On August 4, 2011, Kraft Foods, Inc. (NYSE: KFT) announced that its Board of Directors had approved the spin-off of its North American grocery business via a tax-free distribution to shareholders, which is expected to be completed by the end of 2012. The separation will require SEC approval and an affirmative IRS ruling. The spin-off company, which generates about $16 billion in annual revenue, includes US beverages, cheese, convenient meals and grocery segments, as well as Canadian non-snack categories and food service. Among the spin-off company’s well known brands are Oscar Mayer, Maxwell House, Capri Sun, Jell-O and Kraft macaroni and cheese. The entity is expected to generate strong free cash flow and relatively high margins.

Post spin the parent company will focus on the snack division as well as expansion into developing markets. Leading brands include Oreo, Cadbury, Trident, Jacobs coffee and Tang. This entity generates annual revenue of about $32 billion with 42% coming from developing markets.

KFT also reported year over year revenue growth of more than 13% in 2Q 2011 to about $13.9 billion. Operating income, excluding acquisition- and integration-related costs expanded more than 4% as price hikes more than offset higher raw material costs. KFT raised full-year operating EPS guidance to at least $2.25 (from $2.20). The higher guidance results from beneficial currency impacts, as well as aggressive cost management more than offsetting increased input costs.

The separation will enable investors to focus on a faster-growth snacks business with greater developing market exposure or a high margin, cash flow generating North American business. KFT currently pays an annual dividend of $1.16 per share (yield of 3.4%). It might be reasonable to conclude the spin-off company will carry a greater dividend yield post separation, while the parent will have to make decisions post spin whether to maintain a healthy dividend or focus on increased spending for new market penetration.

The stock trades closely with other leading food producers, despite the higher 3-year EPS growth forecast by analysts. The faster growth is largely owed to developing market expansion. In 1H 2011 Kraft’s developing market organic sales increased nearly 12% year over year to $6.8 billion. North American organic sales rose a slower 3% to about $12 billion, with increased pricing more than offsetting a decline in volume/product mix. Over the same period developing market operating income expanded about 17% compared to only fractional growth in North America. One might expect the faster growth parent to receive a higher forward P/E multiple from investors. Kraft’s grocery peer group trades at about 14x 2012 consensus EPS estimates. In comparison the faster growing nuts and potato chip company Diamond Foods Inc. (NASDAQ: DMND) trades about 22x 2012 EPS estimates.

KFT’s snack division expanded through the 2010 acquisition of British candy company Cadbury Plc for $19.6 billion in a cash and stock deal, or about 2x trailing sales, after an initial lower bid was rejected. By comparison DMND trades about 1.1x forward sales on an EV/sales basis. DMND has made large acquisition to expand its presence in the chip market. In April 2011, DMND agreed to acquire Pringles from Procter and Gamble (NYSE: PG) for about 1.7x trailing sales. Applying a multiple of 1.7x-2x to the snack division’s anticipated sales of $32 billion would generate a post-spin parent enterprise value of about $55-64 billion. The companies listed in the exhibit within the FLASH trade about 1.9x forward sales. Applying that multiple to $16 billion in projected sales generates an enterprise value of about $30 billion. KFT closed on August 3, 2011, at an enterprise value of $88 billion.

On August 1, 2011, General Growth Properties Inc. (NYSE: GGP) announced its Board of Directors approved a plan to spin off a 30-mall portfolio in a taxable special dividend to GGP shareholders. The malls will be transferred to Rouse Properties Inc., which is expected to qualify as a real estate investment trust (REIT) and trade on the NYSE following the separation. The portfolio comprises 21.1 million square feet including malls in or near San Francisco, CA; Las Vegas, NV; and Dallas, TX. Rouse properties are currently 87.7% leased and account for about 7% of GGP’s net operating income (NOI). Spinning off these entities will enable GGP to focus on its premier mall portfolio and allow Rouse to consider efforts to enhance value through various means that may include redevelopment. The special dividend is expected to be declared in 4Q 2011 pending SEC review of Rouse’s Form 10 filing, which should be filed in August 2011. Management intends for the special dividend to satisfy a portion of its 2011 REIT taxable income distribution requirement. GGP was highlighted in The Spin-Off Report Radar Screen earlier this year.

