On April 7, 2011, Expedia Inc. (NASDAQ: EXPE) announced that its Board of Directors had preliminarily approved the spin-off of the company’s TripAdvisor unit via tax-free distributions to shareholders, with an expected completion date sometime during 3Q 2011. The transaction is subject to customary spin-off approvals, including IRS, SEC, and final Board of Directors approval.

TripAdvisor, which operates Web sites in 29 countries including China, offers travel advice, recommendations and planning services. The advertiser-driven sites boast more than 40 million unique monthly visitors and 20 million members. Expedia’s remaining sites, including expedia.com and hotels.com provide airline, hotel and other travel-related booking services for a fee.

Barry Diller is the Chairman of the Board and Senior Executive of EXPE and holds 61% of the company’s voting rights, which includes a proxy to vote Liberty Interactive Inc.’s (NASDAQ: LINTA) 29% stake.

EXPE had about $415 million in net debt at year-end 2010. The company generated about $777 million in cash from operations with $155 million in capital expenditures. Revenue grew 13% in 2010 to $3.3 billion on a 19% gross bookings increase. Operating income before amortization (OIBA) rose 9% to $831 million on slower growth from leisure OIBA partially offsetting the much-faster TripAdvisor profitability improvement. TripAdvisor revenue increased 38% to $486 million in 2010 to account for 15% of total EXPE revenue (compared to about 12% in 2009). Segment OIBA of $260 million in 2010 was up 33% year over year and accounted for more than 31% of total EXPE OIBA, up from 26% in the previous year. TripAdvisor generated an OIBA margin of 53% in 2010 compared to a leisure segment (including expedia.com and hotels.com) margin of 29%.

EXPE trades at a fairly significant discount to both travel-related bookings sites and leisure information sites. The fast-growth, high-margin TripAdvisor business seems to be undervalued, in our view, when compared to similar travel-information provider Travelzoo Inc. (NASDAQ: TZOO). The spin-off could unlock value. The stock rose more than 10% after hours as investors seemed to at least initially applaud management’s efforts. The stock weakened nearly 17% in mid February when 4Q 10 earnings disappointed investors. Management indicated margins could be hampered by increased costs for international expansion and technology improvements.

On June 19, 2014, Timken Co. (NYSE: TKR) and TimkenSteel Corp. (NYSE: TMST) held separate analyst meetings to update the outlooks on their respective businesses. On the same day, TKR and TMST began trading in the “when-issued” market. On a “when-issued” basis, TKR closed trading at $49.49 per share while TMST closed trading at $37.74 per share. Shares of TMST will be distributed to TKR shareholders of record as of June 19, 2014, on June 30, 2014, with regular-way trading commencing on July 1, 2014.

TKR management revised post-spin EPS guidance for Timken to $2.40 to $2.60 (previously $2.20 to $2.50). Embedded in the guidance are expectations for each segment’s revenue growth and EBIT margin. Notably the low end of revenue growth was increased for Mobile and Process segments, while Aerospace revenue was reduced at the low and high end of guidance (see attachment). The Aerospace segment is significantly smaller than the Mobile and Process units representing approximately 8% of revenue and 5% of segment operating income. The company also stated that it will maintain a $0.25 quarterly dividend in 3Q 2014 and has increased its share repurchase authorization by 10 million shares. TKR still has 1.5 million shares remaining on a previous repurchase authorization. Both authorizations expire at the end of 2015.

The fair value for post-spin TKR is revised to $52 per share (previously $49 per share) incorporating revised guidance for segment performance, expected corporate expenses and applying a peer group multiple of 9.5x projected EBITDA. The peer group includes SKF AB (SKFB SS), Kaman Corp. (NYSE: KAMN), and RBC Bearings (NASDAQ: ROLL). The increase in fair value is due to the increase in the low end of sales guidance for the Mobile and Process segments, higher expected margins at Process (18.5% versus 16.7%) and Aerospace (11.5% versus 7.9%), partially offset by the reduced Aerospace revenue, a lower Mobile margin (11.5% versus 16.3%), and net debt of $240 million (previously $159 million).

