On July 29, 2020, before the market open, Aaron’s Inc. (NYSE: AAN) announced a plan to separate its Progressive Leasing (“Progressive”) business from Aaron’s Business (“Aaron’s”). The tax-free separation is expected to be completed by the end of the year.

Aaron’s is a lease-to-own retailer serving underserved and credit-challenged customers; in 2019 the company registered annual sales totaling nearly $4 billion and EBITDA of $435 million. The company focuses on leases and retail sales of furniture, electronics, appliances, and computers, and sells through company-operated and franchised stores in the U.S. and Canada, as well as via its e-commerce platform, Aarons.com. The company currently operates under three segments: Progressive Leasing (54% of 2019 revenue and 63% of adjusted EBITDA), Aaron’s Business (45% of 2019 revenue and 38% of adjusted EBITDA), and Vive Financial (1% of 2019 revenue and a 1% drag on adjusted EBITDA). It also engages in the sale, lease ownership, and specialty retailing of furniture, consumer electronics, home appliances, and accessories. The company completed the acquisition of Progressive Finance in 2014. In February 2013, Aaron’s was involved in litigation which alleged its use of spyware on rented computers to send over 185,000 emails to the rental company, including customers’ Social Security numbers, passwords, and captured keystrokes, as well as explicit images. In October 2013, Aaron’s agreed to a settlement with the Federal Trade Commission that limited how it used monitoring technology and ordered deletion of all customer information that had been improperly collected.

As a retailer, Aaron’s has been affected by the COVID-19 pandemic, suffering from showroom closures and more limited retailer operating hours, but the recent resumption of economic activities has resulted in a rebound in both the Progressive Leasing and Aaron’s Business segments. Progressive’s retail partners have begun to reopen stores, and government stimulus has supported improved invoice volumes from April lows and lower write-offs. The company has indicated that Leasing revenues are expected to improve owing to lower write-offs, longer customer retention, and improved customer payments. 

Following the separation, Progressive, with approximately $2.2 billion of revenue in 2019, will be comprised of the company’s current Progressive business segment, as well as Vive Financial. As a standalone company, Progressive Leasing will be well-positioned for continued strong growth with existing and new retail partnerships. Steve Michaels, the company’s Chief Financial Officer and President of Strategic Operations, was appointed Chief Executive Officer of the Progressive Leasing business segment, effective July 31, 2020, succeeding Ryan Woodley.

Post-spin Aaron’s generated approximately $1.8 billion of revenue in 2019 and will be comprised of approximately 1,400 company-operated and franchised stores in 47 U.S. states and Canada, the e-commerce platform Aarons.com, and Woodhaven Furniture Industries (“Woodhaven”). An established leader in the lease-to-own industry, Aaron’s is expected to continue to consolidate and reposition its real estate footprint and expand its e-commerce business model. Effective July 31, 2020, Douglas Lindsay, President of the company’s Aaron’s Business segment, became Chief Executive Officer of Aaron’s Business, and Steve Olsen, Chief Operating Officer of Aaron’s Business, was appointed President of Aaron’s Business.

In terms of rationale for the spin, it would appear the entities’ vastly different growth rates and physical asset dependence would imply differing valuations post-spin. For Progressive, its asset-light lending model, exhibiting recent top-line growth approximating 20%, should warrant a higher earnings multiple than a primarily retail physical store model that is likely still in the process of rightsizing and optimizing its store locations. Given the current AAN trading multiple, and the ability of both post-spin companies to resume growth and maintain low loan loss levels, awarding a higher multiple to the faster-growth Progressive business appears likely to unlock value for shareholders. For the parent company, with shares trading roughly in line with the five-year average multiple, a modest contraction in multiple, albeit still above peer Rent-A-Center, should be more than offset by Progressive’s potential multiple expansion for pre-spin shareholders.

