On December 10, 2013, NorthStar Realty Finance Corp. (NYSE: NRF) announced its Board of Directors had approved a plan to spin off its asset management business through a tax-free distribution to shareholders to be completed by 2Q 2014. The spin entity, to be named NorthStar Asset Management Corp., intends to apply for listing on the NYSE. The asset management business will be led by the current NRF management team. NorthStar Asset Management will generate an annual management fee of $90 million, 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. Management will host a conference call today at 10 a.m. ET. The transaction requires an effectiveness declaration regarding registration statements by the SEC and final Board approval.

The asset management business generates fees from sponsoring and advising on commercial real estate activities through three non-traded REITs. One managed REIT has raised $1.1 billion in capital, while the other two are currently in the process of raising an additional $2.75 billion. Through the first nine months of 2013, the asset management business has generated $25.3 million in operating income, up 240% year over year. NorthStar Asset Management will initially be structured as a C-Corp, however management will look for ways to pursue alternative structures in an attempt to optimize its tax status.

The parent is a diversified commercial real estate (CRE) REIT. The company focuses on originating, acquiring and managing CRE real estate and debt investments secured by income producing assets. Investments include office buildings, retail, industrial facilities, and hotels. As of 3Q 2013, the company had $1.6 billion in CRE debt and $3.5 billion in real estate investments. The company has been reducing its exposure to collateralized debt obligations (CDOs) and increasing investments in real properties including manufactured housing communities and healthcare facilities. The move from CDOs to real estate is likely an attempt to unlock value. Property REITs tend to trade at far lower yields than commercial mortgage REITS given the perceived lower risk of the assets.

The structure of the two entities, including incentive fees paid by NRF to the spin entity when certain thresholds are met, could be compared to the MLP general partner set-up. Based on the current assets under management, management estimates that NorthStar Asset Management will generate $155 million in gross fees and will have $0.30 per share in cash available for distribution (CAD). MLP GP C-Corps. yield about 4.5%. However, this reflects the low risk to payouts from the MLPs, which operate pipelines generating very consistent cash flows. If NorthStar Asset Management distributed $0.27 per share, based on a 90% payout ratio, the asset management could be valued between $4.91 and $6.00 per share, assuming the MLP GP peer group average or a slight discount.

Management estimates the post-spin parent will generate $0.80 per share in CAD. Assuming a 75% payout ratio, in line with NRF’s most recent distributions, the parent could distribute $0.60 per share. Based on an 8% and 9% yield, in line with other commercial mortgage REITs, the post-spin parent could be valued in a range of $6.67 to $7.50 per share. This rough preliminary valuation suggests a sum of the parts valuation of $11.58 to $13.50.

On December 6, 2013, Sears Holdings Corp. (NASDAQ: SHLD) filed a Form 10 registration statement to spin off its Lands’ End clothing business through a tax-free distribution of shares to SHLD holders. Lands’ End intends to apply for a listing on the NASDAQ under the ticker “LE”. The transaction still requires final Board approval, acceptance of the NASDAQ listing request, receipt of an opinion from SHLD’s legal counsel regarding the tax-free status of the transaction and an effectiveness declaration from the SEC. 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 capital structure, share distribution ratio for the spin entity, and timing of the transaction were not disclosed.

SHLD bought Lands’ End in 2002 for $1.9 billion. The clothing brand is distributed through landsend.com, direct mail, about 280 “store within a store” departments at SHLD stores, and 14 separate retail centers averaging 8,600 square feet. Through the first half of F2013 (ending January 31, 2014), direct segment sales totaled $537 million, or about 83% of total revenue. Sales have weakened in recent years, but through the first half of F2013, lower sales and increased promotional activity have been offset by workforce and third-party cost reductions. Adjusted EBITDA grew 14% year over year in 1H F2013 to about $41 million while sales were down 3% to about $649 million. LE expects costs as a standalone publicly-traded entity to grow about $8 to $10 million per year. The Form 10 lists the book value of LE at $817 million as of August 2013. Free cash flow in the first half of F2013 grew more than 40% to $24.2 million largely due to reduced cap-ex. In the three years through F2012, purchases of property and equipment have averaged $16 million. Cash flow from operations in F2012 totaled $96 million. Through the first half of F2013, CFO is up about 11% year over year.

