Attached, please see The Spin-Off Report on L Brands, Inc. (NYSE: LB).

On May 11, 2021, L Brands Inc. (NYSE: LB) announced plans to separate its Victoria’s Secret business from its Bath & Body Works business, making it a standalone, publicly traded company, which is to be dubbed “Victoria’s Secret & Co.” and trade on the New York Stock Exchange (NYSE) under the ticker “VSCO”. The transaction, structured as a tax-free spin-off, is expected to be completed after the market close on August 2, 2021, with shareholders of record on July 22, 2021, receiving one share of VSCO for every three shares of LB held. So-called “When-Issued” trading for Victoria’s Secret is expected to commence on or about July 21, 2021, under the ticker “VSCO WI”. Additionally, on August 3, 2021, L Brands will formally change its corporate moniker to Bath & Body Works, Inc. and begin trading on the NYSE under the ticker symbol “BBWI”.

For broader context on the pending transaction, it should be noted that in February 2020, amid pressure from investors, including Barington Capital, L Brands announced plans for the sale of a majority 55% stake in the Victoria’s Secret brand to private equity firm Sycamore Partners for $525 million. However, in May 2020, the deal was terminated by mutual agreement amid widespread industry uncertainty during the COVID-19 pandemic (anecdotally, management indicates that they evaluated the possibility of another sale and received “significant” interest and held “substantive” discussions with “multiple” potential buyers but concluded that a tax-free spin-off would ultimately create more value for shareholders, particularly as the “turnaround” plan being implemented over the last 10 months continues to gain traction).

The standalone VSCO will be led by Martin Waters, who was named head of VS Lingerie in November 2020 and previously served as head of LB’s international business from 2008, while Amy Hauk and Gregory Unis will continue at their leadership posts at PINK and VS Beauty, respectively. The chief financial officer will be Tim Johnson, who was formerly the CFO of Big Lots (NYSE: BIG). The new Board will consist of seven members, of which six will be both female and deemed independent, including the chairperson, Donna James (who, among other things, has been on LB’s Board since 2003). The lone exception, in terms of gender and independence, will be Mr. Waters. (The parent company will continue to be led by current chief executive Andrew Meslow, who was appointed the head of Bath & Body Works in February 2020 after serving as chief operating officer for ~8 years. Following the spin-off, Wendy Arlin, formerly LB’s controller, will replace 14-year veteran Stuart Burgdoerfer, who is retiring as chief financial officer.)

The impending transaction is expected to benefit both entities by providing distinct strategic, managerial, and operational focuses, along with better-tailored capital allocation strategies, while offering the investment community the ability to independently value each business, which, in our view, is likely to result in multiple expansion at the parent. As part of the transaction, the company, on a consolidated basis, is expected to realize one-time costs of ~$70 million and roughly $80 million of incremental annual overhead costs (i.e., dis-synergies), primarily related to technology expenses and headcount, which will be split between the two entities; these, along with the allocation of corporate costs previously reported in the Other segment, will result in roughly $100 million of additional post-separation costs for both BBWI and VSCO (as compared to what was previously reported in their segment results). As well, to minimize additional dis-synergies, the two companies will enter a Transition Services Agreement, primarily relating to information technology platforms. As mentioned earlier, the completion of the transaction is targeted for August 2021. A virtual investor day, to be held jointly for Bath & Body Works and Victoria’s Secret, is scheduled for July 19, 2021.