While the long-term investment case for AAN and Progressive business may be up for debate, the current economic environment appears favorable. Given the current COVID-19 crisis, the apparent increase in desirability for suburban home dwellings, vs urban apartments, may in fact result in increased preference/need for rent to own businesses such as AAN. As demand for suburban houses has grown, home prices have also increased. New suburbanites may have to stretch budgets to secure a home, which may constrain their appliance, furniture, and home décor budgets, which may skew the perceived favorability of a rent-to-own solution. Alternatively, a persistently high unemployment rate could also benefit both post-spin companies as constrained budgets may be able to afford the rent-to-own model for household necessities (i.e. replacing a broken refrigerator) versus traditional upfront payment options. The ability to drive increased sales per store/partner location, should support our case for a rerating of the Progressive business and support the post-spin AAN valuation.

On a pre-spin basis, shares of Aaron’s Inc. can be fairly valued at $72 per share, consisting of $62 per share of businesses to be contributed to Progressive Leasing, and $14 per share for the parent company and accounting for current net debt of approximately $5 per share. Given the implied upside to the current share price, we initiate coverage of Aaron’s Inc. as a BUY ahead of the planned spin-off of Progressive Leasing.

Domtar Corporation (NYSE: UFS), a forest & consumer products company, operates two distinct segments: (1) Pulp & Paper (77% of consolidated sales and 67.5% of adj. EBITDA in 2020E); and (2) Personal Care (23% of sales and 32.5% of adj. EBITDA in 2020E). For background, UFS was previously covered by The Hidden Opportunities Report from March 2017 until its achievement of our fair value estimate in January 2018 (a period in which the stock returned ~39.5% compared with 16% and 17% gains in the S&P 500 and Russell 2000, respectively). Notably, since January 2018 UFS’s share price has declined ~47.5% (compared with a 21% gain in the S&P and a ~4.0% decline in the Russell) albeit with the bulk of the decline occurring amid the COVID-19 pandemic in 2020. Within this context, in August 2020, UFS disclosed a review of potential strategic alternatives for its Personal Care (PC) division, which, as noted in our original report, has a markedly divergent product set and growth profile (as well as requires different manufacturing, technology and marketing strategies) when compared with the company’s core-Pulp & Paper (P&P) division. Moreover, we continue think the PC segment could garner a premium valuation from a range of strategic partners (while also attracting interest from private equity suitors) and that as a standalone the P&P segment, which is in the process of repurposing a portion of its production assets toward the attractive packaging sector, could itself become an takeover/go-private target.  As such, with shares trading at less than 5.0x 2022E EV/EBITDA and a discount to tangible book value we estimate the stock is undervalued, particularly relative to the potential value creation from the separation/monetization of its PC unit and the potential attractiveness of a standalone P&P business to strategic acquirers.  Considering management commentary, peer, and M&A valuations as well as discounted cash flows, value of $38 per share and $19 per share can be assigned to UFS’s Pulp & Paper and Personal Care businesses. Accounting for corporate costs and projected net debt of ~$20 per share yields a base case sum-of-the-parts value of roughly $37 per share (with bull/bear cases of ~$31-$42 per share).

On January 9, 2020, after the market close, SYNNEX Corporation (NYSE: SNX) announced a plan to separate its Concentrix business from its IT distribution business. The tax-free separation, which is expected be completed in 4Q 2020, is subject to the customary closing conditions. Following the separation, Dennis Polk, SYNNEX President and CEO, will continue to hold the positions, and Chris Caldwell, President of Concentrix, will become President and CEO of Concentrix. SYNNEX shareholders will receive one share of Concentrix common stock for each share of SYNNEX held. Management has stated that it expects to allocate debt equally between the two entities, although capitalization information has not been announced as of this writing.

SYNNEX Corp., with consolidated F2019 revenue of $23.7 billion, is one of the largest IT distribution and BPO (business process outsourcing) companies in the Americas and Japan. The company operates two business segments: Technology Solutions and Concentrix. The Technology Solutions segment, which serves resellers, system integrators, and retailers, provides IT-focused distribution, including peripherals, information technology systems, software, networking and security equipment, and consumer electronics. It also provides logistics, integration services, systems design, marketing services, and financing services. Following the separation, SYNNEX Technology Solutions will remain focused on IT distribution and is expected to generate annual revenue of approximately $19 billion.