TimkenSteel management revised 2014 revenue growth assumptions to increase 20% to 25% (previously 15% to 20%). TMST also announced that the company expects to initiate a quarterly dividend of $0.13 to $0.15 per share. The fair value for TimkenSteel is revised to $43 (previously $42). TMST’s fair value is based on the average valuation derived from 2014 estimated EV/EBITDA, and a peer multiple to TMST’s book value of property, plant and equipment, net (PP&E). The increase in fair value is primarily due to the higher 2014 revenue growth guidance midpoint of 22.5% (previously 17.5%). Please see the Timken Co. Spin-Off Report dated May 29, 2014, for further details.

On February 16, 2011, The Williams Companies Inc. (NYSE: WMB) 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 will be followed by a tax-free spin-off of the remaining shares to WMB shareholders in 2012. The WMB Board has approved the plan.

The E&P assets include proved reserves in the Piceance, Powder River and Green River Basins as well as undeveloped acreage in Appalachia’s Marcellus Shale and the oily Bakken Shale in North Dakota. In addition through its 69% interest in Apco Oil and Gas International Inc. (NASDAQ: APAGF), new E&P has production in Argentina and contracts in Colombia.

Following the spin-off, WMB will consist of 100% ownership of the general partner (GP) and 73% limited partner (LP) interest in Williams Partners LP (NYSE: WPZ), an MLP with assets in the Rocky Mountains and on and offshore Gulf of Mexico. Assets include natural gas gathering, processing and treating facilities as well as interstate pipelines. WMB also announced plans to raise its dividend 60% to $0.20 per share for the 1Q 2011 dividend payable in June 2012. Management also indicated a 10-15% hike for the dividend in June 2012 is targeted.

The spin-off will allow management to focus more intently on meeting growing demand in their separate businesses. The new E&P can base spending priorities on developing and producing oil or gas from key assets, while Williams can meet changing needs for US commodity processing and transportation as domestic natural gas production reaches record levels. Funds from the IPO are expected to be utilized to reduce debt.

Williams projects growth in its E&P segment profit in 2011 due to rising natural gas production from increased drilling last year. But this morning’s guidance update also reflects lower natural gas price assumptions due to impact of increased domestic drilling on US gas in storage. Over the last 18 months WMB added assets in the productive Marcellus Shale where proximity to end-users can generate higher realized prices than some of WMB’s traditional core assets. WMB also purchased assets in the Bakken, which could offer increased exposure to oil. WMB’s proved reserves are currently overwhelmingly natural gas. Williams Partners is benefiting from higher NGL margins and increased volume.

On February 14, 2011, Marriott International Inc. (NYSE: MAR) announced plans to spin off its timeshare business through a tax-free special dividend by late 2011. The spun-off business will focus on developing and operating timeshare and fractional ownership units under the Marriott brand and fractional ownership products under the Ritz-Carlton brand. Marriott will receive franchise fees for use of brand names by the spun-off company. Marriott International will focus on lodging management and franchises.

The Marriott family is expected to hold 21% of the common stock of each entity following the special dividend. Each company will have a separate board of directors. The CEO of the timeshare business will be Stephen Weisz, the current president of that segment. The timeshare company is not expected to pay a quarterly dividend or be investment grade. The spin-off is not anticipated to result in any change to MAR’s current dividend policy. A Form 10 registration statement is expected to be filed in 2Q 2011. The spun-off company will operate 71 timeshare and fractional resorts with more than 10,000 employees. The segment generated $1.5 billion in revenue in 2010 (or about 14% of company-wide sales).

The timeshare market has been slow to recover and management is guiding for flat sales in 2011. Meanwhile company-wide guidance in 2011 (including timeshares) is for lodging REVPAR (revenue per available room) to increase 6%-8%, with adjusted EBITDA improving 12%-18% to $1.17-$1.23 billion. EPS is projected to improve 18%-21% to $1.35-$1.45, despite the stagnant timeshare market. Given the slower recovery in timeshares and the more capital intensive nature of the business, the spin-off could make sense to management at this time.