L Brands, which generated consolidated sales of $11.8 billion, with $1.8 billion of adjusted EBIT and $2.3 billion of adjusted EBITDA, in January-ending F2020, currently reports two primary business segments: (1) Victoria’s Secret ($5.4 billion of sales in F2020 with $98 million of adjusted EBIT and $425 million of adjusted EBITDA), which primarily sells women’s intimate apparel; and (2) Bath & Body Works (B&BW), which sells body care and home fragrance products. On a consolidated basis, LB currently trades at about 7.5x 2022E EV/EBITDA, whereas the most applicable specialty retail peers to its VS and B&BW brands trade at ~7.5x and 15.0x, respectively, which implies the potential for multiple expansion at the post-spin parent. As well, while VS is in the midst of a multi-faceted turnaround, in terms of both its financial results and brand positioning, that has shown initial promise but admittedly remains in the early stages, B&BW has posted consistent growth and above-peer profitability in recent years. In that context, while we think upside exists on a pre-spin basis, we ultimately prefer shares of the post-spin parent given its consistent growth, high-end profitability, and free cash flow generation potential, which is likely to support increased capital returns to shareholders (via dividends and share repurchases). That said, exposure to the post-spin VSCO could offer more risk-tolerant investors upside optionality related to an ongoing turnaround in the medium term, and a potential sale in the longer term. All told, our initial pre-spin fair value estimate of $90 per share is comprised of $17 per share for Victoria’s Secret & Co. (VSCO) and ~$73 per share for the post-spin parent, which will adopt the Bath & Body Works moniker and trade under the ticker BBWI. On a post-spin basis, we fairly value shares of VSCO at $50 per share to account for the one-for-three share distribution ratio. Given the implied upside of more than 20% to our fair value estimate, we rate the shares of pre-spin LB as a BUY.

On August 6, 2020, before the market open, Bausch Health Companies Inc. announced a plan to separate its eye health business via a spin-off, subject to certain conditions and approvals, including the reorganization of the company’s reporting segments, which began with the reporting of 1Q 2021 results. The spin company will adopt the corporate moniker Bausch + Lomb (B+L), while the parent company will rebrand itself as Bausch Pharmaceuticals (Bausch Pharma). The spin-off announcement came on the heels of reports in the business press that BHC was considering a sale of the eye-care unit in April 2020. The spin-off is targeted for completion in 3Q 2021; however, during the 4Q 2020 earnings conference call, management noted that it may consider a partial IPO of the Bausch & Lomb business, prior to spinning off B+L, in an attempt to accelerate the timing of the transaction. Further, given management’s commentary on post-separation debt levels (discussed later in this report), which do not appear achievable absent an additional transaction, it could be posited that the spin-off may be preceded by further asset sales or by a partial IPO, followed by a distribution of B+L shares to BHC shareholders (i.e., a carve-out) to achieve the targeted debt levels (management suggests initial leverage for B+L of ~2.5x and for Bausch Pharma of ~6.5x-6.7x). B+L will be headed by current BHC CEO Joseph Papa, with Sam Eldessouky, who currently oversees global controllership functions, becoming CFO.

In terms of rationale, the spin-off of B+L is an attempt to accomplish two goals. First, separating the parts of the current BHC by profitability metrics will allow one side of the business to carry the majority of the current debt load, while increasing capital flexibility for the lower-margin business. Second, the spin-off could unlock shareholder value on a re-rating of the eye-care business from current levels, which are below 10x forward EBITDA estimates, to more closely approximate specialized peers, which trade north of 20x. The higher-margin Bausch Pharma will carry the bulk of the current BHC’s debt load, while B+L, with its lower margins, will have a far less levered balance sheet, allowing for internal R&D spending to organically increase sales. Following the spin-off, Bausch Pharma’s cash flow will be earmarked for debt service. Management has targeted 2.5x net leverage for Bausch + Lomb and net leverage of 6.5x-6.7x for Bausch Pharma.

B+L is looking to capitalize on recent trends in eye health, including emerging conditions brought on by increasing screen time, aging populations, less time spent on outdoor activities, and academic pressure. Recent product launches include daily disposable contact lenses, B+L ULTRA contact lenses, and Lumify for eye redness, among others. Looking ahead, a resumption of surgical procedures delayed by COVID restrictions, combined with a return of product demand from consumers destocking their pantries (which were loaded up during COVID), should lead to a return to more normalized growth, which historically experienced low- to mid-single-digit increases for the B+L segment. We believe the recovery trends that the company is currently experiencing are sustainable and that it should return to pre-COVID growth levels going forward.

Excluding B+L, Bausch Pharma will look to grow organically through further international penetration of existing products and the introduction of new products. A key focus will be on the expanded use of Xifaxan (clinical name rifaximin), which had trailing 12-month sales of $1.5 billion. Approval of new Xifaxan formulations may be able to offset some of the expected revenue declines from loss of exclusivity on certain products.