The Concentrix segment, which generates annual revenue of approximately $4.7 billion (20% of consolidated revenue in F2019), is a top-two global customer experience (CX) solutions provider, offering a portfolio of end-to-end business outsourcing services focused on customer engagement, process optimization, technology innovation, front- and back-office automation, and business transformation services. The business currently supports over 125 of the global Fortune 200 clients in various industry verticals, including automotive, banking and financial services, consumer electronics, energy and public sector, healthcare, insurance, media and communications, retail and e-commerce, and technology, as well as travel, transportation, and tourism. Concentrix was acquired by SYNNEX in 2006. The business, which provided call center, database analysis, and print-on-demand services, has since been integrated into the company’s global services portfolio.

On a pre-spin basis, SYNNEX can be fairly valued at $143 per share. Post-spin, shares of SNX and Concentrix can be fairly valued at $71 and $73, respectively. With the pre-spin sum-of-the-parts estimate implying 8% upside to SNX’s current consolidated share price ($133 as of this writing), the transaction does not appear poised to unlock value. Thus, we initiate coverage with a NEUTRAL rating. Note that shares of SNX have increased approximately 4% year to date, versus a 3% increase in the S&P 500 over the same period.

For post-spin SNX, we expect the company to maintain its leadership position in IT services and distribution, while shifting its revenue mix toward more value-added services—which should improve margins over time. That said, in the near term, the business will remain pressured by reduced IT capital expenditures by companies as a result of the COVID-19 pandemic, and continued year-over-year revenue declines will make it difficult for the company to generate meaningful margin improvement.

Concentrix will be similarly impacted by the softness in IT related spending, but has a stronger growth profile than SNX longer term as the company benefits from the accelerating secular trend of outsourcing BPO software, a core addressable market quantified at $85 billion and projected to grow at a 3%-5% CAGR over the next five years. While similarly pressured by the impact of COVID-19 on the leisure and hospitality industries, Concentrix should continue to benefit from strength in the technology, e-commerce, banking, and healthcare sectors.

On September 4, 2019, Fortive Corp. (NYSE: FTV) announced that the company planned to separate its global industrial assets focused on transportation and mobility from its growth-oriented professional instrumentation assets, via a tax-free spin-off. On January 15, 2020, it was announced that the spin entity will be named Vontier Corporation. The separation, which will occur by means of a spin-off of 80.1% of the outstanding shares of Vontier common stock to Fortive stockholders, is expected to be completed in the fourth quarter of 2020, subject to standard conditions. Based on approximately 337,235,362 shares of Fortive common stock outstanding as of August 27, 2020, and assuming a distribution of 80.1% of Vontier’s common stock and applying a 5:2 distribution ratio, Vontier expects that a total of approximately 134,894,145 shares of Vontier common stock will be distributed to Fortive’s stockholders and approximately 33,513,027 shares of Vontier common stock will continue to be owned by Fortive (19.9%). Vontier is expected to pay a cash dividend to Fortive of approximately $1.6 billion. Following the completion of the transaction, James A. Lico and Charles E. McLaughlin will continue to serve as President/Chief Executive Officer and Senior Vice President/Chief Financial Officer, respectively, of post-spin Fortive.

As background, in February 2020, Fortive filed for an initial public offering (IPO) of Vontier , which at the time was estimated to yield $1 billion, but subsequently withdrew the offering in April 2020 due to uncertainty in the market stemming from the COVID-19 pandemic.

Vontier Corporation will be a global industrial company focused on transportation and mobility, with a portfolio of leading retail and commercial fueling, fleet management, and professional tools brands across its transportation technologies and franchise distribution product lines. The company will have leading positions in several end-markets, including retail fueling and mobility infrastructure, fleet management, and vehicle maintenance and repair. Vontier will be comprised initially of a portfolio of leading retail and commercial fueling, fleet management, and professional tools brands, including Gilbarco Veeder-Root, Matco Tools, and Teletrac Navman. In 2019, the business generated revenue and EBITDA of $2.8 billion and $651.5 million, respectively (21% EBITDA margin).