GGP emerged from bankruptcy in November 2010. As part of the reorganization plan, it spun off The Howard Hughes Corp. (NYSE: HHC), a developer of Master Planned Communities and mixed-use real estate, into a separately traded company. From the separation through early August 2011, GGP is up nearly 20% compared to about a 5% gain for the S&P 500.

GGP also reported 2Q 2011 core funds from operations of $199.6 million compared to the year-ago $206.1 million. Lower interest expense was offset by lower lease termination income. Comparable tenant sales increased 8.4% to $465 per square foot on a trailing 12-month basis while regional mall percentage leased rose 90 basis points to 92.5%. According to management, following the separation, tenant sales will approach $500 per square foot.

Since emerging from bankruptcy GGP has focused on strengthening the balance sheet and streamlining the portfolio. The spin-off seems to be a step in that direction as percentage leased and rental rates appear lower in the Rouse properties. Rouse may consider redeveloping some of these properties to maximize cash flow generation. In previous years, GGP may have considered selling off these properties, but the market for malls is reportedly less buoyant than in the past. As a result the spin-off was a clear choice when seeking to right size the asset base. While GGP appears to trade at a slight premium to comparable mall operators, one might assign the higher multiple to investor expectations that management will continue to aggressively pursue avenues for enhancing shareholder value, including spinning off or selling properties, buying back shares and strengthening the balance sheet.

On July 28, 2011, L-3 Communications Holdings Inc. (NYSE: LLL) announced its Board of Directors approved a plan to spin off its Government Services unit, to be named Engility, to shareholders in a tax-free distribution scheduled for 1H 2012. Management projects Engility’s 2011 pro forma sales of about $2 billion and EBITDA of $193 million. Businesses that will be spun off include its systems engineering and technical support as well as training and operational support services for the Department of Defense, US government agencies and other civil and international clients. Its cyber solutions business will remain a part of the parent. L-3 is expected to have a stronger growth profile and higher operating margins following the separation, according to management.

L-3 had previously been urged to consider ways to lift shareholder action. Activist firm Relational Investors recently took a 6% stake in the company and in a June 2011 SEC filing, Relational argued that L-3 had underperformed defense-related stocks and the broader market due to its uneven mix of businesses. L-3 management had already disclosed earlier this year that they would consider divesting certain assets. LLL operates in several defense segments, including high-margin electronics and intelligence, as well as more commoditized aircraft maintenance and government services. L-3 was highlighted in The Spin-Off Report Radar Screen earlier this year due to these potential issues. LLL appears to trade at a modest discount to a defense contractor peer group when valuing based on 2011 consensus EBITDA estimates. A likely reason for the discount is a consensus projection for declining EBITDA in the out year.

Notably, higher margin, electronics-focused defense contractors trade at a considerable premium to the more diversified defense businesses. A group including FLIR Systems Inc. (NASDAQ: FLIR), Cubic Corporation (NYSE: CUB) and Rockwell Collins Inc. (NYSE: COL) trade at an EV to 2011 EBITDA multiple of about 9x. Post-spin LLL could be rewarded with a much higher multiple if it is grouped with these businesses following the separation of the more commoditized Government Services segment.

LLL also reported 1H 2011 results and raised guidance for the year largely based on a lower projected effective tax rate. Full-year sales guidance remained unchanged at $15.5-$15.6 billion with an operating margin of 10.7%. The EPS projection was raised to $8.65 to $ 8.75 from the previous $8.50 to $ 8.60. Government services segment operating margin is expected to be about 7.9%. Year over year, company-wide sales declined 3% to $7.4 billion in 1H 2011 while operating margin narrowed 40 basis points. Weakness was owed in part to project order delays and the loss of an Afghanistan Ministry of Defense support contract. Government services revenue declined 1% while operating margin fell 70 basis points, in part due to competitive pressure on project re-competes and profitability of new contracts.

LLL expects Engility will pay a dividend to the parent of $500-$650 million and carry debt/EBITDA in the range of 3x-4x. Based on 2011 EBITDA guidance, debt could be about $675 million. LLL could use the cash for acquisitions to increase exposure to faster growing non-commoditized electronics businesses.