On a pre-spin sum-of-the parts basis, shares of Bausch Health Companies Inc. are fairly valued at $38 per share, comprised of $49 in value from the B+L business, $54 in value from the Bausch Pharma business, and current net debt of $65 per share. Given implied upside of nearly 25% from the current share price, we recommend the shares of BHC prior to the spin-off. It should be noted that while detailed segment information (used in this report) has been provided, a full Form-10 filing has yet to be made. Additionally, given the leverage targets for the post-spin entities, we would expect the company to announce news on either a significant asset sale or on the beginning of an IPO process. We think that public filings (for a spin-off and/or IPO), along with announcements on asset sales and debt retirement, could prove to be catalysts ahead of the spin-off. Following the spin-off, we expect a significant re-rating for the eye-care business to unlock value, as the attractive, far less levered business receives a multiple more in line with peers. At the same time, we posit that Bausch Pharma may see selling pressure as a standalone entity as investors shy away from its heavy debt load.

Garrett Motion (NASDAQ: GTX), the former Transportation Systems segment of Honeywell (NASDAQ: HON), which was spun off from HON in October 2018, designs and builds highly engineered turbochargers as well as other electric-boosting technologies, primarily for the original equipment manufacturers (OEMs) of light and commercial vehicles (with gasoline, diesel, natural gas, hybrid electric, and fuel cell electric powertrains) and, to a lesser degree, for the global aftermarket.  On April 30, 2021, GTX emerged from Chapter 11 bankruptcy protection, which it sought primarily due to legacy asbestos liabilities that were assigned by its former parent. GTX’s restructuring was induced by contingent liabilities, as opposed to being driven by any fundamental weakness in its business/operating model. In that context, at ~5.5x 2023E EPS (versus peers trading in excess of 10x), we think the shares are materially undervalued, as the stigma/complexity of its recent emergence from Chapter 11 has seemingly obfuscated the reality that GTX has a strong underlying business, which operates in an essential duopoly and has clear visibility to double-digit compound annual top-line growth and mid-teens adjusted EBITDA and EPS growth over the next three to five years, as well as a capital structure that will become increasingly simple and a leverage profile that should be under 1.5x by 2023E. Moreover, in the very near term, we think management’s most recent financial guidance, provided in February 2021, along with the current lack of sell-side research coverage, has likely led investors to underappreciate how rapidly Garrett’s business has recovered from the COVID-19 pandemic. Longer term, given the strength of its cash flows, we think GTX could ultimately be a target for private equity buyers (potentially ones looking to roll up auto-related suppliers). Based on management commentary and peer and M&A valuations, as well as discounted cash flows, standalone GTX could be valued at ~$12.50 per share, implying more than 50% of potential upside (with bull and bear cases of $15 and $9.50 per share, respectively). Potential catalysts include updated/higher financial guidance, a simplified capital structure, and an improving cash flow and leverage profile, as well as expanded sell-side research visibility. Risks include management execution, competition, technological obsolescence, legal liabilities, currency/commodity price fluctuations, potential undue influence by controlling shareholders, and/or a recession.

On October 27, 2020, before the market open, DTE Energy Co. announced a plan to separate its midstream business from its regulated electric and natural gas utility businesses in a tax-free separation. The standalone publicly traded midstream business, which will adopt the corporate moniker DT Midstream Inc., is expected to trade on the NYSE under the symbol “”DTM.”” Shares of DT Midstream will be distributed to shareholders of record on July 1, 2021, before the market open. DTE shareholders will receive one share of DT Energy for every two shares of DTE owned as of the record date, June 18, 2021. When-issued trading in DT Midstream is expected to begin on or about June 17, 2021, under the symbol “”DTM WI.”” DTE, ex DT Midstream, is also expected to trade in the when-issued market, under the symbol “”DTE WI.””

As a standalone publicly traded company, DT Midstream will focus on its portfolio of natural gas pipelines (intra- and interstate), storage systems, gathering pipelines and systems, treatment plants, and compression facilities. The company’s assets and operations will control the Pipeline & Storage business that is currently part of DTE’s Non-Utility segment. DT Midstream’s assets connect demand centers in the Midwest U.S., Eastern Canada, Northeastern U.S., and Gulf Coast regions to production from the Marcellus/Utica and Haynesville shale plays.

Looking forward, DT Midstream appears poised to capitalize on increased demand for natural gas in the regions where its assets are located. The company’s pipelines are generally locked up under firm revenue contracts that account for approximately 70% of current revenue. Additionally, with the economy reopening as the COVID-19 pandemic recedes, we expect demand to increase as industrial manufacturers return to full operation, use of gas-fired power generation expands, and liquified natural gas (“”LNG””) exports grow.

