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.

On August 9, 2012, Hillshire Brands (NYSE: HSH) issued initial F2013 (ending June 30) EPS guidance well below the Wall Street consensus estimate. However this is a company in transition, thus near term results likely fail to reflect the true underlying value of the business. As such, considering a longer-term outlook or normalized cash flow, one could reach a fair value of $32 per share.

Management’s F2013 outlook is for flat revenue and EPS of $1.40-$1.55 per share. Operating margin is expected to be slightly down due to increased investment in media, advertising and promotions. HSH also declared a regular quarterly cash dividend of $0.125, or $0.50 annually. Management has set mid-term goals of 4%-5% annual revenue growth, 10% operating margins and a dividend payout of 30%-35% in F2015. As evidenced by management’s F2013 guidance, investments in media, advertising and promotions are still in the early stages and have yet to yield results. Assuming these goals can be achieved, HSH would earn $2.24 per share in F2015 (see attachment). HSH’s peer group, including Hormel Foods Corp. (NYSE: HRL), ConAgra Foods Inc. (NYSE: CAG) and JBS S.A. (SA: JBS), currently trade at roughly 15x forward earnings. Applying that multiple to F2015E EPS would derive a value of $34 per share in three years.

As an alternative, a valuation can be derived based on historic free cash flow generation and the ability to grow the dividend from the current level. In the three years prior to the spin-off, HSH generated an average of $183 million in free cash flow excluding cash provided by and used for D.E Master Blenders (NYSE Euronext: DE), which was separated on June 28, 2012.. If the company were to pay out half of normalized free cash flow to shareholders, a $0.77 per share dividend could be sustained in a normalized scenario. If shares were to yield 2.5%, in line with dividend payers in the S&P 500 index, a fair value estimate of $31 would be derived (see attachment). It could be argued that the 2x coverage may in fact be conservative. Over the past ten years HSH paid 70% of free cash flow out in the form of dividends. Taking an average of the two methods a fair value estimate of $32 is derived.

Finally, it should be noted that HSH may still be considered an attractive takeover candidate. In late 2010 and early 2011 several interested buyers, including both strategic and financial, reportedly made offers for the company. Given the long-term prospects described above, it would seem likely that suitors still exist. If shares were to be acquired at the $32 fair value estimate, it would imply 9.5x F2013E EBITDA (see attachment). This multiple is above the 8.9x average takeout multiple for the food, beverage and tobacco industries over the past ten years as reported by Fitch Ratings.

On August 8, 2012, Liberty Media Corporation (NASDAQ: LMCA, LMCB) announced it would spin-off all assets other than the 100% owned subsidiary Starz LLC, thus making the premium movie service an independent company. The non-Starz businesses will be spun off to shareholders in a tax-free distribution scheduled to be completed by the end of 2012. The new company will maintain the Liberty Media name, while the cable unit (which includes Starz, Encore and affiliated distribution services) will be called Starz. The transaction still requires an IRS private letter ruling, registration of statements with the SEC and any additional government approvals. Starz would have $1.5 billion in debt if it drew down its entire bank facility and an undetermined amount of cash.

Businesses that will be part of the separated entity include the Atlanta Braves baseball team, as well as TruePosition Inc., a provider of equipment and technology to enable cellular E-911 services. LMCA also holds positions in publicly traded companies, including satellite radio service Sirius XM Radio Inc. (NASDAQ: SIRI), book retailer Barnes & Noble Inc. (NYSE: BKS), and concert promoter Live Nation Entertainment Inc. (NYSE: LYV), as well as small stakes in companies such as CenturyLink Inc. (NYSE: CTL), Time Warner Cable (NYSE: TWC), and Sprint Nextel Inc. (NYSE: S).

Notably LMCA has been highlighted in recent months in The Spin-Off Report Bits & Pieces publication due to its high quality, growing assets and the seemingly low valuation attributed to the stub security, when considering the market prices for its publicly-traded holdings. Chairman John Malone holds about 1.8% of shares outstanding. LMCA has traded at a discounted EV/OIBDA multiple when accounting for the value of its stakes in BKS, LYV and SIRI since late 2011.

The stock is trading at less than 10x trailing adjusted OIBDA (excluding one-time gains for TruePosition) based on the above-calculated adjusted enterprise value. The separation has the potential to unlock shareholder value given this apparent mispricing of the currently non-publicly traded assets, particularly given recent success of these entities. The Starz and Encore cable channels reached an all-time high of nearly 55 million subscribers at the end of 2Q 2012. The Starz subscriber base expanded nearly 6% year over year in part due to critical success of original content, including Boss and Magic City, although segment OIBDA declined 8% year over year in 2Q 2012 to $108, due in part to higher original programming costs. Content value appears to be rising.

Notably Starz turned down an offer by Netflix Inc. (NASDAQ: NFLX) to renew a 5-year contract to distribute Starz content on the internet that had been paying the company $30 million annually. The rejected offer was cited by several media reports to approach $300 million per year. If one used a peer group multiple of 11.5x to the segment’s 2011 OIBDA of $449 million, one could value the standalone business at around $5.2 billion.

On August 2, 2012, Kraft Foods Inc. (NYSE: KFT) announced that the company intends to complete the spin-off of its North American grocery business on October 1, 2012, after the market close. The spin company will retain the Kraft moniker, but its name will change to Kraft Foods Group Inc. and trade under the symbol ‘KRFT’ on the Nasdaq. The parent company will be renamed Mondelez International Inc. and trade under the symbol ‘MDLZ’ on the Nasdaq. KRFT and MDLZ will commence ‘regular way’ trading on October 2, 2012. It is expected that shares of KRFT and MDLZ will trade on a ‘when-issued’ basis shortly before the spin-off is completed. Shareholders as of the unannounced record date will receive one share of KRFT for every three shares of the parent owned.

As noted in the initial Kraft Foods Inc. 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. The adjustments to the initial calculation are shown in the attachment. The post-spin fair value estimate of KRFT is revised to $40 per share to reflect the 1 for 3 share distribution. The fair value estimates for pre-spin KFT of $39 and post-spin MDLZ of $26, remain unchanged.

Please see the Kraft Foods Inc. Spin-Off Report, dated July 13, 2012, for further details.