On July 20, 2011, AMR Corporation, the parent company of American Airlines Inc., announced that it would move forward with the divestiture of American Eagle, its regional carrier, in a tax-free spin-off to shareholders. AMR intends to file a Form 10 with the SEC in August 2011 describing the intended transaction. The company may still consider a sale of American Eagle, however. No timing for the separation has been announced. Should the spin-off occur, we would expect American Airlines and American Eagle to operate pursuant to a mutually beneficial air services agreement, under which American Eagle would continue to provide American Airlines with regional service comparable to that provided prior to the separation, on terms that reflect the prevailing market for those services.

The separation will enable American Eagle to pursue opportunities with other mainline carriers while allowing American Airlines to diversify its regional feeder agreements. Plans for the spin-off were originally announced in November 2007 but were postponed indefinitely in July 2008 due to market conditions. American Airlines is the world’s largest airline, serving 250 cities in over 40 countries with about 3,400 daily flights. Its network fleet includes more than 900 aircraft. The American Eagle network is the largest regional airline system in the world, with more than 1,500 daily flights to more than 160 cities throughout North America. Hubs include New York, Raleigh, Boston, Miami, San Juan, Dallas, Los Angeles and Chicago.

The peer group tables within the FLASH include EV/EBITDA comparisons given that losses per share are projected for AMR in 2011 and 2012. For the first half of 2011, AMR reported year-over-year revenue growth of more than 8% to $11.6 billion, but operating loss widened to $309 million from the year-earlier $102 million. Fuel costs surged 29% and load factor (passengers carried per available seats) dipped modestly, more than offsetting gains in revenue-passenger miles (RPMs). EBITDA was $233 million in 1H 2011 compared to the year-ago $432 million. AMR’s regional affiliates generated $1.2 billion in revenue in 1H 2011 or about 11% of AMR’s $11.6 billion of total revenue. Regional load factor and RPMs both increased.

The regional airlines trade at higher EV/EBITDA multiples than the mainline carriers. AMR trades at a premium to both groups on this valuation metric.

It should be noted that AMR also announced an agreement to purchase 460 fuel-efficient aircraft from Boeing and Airbus beginning in 2013, the largest aircraft order in aviation history.

On July 14, 2011, Ralcorp Holdings, Inc. (NYSE: RAH) announced that its Board of Directors had approved the spin-off of its branded cereals business via a tax-free distribution to shareholders, which is expected to be completed in the next four to six months. The spin-off company, to be named Post Foods, is expected to trade on the NYSE following completion of the separation. Post Foods will issue as much as $1.2 billion in new debt, of which $1 billion in cash will go to the parent. Ralcorp is planning to use those funds to reduce debt, make strategic acquisitions or buy back shares. The spin-off will require SEC approval and an affirmative IRS ruling. Management notes that Post Foods has a different margin and cash flow profile than Ralcorp’s private foods business and may be attractive to different investor bases.

Ralcorp also lowered EPS guidance for fiscal 2011 (ending September 30) to $5.20 and $5.35 (previously $5.45 to $5.55) due to rising commodity prices and the company’s inability to capture those hikes in a timely fashion through product price increases, as well as lower sales of branded cereals. The company also announced that its accelerated cost reduction program should raise operating profit by a total of $80-to-$100 million in fiscal years 2012 through 2014.

Post Foods was acquired from Kraft Foods (NYSE: KFT) in 2008 in a $2.6 billion deal (including about $1.64 billion in RAH stock and $960 million in cash). RAH paid about 2.4x trailing annual sales. Since the acquisition, economic pressures and the highly-competitive branded cereal landscape has resulted in weaker volume and additional promotional activity. While margins are higher than in the branded foods segment, they have been pressured since the purchase. The branded cereals segment generated about $477 million in sales in 1H 2011 (ending March 2011), about 20% of total Ralcorp sales. Over the same period, the branded cereals segment generated profit of nearly $107 million, about 32% of total segment profit. This margin of 22% exceeded the total company’s margin of 14%. Branded cereals accounted for about 26% of depreciation and amortization in 1H 2011. Well-known cereals include Honey Bunches of Oats, Raisin Bran, Grape-Nuts, and Honeycomb.

