On March 17, 2014, the second largest US natural gas producer, Chesapeake Energy Corp. (NYSE: CHK), filed a Form 10 to separate its oilfield services division, to be called Seventy Seven Energy Inc., through a tax-free distribution to shareholders. The entity will apply for a listing on the NYSE under the ticker “SSE”. Last month, the company said it was exploring strategic alternatives for the unit, including a spin-off or an outright sale. The transaction still requires acceptance of a listing by a major exchange, an effectiveness declaration by the SEC, and final Board approval. No date has been set to complete the separation.

Seventy Seven Energy, a provider of drilling and hydraulic fracturing services to exploration and production (E&P) companies, generated 2013 revenue of $2.2 billion and EBITDA of $387 million. About 65% of services were provided internally to develop CHK wells. SSE operates 115 rigs, of which 79 were active (69%). Many of these rigs were obtained through the $312 million acquisition ($14 million per rig) of Bronco Drilling in 2011. CHK is one of the only remaining E&Ps that operates its own drilling rig fleet. The separation will reduce the complexity of the company and allow more capital to be devoted to property acquisitions. If a transaction is completed, the proceeds are expected to be used toward paying down CHK’s debt. CHK is also divesting other non-core assets, which management indicates could generate $1 billion in proceeds in 2014.

The drilling business could be compared to Patterson-UTI Energy Inc. (NASDAQ: PTEN), Pioneer Energy Service Corp. (NYSE: PES) and Nabors Industries Ltd. (NYSE: NBR) which on average trade at approximately 5.3x 2013 EBITDA and about 1x assets. Applying those multiples to SSE’s 2013 EBITDA and year-end assets suggests a fair value of about $2 billion

For the remaining company, CHK is comparable to other natural gas-heavy US independents, including Range Resources (NYSE: RRC) and Anadarko Petroleum Corporation (NYSE: APC), which trade at roughly 12.5x proved reserves, and 1.9x year-end 2013 standard measure of discounted future net cash flows. Applying those multiples to CHK’s 2013 proved reserves implies an approximate valuation of $33 billion. A rough, preliminary sum-of-the-parts analysis suggests a consolidated fair value of $35 billion.

On March 10, 2014, FMC Corporation (NYSE: FMC) announced its Board had approved a plan to separate into two publicly-traded companies through a tax-free distribution to shareholders. “New FMC” will retain the Agricultural Solutions and Health and Nutrition segments, while “FMC Minerals” will consist of the Minerals business. The separation is expected to be completed by early 2015. The transaction still requires an effectiveness declaration of the yet-to-be-filed Form 10 by the SEC, as well as final Board and customary regulatory approvals. Both companies are expected to list on the NYSE following the separation. New FMC will be led by current FMC CEO Pierre Brondeau, while FMC Minerals has yet to name a CEO.

The businesses that will remain with New FMC generate EBIT margins above 20%, while the minerals business’ operating margins are in the mid teens. However, minerals may have stronger growth prospects due to the expansion of lithium applications. The separation of the more mature, higher margin businesses (particularly the less cyclical health and nutrition operations) from the faster-growth, but arguably riskier, minerals segment may be appealing to investors.

FMC’s Agricultural Solutions segment develops crop-protection products, including herbicides and insecticides. More than 50% of sales are generated in Latin America. The segment focuses on treatments for cotton, soybeans, sugarcane and fruits and vegetables. Management has guided for mid-teen segment sales and earnings growth in 2014 driven by share gains in Latin America and increased North American demand.

Health and Nutrition sales are spread globally. The segment is a leading producer of omega-3 fatty acids. Products are used to provide texture and natural colors in processed foods, pharmaceuticals, animal nutrition and personal/oral care. Management guidance is for mid-to-high-teens segment sales expansion and mid-teens earnings growth due to increasing demand for food ingredients.