The parent company, which will keep the Fortive name, will be a professional instrumentation company with a differentiated portfolio of growth-oriented businesses that are aligned with long-term growth trends driven by the shift toward software-enabled workflows, connected devices, and Internet of Things (IoT) offerings, rising productivity, safety, and security requirements, and the demand for safe, high-quality healthcare. Fortive will be comprised of the businesses from the existing company’s Professional Instrumentation Segment, including the Field Solutions, Product Realization, and Sensing Technologies platforms, as well as the Advanced Sterilization Products business. In 2018, the business generated revenue and EBITDA of approximately $3.7 billion and $918 million, respectively (25% EBITDA margin). On a pro forma basis, the parent company generated 2019 revenue of $4.5 billion.

Fortive, with consolidated 2019 revenue of $7.3 billion and a market capitalization of $27.5 billion, is a diversified industrial conglomerate that provides professional & engineered products, software, and services in the areas of field instrumentation, transportation, sensing, product realization, automation, and franchise distribution. The company, which was originally spun off from Danaher Corp. (NYSE: DHR) in July 2016, is comprised of two reportable segments: Professional Instrumentation, which provides products, software, and services used to create actionable intelligence by measuring and monitoring a range of physical parameters in industrial applications, including electrical current, radio frequency signals, distance, pressure, temperature, turbidity, radiation, and hazardous gases; and Industrial Technologies, which provides critical technical equipment, components, software, and services for manufacturing, repair, and transportation markets worldwide. From a strategic perspective, the spin-off is consistent with the company’s strategy of increasingly shifting the business to the growth-oriented software and services segments. In March 2018, the company sold almost the entirety of its Automation & Specialty (A&S) business to Altra Industrial Motion Corp. (NASDAQ: AIMC) for $3 billion. Fortive management has previously indicated that it will have around $8 billion in deployable capital for growth-oriented mergers and acquisitions.

On a pre-spin basis, including the company’s 19.9% interest in Vontier, FTV can be fairly valued at $80 per share. Post-spin, shares of FTV and Vontier can be fairly valued at $74 and $66, respectively, based on a 5:2 distribution. With the pre-spin sum-of-the-parts estimate approximating FTV’s current consolidated share price ($77 as of this writing), pre-spin shares are not recommended for purchase. Thus, we initiate coverage with a NEUTRAL rating. FTV’s current premium multiple to diversified industrial peers suggests that management’s rationale for the spin-off may be principally strategic rather than reflecting the view that the conglomerate structure is a hindrance to valuation. The company has demonstrated short-cycle recovery leverage, while a recurring revenue stream helps insulate from cyclicality and provides visibility, and a growing software business offers optionality on earnings upside. That said, with the shares trading in line with premium diversified industrial peers, it appears that investors are discounting for improving trends. Note that shares of FTV have been essentially flat year to date, in line with the S&P 500 over the same period. We expect post-spin Fortive to continue its strategic focus on deleveraging and liquidity while making strategic acquisitions and investing in new products and expanded sales force. Order growth trends appear favorable, particularly in North America, positioning the company for a potential return to more normalized growth. For post-spin Vontier, we expect the company to similarly focus on strategic acquisitions while expanding its telematics offerings.

ECN Capital Corp. (TSX: ECN), a diversified provider of fee-based services to financial institutions, operates three primary segments: (1) Service Finance (46% of 2020E consolidated sales and ~50% of adj. EBITDA); (2) Triad Financial  (26.5% of sales and 27% of adj. EBITDA; and (3) Kessler Group (27.5% of 2020E sales and 23% of  adj. EBITDA).  ECN was “spun off” as a standalone public company during the October 2016 reorganization of Element Financial, now Element Fleet Management (TSX: EFN). Since its debut, through a series of acquisitions & divestitures, ECN has undergone an underappreciated, in our view, transformation from a primarily “on-balance-sheet” lending business to an asset-light, fee-based operating model. In that context, the shares, trading at less than 6.5x 2022E EPS, appear undervalued, particularly relative to the growth prospects of ECN’s core originations business (as well as the potential incremental contribution from a nascent, fee-based referral business that could significantly add to ECN’s earnings power over the next several years). In terms of potential transactional optionality, while we do not view Kessler Group as necessarily core to the portfolio and think ECN could ultimately be a longer-term takeover target, the most probable near-term development is likely a U.S.-based listing for ECN stock, in 2021.  Considering management commentary as well as peer/M&A valuations and reflecting a blended multiple of 9.5x 2022E EV/EBITDA (and 11x 2022E EPS), value of C$7 per share, C$3 per share, and C$2 per share can be assigned to ECN’s Service Finance, Triad, and Kessler Group businesses, respectively. Accounting for corporate costs and projected net debt of ~C$3.50 per share yields a sum-of-the-parts fair value of C$8.50 per share (with bull/bear cases of C$7 and C$10 per share). [Note: The preceding per share figures have been converted from USD at an exchange rate of 1.30x.] Risks include management execution, competition, currency/interest rate fluctuations, and access to capital as well as funding, credit, and liquidity shortfalls at its customers and counterparties, which could be associated with a prolonged domestic recession or financial crisis.