DTM’s pipeline portfolio is strategically positioned in the dry-gas-producing Haynesville and Marcellus shale plays, which are among the most productive and fastest-growing formations in the U.S. Further, the company’s 2019 entrance into the Gulf Coast region positions DTM to capitalize on increased demand for liquified natural gas (“”LNG””). Future growth in assets can also be expected, with the company currently developing a pipeline from Vector to the Blue Water Energy Center gas-fired electric power plant. Exhibit 18 details the company’s current pipeline of growth projects.

Following the separation, DTE’s revenue and operating earnings will be predominantly derived from the regulated utilities, with roughly 90% of operating income from the Gas and Electric businesses (~70% previously). The company is targeting 7%-8% operating earnings growth at DTE Electric and 9% growth at DTE Gas over the long term. Consolidated operating EPS are expected to increase 5%-7% annually when factoring in declines at Power and Industrial. The mid-point of 2021 guidance suggests EPS of $5.51 per share (excluding DT Midstream). With ~$15 billion in capital investments to be made at the Gas and Electric utilities over the next several years, the rate base should continue to increase, driving earnings in what we view as a constructive regulatory environment based on historical rate base increases at both the Gas and Electric utilities.

On a pre-spin, sum-of-the-parts basis, we fairly value shares of DTE Energy at $148 per share (see Exhibit 26), which consists of $29 in value from DT Midstream and $119 in value from DTE RemainCo. On a post-spin basis, we fairly value shares of DT Midstream at $62 per share and shares of post-spin DTE Energy at $119 per share. Given the limited upside to the current share price, we rate pre-spin DTE Energy at NEUTRAL. Post-spin, we favor the stability and constructive regulatory environment of the parent company, as we view steady increases in the base rate and dividend payments as likely to be attractive to certain investors. In contrast, we are cautious on DT Midstream’s operations as a standalone entity. The extremely high customer concentration risks to natural gas prices (impact on drilling activity) make us wary of owning shares of DTM. Further, a rotation of the shareholder base can be expected in DTM following the distribution, as DTE investors may favor the stability and dividend payments of the parent company. We would reconsider our view on DTM if a significant margin of safety versus our fair value estimate were to arise post spin.

On December 9, 2020, SolarWinds Corp. (NYSE: SWI) issued a press release that stated the company had confidentially filed a Form-10 registration statement with the SEC in relation to a proposed spin-off of its managed service provider (MSP) business. Previously, SWI stated that the company’s Board of Directors had authorized the exploration of a potential spin-off of the MSP business into a standalone entity. Subsequent to the announcement, the company filed a public Form-10 and rebranded the MSP business as “”N-able””. Notably, the N-able brand name arises from SWI’s 2013 acquisition of N-able Technologies, which marked SWI’s entrance into the MSP market. N-able was acquired for $120 million in cash. The separation is expected to be completed in 1H 2021.

SolarWinds Corp. is a provider of information technology infrastructure management software. The company’s product portfolio provides “”powerful, scalable, affordable, easy to use products with a high-velocity, low touch sales model””. The company’s products “”are designed to do the complex work of monitoring and managing networks, systems and applications across on-premise, cloud and hybrid IT environments without the need for customization or professional services.”” The company, which reports results under one segment, operates via two business lines. One, referred to as “”Core IT,”” sells solutions directly to corporate IT professionals, including network and systems engineers, database administrators, storage administrators, DevOps, and internal service desk professionals. The other business line, previously referred to as “”MSP,”” has been rebranded as “”N-able”” and sells solutions to managed service providers who use the solutions to manage their clients’ network and application needs.

As a standalone company, N-able would have generated $302.9 million in revenue and $120.69 million in adjusted EBITDA in 2020. Approximately 53% of N-able revenue was derived from North America, while the U.K. accounted for 10.5%. Revenue growth of almost 16% in 2020 benefited from new MSP partners and expanding business for current MSP partners. Subscription revenue increased 16% as the company added new MSP partners and existing partners added new customers. A key difference between SWI’s Core IT business and N-able is in the revenue growth model, with N-able generating increased revenue as its MSP clients expand their own client base.