New FMC is expected to generate segment earnings of $815 million in 2014. Other agricultural chemicals businesses, such as Syngenta AG (SYNN VX) and Monsanto Co. (NYSE: MON), trade about 17x forward earnings. Interest expense and corporate costs are broken out based on the each segment’s contribution to earnings. The tax rate is assumed to be the same for both businesses in this exercise. Applying a 17x multiple to estimated New FMC earnings results in a fair value of about $66 per share.

The Minerals business produces alkali for chemicals and glass containers, as well as lithium for energy and industrial markets. Management expects global lithium demand to expand at a 9% compound rate through 2020, due to increasing energy applications, such as electric vehicles. The segment is expected to widen sales by high single digits and earnings 19% in 2014. However, minerals segment earnings declined 25% in 2013 due to weak soda ash prices, partially offsetting growth for the other two businesses. Minerals accounted for about 25% of FMC sales in 2013. The peer group includes Solvay SA (SOLBB) and Tata Chemicals Ltd (TTCH IN) for Alkali production, and Rockwood Holdings Inc. (NYSE: ROC) and Sociedad Quimica y Minera de Chilie SA (SQM/B CI) for lithium. On average these peers trade at 21.6x 2012 net income. Using management’s guidance for segment earnings of $153 million, and subtracting the proportionate interest and corporate costs, a fair value estimate of $16 per share can be derived based on this rough, preliminary sum-of-the-parts (SOTP) exercise.

On February 24th, Cosan S.A. Indústria e Comércio (Ticker: CSAN3 BZ, Market Capitalization: BRL 14,904 million—USD 6,351 million based on an exchange rate of USD 1 = BRL 2.35 ) announced its intention to acquire Latin America’s largest logistics company América Latina Logística (Ticker: ALLL3 BZ), or ALL, through its logistics subsidiary, Rumo, and subsequently spin off the logistics arm into a new company named Cosan Logística. Cosan S.A. Indústria e Comércio will be renamed Cosan Energia. Investors are expected to receive one share of Cosan Logística and one share of Cosan Energia for each Cosan S.A. Indústria e Comércio share they own. The timeline for the spin-off, as well as relevant documentation, will be published soon.

Cosan S.A. Indústria e Comércio is a Brazilian holding company with stakes in privately owned corporations such as Comgás (natural gas distribution), Rumo (logistics), Lubrificantes e Especialidades (lubricants) and Radar (agricultural land investments). Additionally, it has created a joint venture with oil and gas major Royal Dutch Shell in the bioenergy sector; Raízen Combustíveis is responsible for fuel distribution, while Raízen Energia is producing sugar and ethanol. 59.3% of the firm is owned by Cosan Ltd (Ticker: CZLT33 BZ), a company traded in the USA and Brazil, and whose only asset is Cozan S.A.’s shares. It was created a few years ago by Brazilian billionaire Rubens Ometto Silveira Mello for the purpose of raising outside capital with minimal dilution. Ometto owns all of the Class B shares—approximately a third of Cosan Ltd’s outstanding shares—that offer 10 votes each.

Rumo has offered to acquire ALL in an all-stock transaction, which would result in Cosan S.A.’s shareholders controlling 36.5% of Cosan Logística and ALL shareholders owning 63.5%. The combined entity will merge Rumo’s warehouses and sugar terminals with ALL’s 12,900 km of rail tracks and more than 26,000 rail cars. While Cosan S.A.’s shareholders will hold a minority position, Cosan S.A. will have the right to appoint the majority of the Directors.

On a trailing-twelve-month basis, Rumo generated BRL 785 million in revenues and BRL 290 million in EBITDA. That compares with BRL 3,660 million of revenues and BRL 1,823 million of EBITDA for ALL. Subsequently, Cosan Logística will have an EBITDA of BRL 2,113 million, and net debt of BRL 4,249 million. Using ALL’s enterprise value-to-EBITDA multiple of 5.4x, the resulting equity valuation of the spun entity would be BRL 7,160 million. Currently, Cosan S.A. trades at approximately 8x EBITDA, significantly higher than the 5.9x average of other sugar and ethanol producers such as Sao Martinho S.A., Tereos Internacional SA and Suedzucker AG. Based on an EBITDA of BRL 1,941 million and net debt of BRL 7,017 million, Cosan Energia’s equity could be worth between BRL 4,433 million and BRL 8,509 million. Incorporating Cosan S.A.’s 36.5% stake in Cosan Logística, Cosan S.A. Indústria e Comércio could be valued between 7,047 million and 11,122 million.

