosan SA Indústria e Comércio they own. The start of trading for the spin entity was scheduled for October 2nd. At the same time, shares of the parent company would trade on an ex-distribution basis, as presented on The Global Spin-Off Report published on October 2nd, 2014.

At the beginning of trading on October 2nd, the company announced that it received a notice from Bovespa, the Brazilian stock exchange, stating that due to problems experienced overnight, shares of the new entity will not start trading until Monday, October 6th—without ruling out further delays. Consequently, shares of Cosan SA Indústria e Comércio will continue trading cum-distribution until Friday, October 3rd or until one day prior to Cosan Logística’s listing.

On September 30, 2014, Masco Corp. (NASDAQ: MAS) announced a plan to spin off the company’s Installation and Other Services businesses (“Services Business”) into a separately traded public company. Shares in the new company will be distributed to MAS shareholders via a tax-free spin-off. The transaction is expected to be completed by mid-2015 and is subject to any required regulatory approvals, receipt of an opinion from counsel as to the tax-free status of the spin-off, an effectiveness declaration of the company’s Form 10 filing with the SEC, and final approval by Masco’s Board of Directors. Concurrent with the announced spin-off, MAS announced a series of strategic initiatives, including a share repurchase program of 50 million shares (14% of shares outstanding, using $1.4 billion in cash on the balance sheet) and an expense reduction program estimated to achieve between $35 and $40 million in annual cost savings (excluding $30 million in one-time charges), primarily through headcount reductions. Jerry Volas, currently Masco Group President, will become Chief Executive Officer of the spin-off company, which will be headquartered in Central Florida. Keith Allman, current Chief Executive Officer of Masco, will remain with the parent company, which will remain headquartered in Taylor, Michigan.

Masco is a manufacturer of building products as well as a provider of services that include the installation of insulation and other building products. The company, which reported total revenues of $8.173 billion in 2013, currently operates under four business segments: Cabinets and Related, Plumbing, Decorative Architectural, and Installation and Other Services. Sales to Home Depot (NYSE: HD), the company’s largest customer, were $2.3 billion, or 28% of consolidated sales in 2013. The Cabinets and Related segment sells semi-custom assembled cabinetry for kitchen, bath, storage, home office and entertainment. The plumbing segment sells faucet, bathing and showering devices sold in North America and Europe under the brand names Delta, Peerless, Hansgrohe, Axor, and Brizo, among others. The Decorative Architectural segment sells architectural coatings including paints, primers, specialty paint products, stains and waterproofing products in the United States, Canada, China, Mexico and South America under the brand names Behr and Kilz to ”do-it-yourself” and professional customers through home centers, paint stores and other retailers.

Masco’s Installation and Other Services segment, which includes Masco Contractor Services, the leading installer of insulation in the U.S., and Service Partners, a distributor of residential insulation products and related accessories in the U.S., reported revenue of $1.4 billion in 2013 (17% of consolidated sales) and has grown at a CAGR of approximately 11% since 2010. The business, which is comprised of 190 branch locations and 70 distribution centers, sells installed building products and distributes building products primarily for new home construction to contractors and dealers, and, to a lesser extent, retrofit and commercial construction, throughout the United States. In addition to insulation, this segment sells installed gutters, after-paint products, garage doors and fireplaces. This segment primarily competes with regional and local contractors and lumber yards.

For MAS, the spin-off of a non-core business with reduced earnings power makes sense, as it allows the parent company to focus on its core manufacturing business, which should benefit from an expected increase in remodeling demand. The Services and Other business generated 2013 revenue of $1.4 billion. Assuming 11% year-over-year growth (consistent with CAGR since 2010), EBITDA for the spin-off company can be estimated at $78 million using a 2.6% operating margin, and adding back estimated depreciation of $37.2 million (proportionate to operating income contribution). Based on an average 2014E EV/EBITDA multiple of 10.9x for a peer group which includes building products manufacturers and distributors Installed Building Products (NYSE: IBP) and Beacon Roofing Supply Inc. (NASDAQ: BECN), segment EV can be valued at approximately $851 million.