The stock trades closely with other leading food producers. RAH jumped more than 30% over several weeks following an $86 per share ($4.9 billion and the assumption of $2.5 billion debt) takeover offer from ConAgra Foods Inc. (NYSE: CAG) in early May 2011, which valued the company at about 1.9x trailing fiscal year sales. RAH has traded between 11x and 20x forward EPS over the last decade, with the mean around 15x. The CAG offer was made at a forward P/E multiple of about 15x for RAH (based on the revised earnings guidance, however, the offer would now be closer to 16x). The offer was rejected by the Board of Directors and the company adopted a poison pill. RAH proceeded to trade above the takeover price on speculation that a likely higher offer was forthcoming. Given the spin-off announcement, RAH appears to be moving forward and seeking other ways to lift shareholder value.

Consensus estimates indicate slower expected EPS growth for Ralcorp compared to peers. Growth is most likely to come from further acquisitions to expand the private labels food business. RAH can focus on those efforts after spinning off the branded cereals operations.

On July 14, 2011, ConocoPhillips (NYSE: COP) announced that its Board of Directors had approved the spin-off of its refining and marketing business via a tax-free distribution to shareholders, which is expected to be completed in 1H 2012. Chairman and CEO Jim Mulva will lead the separation efforts. Upon completion of the spin-off, Mr. Mulva intends to retire. Capital and liability allocations are yet to be finalized. The spin-off will require SEC approval and an affirmative IRS ruling.

COP’s refining and marketing operations include 12 refineries in the US, as well as refining plants in the United Kingdom, Ireland, Germany and Malaysia. It is the largest US and fourth largest (non-government owned) global refiner. At the end of 2010, worldwide crude oil processing capacity totaled 2.4 million barrels per day (including 2 million barrels in the US). Over the last three years, COP averaged nearly 2.3 million barrels processed per day. In 2010, capacity utilization fell to 81% (from a near-term peak of 94% in 2007). COP may consider shuttering older facilities or reducing capacity to maximize ROCE.

The exploration and production (E&P) operations comprise 8.3 billion barrels of oil equivalent (bboe) at year-end 2010. Average production in 2010 totaled about 1.75 million barrels oil equivalent per day, down modestly from 2009 as COP focused on liquids production and slowed development of North American natural gas basins.

Management has focused on lifting shareholder value through share repurchases, buying back about $4 billion in shares in 2010. The company has about $11 billion left in the current buyback program and intends to aggressively repurchase stock at opportune times. The separation is an additional effort to increase shareholder value. The two separate companies should be easier for investors to value. The capital intensive refinery business has been under pressure in recent years due to economic weakness, which resulted in reduced processing and lower spreads. The refining and marketing business will be able to focus capital investment on refinery upgrades, while the E&P business can seek out ways to lift proved reserves (although management has indicated organic growth is more likely than through acquisition).

The proposed spin-off has the potential to unlock additional value as the valuation of these businesses, as separate entities, could be greater than COP’s current valuation. The E&P peer group trades at an EV/proved reserves of about 17.2x and price/daily production of about 58x. The refiner peer group trades at an EV/daily capacity of about 9x. Applying a 17x multiple to COP’s proved reserves of 8.3 billion barrels produces an E&P segment EV of $141 billion and applying a 9x multiple to COP’s daily refining capacity of 2.4 million barrels results in segment EV of $22 billion for a sum-of-the parts enterprise value of about $163 billion. Subtracting net debt of about $15 billion, one may generate a market capitalization of about $148 billion, and an approximate price per share of $102.

On June 24, 2014, NorthStar Realty Finance Corp. (NYSE: NRF) announced shares of NorthStar Asset Management Group Inc. will be distributed on June 30 with regular-way trading scheduled to commence on July 1. The spin-off entity will trade under the ticker “NSAM” following the separation. The record date is also June 30. Trading in the when-issued market is expected to commence on June 27. The transaction still requires an effectiveness declaration of the filings by the SEC. Prior to the transaction, NRF will effect a 1:2 reverse stock split of its own shares.