Following the separation, the parent company will continue to deal with the fallout from the cyberattack involving its Orion monitoring products between March and June 2020, which will likely result in lower new customer acquisitions and potential cancellations by existing customers. We would expect that revenue growth rates, historically in the mid- to high-single-digits, will be depressed in the near term before returning to previous levels as concerns over the impact of the cyberattack pass. Lower revenue growth and an increased focus on existing customers versus new customer acquisitions is likely to result in lower margins near term, with a return to “”rule of 50″” operations (revenue growth plus EBITDA margin over 50%) in 2022. Management commentary suggests that the parent company will generate initial margins of roughly 42%-43% as a standalone company while incorporating approximately $20-$24 million in incremental costs that will be phased in over the next year.

On a pre-spin, sum-of-the-parts basis, we fairly value shares of SolarWinds at $19 per share. Our fair value estimate is comprised of approximately $9 per share in value from post-spin SWI and approximately $10 per share in value from N-able. Our post-spin fair value estimates are based on an assumed 1:1 share distribution ratio and are subject to change upon finalization of the company’s Form-10 filing. Although our fair value estimate implies approximately 15% price appreciation potential from the current share price, we rate shares of SWI at NEUTRAL prior to the spin. Our NEUTRAL position is based on what we believe will be residual overhang on both post-spin entities from the recent cyberattack. Although we believe that both N-able and SolarWinds will be able to move past the incident, especially since it appears that minimal damage was actually incurred, we do not see the separation as a catalyst to realize the potential price appreciation, particularly as the share price has appreciated substantially from the 52-week low of $13.98 following the announcement of the attack. Further, we note the ownership levels by private equity firms, meaning that shares of both post-spin entities and the pre-spin company will have a limited float, with the possibility that an eventual exit by either Thoma Bravo or Silver Lake could introduce a degree of volatility. Post-separation, we favor N-able’s business model, as we believe that growing demand from small and mid-sized businesses for affordable monitoring solutions will lead to a greater number of MSP partnerships and an increasing number of clients for existing partners.

On February 5, 2020, before the market open, Merck & Co. Inc. announced a plan to separate its Women’s Health business, biosimilar drugs, and legacy products into a new publicly traded company that will adopt the corporate moniker Organon & Co. The tax-free separation is expected be completed on June 2, 2021, after the market close. MRK shareholders of record as of May 17, 2021, will receive one share of Organon for every 10 shares of MRK held. Organon will trade on the NYSE under the ticker “OGN” and is expected to begin regular-way trading on June 3, 2021. “When-issued” trading in MRK and OGN is expected to begin on or about May 14, 2021.

Merck, with consolidated 2020 revenues of $48 billion, is one of the largest manufacturers of healthcare solutions worldwide. The company offers therapeutic and preventive agents to treat cardiovascular, type 2 diabetes, chronic hepatitis C virus, HIV-1 and other infections, insomnia, and inflammatory diseases; neuromuscular blocking agents; cholesterol modifying medicines; and anti-bacterial and vaginal contraceptive products. The company also offers products to prevent chemotherapy-induced and post-operative nausea and vomiting; treat non-small-cell lung, ovarian and breast, thyroid, cervical, and brain cancers.

Please see the attached Hidden Opportunities Report on Cognyte Software Ltd. (NASDAQ: CGNT).

