On April 17, 2014, after the market close, SLM Corp. (NASDAQ: SLM), commonly known as Sallie Mae, updated information for post-spin entities SLM Corp and Navient Corp. Shares of Navient will be distributed after the market close on April 30, 2014, with regular way trading scheduled to begin on the NASDAQ on May 1, 2014, under the ticker “NAVI”. Shares of NAVI will be distributed on a 1:1 basis to SLM holders as of April 22, 2014. Navient began trading on a “when-issued” basis under the symbol “NAVIV” and Sallie Mae under the symbol “SLMVV” on April 17.

NAVI’s loan portfolio will include about $103 billion in Federal Family Education Loan Program (FFELP) loans, $31 billion in private education loans, and $7 billion of other interest-earning assets, as well as a federal loan servicing platform. FFELP was eliminated in 2010 through the passage of the Health Care and Education Reconciliation Act, as a result of which the government replaced private lenders in extending federally backed loans to students. Therefore, most of this portfolio is in run-off mode, will amortize over 20 years, and presents opportunities to return capital to shareholders.

The parent company will retain the Sallie Mae moniker and will transform into a traditional consumer finance bank, with a focus on funding private education loans. Sallie Mae Bank is a branchless entity that accepts deposits to fund student loans and will remain with the parent company. In addition, SLM will offer some student-focused insurance products. Given a relatively small current asset base, and the ability to expand that base approximately 20% annually in the near term, separating the banking operations should allow greater visibility into SLM’s growth opportunities.

The fair value estimate for NAVI of $15.16 per share remains intact. Please see the FLASH note published on April 10, 2014, for further information on Navient’s valuation. Based on the updated Sallie Mae investor presentation, the fair value estimate for post-spin SLM has been revised to $10 per share (from $11.44). The updated valuation is a result of management’s revised expectation for ROE of 15%+ versus the prior guidance of 16% to 20%. The P/E multiple was increased to 16.1x (previously 16.0x) to reflect the current average forward multiple of a broad group of regional banking companies. Applying a 15% ROE and peer group P/E multiple to the current book value results in a fair value of $9.83. This valuation exercise implies a price to book ratio of 2.4x, which is below the 2.5x average price to book ratio for regional banks with ROEs exceeding 13%.

Alternatively, applying a 2.5x P/B multiple to SLM’s book value results in a $10.18 per share estimate. The average of the two valuation exercises is $10 per share. Shares should be expected to initially trade at approximately this value. If post-spin SLM were to generate return on equity in excess of 15% upside to this fair value would exist. Please see the initial SLM Corp. Spin-Off Report (February 11, 2014) and FLASH note (April 10, 2014) for further details.

On April 11, 2014, Vornado Realty Trust (NYSE: VNO), a commercial property Real Estate Investment Trust (REIT), announced plans to spin off its shopping center operations through a tax-free distribution of shares to VNO shareholders. The spin entity, which will also be structured as a REIT, will consist of 81 strip centers and four malls. Following the separation, VNO’s portfolio will largely consist of office properties and street-level retail space in New York and Washington, D.C. The transaction could be compared to the 2012 spin-off of Rouse Properties Inc. (NYSE: RSE) from mall owner and operator General Growth Properties Inc. (NYSE: GGP) and the planned 2014 separation by Simon Property Group (NYSE: SPG) of its strip centers. These transactions have the potential to unlock shareholder value through multiple expansion for the remaining more visible and valuable properties in the parent portfolio and the opportunity for the spin entity to invest in the weaker assets, which typically generate lower returns. Under the current corporate structure, it is likely VNO’s capital is being diverted to higher-return assets, which could prevent the strip malls from generating a better rate of return. Jeffrey Olson, currently CEO of shopping center REIT Equity ONE Inc. (NYSE: EQY), will become Chairman and CEO of the yet-to-be-named spin entity. Steven Roth, Chairman and CEO of VNO, will also serve on the spin entity’s board. The transaction is expected to be completed in 4Q 2014, pending the filing of a Form 10 and an effectiveness declaration by the SEC, approval for listing of the spin entity by a major exchange and final Board approval. VNO expects its current $2.92 per share annual dividend will be maintained through a combination of the two entities post-spin dividends of the post spin entities. VNO management will host a conference call at 10 am on April 14, 2013, to discuss the transaction.