Earlier this month Cerberus Capital Management announced a deal to acquire timeshare operator Silverleaf Resorts Inc. (NASDAQ: SVLF) for $2.50 per share cash, which equates to nearly 9x trailing twelve-month EBITDA. Using that multiple, Marriott timeshare segment’s enterprise value could be estimated at about $2 billion following the spin-off.

MAR appears not to trade at a discount to leading peers, several of which also operate fractional ownership programs. The spin-off benefit would seem largely to relate to growth opportunities for the lodging unit untethered from the slower growth, more cyclical timeshare segment. An investor may consider a higher valuation for the remaining business if one expects faster EPS growth over the longer term.

On January 28, 2011, Sara Lee Corp. (NYSE: SLE) announced that its Board of Directors had approved the tax-free spin-off of its North American Retail and Foodservice businesses (excluding beverages). The spun-off brands will include Sara Lee, Jimmy Dean, Hillshire Farm and others. The separation is expected early next year. SLE also intends to declare a $3 per share special dividend prior to the spin-off funded largely through the previously announced sale of its North American bakery business.

The announcement follows a drawn-out process where management reportedly sought out take-over offers for one or both businesses. According to The Wall Street Journal, all of the offers fell below the $20 per share takeout price that would have been deemed acceptable by management. SLE has been exploring options since CEO Brenda Barnes left the company last year for medical reasons.

The spin-out will retain the Sara Lee name, while the unnamed remaining company consisting of the North American and International beverage businesses as well as the International fresh bakery business, includes well-known brands such as Senseo and Pickwick. These businesses generated $4.6 billion in sales in fiscal 2010 (ending July 3, 2010), while the Retail and Foodservice businesses accounted for $4.1 billion in revenue over the same period.

SLE simultaneously updated its guidance for fiscal 2011 after restating to exclude North American bakery, which is moved into discontinued operations. Operating income from continuing operations guidance for fiscal 2011 was narrowed to the lower end of the previous range: from $904 to $969 million to the revised range of $904 million to $940 million. The revision is the result of higher coffee bean prices which cannot be entirely passed onto customers. New EPS guidance from continuing operations is set at $0.85 to $0.89 from the previous $0.87 to $0.94.

Management indicated that the reason for the separation of the businesses is to help maximize shareholder value while enabling management of each company to focus on distinct growth strategies and end markets. The expectation is that the two stocks will develop separate focused shareholder groups. Each company is expected to maintain an investment grade credit rating and a dividend yield. The spin-out also enables prospective buyers to consider the attributes of separate businesses, which may fit better under their corporate umbrellas. Each company could be a more appealing acquisition candidate to a wider pool of buyers, in our view.

However, there appears to be little upside in the short-term, given the significant run-up in the stock on investor expectations of a potential near-term sale of the entire business. Despite yesterday’s pullback, the stock is up about 24% since the beginning of November 2010 compared to a rise of 10% for the S&P 500 over the same period. The stock is currently trading more than 20x updated fiscal 2011 EPS guidance. Other food service companies (including KFT and TSN) trade at about 11x forward fiscal year EPS estimates, while coffee producers (such as PEET and GMCR) trade above 25x forward EPS. We note that SLE has generated much higher margins for the international beverages business than its North American foodservice and retail businesses. (The North American beverage operations have been reported in the foodservice segment to date.) Longer term, we expect buyers will potentially be enticed by the strong brands in both businesses and potential upside to the stock price may exist if offers are made pre- or post-spin-out.

On January 13, 2011, Marathon Oil Corporation (NYSE: MRO) announced that its Board of Directors had approved the spin-off of its refining business via a tax-free distribution to shareholders, which is expected to be completed on June 30, 2011. The spin-off company, which will be named Marathon Petroleum, is expected to trade on the NYSE under the ticker symbol ‘MPC,’ while Marathon Oil, which will become a pure-play global exploration and production company, will continue to trade under the ticker symbol ‘MRO.’

Marathon Oil had originally intended to spin off the downstream business during early 2009, but management eventually cancelled the transaction due to uncertainty in the financial markets. The decision to move forward with the spin-off will permit both companies to focus their operations and implement strategic objectives without internal competition for capital and resources. Management also expects to unlock shareholder value by making the investment profiles of each business more transparent to the market.