In contrast, post-spin MAS generated 2013 revenue of $6.76 billion and an 11.7% operating margin. Assuming a 10% growth rate, EBITDA for the post-spin parent can be estimated at $1,018 million using a 12% operating margin, and adding back estimated depreciation of $149 million. Based on an average 2014E EV/EBITDA multiple of 10.4x for a peer group including home improvement suppliers Stanley Black and Decker (NYSE: SWK), Mohawk Industries Inc. (NYSE: MHK), and Fortune Brands Home & Security Inc. (NYSE:FBHS), among others, EV for post-spin MAS can be valued at approximately $10.6 billion. This rough, preliminary exercise suggests the company has a sum-of-the-parts fair value of $26 per share when accounting for $2.2 billion in net debt.

On September 30, 2014, Kimball International, Inc. (NASDAQ: KBALB) announced that shares of Kimball Electronics (KE) will be distributed to Kimball shareholders of record as of October 22, 2014 on October 31, 2014. When-issued trading will begin at least two trading days prior to the record date, and “”regular-way”” trading of KE common stock will commence on October 23, 2014. Kimball Electronics common stock is expected to list on the NASDAQ Global under the ticker symbol “”KE.”” Following the spin-off, Kimball International’s symbol will change to “”KBAL.”” Shareholders of record will receive three shares of KE for every four shares of KBALB owned.

Following the separation, Kimball’s Electronics Manufacturing Services group (EMS), which provides electronics manufacturing assemblies in the medical, industrial, automotive, and public safety markets, will operate as Kimball Electronics. The parent company, Kimball International, provides furniture for the office and hospitality markets. Clearly these are two very disparate businesses and, historically, Kimball has struggled with execution, as the relative underperformance and outperformance of either segment has resulted in a metaphorical two-legged stool situation, weighing on the company’s blended revenue and earnings growth. This unusual composition – coupled with a dual-class equity structure – has weighed on valuation, with both segments historically underperforming peers. Accordingly, a separation would afford investors a choice, and may eliminate the ‘conglomerate discount,’ while providing each company with the ability to invest appropriately for growth.

The post-spin valuation assumptions remain unchanged from the initial Kimball International Inc. Spin-Off Report (September 25, 2014). Based on an analysis of projected sales, EBITDA, assets, free cash flow, and dividend yield, post-spin fair value estimates of $11.60 per share of KE (based on a 3:4 distribution ratio) and $6.92 per share of KBAL can be derived, for a pre-spin sum-of-the-parts value of $16 per share. This exercise suggests that the shares are approaching full valuation heading into the transaction, likely already pricing in a continued recovery and potentially improving fundamentals. Given the limited upside, the shares are not recommended for purchase at this time. One could look to a more attractive pre-spin entry point below $13.Please see the Kimball International Inc. Spin-Off Report dated September 25, 2014 for further details.

On September 30, 2014, eBay Inc. (NASDAQ: EBAY) announced a plan to spin off its online payments business, PayPal, into a separately traded, public company. The separation, which will be completed via a tax-free distribution of PayPal shares to EBAY shareholders, is expected to be completed in 2H 2015, and still requires an effectiveness declaration of the company’s Form 10 filing with the SEC, a favorable opinion and/or rulings on the tax-free nature of the spin, and final Board approval. Devin Wenig, currently the president of eBay Marketplaces, will assume the CEO role at new eBay, while Dan Schulman, most recently the president of American Express Co.’s (NYSE: AXP) Enterprise Growth Group, will join PayPal effective immediately and serve as CEO upon separation. EBAY’s current CEO John Donahoe will not have a management role at either new eBay or PayPal, but will be a member of one or both Board of Directors. The potential for EBAY to spin-off PayPal was highlighted in The Spin-Off Report Radar Screen as recently as April 2014.

The decision to spin-off PayPal follows the January 2014 disclosure by eBay that activist investor Carl Icahn had acquired a 1% stake in the company and proposed spinning off PayPal. However, the company had dismissed Icahn’s recommendations, indicating it had already explored a potential divestiture of the unit in the past, and cited significant synergies between PayPal and eBay. With the company remaining steadfast in retaining PayPal, Icahn relented and proposed an alternative plan for carving out 20% of the payments business with long-term contractual agreements in place to sidestep any lost synergies.

eBay operates in three reportable segments: Marketplaces, Payments, and GSI. Marketplaces includes the company’s core ecommerce business eBay.com, as well as other shopping websites such as StubHub, Fashion, Motors, and Half.com, and classified websites such as Marktplaats.nl and mobile.de. The Payments segment consists of PayPal, which enables individuals and businesses to send and receive payments online and through mobile devices; Bill Me Later, which enables US merchants and consumers to obtain credit at the point of e-commerce and mobile transactions; and Zong, which enables mobile phone users to purchase digital goods. The GSI Commerce business provides e-commerce and interactive marketing services for merchants.