Assuming the 11% growth rate is maintained for full year F2013, CFO would total about $98 million (including higher standalone costs). Subtracting average cap-ex of $16 million, LE could generate about $82 million in free cash flow. Based on a 10% yield, the value of the business could be $820 million. Alternatively, a value of $817 million is reached based on 1x book value.

Similar direct sales and store-based clothing retailer J. Crew Group Inc. was acquired by a consortium led by Leonard Green & Partners for about 8.1x EBITDA in a deal that closed in early 2011. In F2012, LE generated $108 million in EBITDA. Through the first half of F2013, EBITDA increased 14% year over year. Assuming a range of $108 to $123 million in EBITDA, a similar takeover multiple would value LE at about $875 million to $1 billion. Alternatively, a group of other clothing retailers such as Perry Ellis International Inc. (NASDAQ: PERY), American Eagle Outfitters Inc. (NYSE: AEO) and Guess? Inc. (NYSE: GES) trade about 7.2x 2013 EBITDA. Applying a 7.2x multiple to $108 to $123 million in EBITDA values LE at $778 to $886 million with a midpoint of about $832 million. It would appear from these various rough and preliminary exercises that a value of about $825 million for LE appears reasonable.

Sears remains an interesting opportunity due to the aggressive repositioning efforts by Lampert. Notably management is also considering a spin-off or separation of the Sears Auto Center business. In addition, property and equipment is currently held on the balance sheet at around $5.7 billion. When one considers the $825 million value of LE, the possible $1 billion valuation for the Auto Centers (see the December edition of The Spin-Off Report Radar Screen for details) and the real estate value one might consider SHLD attractive at the current enterprise value of $9.9 billion. Based on this calculation, all the remaining Sears businesses would be valued at just $2.4 billion.

On December 3rd, Westfield Group (Ticker: WDC AU, AUD 10.78, Market Capitalization: AUD 22.8 billion) and Westfield Retail Trust (Ticker: WRT AU, AUD 2.99, Market Capitalization AUD 8.7 billion) announced the merger of WDC’s Australian and New Zealand real estate assets with WRT, through distribution of shares in a newly created company named Scentre Group. Westfield Group will subsequently be renamed Westfield Corporation. WDC shareholders will receive 1,246 shares of Scentre Group and 1,000 shares of Westfield Corporation for every 1,000 shares they own. After the demerger, they will own 100 percent of Westfield Corporation and 48.6 percent of Scentre Group. WRT shareholders will receive 918 Scentre Group shares and AUD 285 for every 1,000 shares they own, and will control 51.4 percent of Scentre Group. The cash component of AUD 0.285 per share is based on an AUD 850 million capital return which will be implemented through a share buyback of 8.2 percent of shares outstanding at a price of AUD 3.47 per share—a 16 percent premium to December 3rd’s closing price. The new structure will allow Scentre Group to be internally managed—as opposed to Westfield Retail Trust, for which the properties are currently managed by Westfield Group. Additionally, investors will have the opportunity manage their exposure to Australia and New Zealand, and to the USA and Europe. The demerger is subject to regulatory and shareholder approvals, and is expected to be completed by June 2014.

Westfield Group is an owner-operated Australian REIT, its largest shareholder and Chairman being Frank Lowy, Australia’s second richest person, with a net worth of USD 5.3 billion. In 2010, WDC spun off a 50 percent interest in its Australian and New Zealand malls into a separate entity, Westfield Retail Trust. Thus, the new round of restructuring is finalizing the separation of the Australian and New Zealand malls—which will be 100 percent owned by Scentre Group—from the USA and European malls—held by Westfield Corporation. The Lowy family will continue to be actively involved in both companies; Frank Lowy will serve as Chairman, and Steven Lowy as a Director, of both companies. Peter Lowy will be a member of Westfield Corporation’s Board. Peter and Steven Lowy are currently co-CEO’s of WDC and will hold the same position at Westfield Corporation.