On February 20, 2014, Oil States International Inc. (NYSE: OIS) released full year results and provided 2014 guidance for segments, including Accommodations, which is scheduled to be separated later this year. Based on lower utilization and a contract termination in Australia resulting from weak metallurgical coal (met coal) prices, the fair value for the spin entity is lowered to $56 per share (from $62).

OIS Accommodations SpinCo Inc. provides accommodations for workers primarily in Australian mining areas, the Canadian oil sands, and remote US locations. The Australian Villages and Canadian Lodges tend to be modular, portable configurations. In addition to living quarters, OIS Accommodations provides dining and community areas, catering, and waste services. These offerings are typically through three- to five-year “take or pay” contracts with the mine or E&P operator, where the client still pays for a set utilization level but at a lower level if the number of guests fall below the threshold. The company can typically adjust the workforce to maintain margins if utilization falls below predetermined levels. Despite the relative comfort of longer-term contracts, weak oil and natural gas (in North America) and met coal (Australia) prices can result in early terminations (for a negotiated fee). While OIS Accommodations is growing its room count in Canada, and benefiting from ongoing oil sands development, declining met coal prices has caused lower Australian occupancy. During the 4Q 2013 conference call, management indicated that segment revenue could decline 5-10% in 2014 resulting from lower utilization and a contract termination in Australia.

Previously, The Spin-Off Report had projected modest Accommodations EBITDA growth in 2014 due to rising Canadian revenue and more stable Australian utilization. Based on the updated information, the blended 2013/2014E EBITDA assumption for standalone OIS Accommodations falls to $406 million (from $448 million). Applying the same 9.1x multiple to the blended EBITDA estimate results in the $6 per share reduction in the fair value.

The spin transaction still appears to unlock value in OIS. In addition, management indicated that REIT conversion will be considered by the Spinco Board following the separation. The spin could formally convert to a REIT on January 1, 2015, if this option is elected. Conversion could add an additional $13 per share to the valuation, when considering similar estimates and REIT multiples (see the Oil States Spin-Off Report dated February 19, 2014, for more information). Based on this revised calculation, our sum-of-the-parts valuation for pre-spin OIS is adjusted to $114 per share (previously $120).

On February 19, 2014, management of Knowles Corp. offered initial guidance during an analyst day. Shares of Knowles will be distributed on a 1:2 basis to holders of Dover Corp. (NYSE: DOV) after the market close on February 28, 2014, with regular way trading scheduled to begin on the NYSE on March 3, 2014, under the ticker “”KN””.

Knowles manufactures MEMS microphones, speakers, and receivers for the smartphone market. Micro-ElectroMechanical Systems (MEMS) microphones are used in consumer electronics, primarily smartphones. MEMS technology allows for the manufacture of small mechanical components on the surface of silicon wafers. Knowles is the current market leader in the MEMS microphone industry; however, the company has lost market share in recent years to both established and new competitors.

Management projected revenue declining 4% year over year in 1Q 2014, while operating margin is expected to narrow to 12%-13% (compared to 14.2% in 1Q 2013) as a result of lower sales to former large customers Nokia (NYSE: NOK) and BlackBerry Ltd. (NASDAQ: BBRY), as well as a lack of new product launches from current customers. Longer-term revenue is forecast to expand 7% and operating margins widening to 22% as a result of cost cuts including plant consolidation plans, which should provide approximately $40 million in annual savings over the next several years.