The two companies will enter into arms-length agreements to maintain a relationship following the spin-off in order to preserve the current mutual benefits the two entities enjoy. The separation will create a faster growth company in PayPal, which should garner an increased valuation multiple upon separation. The global online and mobile payments industry is expected to experience significant growth over the next several years, with well capitalized competitors such as Apple Inc. (NASDAQ: AAPL) and Google Inc. (NASDAQ: GOOG) entering the market. The new eBay will offer more modest growth rates, with strong cash flow generation owing to wider margins that could eventually turn into a meaningful return of capital story for shareholders. The company’s current debt will remain with eBay following the transaction.

PayPal generated trailing revenue of $7.2 billion, up 19% year-over-year. Assuming a similar revenue growth rate maintains through 2014, PayPal’s 2014 EBITDA can be estimated at $2.4 billion using disclosed operating margins, and adding back estimated depreciation of $450 million (proportionate to operating income contribution). Based on an average 2014E EV/EBITDA multiple of 13.2x for a peer group including American Express (NYSE: AXP), Global Payments Inc. (NYSE: GPN), and Google Inc. (NASDAQ: GOOG), PayPal’s EV can be valued at approximately $32 billion. This valuation multiple might be considered conservative given Paypal’s annual revenue growth rates during the past two years ending calendar 2013 have been 14% and 21% versus American Express’s rates of 4% and 5%, respectively, and Global Payments’ rates of 7% and 13%, respectively.

New eBay’s operations could be compared to a basket of internet retailers which include Overstock.com Inc.(NASDAQ: OSTK) and Blue Nile Inc. (NASDAQ: NILE), among others. This peer group currently trades at approximately 11.0x 2014E EBITDA, roughly in line with EBAY’s multiple prior to this morning’s announcement. Excluding PayPal’s contribution, assuming 10% revenue growth and 35% operating margins, it can be estimated that eBay will generate $4.6 billion in 2014. Applying the peer group multiple derives an enterprise value of $50.3 billion for post-spin EBAY. This rough, preliminary exercise suggests the company has a sum-of-the-parts fair value of $68 per share when accounting for $2 billion in net cash.

On September 23rd, Royal Philips NV (Ticker: PHIA NA, EUR 25.06 per share, Market Capitalization: EUR 23.97 billion—USD 30.82 billion based on an exchange rate of USD 1 = EUR 0.78) announced its intention to split into two companies, one focused on lighting solutions and one focused on healthcare and consumer products. The former company will be renamed Philips Lighting, while the latter business, which will result from the combination of the company’s Healthcare and Consumer Lifestyle segments—into a division the company has named “HealthTech”, will retain the Royal Philips name. The split into two companies is expected to lead to a leaner corporate structure, release capital for investments and eliminate any potential holding company discount. Moreover, the demerger may seek to dissociate Philips from the lower margin lighting business, an activity with which the company is widely associated even though it currently comprises only a third of its EBITDA, with the presumed benefit of a trading multiple expansion for the parent company. The separation is expected to be completed by 2016, although the structure of the transaction is still uncertain; the company stated that it is considering “various options for alternative ownership structures with direct access to capital markets”, implying that both an initial public offering and a distribution in specie are feasible outcomes. Consequently, Royal Philips will be covered in The Global Spin-Off Radar Screen until a final decision with regard to the form of the distribution is made.

Prior to the separation of Philips Lighting, the company will execute another demerger. On June 30th, the company announced that it will combine its Lumileds and Automotive businesses—both sub-segments of the Lighting business—into a standalone company, with the aim of exploring strategic alternatives and attracting third-party capital. The company intends to remain a significant shareholder of this entity, and will probably sell a portion of the business to either a strategic investor or in the capital markets in the first half of 2015.

Following the separation, Philips Lighting will comprise the Light Sources & Electronics, Professional Lighting Solutions and Consumer Luminaires segments. Additionally, it will inherit Royal Philips’ stake in the newly created entity housing the Lumileds and Automotive businesses. During 2013, the Lighting business generated EUR 8,413 million in sales—with approximately EUR 1,400 million attributed to the Lumileds and Automotive segments—and EUR 1,832 million in EBITDA. A Philips Lighting pure play competitor would be OSRAM Licht AG (OSR GR)—Siemen’s (SIE GR) former lighting division that was spun off in a transaction covered by The Global Spin-Off Report on a report published on April 29th, 2013. Currently, OSRAM trades at an enterprise value-to-EBITDA multiple of 5.6x. Therefore, Royal Lighting could have an enterprise value of EUR 5,561 million.

