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.

On June 16th, 2014, UGL Limited (Ticker: UGL AU, AUD 6.55, Market Capitalization: AUD 1,091 million) announced an agreement with a private equity consortium for the sale of its global property services business, DTZ. The enterprise value consideration stands at AUD 1,215 million. The sale is expected to be completed by September 2014 and, consequently, the previously announced spin-off has been cancelled.

UGL’s management originally intended to spin off DTZ in a transaction that was expected to be completed by the end of 2014. However, it continued to accept bids for the business, and eventually agreed on the sale. The private equity consortium comprises TPG Capital, PAG Asia Capital and the Ontario Teachers’ Pension Plan. At AUD 1,215 million, DTZ is valued at just 10.8x EBIT. Similar international property services companies are FirstService Corporation, CBRE Group, Jones Lang LaSalle and Realogy Holdings. Their average enterprise value-to-EBIT multiple stands at 17.5x. Had DTZ been valued on that basis, it would have been sold for AUD 1,969 million, AUD 750 million above the agreed upon price.

UGL’s revenues and profitability had declined sharply in the past year, as a result of the slowdown in Australian mining capital expenditures, the company’s main source of revenue. The combination of lower income and an increasing debt load could have forced the company’s management to agree on a sale that would help the remaining engineering business reduce its leverage. On the other hand, DTZ had significantly boosted its revenues and EBIT since 2012, and was sold at what would reasonably be considered a “bargain” valuation.

After the DTZ divestment, UGL could be valued at an enterprise value-to-EBIT of 8.3x, as per its Australian peers. The resulting enterprise value is AUD 431 million. Including the DTZ sale price, UGL should have an enterprise valuation of AUD 1,646, compared to its current value of AUD 1,732. In fact, the current valuation of the firm implies that UGL is valued at AUD 517 million, or 10x times EBIT, a significant premium to its competitors that would be hard to justify based on its recent results.

On June 10, 2014, B/E Aerospace Inc. (NASDAQ: BEAV) announced plans to spin off its consumable supply business. The announcement followed several media reports over the previous three weeks that multiple buyers, including German aircraft seating manufacturer Recaro (private), could be interested in purchasing assets from BEAV. The combined business may be too large for one purchaser. Management had postponed its annual shareholder meeting to explore strategic alternatives.

The parent company will focus on aircraft cabin interior equipment, currently referred to as Manufacturing Co., while the spin entity, Services Co., will focus on distribution, logistics and technical services for the aerospace and energy services markets. The transaction, which is expected to be completed in 1Q 2015, still requires an effectiveness declaration of the company’s Form 10 filing, and a favorable opinion from counsel on the tax-free status of the spin-off. Given the transaction is structured so Services Co. is the spin entity, Manufacturing Co. could be positioned to be an attractive takeout candidate post separation. Investors should closely consider acquisition multiples for aircraft component manufacturers.

In June 2014, BEAV announced that the company had signed definitive agreements to acquire two companies: EMTEQ Inc. and F+E Fischer + Entiwicklungen GmbH & Co. KG. The combined companies generated $150 million in trailing twelve-month revenue. The purchase price of $470 million equates to 3.1x revenue. The last large transaction in the aerospace component sector occurred in 2012 when United Technologies Corp. (NYSE: UTX) purchased Goodrich Corp., a supplier of systems and services to aerospace and defense end markets. UTX paid approximately 12.8x EBITDA.

Other recent acquisitions in the aircraft cabin interiors space have generally been smaller in size and financial terms not disclosed. Manufacturing Co. generated trailing twelve-month sales of $2.5 billion and EBITDA of $510 million. Applying those multiples would value the post-spin entity at $6.5 – $7.8 billion in a takeover scenario. Alternatively, if one valued Manufacturing Co, based on closest comparable Zodiac Aerospace’s current 13.4x trailing EBITDA multiple, a $6.8 billion estimate would be derived.

On a trailing basis, Services Co. generated $1.6 billion in revenue and $365 million in EBITDA. A large peer group of industrial parts distributors trade at approximately 13x trailing EBITDA. Applying that multiple to Services Co. results in an enterprise value of $4.7 billion.