The spin entity’s portfolio of 85 retail properties total approximately 16.1 million square feet with an average occupancy of 95.5% as of year-end 2013. VNO management has guided for 2014 net operating income (NOI) of approximately $200 million for spinco. Applying the strip center peer group capitalization rate of 6.3%, results in a valuation of $3.2 billion.

In addition to the office properties and street retail space, the parent will retain and attempt to dispose of 20 small retail properties valued at about $100 million. Two other properties are already under contract for sale (Beverly Connection and Springfield Town Center) for a total price of approximately $725 million. Assuming a 35% tax rate on the dispositions (the tax basis of the properties has not been disclosed), adds $536 million to the parent’s enterprise value. The New York and Washington, DC properties generated EBITDA of $1,284 million in 2013. Applying a peer group 22.1x multiple to trailing EBITDA values those properties at $28.4 billion. This results in a SOTP for post-spin VNO of $28.9 billion.

Based on this rough, preliminary exercise, a pre-spin enterprise value of $32.1 billion can be derived for VNO.

On April 10, 2014, SLM Corp. (NASDAQ: SLM), commonly known as Sallie Mae, announced shares of Navient Corp. will be distributed after the market close on April 30, 2014, with regular way trading scheduled to begin on the NASDAQ on May 1, 2014, under the ticker “NAVI”. Shares of NAVI will be distributed on a 1:1 basis to SLM holders as of April 22, 2014. Trading on a “when-issued” basis is expected to commence on or about April 17, 2014. The transaction still requires an effectiveness declaration by the SEC and receipt of a private letter ruling from the IRS.

NAVI’s loan portfolio will include about $103 billion in Federal Family Education Loan Program (FFELP) loans, $31 billion in private education loans, and $7 billion of other interest-earning assets, as well as a federal loan servicing platform. FFELP was eliminated in 2010 through the passage of the Health Care and Education Reconciliation Act, as a result of which the government replaced private lenders in extending federally backed loans to students. Therefore, most of this portfolio is in run-off mode, will amortize over 20 years, and presents opportunities to return capital to shareholders.

The parent company will retain the Sallie Mae moniker and will transform into a traditional consumer finance bank, with a focus on funding private education loans. Sallie Mae Bank is a branchless entity that accepts deposits to fund student loans and will remain with the parent company. In addition, SLM will offer some student-focused insurance products. Given a relatively small current asset base, and the ability to expand that base approximately 20% annually in the near term, separating the banking operations should allow greater visibility into SLM’s growth opportunities.

As noted in the initial SLM Corp. Spin-Off Report (February 11, 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 post-spin fair value for SLM of $11.44 per share remains intact.

The fair value estimate for NAVI is raised to $15.16 per share (previously $13.86) to reflect an increased valuation multiple on the peer NelNet Inc. (NYSE: NNI). The valuation multiple is increased to 7.0x (from 6.4x) reflecting NNI’s average forward P/E multiple over the past two years. Please see the initial SLM Corp. Spin-Off Report for further details.

On April 10, 2014, Automatic Data Processing Inc. (NASDAQ: ADP) announced plans to spin off the company’s Dealer Services business through a tax-free distribution of shares to ADP shareholders. The transaction is expected to be completed in early 4Q 2014. The new standalone company, which has yet to be named, is expected to have annual revenue approaching $2 billion. The current Dealer Services segment provides retail and digital marketing solutions to automotive retailers and manufacturers. The parent company will maintain the Employer Services segment, which offers payroll, benefits administration, and other outsourced solutions to businesses, and the Professional Employer Organization (PEO) Services segment, which provides employment administration outsourcing solutions through co-employment agreements. The spin company is expected to distribute at least $700 million to ADP in conjunction with the separation. Proceeds from the distribution will be used to fund share repurchases. ADP plans to maintain its current $0.48 per share quarterly dividend following the separation. The spin-off still requires final Board approval, a favorable ruling with respect to the tax-free nature of the spin-off, and an effectiveness declaration from the SEC.