Cognyte Software (NASDAQ: CGNT) is the cyber intelligence business that was spun-off from Verint Systems Inc. (NASDAQ: VRNT) on February 1, 2021. As a standalone, CGNT helps organizations, primarily governments, increase security (i.e., prevent crime, terrorism, and/or cyberattacks) by providing clients with so-called “actionable intelligence” solutions via the ability to collect/capture large amounts of structured & unstructured data, analyze the information (utilizing, among other things, predictive analytics and artificial intelligence), and ultimately produce insights that can be readily digested/deployed by decision-makers. CGNT’s stock has declined more than 15% since its initial debut at $30 per share in the when-issued market (vs. a ~10% increase in the S&P), as well as from the average price during its first week of regular-way trading, which ranged between $28.01-$31.54. In our view, the decline could be attributable to a range of factors, including investor churn/the exit of a few larger holders (due to mandate/benchmark conflicts), as well as CGNT’s somewhat muted near-term outlook, which on its face portends a ~5.5% decline in F2022 earnings, albeit due to $15 million of post-spin dis-synergies/public company costs. On a normalized basis, F2022 growth would be in the low-teens, with the expectation for an acceleration into the mid-teens in F2023 and ~20% in F2024. (Other factors behind the decline could include investor angst surrounding the inherent vagaries of the CGNT’s customer base and services as well as its transition to a software model, although we view the heavy lifting on that front as largely complete and think the corresponding increase in recurring revenue will mitigate the historical view that CGNT’s business is less predictable than VRNT’s core customer engagement business.) All told, at 16.5x EV/F2023E EBITDA and ~3.0x F2023E sales, the shares trade at a significant discount to peers, a level that we think offers an attractive entry point into a company with a clean balance sheet and a strong position in a growing sector, which can support 15%-20% growth in earnings and free cash flow in F2023-F2024. As well, we think the fragmented security analytics sector is likely to see additional consolidation over the longer term. Based on management commentary and peer and M&A valuations, as well as discounted cash flows, standalone Cognyte Software (CGNT) could be valued at ~$34 per share, including projected net cash of ~$1.50 per share, implying ~35% of potential upside (with bull and bear cases of $40 and $28 per share, respectively).

Please see the attached Hidden Opportunities Report on XPO Logistics, Inc. (NYSE: XPO).

XPO Logistics, Inc. (NYSE: XPO) currently operates two segments: (1) Transportation (62% of consolidated sales in 2020 and 67% of adj. EBITDA), which provides asset-based less-than-truckload (LTL) and non-asset-based truck brokerage services in North America and Europe; and (2) Logistics (38% of revenue and 33% of adj. EBITDA in 2020), which operates 212 million sq. ft. of warehouse space in 27 countries and offers supply chain services, such as e-commerce fulfilment, warehousing & distribution, reverse & cold-chain logistics, packaging & labeling, inventory management, and factory & aftermarket support. In January 2020, XPO disclosed a strategic review to explore the potential spin-off or sale of one or more of its business lines (excluding its North American LTL business). The review was terminated in March 2020 (due to market conditions) but a tax-free separation of its freight transportation and contract logistics/warehousing operations was ultimately announced in December 2020. The impending transaction, which is expected to be completed in 2H 2021, is rooted in management’s frustration that, despite industry-leading scale and operating performance, in terms of growth, profitability and free cash flow (FCF), its businesses trade at discounts to their most relevant peers. In pursuit of narrowing that discount, XPO is seeking to both simplify its business (hence the spin-off) and achieve investment grade credit ratings at both post-spin entities (which portends that the main use of FCF, which is expected to be $600-$700 million in 2021, will be toward deleveraging). XPO currently trades at ~9.1x 2022E EV/EBITDA, whereas its most applicable LTL and truck brokerage peers trade, on average, at ~15.5x and 12.5x, respectively. Public valuations in the contract logistics space are less consistent but average ~12.0x 2022E EV/EBITDA. In that context, amid solid underlying fundamentals, which we think could support incremental upside to our current forecasts, we see the opportunity for a re-rating across the XPO’s portfolio. In that regard, even assuming XPO’s discount to peers simply narrows (but does not close) an initial pre-spin fair value estimate of $159 per share, implying more than 25% upside, can be derived (with bull and bear cases of $176 and $141, respectively). While our initial bias is toward the post-spin Transportation business, we think the Logistics business will enjoy favorable secular tailwinds from growth in e-commerce fulfilment and could ultimately see more material upside, in terms of improvements in its operating performance and the magnitude of its multiple expansion, over the longer-term.

Attached, please see The Spin-Off Report on XPO Logistics, Inc. (NYSE: XPO).

On December 2, 2020, XPO Logistics, Inc. (NYSE: XPO), a global transportation and logistics company, announced plans to separate its contract logistics business from its freight transportation operations, which include both asset-based less-than-truckload (LTL) and non-asset-based freight brokerage services. The new standalone company, which is expected to be the second largest contract logistics provider globally with ~212 million sq. ft. of warehouse space in 27 countries, will adopt the corporate moniker GXO Logistics, Inc. (and it is expected to initially trade on the New York Stock Exchange but ultimately explore a dual listing on the London Stock Exchange). The transaction is expected to be tax-free to shareholders and is scheduled to be completed in 2H 2021 subject to conditions, including the effectiveness of a Form 10 registration statement, which has been confidentially filed with the SEC, and receipt of final Board approval. Post-spin, Brad Jacobs, XPO’s current chairman and chief executive, will retain those positions at RemainCo, which will maintain the current corporate moniker, XPO Logistics, while also serving as chairman of GXO Logistics, where Malcolm Wilson, the current head of XPO Logistics Europe, will take the helm as chief executive.