On June 10, 2014, B/E Aerospace Inc. (NASDAQ: BEAV) announced plans to separate into two standalone publicly-traded companies through a tax-free distribution of shares to BEAV shareholders. One company will focus on aircraft cabin interior equipment, currently referred to as Manufacturing Co., while the other entity, Services Co., will focus on distribution, logistics and technical services for the aerospace and energy services markets. The transaction, which is expected to be completed in 1Q 2015, still requires an effectiveness declaration of the company’s Form 10 filing, and a favorable opinion from counsel on the tax-free status of the spin-off.

The announcement follows a Reuters report that German aircraft seating manufacturer Recaro (private) was interested in purchasing assets from BEAV. Following the report, BEAV announced that it had postponed its annual shareholder meeting and hired advisors to explore strategic alternatives, including a possible sale, merger, or spin-off. The stock ran up more than 10% following the report. Management did not disclose whether Manufacturing or Services would be the legal spin entity, which may leave open the possibility for one of the companies to be purchased following the transaction.

The spin-off transaction will result in Manufacturing Co. likely being a more cyclical entity, with growth opportunities based on market share. As a supplier of consumables, Services Co.’s business should exhibit more stability through industry cycles, but operate with a more commoditized margin profile.

Manufacturing Co. designs, develops, and markets aircraft cabin interiors, and generated trailing twelve-month sales of $2.5 billion and EBITDA of $510 million. Products include seating, food and beverage storage, lighting and oxygen systems, among others. About 60% of revenue will be derived from original equipment manufacturers (OEM), with the remainder from sales in the aftermarket. The company will operate in two segments: business jets and commercial aircraft. Business Jets will account for 81% of revenue. Valuation of Manufacturing is challenged by the fact that the publicly traded peer group is limited to Zodiac Aerospace (ZC FP), which trades at 13.4x trailing EBITDA. Applying ZC’s multiple to Manufacturing’s trailing EBITDA results in an enterprise value of $6.8 billion.

Services Co. has historically been a supplier of fasteners and other consumables, along with logistics services to the airline and aerospace industries. The company expanded its logistics business, and associated equipment rental business, into the energy industry in 2013, providing services and supplies to remote drilling sites. On a trailing basis, Services Co. generated $1.6 billion in revenue and $365 million in EBITDA. A large peer group of industrial parts distributors trade at approximately 13x trailing EBITDA. Applying that multiple to Services Co. results in an enterprise value of $4.7 billion. Through this rough, preliminary exercise a pre-spin sum-of-the-parts fair value of $95 per share is derived.

On June 9, 2014, PPL Corporation (NYSE: PPL) announced plans to spin off its competitive energy business and merge it with the power generation portfolio of energy investment firm Riverstone Holdings LLC (private), to form a new, publicly-traded entity to be called Talen Energy Corp. Under the terms of the Reverse Morris Trust transaction, PPL shareholders will own 65% of Talen upon completion of the merger, while Riverstone will hold the remaining 35% interest. Talen will have a combined 15,320-megawatt portfolio with a mix of natural gas, coal and nuclear capacity. About 83% of total capacity is located in the Pennsylvania-New Jersey-Maryland Interconnection. Talen is expected to generate $1.07 billion in EBITDA in 2015, assuming $155 million in realized synergies. The transaction is subject to approval by the Nuclear Regulatory Commission (NRC), the Federal Energy Regulatory Commission (FERC) and other state regulators. The deal is expected to be completed in nine-to-twelve months.

Following the merger, PPL will retain its regulated utilities owned and operated in the United Kingdom, Kentucky and Pennsylvania. The parent is projected to generate EPS of $2.05 to $2.25 in 2015 and maintain its $1.49 per share dividend. Management is targeting 4% compound annual earnings growth following the separation.

The separation may have potential to unlock shareholder value as PPL appears to trade relatively in-line with other regulated utilities, ignoring the potential growth for the merchant energy business. Regulated utilities, including American Electric Power Co. (NYSE: AEP), Duke Energy Corp. (NYSE: DUK), and Southern Company. (NYSE: SO), trade at an average 15.1x projected 2015 EPS. Applying the peer group multiple to 2015E EPS of $2.15 results in an estimated fair value of $32 per share for post-spin PPL, only modestly below the current share price.