Marathon Petroleum, the spin-off company, 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 Petroleum will target investment-grade status, holding at least $750 million in cash and $2.5-$3 billion in debt, and is expected to pay yearly dividends of $0.80 per share.

Following the completion of the spin-off, Marathon Oil will become a geographically diverse upstream company with a portfolio comprised primarily of liquids. Exploration and production assets include its core areas in the US, Equatorial Guinea (where LNG operations are also undertaken), Libya, and the North Sea, while its growth assets that are yet to be developed include resource plays in the US, Gulf of Mexico, Angola, and Canada, and exploration plays in Gulf of Mexico, Iraq, Poland, and Indonesia. Post-spin-off Marathon Oil will also own a 20% interest in an oil sands mining business in Canada.

The proposed spin-off has the potential to unlock additional value as the valuation of these businesses, as separate entities, could be greater than Marathon Oil’s current valuation. For example, Marathon Oil currently trades at 10x and 8.5x consensus 2011 and 2012 earnings forecasts, respectively, and at 4x consensus 2011 EBITDA estimates. By comparison, US refining companies trade at an average of approximately 14x and 10x consensus 2011 and 2012 earnings per share, respectively, and at 5x 2011 EBITDA estimates, while US upstream companies trade at approximately 15x and 12x consensus earnings estimates and 6x their 2011 consensus EBITDA estimates. Thus, to the extent that the stand-alone companies are valued on par with comparable multiples, the spin-off should unlock shareholder value.

Shares of Exelis Inc. (NYSE: XLS), to be known as ITT Exelis, and Xylem Inc. (NYSE: XYL) will be distributed after the bell on October 31, 2011 to ITT Corporation (NYSE: ITT) shareholders, with regular way trading expected to commence on November 1, 2011. ITT holders will receive one share of XLS and XYL for every one share of ITT held at the close of business October 17, 2011. Trading on the ‘when issued’ market is expected to begin on or about October 13, 2011. In addition to the separation, the ITT Board of Directors also approved a reverse stock split of the parent company on the distribution date. ITT Exelis includes ITT’s defense business, while Xylem encompasses ITT’s water technology operations. The remaining businesses, which stay with the parent, include products and services for industrial, transportation and energy markets.

The SEC still must declare effective the spin-off companies’ Registration Statements to conclude the regulatory review. As noted in our initial ITT Corporation Spin-Off Report (March 10, 2011), the fair value calculation would be adjusted based on the finalized distribution ratio, capital structure and changes in company/industry fundamentals. Given expectations for slower defense spending, the peer group’s EV/ EBITDA multiple has contracted significantly. The multiple contraction accounts for about 65% of our reduced fair value estimate. Based on the revisions, one might expect ITT to initially trade around $19 per share post-separation (including effect of reverse split), XLS to trade around $23 per share and XYL at about $26 per share.

On January 12, 2011, ITT Corporation (NYSE: ITT) announced that its Board of Directors had approved the spin-off of the company’s water-related business and its defense and information solutions business via tax-free distributions to shareholders, with an expected completion date sometime during 4Q2011. The transaction is subject to customary spin-off approvals, including IRS, SEC, and final Board of Directors approval.

ITT Corporation is undertaking the spin-offs with a view to separate itself into three independent publicly-traded companies: Future ITT, the parent company, a diversified global manufacturer of highly engineered industrial products for the oil and gas, automotive, and aerospace markets; Future Water, a global water technology company providing water and wastewater treatment solutions and related technologies for industrial, commercial, and municipal customers; and Future Defense, a diversified technology and information solutions provider primarily for US armed forces.

All three companies will be global market leaders in their respective markets and will be well capitalized (all three companies will be funded with the expectation to attain investment-grade status), providing management with the financial flexibility to undertake growth projects without internal competition for capital and resources. The stated reason for the spin-off is management’s belief that shareholder value may be unlocked by focusing the operations of each stand-alone company.