This separation follows a strategic review that was announced in January 2020 but terminated in March 2020, given market conditions amid the burgeoning COVID-19 pandemic. At the review’s inception, XPO indicated that the potential spin-off or sale of one or more of its business lines would be explored, with the exception of its North American less-than-truckload operation, which is markedly more asset intensive than its other business lines (and essentially represents the legacy operations of Con-Way Freight, which XPO purchased for ~$3 billion in 2015). At the time, the decision to both break up the business and increase the focus on its more asset-based operation (although the truck brokerage business is non-asset based) could have been viewed by some investors as a somewhat surprising tack for Mr. Jacobs. In part due to his previous ventures, United Waste and United Rentals (along with XPO), he is known for active acquisition strategies in fragmented industries, as well as for his initial focus on non-asset-based and asset-light transportation services after assuming control of XPO in 2011. That said, the impending transaction seems rooted in management’s frustration that, despite industry-leading scale and operating performance in terms of growth, profitability, and free cash flow generation, its myriad businesses trade at persistent discounts to their most relevant peers. In pursuit of narrowing this perceived discount, XPO is seeking both to simplify the company (hence the proposed spin-off, which essentially separates its freight-moving and warehousing businesses) and to achieve investment-grade credit ratings for both RemainCo and GXO. On the latter, although the company is still in discussions with rating agencies on how to optimally allocate debt, the most likely use of near-term free cash flow, which is projected to be $600-$700 million in 2021, will seemingly be toward leverage reduction. As well, the company sees potential commercial benefits from more focused management and capital allocation, particularly with regard to each business’s specialized technology requirements, as well as from having pure-play equity currencies that could facilitate longer-term M&A. With respect to potential dis-synergies, management anecdotally suggests that $10-$20 million of potential incremental costs will likely be offset by operating efficiencies, of which management sees, on a combined basis, $700 million-$1 billion looking toward 2023-2024.

Currently, XPO operates two segments: (1) Transportation, which is primarily comprised of asset-based less-than-truckload (LTL) and non-asset-based truck brokerage services, generated ~$10.2 billion in sales and $1.06 billion in adjusted EBITDA in 2020; and (2) Logistics, which designs, implements, and manages supply chains, generated 2020 sales and adjusted EBITDA of $6.2 billion and $518 million, respectively (see Exhibit 1). On a consolidated basis, XPO currently trades at about 9.1x 2022E EV/EBITDA, whereas its most applicable LTL and truck brokerage peers trade at ~15.5x and 12.5x, respectively. Valuations for public peers in the contract logistics business are less consistent, but average ~12.0x 2022E EV/EBITDA (albeit in a wide range of 6.5x-18.0x). In that context, based on solid underlying fundamentals, which we think could support incremental upside to our current forecasts, we see the opportunity for a re-rating across XPO’s portfolio of businesses, particularly the LTL operation, which has consistently posted profitability at the high end of its peer group. In that regard, even assuming XPO’s discount to peers narrows (but does not close), an initial pre-spin fair value estimate of $159 per share, comprised of $111 per share for XPO RemainCo, which will retain the current XPO Logistics moniker post-spin, and $48 per share for GXO Logistics, is derived. Given the implied upside of more than 25% to our fair value estimate, we rate the shares of pre-spin XPO as a BUY. While our initial bias is toward the post-spin Transportation company, XPO Logistics, we think the contract logistics business, GXO Logistics, will enjoy favorable secular tailwinds from growth in e-commerce fulfilment and could ultimately see more material upside, in terms of improvements in its operating performance and the magnitude of its potential multiple expansion, over the longer term.

On December 22, 2020, IAC/InterActiveCorp. (NASDAQ: IAC) announced that its Board of Directors had approved a plan to spin off its Vimeo business. The transaction, which is expected to be tax-free to IAC and IAC shareholders, is targeted to be completed in May 2021, contingent on shareholder approval at a stockholder meeting to be held prior to the transaction’s completion, among other customary regulatory requirements.