The parent company will merge the Healthcare and Consumer Lifestyle businesses of the existing entity. Such a combination appears rather unique. However, Philips intends to focus on what it calls the “convergence” between the two markets. Philips’ Healthcare business offers healthcare customer services, patient care & clinical informatics, home healthcare solutions and imaging systems. The aim of the company’s products and services is to assist patients in every stage of the healthcare spectrum: from prevention to diagnosis, treatment, recovery and home care. The integration of consumer products will add another step to what Philips presents as a “health continuum”, healthy living. The Consumer Lifecycle business offers products in three categories; Health & Wellness, Personal Care and Domestic Appliances. The company aims to position itself as a champion of a healthy lifestyle, and its consumer product offerings will be a step towards that direction.

For 2013, the Healthcare and Consumer Lifecycle segments generated revenues of EUR 9,575 million and EUR 4,605 million, respectively. The former business is clearly the higher margin one; it generated EUR 1,315 million in EBITDA—a 19% margin—compared to Consumer Lifecycle’s EBITDA of EUR 628 million—a 14% margin. A wide group of medical equipment manufacturers trades at an enterprise value-to-EBITDA multiple of 13.9x, implying a firm wide valuation of EUR 25,392 million for the Healthcare division. Many of the Consumer Lifestyle’s product offerings, such as shaving products and cooking appliances, tend to be housed within large household products conglomerates. Gillette, for example, is now part of Procter & Gamble (PG US). The enterprise value-to-EBITDA of a group of similar companies trades at 13.6x, resulting in a valuation of EUR 8,553 million.

Adjusting for eliminations and net debt—standing at EUR 2,104 million as of June 30th, 2014—one arrives at an equity value of EUR 36,109 million for Royal Philips. That valuation is considerably higher than the company’s current market capitalization. Although some of the disparity could be explained by the use of multiples based on a trailing-twelve-month EBITDA as opposed to a forward estimate—which was utilized in order to account for the use of 2013 financials for Royal Philips’ segments—the valuation gap mainly exists due the potential for a multiple expansion in post demerger Philips. To elaborate further, the company is mainly associated with the lighting industry, which offers fewer growth opportunities and, as evidenced by OSRAM, tends to trade at very depressed multiples. However, Philips’ largest division, with more than 40% of sales and 50% of EBITDA, is Healthcare. Were the company to be widely accepted and considered a medical equipment manufacturer, it would likely trade at a double-digit enterprise value-to-EBITDA multiple as opposed to the current range of 7x to 8x.

On September 19, 2014, Paragon Offshore plc (NYSE: PGN) announced that the company will initiate a quarterly dividend of $0.125 per share. The dividend payout equates to $43.9 million annually based on the current share count and is expected to be paid in November 2014. PGN, an offshore drilling rig operator that was spun off from Noble Corp. (NYSE: NE) on August 1, 2014, currently has 39 active rigs, consisting of 33 standard spec jackups, four drillships, and two semisubmersibles. The company also has three rigs that are currently “”cold stacked””.

Since beginning regular way trading on August 4, 2014 PGN shares have declined 43%, and closed at $6.22 on September 19, 2014. The selling pressure can be attributed to several factors including management’s disclosure that the company would incur a higher than expected effective tax rate in 2H 2014, concerns an increasing supply of jackup rigs set to be delivered beginning in 2015 could pressure industry dayrates and utilization, and the fact that the dividend payout is less than the amount management originally expected to payout, as disclosed in the latest Form 10 filing, of $80 million to $90 million.

Shares currently trade at a discount to peers based on earnings projections but roughly in line with other sizeable jackup operations based on assets. This can be reconciled by the fact that PGN’s rig fleet is older than peers. However, the rig fleet has been well maintained through capital investment, resulting in the older, depreciated rigs continued contribution to earnings.