As noted in the initial Dover Corp. Spin-Off Report (December 16, 2013), 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 estimate for KN is revised to $30 per share (previously $33) to reflect weaker than previously estimated revenue growth (6% versus the previous 16%) and a slight decrease in the comparable valuation multiple (10.2x compared to 10.4x). Additionally, net debt is forecast to be $360 million compared to the prior estimate of $315 million. AAC Technologies (2018 HK), the closest comparable based on product offerings and historic margins, trades at 10.2x 2014 estimated EBITDA. The fair value estimate is derived by applying a 10.2x multiple to estimated 2014 EBITDA of $283 million. Please see the initial Dover Corp. Spin-Off Report (December 16, 2013) for further details.

DOV will remain a diversified industrial conglomerate with exposure to fast growing energy end markets, along with engineered systems and printing and identification segments, following the separation. The fair value estimate for post spin DOV remains $83.60 per share. Shares of Dover ex Knowles (DOV-WI) currently trade at approximately $72.50 in the when-issued market. Please see the initial Dover Corp. Spin-Off Report (December 16, 2013) and FLASH (February 7, 2014) for further details. As a result, DOV-WI is recommended for purchase.

On February 14, 2014, Occidental Petroleum Corporation (NYSE: OXY) announced its Board had approved a plan to separate its California assets into an independent and separately traded company. The transaction is subject to regulatory approvals including an effectiveness declaration by the SEC, acceptance of the new company’s stock for listing, and final Board approval. OXY expects to have a management team in place for the new business by 3Q 2014 and to separate the business by the end of 2014 or early 2015. The announcement comes on the heels of a $1.4 billion pre-tax sale of the company’s Hugoton Field Services, which includes 1.4 million net acres of natural gas fields in the US, an increased annual dividend of $2.88 per share from $2.56 per share, and an increased share repurchase authorization of 30 million shares (the company had 7 million shares in authorization at the end of 2013). OXY was most recently discussed in the February 2014 Spin-Off Radar Screen Report due to the likelihood of this transaction occurring.

The California business unit is considered the state’s largest natural gas producer and, largest oil and gas producer on a gross-operated barrels of oil equivalent (boe) basis. For 2013, total production reached 154,000 boe per day and ended the year with total reserves of 744 mmboe. Management expects this unit to grow at a 7.5% compound annual growth rate to 190, 000 boe by 2016. The parent company will maintain its exploration and production operations in the Permian Basin and other parts of Texas, the Middle East, and Colombia. It will also retain its midstream and marketing segment and a chemical subsidiary, OxyChem.

The separation announcement follows in the footsteps of other integrated oil breakups in the past two years, including Murphy Oil (NYSE: MUR), which spun off its gas stations in 2013, and Hess Corp. (NYSE: HES), which divested $7.8 billion worth of assets during 2013 and is continuing to pursue a sale of its retail and trading units. As OXY announced at the end of 3Q 2013, and reiterated during its 4Q call, the company is trying to shed assets in non-core businesses and manage exposure to political risk. Previously, the company also stated it would consider selling a minority interest in its Middle East/ North Africa operations. It also completed the sale of a 35% interest in general partner Plains All-American Pipeline in October 2013.

On February 6, 2014, Dover Corp. (NYSE: DOV) announced shares of Knowles Corp. will be distributed after the market close on February 28, 2014, with regular way trading scheduled to begin on the NYSE on March 3, 2014, under the ticker “KN”. Shares of KN will be distributed on a 1:2 basis to DOV holders as of February 19, 2014. Trading on a “when-issued” basis is expected to commence on or about February 14, 2014. The transaction still requires an effectiveness declaration by the SEC. Knowles’ management will host an analyst day on February 19, 2014.

Knowles manufactures MEMS microphones, speakers, and receivers for the smartphone market. Micro-ElectroMechanical Systems (MEMS) microphones are used in consumer electronics, primarily smartphones. MEMS technology allows for the manufacture of small mechanical components on the surface of silicon wafers. Knowles is the current market leader in the MEMS microphone industry; however, the company has lost market share in recent years to both established and new competitors. DOV will remain a diversified industrial conglomerate with exposure to fast growing energy end markets, along with engineered systems and printing and identification segments, following the separation.