Steve Anenen, the current president of Dealer Services, will assume the CEO role at the newly formed company, while the current Dealer Services CFO Al Nietzel will assume the CFO role. The rationale for the separation is likely rooted in the fact that the two companies serve disparate functions to differing end markets, providing minimal synergies. Employer Services contributes 70% of annual revenue and 80% of segment operating income. In FY2013 (June), Dealer Services generated revenue of $1.8 billion and pre-tax income of $336 million.

The dealer services segment rapidly expanded in 2010 through the $400 million acquisition of The Cobalt Group from Warburg Pincus. ADP paid about 8.4x trailing revenue. The purchase likely gave the spin entity size and scale to operate as a standalone company. The dealer services business could be compared to other IT focused companies providing software based solutions to the automotive industry, such as Dealertrack Technologies Inc. (NASDAQ: TRAK), and Solera Holdings Inc. (NYSE: SLH). This peer group currently trades at roughly 17.5x 2013 EBITDA. Despite a recent pullback, multiples have expanded for this peer group since the beginning of 2012 due to strength in new vehicle sales. Assuming the pre-tax margin is similar to the current Dealer Services segment, and depreciation remains constant at approximately $99 million, the spin company would have generated an estimated $434 billion in EBITDA in 2013. Applying the peer group multiple to 2013 EBITDA results in an enterprise value of $7.6 billion.

Assuming the parent company’s pre-tax margin will also be similar to the remaining segments, allocating segment depreciation and corporate overhead based on revenue contribution, excluding the Dealer Services, ADP would have earned $2.1 billion in EBITDA in 2013. Peers to the parent company include Paychex Inc. (NASDAQ: PAYX) and TriNet Group Inc. (NYSE: TNET), which currently trade at approximately 14.5x 2013 EBITDA. Applying that peer group multiple to the parent company results in an enterprise value of $30.3 billion. Through this rough, preliminary exercise a pre-spin enterprise value of $37.9 billion is derived.

On April 7th, Mando Corp (Ticker: 060980 KS, KRW 119,000, Market Capitalization: KRW 2,142 billion—USD 2.1 billion based on an exchange rate of USD 1 = KRW 1,041) announced its decision to separate the company into a holding entity, Halla Holdings Corporation, and an auto parts manufacturer, Mando Corporation. Current shareholders will receive 0.4782394 shares of Halla Holdings Corporation and 0.5217606 shares of Mando Corporation. The rationale for the spin-off is that it will simplify the company’s shareholder structure. Additionally, it is expected to ease concerns about related party transactions that have plagued the company. The demerger is subject to the necessary regulatory and shareholder approvals—the shareholders’ meeting to vote on the demerger will be held on July 28th, 2014. The last day of trading for Mando Corp will be August 28th, 2014, after which, trading will be suspended. While the ex-date for the spin-off is considered to be September 1st, 2014, both stocks are expected to be re-listed on October 6th, 2014.

Mando Corp is controlled by a Korean Chaebol1, Halla Group. Halla Group was spun off of Hyundai Group in 19752. During the Asian crisis of 1997 the company had to divest most of its subsidiaries to repair its levered balance sheet. As a result, its size and clout have been significantly shrunk. In 2008, it acquired Mando Corp, a company it had sold in 1999. Halla Group’s Chairman, Chung Mong-won, owns 7.7 percent of Mando Corp directly, and 17.3 percent through Halla Corp, Mando’s parent company.