Today, the company essentially operates as a holding company and reports under five segments: ANGI Homeservices, which owns a majority stake (83%) in ANGI Inc. (NASDAQ: ANGI); Vimeo, which operates the all-in-one video software platform of the same name; Dotdash, which encompasses a portfolio of digital publishing brands; Search, which operates Ask Media Group, primarily a provider of general search services; and Emerging & Other, which operates a variety of online platforms. On a consolidated basis, IAC reported revenue of $3.0 billion and adjusted EBITDA of $94 million in 2020. The majority of adjusted EBITDA was generated from the ANGI segment, with Dotdash representing a growing profit contribution. Additionally, IAC owns 59.0 million shares of MGM Resorts International (NYSE: MGM), representing approximately 12% of MGM shares outstanding, which are accounted for using the equity method.

On January 25, 2021, IAC announced that Vimeo had raised $300 million in equity from funds advised by T. Rowe Price Associates Inc. and Oberndorf Enterprises LLC, implying a valuation in excess of $5 billion. The $300 million was raised in two tranches, with $200 million raised at a $5.2 billion pre-money valuation, and $100 million at a $5.7 billion pre-money valuation. The $300 million equity raise followed the November 2020 equity raise of $150 million, which previously valued Vimeo at $2.75 billion. Given the equity investments made in Vimeo, following the spin-off transaction, IAC shareholders of record will own approximately 88% of outstanding Vimeo shares. It is currently expected that IAC shareholders of record will receive 1.6 shares of Vimeo for each share of IAC held at the record date.

Going forward, as a standalone entity, Vimeo looks to capitalize on its growing enterprise customer base. With over 38,000 enterprise customers, who at year-end 2020 paid fees of over $22,000 per year on average, management believes that the company is positioned to capitalize on large companies growing their accounts. Management cites that 60% of Fortune 500 companies have at least one paid Vimeo account, while less than 1% of subscribers pay more than $10,000 per year. Given its foothold within large enterprises, Vimeo’s ability to increase enterprise subscriptions appears to be the key to future growth and profitability. Vimeo highlights that the addressable market for its video solutions is expected to grow from $40 billion in 2021 to $70 billion in 2024. This includes both small- and mid-sized businesses using video for marketing as well as large enterprises using the platform for internal and external communications.

We value shares of Vimeo at 17x our 2022E revenue, a modest discount to the $5.2 billion raise valuation-implied multiple, and forecast a value of $8.1 billion, or $50 per share for post-spin Vimeo (based on 161.5 million post-spin shares outstanding). On a pre-spin basis, this implies Vimeo is worth $92 per IAC share (based on 88.8 million IAC shares outstanding).

Following the spin-off, IAC’s value will primarily be derived from the equity positions in ANGI and MGM, and its net cash position, and to a lesser degree from the operating businesses within the Dotdash, Search, and Emerging segments. Accounting for our fair value estimate for Vimeo, plus the current market prices of the publicly traded holdings in ANGI and MGM, along with an adjusted cash value of $2.5 billion (removing the $300 million attributed to Vimeo), we derive an adjusted value for the IAC stub that is negative, implying zero value for the operating businesses of Dotdash, Search, and Emerging & Other. While the ultimate value of the remaining stub’s operating businesses can certainly be debated, it is tough to reconcile a negative value being attributed to them at the current market prices of IAC and its public holdings. An argument can be made that the reconciliation would lie in our Vimeo valuation, which would have to be lowered by approximately $950 million to right the negative stub value in our exercise, requiring a two-turn decrease in our Vimeo multiple to 15x, which would still ascribe virtually zero value to the operating businesses.

On a pre-spin, sum-of-the-parts basis, we fairly value IAC at $248 per share, consisting of approximately $92 per share in value from Vimeo and approximately $157 per share in value from post-spin IAC, of which $135 per share is attributable to public holdings and the company’s net cash position. We view the current valuation as attractive in light of the near-term catalyst of the Vimeo spin-off and the resultant negative stub valuation that has emerged due to IAC’s recent share price decline, and we rate the shares as a BUY ahead of the expected May spin-off of Vimeo.