Westfield Corporation will have total assets of AUD 19.3 billion. Its 44 malls—of which 39 are located in the USA and 5 in Europe—generated USD 19.8 billion in sales. The management forecasts funds from operations for 2014 of approximately AUD 0.9 billion, or AUD 0.44 per share. Based on the average 17.5x price-to-funds from operations of three large US retail REITs—Simon Property Group, Taubman Centers and The Macerich Co—Westfield Corporation could be valued at AUD 15.9 billion, or AUD 7.65 per share. Scentre Group will own 47 malls under the Westfield brand in Australia and New Zealand. Its assets will stand at AUD 28.5 billion and its sales at AUD 22 billion. The average price-to-book multiple for the A-REIT Index of REITs that are part of the S&P/ASX 200 Index is 1.12x. Applying this multiple to Scentre Group’s 14,9 billion in equity, we arrive at a valuation of AUD 16.7 billion. Shareholders of both companies could have a net worth of AUD 33.4 billion (i.e. a combined market capitalization of AUD 32.5 billion plus the AUD 0.85 billion capital return). That compares to the current AUD 31.55 billion market capitalization of Westfield Group and Westfield Retail Trust, combined.

On December 3, 2013, ONEOK Inc. (NYSE: OKE) conducted an investor day, providing a first look at operations of the two entities on a standalone basis prior to the planned 1Q 2014 separation. OKE will distribute shares of its natural gas utilities business ONE Gas Inc. on a 1:4 basis to OKE shareholders. The spin entity intends to list on the NYSE under the ticker “OGS”. The transaction still requires a private letter ruling from the IRS regarding the tax-free status of the separation, regulatory approval from the Kansas Corporation Commission (KCC), and final Board approval. As noted in the initial ONEOK Spin-Off Report (November 29, 2013), the fair value calculations would be adjusted based on the distribution ratio, capital structure, dividend policy and changes in company/industry fundamentals. The valuations have been revised based on the 1:4 distribution ratio, as well as initial dividend guidance for the two entities. The spin-off entity distributes natural gas to more than two million customers through the utilities Oklahoma Natural Gas Company, Kansas Gas Service, and Texas Gas Service. The parent will maintain its 41.3% interest, including general partner (GP) interest, in master limited partnership (MLP) ONEOK Partners LP (NYSE: OKS). ONE Gas is expected to make a cash distribution to the parent of around $1.2 billion at the time of separation.

ONEOK set its expected 2014 dividend at $2.33 per share, modestly above our estimated range, as OKE will not pay cash taxes in the first year, and will generate cash flow from its soon-to-be-closed Energy Services segment. However, the dividend growth rate following the initial year will be lower due to an expected tax rate of 15-25% after year one, and slower distribution expansion from the MLP due in part to increased maintenance cap-ex and ongoing ethane rejection.

OGS management guided for a 2014 pre-split dividend of $0.28 per share in 2014, modestly below The Spin-Off Report’s projected $0.36 due to a lower payout ratio (55-65% versus the 70% previous projection) and spin-off related costs in the first year post-separation. The dividend is expected to grow at a 5% rate in the first three years following the transaction due largely to expansion of the rate base from significant infrastructure investment of $240-285 million annually, as well as improvement towards the allowable ROE by regulators. Based on revised earnings and dividend guidance, and the 1:4 share distribution, the fair value for OGS is adjusted to $33.37 per share ($8.34 non-split adjusted) from $9.39. Investors may consider opportunities in the stock if it trades under $30 per share in initial trading, implying a dividend yield in excess of 3.7%.

OKE has guided for a midpoint of $600 million in distributable cash flow in 2014, about a 1.25x distribution coverage ratio and a potential dividend of $2.33 per share. However, these assumptions include no cash taxes in 2014 and $39 million in cash flow from the Energy Services division, which is being shut down. If one models a valuation based on the projected $607 million in distributions from OKS, $60 million in interest expense, $8 million in corporate expense, and a 20% cash tax rate on the distributions, distributable cash would decline to $2.03 per share. Assuming a 1.05x coverage ratio, a reasonable annual dividend would total $1.93 per share. Based on a 3.7% yield, the fair value for OKE would be $52.18 per share (see attached exhibit).