Talen Energy can be compared to other competitive energy providers such as Calpine Corp. (NYSE: CPN), The AES Corp. (NYSE: AES), and Dynergy Inc. (NYSE: DYN). Of note, CPN trades at a premium multiple to the peers, likely in part due to its power generation mix. Talen will have approximately 40% exposure to coal generation and may be more comparable to DYN and AES, which trade at 7.8x estimated 2015 EBITDA. Applying that multiple to Talen’s expected 2015 EBITDA of $1.07 billion results in an enterprise value of $8.3 billion. Accounting for net debt of $2.5 billion (assuming $900 million in cash is received for the sale of its hydroelectric plants in Montana), and PPL shareholder’s 65% ownership of Talen, the fair value to PPL shareholders is $6 per share. Through this rough, preliminary exercise a pre-spin sum-of-the-parts fair value of $38 per share is derived.

On May 29, 2014, Simon Property Group Inc. (NYSE: SPG) begins regular-way trading following the separation of Washington Prime Group Inc. (NYSE: WPG). Shares of WPG were distributed on a 1:2 basis to SPG holders as of May 16, 2014. Management updated standalone 2014 FFO guidance ahead of the commencement of regular-way trading. As noted in the initial Simon Property Group Inc. Spin-Off Report (March 5, 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 WPG was revised to $26.50 per share earlier this month based on the final distribution ratio, peer group multiples, and adjustments to the FFO estimate for the spin-off entity (see the Simon Property Group Inc. Spin-Off Report FLASH, dated May 7, 2014, for more details regarding the WPG valuation).

SPG anticipates standalone 2014 FFO in the range of $9.06 to $9.16 per share when removing $0.10 of separation-related costs. The previous SPG valuation was based on 2014E FFO of about $8.90 per share. In addition, the 2014 price/FFO multiple for the peer group of large mall operators, which includes General Growth Properties Inc. (NYSE: GGP), The Macerich Company (NYSE: MAC), and Taubman Centers Inc. (NYSE: TCO), has expanded to 18.7x (from 18.3x at the time of the initial report). Based on this updated data, the post-spin fair value for SPG rises to $170 per share (from $163).

On May 27, 2014, Rayonier Inc. (NYSE: RYN) announced that shares of Rayonier Advanced Materials will be distributed on a 1:3 basis on June 27, 2014, to RYN shareholders of record as of June 18, 2014. Rayonier Advanced Materials is anticipated to commence regular-way trading on the NYSE under the ticker “RYAM” on June 30, 2014. Shares of RYAM are expected to trade on a when-issued basis on or around the record date. The transaction still requires 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.

Following the separation, RYN will retain the Forest Resources and Real Estate businesses. The company will hold roughly 2.6 million acres in timberlands, including approximately 200,000 acres of “higher-and-better-use” land along the coast of Florida and Georgia, which have been designated for sale. RYAM will operate two specialty pulping facilities in Jesup, GA and Fernandina Beach, FL, with approximately 675,000 metric tons of annual capacity, making it one of the world’s largest dissolving pulp producers.

In late April 2014, RYAM lowered its 2014 adjusted EBITDA guidance to $284 million (from a previous range of $294-$317 million) due to lower sales and higher standalone costs. Based on the average peer group EV/EBITDA multiple of 6.5x since the beginning of 2014, RYAM’s fair value estimate is lowered to $21 per share (previously $24 per share accounting for the 1:3 share distribution).

The recent supply glut has largely been due to RYAM’s capacity conversion of one of its production lines in its Jesup facility. Pricing has decreased roughly 3% year-over-year during 1Q 2014, and has caused the company to pull forward its planned maintenance shutdown of its Jesup mill, which was originally intended for 2015. As a result, the company anticipates a negative impact to 2014 shipments and volumes.

RYN’s 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.

On a pre-spin basis, RYN’s fair value estimate has been adjusted to $43 per share, down from $44 per share previously. Please see the Rayonier Inc. Spin-Off Report dated April 22, 2014, for further details.

On May 13, 2014, The Ensign Group Inc. (NASDAQ: ENSG) announced shares of CareTrust REIT Inc. will be distributed on June 2, 2014, with regular way trading scheduled to begin on the NASDAQ on June 3, 2014, under the ticker “”CTRE””. Shares of CTRE will be distributed on a 1:1 basis to ENSG holders as of May 22, 2014. Trading on a “”when-issued”” basis is expected to commence on or about May 20, 2014. The transaction still requires acceptance of CTRE’s listing by the NASDAQ and an effectiveness declaration of the company’s registration statement by the SEC. ENSG has received a favorable ruling from the IRS regarding the tax-free status of the transaction.