In April 2013, Mando Corp bailed out a troubled subsidiary of Halla Group, Halla Corp—then named Halla Engineering & Construction Corp—by injecting USD KRW 378.5 billion in equity to Halla Meister, a wholly-owned subsidiary that engages in the distribution of auto parts and construction materials, among others. Subsequently, Halla Meister used the proceeds to acquire a 16% stake in Halla Corp. Recall, Halla Corp, was already Mando’s parent company. That transaction represented a clear conflict of interest and created a shareholder revolt. In the company’s general meeting, held in March 2014, National Pension Service3, Mando Corp’s second largest shareholder, tried, unsuccessfully, to oust the company’s CEO. Its proposal received 30 percent of the votes. Thus, the spin-off appears to be an attempt to ease shareholder concern about further related party transactions and corporate governance issues.

After the demerger, Halla Holdings Corporation will take over Mando Corp’s stakes in Halla Stackpole and Mando Hella (joint ventures with Canadian Stackpole and German Hella, respectively) as well as Halla Meister. Therefore, the holding company’s structure will still constitute a so-called “circular shareholding”. All three subsidiaries are engaged in auto parts related businesses, such as advanced electronics auto parts and auto part distribution. After the spin-off, Halla Holdings Corporation will have assets and shareholders’ equity of KRW 1,078 billion of KRW 670 billion, respectively. Regardless of the potential valuation, investors should be cautious, as the new structure could be used to give Halla Holdings greater leeway to execute further value-destroying related party transactions.

Mando Corporation, on the other hand, will comprise Mando Corp’s operating entities, such as Mando China and various operating subsidiaries—including manufacturing facilities in the US. It will be a pure auto parts manufacturer, and is expected to attract the majority of investor interest. As of December 31st, 2013, it had assets of KRW 2,538 billion and equity of KRW 744 billion.

On March 27, 2014, Baxter International Inc. (NYSE: BAX) announced plans to spin off the company’s biopharmaceutical business through a tax-free distribution of shares to BAX shareholders. The transaction is expected to be completed by mid-year 2015. The biopharmaceuticals business will be comprised of the current BioScience segment, excluding BioSurgery related revenues. The spin company, which has yet to be named, will control a variety of pharmaceutical products used in the treatment of bleeding disorders, burns and shock, and other acute blood-related conditions. The new company had revenue of $5.8 billion in 2013. The parent company, focusing on medical devices, offers products for drug delivery and inhalation anesthetics, among others, had revenue of $9.4 billion in 2013. The parent company will maintain the Medical Products segment, as well as the BioSurgery business, which is currently included in the BioScience segment. The spin-off still requires final Board approval, a favorable ruling with respect to the tax-free nature of the spin-off, regulatory approvals, and an effectiveness declaration from the SEC.

Robert L. Parkinson Jr. will continue to serve as the CEO of the parent company, Baxter. Ludwig N. Hantson, the current president of the BioScience division, will assume the CEO role at the newly formed company.

The rationale for the separation is likely rooted in the fact that biopharmaceutical companies can trade at premium multiples when compared to medical device companies due to the higher margin, and less commoditized product offerings. In 2013, the BioScience segment (including BioSurgery) generated revenue of $6.6 billion, and EBITDA of $1.9 billion, representing a 41% EBITDA margin. The Medical products segment had sales of $8.7 billion and operated with a 21.5% EBITDA margin, excluding corporate overhead. In addition, the two companies appear to serve differing end markets, likely providing minimal synergies in the current corporate structure. With the removal of the higher risk, and more capital intensive BioScience segment, the remaining parent company will likely become a more stable cash flow generator with opportunities to return cash to shareholders. Alternatively, the biopharmaceutical company will likely lower its cost of capital. The transaction appears similar to the 2013 spin off of pharmaceutical company AbbVie Inc. (NYSE: ABBV) from Abbott Laboratories (NYSE: ABT). Since the spin off, ABBV shares have appreciated 47%, while shares of ABT increased 20%. The S&P 500 increased 27% over the same time period.

The biopharmaceutical company could be compared to Jazz Pharmaceuticals (NASDAQ: JAZZ), and Salix Pharmaceuticals (NASDAQ: SLXP). This peer group currently trades at 17.2x 2013 EBITDA. Assuming the biopharmaceutical EBITDA margin is similar to the current BioScience segment, and applying corporate costs weighted by segment assets, it can be estimated that the spin company would have generated $1.8 billion in EBITDA in 2013. Applying the peer group multiple to 2013 EBITDA results in an enterprise value of $31.6 billion.