Since the spin-off was completed, market sentiment for offshore drillers has turned decidedly negative. Peers have also seen pressure, Diamond Offshore (NYSE: DO), Transocean (NYSE: RIG), and Hercules Offshore (NASDAQ: HERO) have all declined in price between 25% and 30% over the past three months. The change in industry sentiment can be attributed to the anticipation of declining utilization and dayrates moving forward. Given the highly cyclical nature of the offshore drilling industry, PGN is not immune from these broader macro concerns. However, given the share price decline shares currently yield 8% based on the newly initiated dividend.

Despite these concerns, PGN’s business has not materially changed since the initial Noble Corp. Spin-Off Report, dated July 17, 2014. In 2Q 2014, PGN’s average rig utilization declined to 75%, from 80% in the prior year. However, average dayrates increased 18% to $147,752 (blended jackups and floaters), which offset the utilization decline, and resulted in increased revenue for the quarter. The utilization trends experienced by PGN are not specific to the company as industry wide, both jackups and floaters, are seeing an increasing supply of rigs that will pressure utilization.

As a base case for valuation, Paragon’s assets, equity and property, plant, and equipment can be used to estimate a fair value. Within the peer group, HERO has the most exposure to the jackup market, which makes it the most obvious of peer comparisons. Based on PGN’s pro forma balance sheet as of June 2014, and using HERO’s current multiples of 0.6x assets and 0.76x PP&E, net, an average fair value of $5.75 per share is derived. However, using multiples from the broader offshore peer group would result in an average fair value of $11.41. Similarly, using PGN’s book value, HERO’s multiple and the broader peer group multiple results in $6.85 and $11.88 per share, respectively. The values derived using assets have declined since the spin-off due to the compression of peer trading multiples.

Earnings based metrics result in higher valuation estimates given the earnings power of the assets, current contracts, and the ability of management to renew, or find replacement work for the rig fleet. The current consensus estimate expects revenue to decline 5% in 2014, followed by roughly flat sales trends in 2015. Over the same time period, PGN’s EBITDA is expected to decline 5.5% and 7.2%, respectively.

On an EV/EBITDA basis, shares of PGN trade at 2.7x 2015 consensus EBITDA, a 33% discount to competitor HERO. If shares were to be valued in line with HERO, based on consensus 2015 EBITDA, a fair value of almost $17 per share would be derived. If 2015 EBITDA were to be 20% below the consensus estimate, using the same multiple would result in a $9.46 estimate. While shares appear cheap on a relative basis, if industry trends continue to signal caution, Paragon offshore will continue to exhibit a degree of volatility.

Given the share price decline, and the fact that PGN trades roughly in line with HERO on an asset basis, there appears to be upside if Paragon can renew contracts and stabilize earnings. The near term elevated effective tax rate, roughly 45% in 2H 2014, is expected to normalize in low 30% range in 2015, and the company has a goal in the mid-20% range for 2016. The largest hurdle to PGN’s business remains the company’s ability to keep rigs working in the face of new rigs entering the market. As such, shares would likely react positively to news of renewed or newly awarded contracts. Of importance is likely the potential renewal of contracts with Petrobras, two of which expire in 2015. Petrobras has stated it will build new rigs that could replace PGN’s rigs, however completion is not likely until 2017 implying that PGN could potentially renew the Petrobras contracts while seeking alternate work for the platforms beginning in 2017.

On September 19, 2014, Vectrus Inc. (VEC) management held an investor presentation highlighting the company’s business objectives. Topics discussed included the company’s key contract wins in recent months and plans to diversify revenue streams in light of the current tight government budget environment. In response to troop drawdown, most notably in Afghanistan, the company is attempting to diversify the contract base away from current concentrations with the US Army and Middle East exposure. Contracts with the US Air Force and Navy are expected to represent an increasing percentage of revenue over the next several years. Middle East exposure will reduce to approximately 50% versus over 75% (including Afghanistan) in 2014. US based contracts are also expected to increase on a relative basis.

Management expects 2014 revenue to approximate $1.1 to $1.2 billion (previously estimated at $1.24 billion), and normalized operating margins of 4% – 5% (previously estimated at 5.75%). Vectrus revenue totaled $1.48 billion in 2013. Under these assumptions, VEC would generate $52 million in EBITDA in 2014. VEC’s peer group includes military services providers ManTech International Corp. (NASDAQ: MANT), Science Applications International (NYSE: SAIC), and Engility Holdings Inc. (NYSE: EGL), which have exposure to Department of Defense spending, among others. These peers currently trade at an average of 9.1x 2014E EBITDA. Of note EGL, which was a spin-off from L-3 Communications (NYSE: LLL) in a transaction similar to Exelis Inc. (NYSE: XLS) spinning off VEC, trades at 8.0x 2014 estimated EBITDA, and likely provides the best comparison to VEC for initial trading.