The DCF model results in a fair value of $50.61 per share. (See attachment for assumptions used in the model.) The average of these two valuation methodologies is $51.40 per share, essentially unchanged from the $51 fair value in the initial report. The pre-spin SOTP valuation for OKE is $59.75 per share (compared to the initial $60.39 valuation).

On September 12, 2011, The McGraw-Hill Companies (NYSE: MHP) announced its Board of Directors approved a plan to separate into two publicly traded companies: (1) McGraw-Hill Markets, which will encompass Standard & Poor’s, Platts, Capital IQ, S&P Indices and J.D. Power and Associates, and (2) McGraw-Hill Education, a provider of published materials and digital services to the K-12, higher education and professional development markets. The spin-off of Education will be conducted via a tax-free distribution to shareholders, which is expected to be completed in 2012. Capital and liability allocations are yet to be finalized. The spin-off will require SEC approval and an affirmative IRS ruling. MHP CEO Terry McGraw will lead McGraw-Hill Markets moving forward. A search will be conducted to find a CEO of Education.

MHP also announced an extensive cost reduction plan and an accelerated share repurchase program as part of its efforts to enhance shareholder value. MHP intends to buy back $1 billion of shares in 2011. The company has repurchased 14.1 million shares at a cost of about $541 million year-to-date.

The company is facing scathing criticism over the decision by its Standard & Poor’s unit to downgrade the US credit rating in early August 2011. S&P President Deven Sharma announced plans to step aside; he will be replaced by Douglas Peterson, COO of Citigroup (NYSE: C) North America. A US Congressional Committee is looking into the downgrade. S&P has already received a rebuke for its role in the credit crisis, and the US Justice Department is also reportedly investigating S&P’s ratings of mortgage-backed securities.

MHP Markets is expected to generate about $4 billion in revenue, while Education will account for about $2.4 billion in sales in 2011. MHP trades relatively in-line with credit rating peer Moody’s Corporation (NYSE: MCO), but at a discount to financial publishing firms Morningstar Inc. (NYSE: MORN) and Thomson Reuters Corp. (NYSE: TRI). The discount could be owed to a number of factors including the difficulty valuing the disparate pieces of MHP’s global operations, as well as concerns and uncertainty about future regulations of credit rating agencies.

Education accounted for about 29% of total MHP revenue in 2010. In 1H 2011 the segment generated a little over $839 million in sales, down about 5% year over year, while generating a segment operating loss of about $33 million, wider than the year-earlier $10 million loss. The weakness was attributed in part to the timing of certain orders, which were pushed back into the second half of 2011.

Publicly traded Pearson Plc (NYSE: PSO), the publisher of the Financial Times as well as of North American textbooks, trades at about 1.7x sales. Applying that multiple to MHP’s Education segment’s expected 2011 sales provides an enterprise value for the segment of slightly more than $4.1 billion. Annualizing MHP’s non-education segment 1H 2011 EBIT (including $78.4 million of corporate expense) of $607 million, and applying a 7.5x multiple (in-line with the multiple for credit rating peer MCO) generates an EV for the MHP Markets of about $9.1 billion. A sum-of-the-parts valuation could place an enterprise value of about $13.2 billion on the entire entity. MHP closed on Friday at an enterprise value of about $11.5 billion.

On October 1, 2012, Seacor Holdings Inc. (NYSE: CKH) signaled its intention in an SEC filing to spin off its aviation services unit. The oil services company intends to separate the segment, which operates under the name Era Group Inc., through a tax-free distribution of shares to its shareholders. No date was set for the transaction. Seacor has also sought a private letter ruling from the IRS concerning the tax-free nature of the proposed separation. The company previously planned to apply for a listing under the ticker “”ERA”” on the NYSE, according to an S-1 filing.

Seacor operates in several segments, including offshore marine services, inland river services, marine transportation services, commodity trading and logistics, as well as aviation services. In August, credit ratings agency Moody’s Inc. (NYSE: MCO) lowered its outlook on CKH to negative from stable noting a tepid earnings recovery, according to the Associated Press. As of June 30, 2012, CKH had net debt exceeding $600 million and trailing twelve-month EBITDA of about $250 million, according to Thomson ONE. In March 2012, CKH sold its environmental services unit, which focused on oil spill recovery, for nearly $100 million.