The spin-off entity will receive an annual management fee of $100 million and an additional fee representing 1.5% of cumulative equity raised by NRF subsequent to December 10, 2013, plus incentive fees based on cash available for distribution through a 20-year contract with NRF. It will also receive fees and incentives to manage sponsored non-listed REITs. The initial annual base management fee for NSAM is $148 million (previously $126 million) following a May 2014 NRF equity offering. Following the financial crisis, NRF has been winding down its legacy collateralized debt obligation (CDO) business through the liquidation and deconsolidation of certain CDOs. New investments have been focused on purchasing real properties, largely in the manufactured housing, healthcare, and multifamily sectors. NRF also invests in private equity funds, real estate debt, and other real estate-related securities. As noted in the initial NorthStar Realty Finance Spin-Off Report (March 19, 2014), the fair value calculations would be adjusted based on the finalized distribution ratio, capital structure, dividend policy and changes in company/industry fundamentals.

The fair value for NRF remains unchanged at $17 per share, based on an 8.4% yield on a projected dividend of $0.71 per share (assuming an 87% payout on estimated cash available for distribution [CAD] of about $0.82). The fair value of $18 per share (previously $16) for NSAM assumes the spin entity can generate $0.38 to $0.42 per share of CAD in its first twelve months (previously $0.36 to $0.40), which is based on NRF raising additional capital or NSAM achieving certain incentive thresholds. The peer group, including general partners (GPs) of Master Limited Partnerships (MLPs), or real estate asset managers trade at about 22.5x distributable cash flow or earnings (previously 21x), respectively.

Shares of AMC Networks Inc. (NYSE: AMCX) will be distributed to Cablevision Systems Corporation (NYSE: CVC) shareholders on June 30, 2011, with regular way trading expected to commence on the following day. CVC holders will receive one share of AMCX for every four shares of CVC held at the close of business June 16, 2011. Trading on the ‘when issued’ market is expected to begin on the NYSE on the same day.

CVC’s Board of Directors approved the spin-off of AMCX on June 6, 2011. The SEC still must declare effective AMCX’s Registration Statement to conclude the regulatory review. As noted in our initial AMC Networks Spin-Off Report (May 23, 2011), the fair value calculation would be adjusted based on the finalized distribution ratio and capital structure. The revised fair value calculation of $38 per share reflects the 1:4 share distribution.

AMC Networks includes four national programming networks. The largest is AMC (formerly known as American Movie Classics), a provider of dramatic television series and films as well as a library of popular and classic films. Television series on AMC include Mad Men, Breaking Bad, and The Walking Dead. WE tv focuses on original content for women, including series such as Bridezillas and Downsized, as well as re-airing classic series including The Golden Girls and Charmed. IFC airs independent films and documentaries as well as original programming, including Portlandia and The Onion News Network. Sundance Channel airs independent films and programs highlighting design, travel, and fashion.

AMC has generated strong ratings and increasing pop culture relevancy with recent programming initiatives. Notably, The Walking Dead, which premiered on Halloween night 2010, set ratings records for the network. The program ranked as the fifth most watched basic cable primetime original series in 2010, with more than 6.6 million households, and perhaps more importantly, topped the rankings for viewership in the advertiser-favored age range of 18-49, with more than 4.5 million sets of eyeballs. Investors are likely focused on AMC Networks’ growth prospects in a recovering economy. Given the introduction of new, critically acclaimed, and high-rated programming on AMC along with potential subscriber expansion for its smaller networks and independent forecasts of cable television advertising spending growth, AMC Networks’ prospects appear positive in the early years post-spin-off.

Shares of Marathon Petroleum Corporation (NYSE: MPC) will be distributed to Marathon Oil Corporation (NYSE: MRO) shareholders on June 30, 2011, with regular way trading expected to commence on the following day. MRO holders will receive one share of MPC for every two shares of MRO held at the close of business June 27, 2011. Trading on the “when issued” market is expected to begin on the NYSE on June 23, 2011.