On November 7, 2019, before the market open, Nielsen Holdings plc (NYSE: NLSN) announced its intention to separate its Global Connect business via a spin-off from the company’s Global Media operations. The transaction, which is expected to be tax-free to shareholders, will be accomplished via a 100% distribution of shares in a new publicly traded company, which will contain the Nielsen Global Connect business, to NLSN shareholders. The spin-off, which is expected to be completed in 4Q 2020, is subject to customary closing conditions, including final Board approval, an effectiveness declaration of the company’s Form 10 filings with the SEC, and the receipt of an opinion on the tax-free nature of the transaction.

Nielsen, with a current consolidated market capitalization of $5.5 billion, is a leading global measurement and data analytics company. The company’s products allow customers to make business-critical decisions based on detailed customer analytics data. The company, known primarily for its legacy business of delivering television and radio ratings, has expanded its product offerings to include information on consumer buying trends for packaged goods companies, as well as other product offerings. Virtually every dollar spent on TV by advertisers in the U.S. (approximately $75 billion annually) is based on Nielsen ratings. The company essentially holds a monopoly position, as there is no other widely accepted ratings service for television in the U.S. today.

Nielsen historically reported results under two segments: (1) Buy (47.5% of consolidated sales and 25% of adjusted EBITDA in 2018), which provides consumer purchase measurement and analytics services; and (2) Watch (52.5% of consolidated sales and 75% of adjusted EBITDA in 2018), which provides media audience measurement and analytics services. In February 2019, the company realigned its business segments from Watch and Buy to Nielsen Global Media and Nielsen Global Connect. Global Connect (47% of revenue and 20.8% of EBITDA in 2019) primarily consists of the company’s core tracking and scan data (measurement data and consumer behavior information) provided to businesses in the consumer packaged goods industry. Global Media (52.7% of revenue and 79.2% of EBITDA in 2019) derives its revenue from television, radio, digital, and mobile audience measurement services.

Although Nielsen maintains a global leadership position with a notably stable business model characterized by approximately 70% recurring revenue, sustained customer relationships (average client relationship of 30 years’ duration), and relatively low capital intensity, the company’s revenue growth in recent years has been challenged by declining broadcast television audiences, the shift toward internet-based content, and the overall fragmentation of viewing audiences. Consolidated revenues were essentially flat in 2018 and 2019. The Media business continues to show modest top-line growth (+2% year-over-year in 2019); the Connect segment, in contrast, has felt the pressure of a weakening retail environment, having declined 3% in 2019

In July 2018, in part due to pressure from activist investor Elliott Management Corp. (which as of this writing owns a 4.6% stake in the company), Nielsen announced the departure of Mitch Barns as CEO after 21 years with the company. In addition, the company announced a “strategic review” of its under-performing Connect segment, which included a broad range of strategic alternatives, including continuing to operate as a public/independent company, a separation of either the Media or Connect segment, or a sale of the entire business. With the Connect segment in an apparent secular decline and carrying a 14% EBITDA margin in 2019 (well below the 43% margin generated by the Media business), the business was restraining Nielsen’s overall growth and profitability. Ultimately, Nielsen announced the tax-free spin-off of the Global Connect business on November 7, 2019, formally concluding the company’s strategic review. Elliott Management announced support for the transaction.