Era Group provides helicopter supply vessels to offshore oil and gas platforms in the Gulf of Mexico, Alaska and international markets. It also provides emergency medical response and tours in Alaska. The business is capital intensive and can be cyclical. However, one might also expect the business to be synergistic with the marine supply operations. Competitors in the energy sector include PHI Inc. (NASDAQ: PHII) and Bristow Inc. (NYSE: BRS). Meanwhile Air Methods Corp. (NASDAQ: AIRM) provides emergency medical response helicopters. The peer group trades at an EV/trailing EBITDA of 10.8x. CKH’s aviation segment generated EBITDA of $79 million in 2011, and five-year normalized EBITDA of around $67 million.

Applying the 10.8x multiple to last year’s and normalized EBITDA generates an EV range of around $720 to $850 million. Barriers to entry would appear relatively high, given the long-term relationships with its client base of offshore exploration and production companies (E&Ps), cost to build a fleet, and insurance requirements. In August 2011, CKH filed to conduct an IPO of Era shares to raise about $150 million. The company did not disclose how many shares or what percentage of the business would be carved out. No IPO took place. If one were to assume the company was seeking to IPO less than 20% with the intention to spin off the remaining shares in a tax-free distribution, it would place a value of about $750 million on the company.

The offshore oil and gas supply service market weakened following the Deepwater Horizon oil spill in spring 2010. CKH’s remaining businesses focus on marine supply and support for the offshore markets as well as inland barge transport. Those businesses could be compared to inland barge operator Kirby Corp. (NYSE: KEX), and offshore supply service providers Hornbeck Offshore Services Inc. (NYSE: HOS) and Gulfmark Offshore Inc. (NYSE: GLF). The group trades at an average 7.9-to-9.7x trailing and forward EBITDA. Applying those multiples to the EBITDA generated by CKH’s remaining businesses in 2011, results in an EV range of about $1.3 to $1.6 billion.

Shares of Kraft Foods Group Inc. and Mondelez International Inc. will begin ‘regular way’ trading on October 2, 2012. Kraft Foods Group Inc. and Mondelez will trade on the NASDAQ under the respective symbols ‘KRFT’ and ‘MDLZ’. Kraft Foods Inc. (NASDAQ: KFT) shareholders of record as of September 19, 2012 will receive one share of KRFT for every share of KFT owned and one share of MDLZ for every three shares of KFT owned. Following the distribution the KFT symbol will be retired. Shares of KRFT and MDLZ will begin trading on a ‘when issued’ basis on September 17, 2012.

On September 14, 2012, it was announced that KFT would be taken out of the Dow Jones Industrial Average (DJIA) and replaced by UnitedHealth Group Inc. (NYSE: UNH). KFT currently represents 2.29% of the DJIA. The exclusion from the DJIA will result in a degree of forced selling from index-based funds and ETFs, such as the SPDR Dow Jones Industrial Average (NYSEArca: DIA) ETF, which has an $11.3 billion net asset value.

As noted in the initial Kraft Foods Spin-Off Report (July 13, 2012), the fair value calculation would be adjusted based on the finalized distribution ratio, capital structure, dividend policy and changes in company/industry fundamentals. Following the most recent investor presentations, the fair value calculations have been adjusted to reflect updated management guidance for 2013. The adjustments to the prior calculations are shown in the attachment. The post-spin fair value estimate of KRFT is revised to $45 per share (from $40). KRFT shares may initially trade closer to $40 based on 2013 EPS guidance.

The post-spin fair value estimate for MDLZ remains $26 per share, although some underlying operating assumptions have been adjusted to reflect guidance.

Please see the Kraft Foods Inc. Spin-Off Report, dated July 13, 2012, and FLASH note, August 3, 2012, for further details.

On September 12, 2012, NACCO Industries Inc. (NYSE: NC) announced that the company intends to complete the spin-off of Hyster-Yale Materials Handling Inc. on September 28, 2012, after the market close. The spin company will trade under the symbol ‘HY’ on the NYSE. Shareholders of record at the close of business on September 25, 2012, will receive one share of Class A and one share of Class B HY for every Class A and Class B share of NC. Hyster-Yale will begin ‘regular way’ trading on October 1, 2012. It is expected that shares of HY and NC will trade on a ‘when-issued’ basis before the record date.