As noted in the initial Dover Corp. Spin-Off Report (December 16, 2013), the fair value calculations would be adjusted based on the finalized distribution ratio, capital structure, dividend policy and changes in company/industry fundamentals. The KN fair value estimate of $33 per share (based on the 1:2 distribution) remains intact prior to the analyst day.

The fair value estimate for DOV is raised to $83.60 per share (previously $77) to reflect stronger than previously estimated segment margins at Engineered Systems (18% versus the previous 17%) and Printing & Identification (17.9% versus 17.0%). The revised assumptions result in a Spin-Off Report EPS estimate of $4.65, compared to the previous estimate of $4.29. Dover management has guided for 2014 EPS of $4.60 – $4.80. The fair value estimate is derived by taking an average of the peer group 17.9x P/E multiple, and sector specific EV/EBITDA multiples to individual segment EBITDA contributions.

Given the revised fair value estimate, and the recent pullback in price, DOV shares appear interesting ahead of the spin-off. As such, pre-spin Dover investors could treat KN as a free dividend. As detailed in the initial DOV report, in recent similar transactions by industrial conglomerates, the parent entity has experienced multiple expansion post spin-off, generally providing outperformance versus the broader market. Please see the initial Dover Corp. Spin-Off Report (December 16, 2013) for further details.

On February 5, 2014, Newcastle Investment Corp. (NYSE: NCT) held an investor call one day after its local media spin-off, New Media Investment Group Inc., began trading on a when-issued basis. NEWM closed its first day at $10.50 per share. The stock is scheduled to begin regular way trading on February 14. During the call, management highlighted growth prospects for NEWM’s digital marketing division and its potential acquisition pipeline. One might expect significant shareholder turnover in NEWM through the when issued period and first weeks of regular way trading, as holders of the mortgage REIT may not want to or cannot hold a local media stock. This may create a greater opportunity for equity mispricing, particularly given limited research coverage.

The Spin-Off Report’s fair value of $11.80 per share for NEWM is derived using an average of EV/Assets, EV/EBITDA, and an estimated 18% free cash flow yield. Given the approximate 85% ownership stake in NEWM, the value to NCT shareholders pre-spin is about $0.85 per NCT share. Please see the published Spin-Off Report on Newcastle Investment Corp., dated October 22, 2013, for additional information. The spin-off entity includes 404 community publications, 350 related websites, 313 mobile sites, and six yellow-page directories, reaching about 10 million people each week. Publications include local community papers and “free” shoppers. Advertising revenue continues to decline, but circulation revenue has begun to stabilize.

On January 28, 2014, International Paper Co. (NYSE: IP) announced plans to spin off its distribution business, xpedx, through a tax-free distribution to shareholders. Following the spin-off, the new standalone company will merge with privately held Unisource Worldwide Inc. in a Reverse Morris Trust (RMT) transaction. Upon completion of the spin and merge, IP shareholders will own 51% of the new stand-alone entity. In conjunction with the proposed transaction, xpedx will make a cash payment of approximately $400 million to IP. The new entity is expected to generate annual revenue of $9 to $10 billion. The merger is projected to create $200 million in annual synergies. Mary Laschinger, the current president of xpedx, will assume the CEO and Chairman role at the yet-to-be-named company. xpedx will apply for a listing on the NYSE. The transaction still requires customary regulatory approvals. The new entity is targeting a 4x to 5x leverage ratio.

The merger agreement was reached between IP and UWW Holding, Inc., the holding company of Unisource and owned indirectly by an affiliate of Bain Capital and by Georgia-Pacific. Unisource was acquired by private equity in late 2002 for $850 million. The spin entity provides business-to-business distribution of printing supplies and assorted equipment. The peer group, which includes Arrow Electronics Inc. (NYSE: ARW), ePlus Inc. (NASDAQ: PLUS) and United Stationers Inc. (NASDAQ: USTR) trade about 0.4x forward sales. Applying that multiple to projected $9 to $10 billion in annual sales for the merged entity would value this business in a range of $3.6 to $4 billion. The spin would seem to allow IP to separate an extremely low margin, although steady cash flow, business.