Assuming the parent company margins will be similar to the current medical products segment, and allocating proportionate corporate costs, it can be estimated that excluding the biopharmaceutical company, BAX would have earned $1.3 billion in EBITDA in 2013. Peers in the medical device industry include Abbott Laboratories (NYSE: ABT) and CONMED Corp. (NASDAQ: CNMD), and currently trade at approximately 13.0x 2013 EBITDA. Applying that peer group multiple to the parent company results in an enterprise value of $16.7 billion. Through this rough, preliminary exercise a pre-spin enterprise value of $48.3 billion is derived.

On March 20, 2014, Lands’ End began when-issued trading under the symbol “LEDMV”. Shares closed last night at $33.50 versus a fair value of $22. Shares of Lands’ End will be distributed on April 4, 2014, to SHLD shareholders of record as of March 24, 2014. Lands’ End will trade on the NASDAQ under the symbol “LE” following the distribution. Shareholders of record will receive 0.300795 shares of LE for each share of SHLD owned. Sears CEO Edward Lampert’s ESL Investments Inc. expects to own 48.4% of Lands’ End common stock following the separation; ESL owns 48.4% of SHLD stock.

The Lands’ End brand was acquired by Sears in 2002 for $1.9 billion. Following the acquisition, SHLD began selling Lands’ End apparel in Sears stores. Today, the company has 275 stores located within Sears retail space as well as 16 standalone Lands’ End locations, which the company refers to as “Inlet Stores.” Sales at Sears locations account for just 16% of revenue. The company generated $1.6 billion in revenue in FY2013, ended January 2014, and reported adjusted EBITDA of $150 million. Revenue declined 1% in FY2014. If sales were again to decrease 1%, assuming stable operating costs aside from the $8-$10 million in increased standalone corporate costs, LE would earn $0.41 per share in 2014. Shares of Lands’ End could be compared to other clothing retailers including The Gap Inc. (NYSE: GPS) and American Apparel Inc. (NYSE: APP), among others, which currently trade at approximately 16.4x 2014 EPS. Applying that peer group multiple to LE’s projected 2014 EPS results in a fair value estimate of $22 per share.

Sears Holdings has been a highly visible and controversial name. The SHLD retail story has been one of declining sales levels and store counts. The negative view on the retail business appears to suggest that the company is bankruptcy bound. However, bullish investors see significant value in the company’s assets, primarily the real estate holdings, which could be monetized over time. The spin-off of Lands’ End is an attempt to monetize one asset. SHLD has opportunities to monetize other assets, including well-known brands and an auto center business

Sears remains an interesting opportunity due to the aggressive repositioning efforts by Edward Lampert. Notably, as mentioned above, management is also considering a spin-off or separation of the Sears Auto Center business. In addition, SHLD and Sears Canada (SCC CN), in which SHLD owns 51%, appear to have multiple opportunities to monetize the significant real estate portfolio and leverage the brand name appliance and hand tools business. The Auto Center business, combined with just the Craftsman and Kenmore brands could be valued in excess of SHLD’s current enterprise value.

The spin-off of Lands’ End appears to unlock modest value, at least in the near term, as the far smaller and profitable operations of LE gain the advantages of more transparency. For investors focused on the near-term spin-off event, a fair value for post-spin SHLD of $46 per share can be derived assuming a stable 0.2x price to sales ratio. Future catalysts for shares of SHLD, including a spin-off of Sears Auto Center, would likely provide upside. Longer-term investors who expect Lampert to ultimately unlock the value of SHLD’s sizeable real estate portfolio could see upside to $79 per share. Please see the initial Sears Holdings Corp. Spin-Off Report (March 18, 2014) for further details.