The long-term fair value estimates for post-spin NC of $62 and HY of $27 remain intact. It should be noted that valuation multiples for HY’s peer group have increased since the initial publication on August 2, 2012. This may result in HY initially trading above this long-term fair value estimate. When considering that HY appears to be operating near peak earnings (see attachment), combined with macro risks to the global lift truck market, a longer-term outlook appears more appropriate. Please see the NACCO Industries Inc. Spin-Off Report, dated August 2, 2012, for further details.

Shares of subsidiary Comverse Inc. are expected to be separated from the holding company Comverse Technology Inc. (NASDAQ: CMVT) on October 31, 2012 with regular way trading of the spin-off to commence on NASDAQ under the ticker ‘CNSI’ on November 1. The transaction still requires shareholder approval, which is expected to be completed by October 10 and an SEC effectiveness declaration. The ‘when issued’ market would likely begin around October 24 shortly after the record date. Holders will receive one share of CNSI for every ten shares of CMVT. During the conference call held on September 7, management indicated that the spin-off entity would initially hold well in excess of $200 million in cash (and no debt) excluding $30 million the holding company will maintain in escrow until the closing of its merger with Verint Systems Inc. (NASDAQ: VRNT), scheduled for January 31, 2013. VRNT is purchasing the 16.3 million shares owned by the holding company, plus the 11.2 million preferred shares, and additional shares valued at around $25 million for a total purchase price of around $813 million based on the current VRNT stock price, or about $3.71 per CMVT share.

The $37.4 million in cash proceeds generated from the sale of the company’s stake in privately-held Starhome B.V. will go to the spin-off entity. The company expects to be cash flow positive in 2H F2013 (ending January). Management estimates CNSI will have more than $300 million in net cash excluding the funds held in escrow at the end of fiscal 2013. If one subtracts the value of the VRNT stake at the current purchase price and the net cash expected at the end of the fiscal year, the stub is valued at $1.07 per share or 0.37x F2013E sales (see exhibit in attachment). Notably this calculation excludes the value of NOLs, which totaled about $1.5 billion as of January 31, 2012.

CMVT has historically traded around 1.0x forward sales while comparables are trading about 0.9x current fiscal year sales (see the initial Comverse Spin-Off Report dated July 26, 2012 for a full comparables table). Even applying a 0.8x sales to F2013E sales of $630 million generates a stub valuation of about $504 million, or $2.30 per share. Adding back the $302 million in cash places the spin-off value at about $3.68 per share, or $36.80 based on the 1:10 distribution. The stock is recommended for purchase on a sum-of-the-parts calculation of $7.40 per share (essentially unchanged from the initial report).

On August 13, 2012, Elan Corporation plc (NYSE: ELN, DUBLIN: ELN) announced it would spin off its biotechnology drug discovery sciences businesses to shareholders. The spin company will be named Neotope Biosciences plc and will be listed on a US exchange. The separation requires approval from shareholders, regulatory agencies, as well as holders of its 2016 Notes. Elan expects to retain a 14-18% minority ownership position in Neotope and commit $120-$130 million in start-up capital. The transaction is tentatively scheduled to be completed by year end 2012. ELN anticipates incurring a charge related to the transaction.

Neotope will focus on early discovery and development of pathology-biology based molecules to be used in treatment of degenerative diseases. The transaction will separate the riskier and longer development timeline biotech drug discovery business from the more commercial and profitable operations that will remain with post-spin Elan, primarily its marketed multiple sclerosis drug Tysabri. The announcement comes days after Elan’s drug to treat Alzheimer’s disease that was being developed with Pfizer Inc (NYSE: PFE) and Johnson & Johnson (NYSE: JNJ) was found to be no more effective than a placebo in clinical tests. ELN said it would take a $117 million charge related to the development failure.

Elan is targeting 2013 EBITDA in excess of $400 million and net income of more than of $250 million following the transaction. Management projects EPS of more than $1.00 by 2015 and cash may be used to fund share repurchases. Current ELN CEO Kelly Martin will remain with Elan following the spin-off.