MRO’s Board of Directors approved the spin-off of MPC on May 25, 2011. The SEC declared effective MPC’s Registration Statement on June 7, 2011, concluding the regulatory review. As noted in our initial Marathon Petroleum Spin-Off Report (published April 21, 2011), the fair value calculation would be adjusted based on the finalized distribution ratio and capital structure. The revised fair value calculation of $34 per share reflects adjustments to the balance sheet following 1Q 2011. The previous fair value estimate of $32 per share was based on pro forma 4Q 2010 net debt.

MPC will operate within three segments: Refining & Marketing, which will comprise a six-plant refining network with 1,142,000 barrels per day of crude oil refining capacity located primarily in the Midwest, as well as wholesale marketing, transportation, and retail operations; Speedway, a convenience store chain with approximately 1,350 locations in the Midwest; and Pipeline Transportation, comprising ownership interests in 9,700 miles of crude oil pipelines. Marathon has invested in its refinery network to increase efficiency and raise margins. Expansion of its Garyville plant cost about $3.9 billion. In addition, Marathon is spending about $2.2 billion at its Detroit facility to increase heavy oil processing by about 80,000 bpd and crude refining capacity by 15,000 bpd. The upgrade is expected to be completed in mid-2012.

El Paso Corporation (NYSE: EP) intends to spin off its exploration and production (E&P) assets from its midstream and pipeline assets by the end of 2011. On May 24, 2011, EP announced that its Board of Directors had approved plans to separate into two standalone publicly-traded companies. The parent company would retain the general- and limited-partnership interests in El Paso Pipeline Partners LP (NYSE: EPB). Additionally, the parent company would continue to operate the country’s largest interstate pipeline system with more than 42,000 miles of pipe extending from The Gulf Coast to large consumer markets in the North East, as well as supply basins in the Southwest and Rockies. Midstream assets include gathering lines, compression units and a gas processing plant in Utah’s Uinta basin, as well as gathering lines and dehydration equipment in Louisiana’s Haynesville Shale.

The proposed spin-off company has 3.4 trillion cubic feet equivalent (tcfe) of hydrocarbon proved reserves at year-end 2010, up 22% from the previous year. The primary assets are located in the Haynesville Shale, South Texas’ Eagle Ford Shale, the Wolfcamp Shale in West Texas’ Permian Basin as well as the Altamont Field in Northern Utah’s Uinta Basin. Production averaged 782 MMcfe/d (million cubic feet per day) in 2010, up 3% year-over-year. Increased drilling in the Eagle Ford and Wolfcamp Shale plays has led to a shift in inventory towards oil and away from gas (from 38% oil in 2007 to 48% in 2010). Management expects the shift to continue. The spin-off will be led by E&P president Brent Smolik.

Since March 2011, The Spin-Off Report Radar Screen has highlighted the potential for EP to pursue a separation, particularly following positive investor reaction to the carve-out announcement by Williams Companies Inc. (NYSE: WMB) in February 2011. WMB was up 8% following the announced plans to carve out as much as a 20% interest in its exploration and production (E&P) assets through an initial public offering in 3Q 2011. The IPO of that business would be followed by a tax-free spin-off of the remaining shares to WMB shareholders in 2012.

In conjunction with the separation announcement, EP also raised guidance for 2011. Adjusted segment EBITDA is now expected to be in the range of $3.4 to $3.6 billion (from a previous range of $3.3 to $3.5 billion) due to increased production and prices. Management guidance is based on $107 per barrel WTI and NYMEX gas of $4.50/MMBtu.

A peer group of similar sized US-based exploration and production companies is trading around $3 per thousand cubic feet equivalent on an enterprise value per year-end proved reserves. EP has net debt of nearly $14 billion at the end of 1Q 2011. One could reach a fair value estimate range for the spin-off based on EP’s proved reserves of 3,362 bcfe at year-end 2010. The range is based on $7 billion in net debt being distributed to the spin-off. Clearly, more debt could be left with the parent given the stable cash flow generation of the pipeline and midstream assets. Based on a one-for-one share distribution, a fair value estimate range for the spin-off of $4 to $10 per share can be attained.

EP has a targeted dividend of $0.60 per share for the parent in 2012 post spin-off. Investors can base a fair value estimate for the parent on a reasonable dividend yield given the relatively secure cash flow generation of pipeline and midstream assets.