Given the lower than previously assumed revenue and margins, the fair value for VEC is revised to $29 per share (previously $46), and is derived by applying an 8x multiple to 2014E EBITDA of $52 million. Downside risk to this fair value exists from further deterioration of revenue and margins. If VEC’s operating margin were to decline to 4.0%, holding all else constant, the fair value would decrease to $25 per share. VEC’s revenue decline in 2014 is expected to be larger than peers, suggesting that further contraction may exist in 2015, which may warrant a discounted multiple to the 8x used in deriving the fair value.

Vectrus will be spun-off from Exelis Inc. on September 27, 2014, after the market close to shareholders of record as of September 18, 2014. Vectrus will begin regular way trading on September 29, 2014, on the NYSE under the symbols “VEC”. Shareholders of record will receive one share of VEC for every 18 XLS shares owned. Shares of Vectrus began trading on a when-issued basis on September 16, 2014 and closed trading at $22.50 on September 18. Please see the Exelis Inc. Spin-Off Report dated May 12, 2014 for further details.

On September 17, 2014, Agilent Technologies Inc. (NYSE: A) announced that shares of Keysight Technologies Inc. will be distributed on November 1, 2014, to Agilent shareholders of record as of October 22, 2014. Keysight will begin regular way trading on November 3, 2014, on the NYSE under the symbol “KEYS”. Shareholders of record will receive one share of KEYS for every two shares of A owned. Shares of both Keysight and Agilent will begin trading on a when-issued basis on October 20, 2014. Agilent also announced a quarterly dividend of 13.2 cents per share of common stock will be paid on October 22, 2014 to all shareholders of record as of the close of business on Sept. 30, 2014. Completion of the spin-off still requires an effectiveness declaration of the company’s Form 10 filings from the SEC. Separately, Agilent announced that Mike McMullen, senior vice president, Agilent, and president of the company’s Chemical Analysis Group (CAG), will succeed William (Bill) Sullivan as CEO on March 18, 2015. William Sullivan will remain as an advisor through the end of the company’s fiscal year, Oct. 31, 2015, when he will retire.

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. Accordingly, the fair value for Keysight has been revised to $49 (from $25) to reflect the updated share count. The fair value is based on the median of comparable price-to-sales, price-to-earnings, and EV-to-EBITDA multiples, with a range of $48.04 to $52.10.

The post-spin fair value for A remains intact at $40 per share. Following the spin-off, Agilent shares should receive a higher multiple than those of Keysight given the company’s industry leadership position, reduced cyclicality, and better long-term growth prospects. There also appears to be potential for further appreciation, considering that improved execution should be able to drive above-market core revenue growth and earnings leverage and, in turn, narrow the valuation disparity relative to peers. Agilent’s peer group trades at 3.2x F2014 revenue projections, 22x earnings, and 14x F2014 estimated EBITDA. On a relative basis, Agilent shares appear undervalued at 19x forward earnings, a 14% discount to peers – essentially in line with their five-year historical average. In the near term following the spin-off, KEYS shares could experience some volatility, as a portion of the investor base might gravitate toward the stability and more focused end-market composition of the new Agilent. Moreover, while recently reported financial results appear encouraging, with a return to year-over-year growth, Keysight could again exhibit negative growth comparables, particularly as visibility remains generally very limited across the technology supply chain. Considering historical and comparable multiples on earnings, sales, and EV/EBITDA, and cash flow, Keysight can be fairly valued at $49 per share and New Agilent at about $40 per share, for a pre-spin sum-of-the-parts value of $65 per share. Please see the Agilent Technologies Inc. Spin-Off Report dated September 16, 2014 for further details.

On September 10, 2014, JDS Uniphase Corp. (NASDAQ: JDSU) announced a plan to spin off its optical components and commercial laser (CCOP) business into a separately traded public company. Shares in the new company, which has yet to be named, will be distributed to JDSU shareholders via a tax-free spin-off. The transaction is expected to be completed in the third calendar quarter of 2015 and is subject to satisfaction of closing conditions, including final approval from JDSU’s Board of Directors, receipt of tax opinions, and an effectiveness declaration of the company’s Form 10 filing with the SEC. Alan Lowe, president of the Optical Components and Commercial Lasers segment, is the CEO-designate of the spin-entity, while JDSU’s current president and CEO, Tom Wachter will continue to serve as CEO of the parent company. The company is holding an analyst day on September 11, 2014 at noon EST.