Following the separation, ENSG will manage approximately 120 skilled nursing centers and managed care facilities in California, Arizona, Texas, Washington, Utah, Idaho, Colorado, Nevada, Iowa, Nebraska, and Oregon. CTRE will hold the vast majority of the ENSG properties and will manage three independent living facilities. The remaining properties will be leased back to ENSG on a triple-net basis. Ensign’s management team will remain in place except for Executive Vice President Gregory Stapley, who will assume the duties of CEO and President of CTRE. Senior housing industry fundamentals support a bullish outlook for both entities post spin. An aging population, combined with a decline in housing supply in recent years, appears favorable for operators. Additionally, the market is highly fragmented, with approximately 70% of facilities being run by so-called mom-and-pop operators. ENSG has been acquisitive in the past, and there is no reason to expect that CareTrust will change strategies following the separation. ENSG has made four small acquisitions thus far in 2014; terms and financials for the transactions were not disclosed.

As noted in the initial The Ensign Group Inc. Spin-Off Report (January 2, 2014), the fair value calculations would be adjusted based on the finalized distribution ratio, capital structure, dividend policy and changes in company/industry fundamentals.

CTRE’s fair value is revised to $16 per share (from $19) per share to account for lower than previously expected rental income, $56 million versus $59 million, and higher than previously anticipated corporate expenses of $4.75 million (from $3 million), partially offset by increased P/FFO multiples for peers Omega Healthcare Investors Inc. (NYSE: OHI) and Sabra Health Care REIT Inc. (NASDAQ: SBRA). The fair value is calculated by applying the peer group price to 2014 FFO multiple and recent senior housing capitalization rates on CTRE’s expected rental income.

The fair value estimate of $29 for post spin ENSG remains intact as the lower rental expense and slight increase in peer EV / EBITDA multiples were offset by a lower net cash position. See the initial The Ensign Group Inc. Spin-Off Report, dated January 2, 2014, for further details.

On May 8, 2014, Time Warner Inc. (NYSE: TWX) announced shares of its publishing subsidiary, Time Inc., will be distributed after the market close on June 6, 2014, with regular way trading scheduled to begin on the NYSE on June 9, 2014, under the ticker “”TIME””. Shares of the spin entity will be distributed on a 1:8 basis to TWX holders as of May 23, 2014. Trading on a “”when-issued”” basis is expected to commence on or about May 21, 2014. The transaction still requires an effectiveness declaration by the SEC.

Time Inc. publishes 23 magazines in the US, including People, Sports Illustrated, InStyle, and Time, and over 70 magazines internationally. Time Inc.’s revenue declined 2.4% in 2013, while operating income decreased 12.7%. The trends in Time Inc.’s business are not surprising, given the secular decline in the publishing industry, which has seen migration of advertising dollars to other media. It could be argued that the publishing business may be a drag on Time Warner’s valuation, as television and film peers trade at higher multiples than the publishing group. Consequently, the separation could be seen as a way for TWX to lower its cost of capital.

As noted in the initial Time Warner Inc. Spin-Off Report (August 23, 2013), the fair value calculations would be adjusted based on the finalized distribution ratio, capital structure, dividend policy and changes in company/industry fundamentals. Assuming a 5% EBITDA decline at Time Inc. in 2014, as higher standalone costs are partially offset by ongoing cost cuts, one may project EBITDA of $569 million and net income of about $229. Given limited cap-ex requirements, the spin entity could generate $316 million in free cash flow. Based on a 10% yield to free cash or 8x multiple (a modest discount to stronger rival Meredith Corporation [NYSE: MDP]) to EBITDA, a fair value of $29 per share is derived.

The fair value for standalone Time Warner is adjusted due to modestly higher guidance offset by lower peer group multiples. Time Warner management has guided for low teens earnings growth (previously low double digits growth) for the standalone business in 2014. Applying a cable network peer group multiple of 19x (previously 20x) and diversified media multiple of 16x (previously 17.5x), results in a fair value range of $63 to $75 per share. Given its focus on television and cable programming, the higher multiple may be warranted following the transaction. TWX has a history of repurchasing shares. Assuming the $1.3 billion cash distribution from the spin entity is used in a buyback, the parent share count could be reduced to 863 million. As a result, a fair value of $71 for post-spin TWX is derived.