The announcement of the break-up of ITT Corporation’s industrial conglomerate has already proven to be well received by the marketplace, as shares peaked at $64 in early trading, a move of over 21% from its previous close on January 11, 2011. The proposed spin-off has the potential to unlock additional value as the valuation of these three businesses, as separate entities, could be greater than ITT Corporation’s current valuation. For example, water treatment companies (Future Water) and technology/IT defense companies (Future Defense) trade at approximately 8x 2011E EBITDA, while highly engineered industrial manufacturing companies (Future ITT) trade at a higher multiple of 8.6x. As a means of comparison, at the current intraday share price of $61, ITT Corporation would be trading at a 2011E EBITDA multiple of 7.3x, which is approximately in line with the lowest multiple of any comparable company in any of these three industries.

On March 15, 2011, Northrop Grumman Corp. (NYSE: NOC) announced that its Board of Directors approved the spin-off of its shipbuilding subsidiary, Huntington Ingalls Industries (‘HII’). Shares of HII will be distributed via a tax-free spin-off on March 31, 2011, subject to final SEC clearance, to NOC shareholders of record at the close of trading on March 30, 2011. Shareholders of Northrop Grumman will receive one share of HII for every six shares of NOC held. HII shares are expected to begin ‘when issued’ trading on the NYSE on March 22, 2011. On the distribution date, ‘when issued’ trading will end and ‘regular way’ trading will commence.

As noted in our initial Huntington Ingalls Spin-Off Report publication (February 18, 2011), the fair value calculation would be adjusted based on the finalized distribution ratio and capital structure. The revised fair value calculation of $16 reflects the final one-for-six share distribution ratio, as well as the adjusted net debt to include HII’s contribution to NOC. Shares of NOC are not recommended for purchase prior to the spin-off due to concerns regarding slower defense spending growth or potential stagnation, closer scrutiny of operating costs and potential Pentagon delays in new project launches.

On June 17, 2014, shares of Rayonier Advanced Materials (NYSE: RYAM) closed in the “”when-issued”” market at $40.00 per share. RYAM shares will be distributed on a 1:3 basis on June 27, 2014, to Rayonier Inc. (NYSE: RYN) shareholders of record as of June 18, 2014. RYAM is expected to commence regular-way trading on June 30, 2014. Rayonier has received an effectiveness declaration of the company’s registration statement by the SEC and receipt of a private letter ruling from the IRS regarding the tax-free nature of the spin-off.

RYAM management has guided for 2014 EBITDA to decline 15% year-over-year to $309 million. RYAM’s peer group includes Borregaard ASA (BRG NO), Tembec Inc. (TMB CN), and Sappi Ltd. (SAP SJ), which currently trades at 7.4x 2014 EBITDA. However, TMB is forecast to grow EBITDA 27% in 2014, while BRG and SAP’s EBITDA are forecast to decrease approximately 5.5% each in 2014. BRG and SAP trade on average at 6.7x 2014 estimated EBITDA while TMB is awarded a premium multiple. Given the expected decline in RYAM’s EBITDA, it appears appropriate to value RYAM with a multiple in-line with BRG and SAP.

RYAM’s fair value is revised to $26 (previously $21) and is derived by applying a 6.7x multiple to estimated 2014 EBITDA of $309 million (previously $284 million). The previous EBITDA estimate included $25 million in incremental corporate costs that had already been accounted for. The valuation multiple has also increased to 6.7x from 6.5x.

RYAM’s revised fair value is meaningfully below the current “”when-issued”” share price of $40.00 (as of market close June 17). At this price level, RYAM is being attributed a 2014 estimated EV/EBITDA multiple of approximately 8.7x. The current multiple is a premium to peer group’s average, and roughly in line with TMB despite RYAM’s lower year-over-year EBITDA expectations.

RYN’s post-spin fair value estimate of $36 per share remains unchanged. The fair value is based on the sum-of-the-parts valuation of its Forest Resources and Real Estate businesses. The valuation considers peer group multiples, historical land acquisition prices for its Forest Resources segment, and average historical selling price per acre for its Real Estate business. Further enhancement of the fair value estimate for post-spin RYN could occur if Chinese lumber demand accelerates or if the US housing market in the Southeast recovers faster than anticipated. Please see the Rayonier Inc. Spin-Off Report dated April 22, 2014, for further details.