JDSU operates three business divisions, Optical Components and Commercial Lasers (CCOP), Network and Service Enablement (NSE), and Optical Security and Performance Products (OSP). The spin entity will be comprised of the current CCOP division, which generated F2014 revenues of $794.1 million, addresses a $7.4 billion market for optical communications (estimated 11% four-year CAGR) and a $2.5 billion market for commercial lasers (estimated 7% four-year CAGR). Products in this segment are primarily optical components and subsystems for the telecommunications market, and include transceivers, amplifiers, splitters, ROADMs (Reconfigurable Add-Drop Multiplexers) for WDM (Wave Division Multiplexing) applications, and passive components. Customers include major telecommunications, mobile and cable network operators and network equipment manufacturers. This segment reported 16% operating margin in F2014.

The parent company will retain the NSE and OSP segments. The NSE division addresses a $7 billion market growing at 6-8% annually, and focuses primarily on software and services used in the deployment and operation of next-generation Internet Protocol (IP) networks. NSE has one of the largest test instrument portfolios in the industry, and provides network and protocol and service assurance tools for testing in the laboratory, network and enterprise environments. Product families include PacketPortal, PathTrak, and SmartClass. The OSP segment addresses an approximate $1.1 billion market (also growing 6-8 percent annually) and consists of anti-counterfeiting solutions for currency authentication and high-value optical components for security, safety, electronics and other applications. Combined revenue for NSE and OSP was $949.5 million for F2014 (June), with blended operating margin of 11%.

With the timing of a recovery in the optical communications market still elusive, owing to a combination of over-provisioning and depressed capital spending at the major operators, the spin-off allows JDSU to divest this business and focus on a growing market opportunities in data center and cloud technologies. The new NSE company appears well-positioned to capitalize on the shift toward software-defined networks (SDN), an emerging architecture driving more intelligent and programmable application control. SDN architectures decouple traditional network functions, resulting in reduced operating costs and increased user flexibility. Demand for SDN technologies has been brought about by the pervasive deployment of data center virtualization technologies and the ensuing requirement for increased user, application and service-level visibility. This industry shift is significant because it is expected to cannibalize demand for traditional switching and routing equipment as more functionality is originated in software, as opposed to hardware. SDN is expected to influence an increasing portion of all network spending (as much as 30 to 40 percent over the next six years by some estimates), requiring that large end-to-end networking suppliers such as Cisco Systems (NASDAQ: CSCO) and Juniper (NASDAQ: JNPR) begin to develop products in this area.

Notably, the industry is seeing increased activity on the part of traditional test and measurement companies to develop and acquire NSE-related technology. In particular, life sciences diagnostics supplier Agilent Technologies (NYSE: A) recently announced plans to spin off its test and measurement subsidiary Keysight Technologies (expected November). For further details, please refer to The Spin-Off Report flash on Agilent dated September 19, 20013.

When deriving a potential valuation for the spin and parent entities, a sales-based multiple can be considered, owing to the somewhat inflated nature of earnings growth estimates for most of the communications technology sector, which is growing off of a cyclical low base. For the CCOP spin company, comparables include optical networking equipment suppliers such as Ciena (NASDAQ: CIEN), and component and subsystems companies Infinera (NASDAQ: INFN) and Finisar (NASDAQ: FNSR). Applying the peer average EV/sales multiple of 1.3x to estimated F2015 sales of $865.6 million results in an estimated enterprise value of $1.1 billion.

For the NSE parent company, comparables include test and measurement companies Ixia (NASDAQ: XXIA) and Spirent Communications (LON: SPM). Applying the peer average EV/Sales multiple of 2.3x to estimated F2015 sales of $1,0 billion, one can derive an implied enterprise value of $2.3 billion. That said, applying a broader comparable group multiple which includes CSCO and JNPR would imply a slightly lower valuation for the business. Although Cisco and Juniper are clearly broader networking suppliers with a significantly larger addressable market, they are representative of the opportunity within SDN and are key performance indicators for the NSE company. Based on this rough, preliminary exercise, a pre-spin sum-of-the-parts valuation of $16.41 per share of JDSU can be derived.