On March 20th, Li & Fung Limited (Ticker: 494 HK, Market Capitalization: HKD 86.1 billion—USD 11.1 billion based on an exchange rate of USD 1 = HKD 0.13 ) announced that it has made an application to the Hong Kong Stock Exchange for the listing of its global brands and licensing business. The new company, Global Brands Group, will be listed by way of a 100 percent share distribution in specie to existing shareholders. Li & Fung has received a positive ruling from the stock exchange to proceed with the spin-off, but needs to make a separate listing application for the new company. The company’s CEO and President, Bruce Philip Rockowitz, will become Global Brands Group’s chief executive after the demerger, and will be replaced by Li & Fung’s current COO, Spencer Theodore Fung. William Fung Kwok Lun will remain the Chairman of Li & Fung, while assuming the same position in the new entity. The transaction is expected to be completed within 2014.

Li & Fung Limited is an export trading business focusing on consumer products and acting as a wholesaler and distributor for various branded and private label products. It is particularly active in exporting China-manufactured products to the US and Europe. As such, it has faced various setbacks in recent years, ranging from weaker demand for Chinese imports by Europe and the US to concerns about its suppliers’ safety records. The company is controlled by William Fung Kwok Lun and Victor Fung Kwok King, two brothers who inherited and expanded the business that their grandfather founded more than a century ago. The family owns more than 20% of the shares, and its net worth is estimated by Forbes to be USD 4.7 billion. Currently, William is the company’s Non-Executive Chairman. Spencer Theodore Fung, the COO and soon to be CEO, is Victor’s son.

The firm operates under three divisions: Trading Network, Logistics Network and Distribution Network. The spun-off entity will be comprised of the Distribution’s segment owned and licensed brands. The remaining portion of that division—i.e. the Distribution’s private label operations—will be merged with the Trading segment. According to the company, the skill set required to manage each business is distinct. Licensed and owned brands depend on design, brand management and marketing strategies that would allow the company to effectively sell its products to retailers. On the other hand, the private label business requires greater operating efficiencies and sourcing skills.

For the year ending December 31st, 2013, Li & Fung had revenues of USD 20,745 million, operating income USD 871 million and net income of USD 725 million. Given that the spin-off business constitutes only part of the Distribution segment, no detailed financial information has been provided. However, Li & Fung currently trades at 0.5 times revenues. Even if Global Brands Group were responsible for the vast majority of the Distribution Network’s revenues, it is not expected to have a valuation in excess of USD 3.5 billion.

On December 10, 2013, NorthStar Realty Finance Corp. (NYSE: NRF) announced that its Board of Directors had approved a plan to spin off its asset management business through a tax-free 1:1 distribution to shareholders, to be completed by 2Q 2014. Prior to the distribution, NRF will effect a 1:2 reverse stock split of its own shares. The spin entity, to be named NorthStar Asset Management Group Inc., intends to apply for listing on the NYSE under the symbol “”NSAM””. The asset management business will be led by the current NRF management team. NorthStar Asset Management 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 transaction requires an effectiveness declaration by the SEC regarding registration statements and final Board approval.

Given the spin entity’s current assets under management, the company projects annual cash available for distribution (CAD) of $0.30-$0.32 per share. Subsequent equity offerings by NRF or the attainment of certain incentive thresholds could raise CAD. The parent, a diversified commercial real estate (CRE) REIT, focuses on acquiring and managing CRE properties, as well as originating or purchasing debt investments secured by income-producing assets. The company’s properties include manufactured housing, assisted living facilities, and multifamily residences. At the end of 2013, NRF had assets totaling nearly $6.4 billion.
From year-end 2008 through year-end 2012, NRF’s book value per share declined more than 70% as a result of the financial crisis and its impact on the value of commercial real estate and related securities. Annual dividend payments fell to $0.40 per share in 2009 (from $1.22 per share in the previous year) during the peak of the crisis. Like many commercial mortgage REITs, NRF has been able to raise additional capital over the last two years and rebuild its portfolio. Recent acquisitions have focused on real property and private equity investments.