Following the transaction, IP will retain its industrial packaging, printing papers, and consumer packaging businesses. Those units accounted for about 83% of sales and 95% of segment EBITDA through the first nine months of 2013 (excluding corporate costs). The company has benefited from improved industrial packaging prices. This segment includes containerboard and corrugated packaging and should be relatively sensitive to changes in economic activity. The peer group includes Rock-Tenn Company (NYSE: RKT), Mondi Ltd. (MND SJ), and Schweitzer-Mauduit International Inc. (NYSE: SWM). Applying the peer group 6.8x multiple to 2013 EBITDA for stand-alone IP of about $4 billion results in an enterprise value of about $27 billion. IP shareholders are expected to receive 51% of the new entity’s shares, which could be valued at $1.8 to $2 billion.

On January 27, 2014, Newcastle Investment Corp. (NYSE: NCT) announced shares of New Media Investment Group Inc. will be distributed on or about February 13, 2014, with regular way trading expected to begin on the NYSE the following day under the ticker “NEWM”. NCT shareholders as of the record date, February 6, 2014, will receive 0.07219 shares of New Media for every share of NCT held, or approximately one NEWM share for 13.85 NCT shares. Trading on a “when-issued” basis is expected to commence on or about February 4, 2014. The transaction still requires an effectiveness declaration by the SEC.

As a REIT, NCT is not structured to operate a media subsidiary long term. Upon the emergence of Gatehouse from bankruptcy, a spin-off appeared to be the most practical option for dealing with these assets. Following the separation, New Media will be externally managed by FIG LLC, an affiliate of Fortress Investment Group LLC (NYSE: FIG), as is NCT. Chairman Wesley Edens is Co-Chairman of Fortress.

The spin-off entity includes 404 community publications, 350 related websites, 313 mobile sites, and six yellow-page directories, reaching about 10 million people each week. Publications include local community papers and “free” shoppers. Advertising revenue continues to decline, but circulation revenue has begun to stabilize.

Following the distribution, NCT shareholders, as of the record date, will own 84.6% of NEWM stock. Non-NCT bondholders of GateHouse had the option to receive cash at 40% of debt face value or equity in the new entity through the pre-packaged bankruptcy. Please see the published Spin-Off Report on Newcastle Investment Corp., dated October 22, 2013, for a full explanation of the transaction options. The valuation for post-spin NCT has been revised to take into account fewer bondholders opting for the cash out than modeled in the initial publication. In addition, NCT conducted a 58 million share equity offering, raising about $300 million, which was utilized to purchase additional senior housing assets, since the initial report.

A post-spin fair value of $11.80 per share is reached for NEWM, based on an updated share count of 30.0 million. The new share count reflects NCT’s distribution of 25.37 million shares representing 84.6% of NEWM equity. The fair value estimate is derived using an average of EV/Assets, an estimated FCF yield of 18% on 2014 projected FCF, and EV to EBITDA. Given the approximate 85% ownership stake in NEWM, the value to NCT shareholders pre-spin is about $1.01 per share. It should be noted that warrants representing approximately 5% of shares outstanding are being issued in conjunction with the spin-off. The warrants are not included in this valuation exercise as they will be initially priced out of the money.

Newcastle appears to be transforming from a mortgage REIT to a property REIT through the collapsing of CDOs and the purchase of senior housing assets. Subsidiaries of Fortress manage the portfolio. Fortress has experience in the sector through its investments in Brookdale Senior Living Inc. (NYSE: BKD).

Based on book values and projected cash flows of its senior housing assets and CDOs, the fair value for NCT is revised to $5.33 per share (from $5.13 per share), utilizing peer groups for both sets of assets. Property REITS trade at higher P/B multiples and lower dividend yields than mortgage REITs.