Unlike many other CRE REITs, NRF has been internally managed since it was established more than a decade ago. The transaction appears to be an attempt to unlock value by separating the asset management business with the expectation that it will receive a higher earnings multiple or lower dividend yield. Risks related to the assets essentially remain with the parent, while the spin entity is guaranteed base fees through the 20-year contract, which can only be cancelled for cause, and bonuses that are structured similarly to incentive distribution rights (IDRs) for the general partners of Master Limited Partnerships (MLPs).

For NRF, a fair value of $17 per share (assuming a 1:2 reverse split prior to the transaction) can be established, based on management estimates of potential standalone annual CAD for the parent and book value of the assets compared to a combination of other mortgage REITs and property REITs. For NSAM, a fair value of $16 per share (with a 1:2 reverse split) is based on earnings or distributable cash flow multiples of a group of MLP general partner C-corps and real estate asset managers, while also taking into account the potential for dividend expansion through NRF equity offerings or by exceeding incentive thresholds. A pre-spin sum-of-the-parts (SOTP) valuation of $16.50 per share offers minimal upside to the current share price. However, it creates an early opportunity to purchase the soon-to-be-separated asset management business. Alternatively, a purchase of NSAM post-spin would be advised if it trades below the fair value estimate.

On March 18, 2014, rental car agency Hertz Global Holdings Inc. (NYSE: HTZ) announced long-awaited plans to spin off Hertz Equipment Rental Corporation (HERC) through a tax-free distribution of shares to HTZ shareholders. The Spin-Off Report Radar Screen first highlighted the potential transaction in June 2011. The transaction is expected to be completed in early 2015. The company has already received a private letter ruling from the IRS regarding the tax-free status of the separation. The spin-off still requires final Board approval and an effectiveness declaration from the SEC.

CEO Mark Frissora will continue to lead the parent following the separation. A management team has not been named for HERC, which will make an approximate $2.5 billion cash distribution to the parent at the time of the separation. Hertz will use proceeds to pay down debt or buy back shares. The parent expects to maintain a 2.5x to 3.5x leverage ratio (net debt to EBITDA). The more capital intensive equipment rental business will have a 3x to 4x leverage ratio immediately following the spin-off.

The transaction will follow HTZ’s November 2012 acquisition of smaller rival Dollar Thrifty Automotive Group Inc. (NYSE: DTAG). HERC provides earthmovers, pumps, and compressors, as well as assorted construction and industrial tools. The unit, negatively affected by the slowdown in non-residential construction, underwent restructuring in 2008, including the shuttering of several branches. As early as 2011, Frissora indicated he would consider separating HERC, but would wait for improved market conditions. The company also needed to complete the lengthy regulatory process to close the DTAG deal and begin integrating the new branches.

In December 2011, United Rentals Inc. (NYSE: URI) announced a deal to acquire RSC Holdings Inc. (NYSE: RRR) for $1.9 billion in cash and stock, or $18 per share, a 58% premium to RRR’s previous closing price. The deal valued RRR at almost 9x TTM EBITDA. URI, RRR, and H&E Equipment Services Inc (NASDAQ: HEES) are close comparables to HERC. URI and HEES currently trade on average at 7.2x trailing EBITDA. HERC generated $667 million in corporate EBITDA in 2013. Applying the peer multiple of 7.2x to HERC’s operations results in an enterprise value of $4.8 billion. The rental equipment market is capital intensive and highly cyclical, resulting in lower valuation multiples than car rental companies.

HTZ went public in November 2006, a year after a private equity group acquired the rental firm from Ford Motor Co. (NYSE: F) in a $15 billion transaction. Following the 2012 acquisition of DTAG, there remains only two large publicly-traded car rental companies: HTZ and Avis Budget Group Inc. (NASDAQ: CAR). CAR trades at 19.5x trailing EBITDA. It would be reasonable to assume that shares of HTZ would experience multiple expansion upon separation of the more capital intensive and cyclical HERC. Excluding HERC’s 2013 EBITDA contribution, HTZ generated $1.4 billion in EBITDA in 2013. Applying CAR’s multiple to post-spin HTZ’s earnings would result in an enterprise value of $26.8 billion. Through this rough, preliminary exercise a pre-spin enterprise value of $31.7 billion is derived.