Based on an analysis of forward revenue and earnings growth, as well as dividend yield, NLSN is fairly valued at $18 per share on a pre-spin, sum-of-the-parts basis. Post-spin, NLSN and the Connect business can be fairly valued at $14 and $5, respectively (based on a 1:1 distribution). Note that as of this writing, the company has not provided detailed capitalization information. Thus, our post-spin fair value estimates are preliminary and subject to change as more information becomes available. With the fair value estimate representing 18% upside to NLSN’s current share price ($15 as of this writing), we rate the pre-spin shares at NEUTRAL. Following the spin-off of the underperforming unit, Nielsen should be better positioned to manage its more profitable, and growing, Media business.

For the post-spin Connect business, we expect fundamentals to remain challenging. While the business maintains a global leadership position with relatively low capital intensity, revenue growth will continue to be threatened by a challenging retail environment. Further, the SG&A spending required to acquire new customers will likely compress or prevent further margin expansion, particularly as top-line growth continues to decline. If the company can use this SG&A to expand into new markets, in addition to solidifying relationships with existing customers, there could be a solid runway for growth and margin expansion over time. However, there are risks associated with this strategy. Note that NLSN shares have declined approximately 24% year-to-date, versus a 7% gain for the S&P 500 over the same period. While the secular headwinds appear largely priced into the current valuation, which at 7.3x 2021E EBITDA represents a significant discount to information services peers, we see little in the way of a near-term catalyst for the shares.

On July 28, 2019, Pfizer Inc. (NYSE: PFE) announced that it would separate Upjohn, the company’s off-patent branded and generic established medicines business, and combine it with Mylan N.V. (NASDAQ: MYL). Under the terms of the agreement, which is structured as an all-stock, Reverse Morris Trust transaction, each Mylan share is to be converted into one share of the new company. Pfizer shareholders are to own 57% of the combined new company, and Mylan shareholders will own 43%. The Boards of Directors of both Mylan and Pfizer have unanimously approved the transaction. The combined Upjohn and Mylan businesses will adopt the corporate moniker, Viatris, and the entity is expected to trade under the symbol “VTRS” on the NASDAQ.

The transaction, which is expected to be tax free to Pfizer and its shareholders, but taxable to Mylan shareholders, was initially expected to close in mid-2020, subject to approval by Mylan shareholders and the customary closing conditions, including receipt of regulatory approvals. In March 2020, however, it was announced that the planned transaction would be delayed, and it is now expected to be completed in 4Q 2020. MYL’s shareholder meeting to approve the transaction was held on June 30, 2020, with shareholders approving the combination.

At, or prior to, the separation, Upjohn will issue $12 billion of debt, with gross debt proceeds retained by Pfizer. The new company, which will be renamed and rebranded by the close of the transaction, will have approximately $24.5 billion of total debt outstanding.

Mylan is primarily a generic drug company, which manufactures active pharmaceutical ingredients and runs a specialty business focused on respiratory, allergy, and psychiatric therapies. The combination with Upjohn will allow the new company to meaningfully expand the geographic reach of Mylan’s existing broad product portfolio and future pipeline into new growth markets where Upjohn has existing sales infrastructure and local market expertise. In addition, Upjohn brings to the combination several iconic brands, including Lipitor (atorvastatin calcium), Celebrex (celecoxib), and Viagra (sildenafil), along with proven commercialization capabilities, including leadership positions in China and other emerging markets. Mylan offers a diverse portfolio across key therapeutic areas, such as central nervous system and anesthesia, infectious diseases, and cardiovascular treatments. The generic drug industry has been negatively affected by declining prices resulting from increased regulation and competition. In addition, pharmacies and wholesalers have combined to create larger purchasing groups, creating more leverage against generic drug companies. As a result, generic drug companies such as Mylan have struggled, leading some companies to divest their generics units or consolidate. For example, Novartis sold parts of its Sandoz generics unit to Aurobindo Pharma in September 2018. Given this background, the new company should realize the benefits of scale and significantly expanded distribution.

For Pfizer, the decision to separate its off-patent drugs business is not surprising, given the company’s recent corporate activity around divesting its non-innovative pharmaceutical businesses and positioning itself for above-industry growth. Pfizer has focused on drugs that are expected to maintain patent protections for some time, both those it has internally developed and those added to its portfolio through acquisitions. In addition, the company has focused on divesting lower-margin businesses. Last year, Pfizer agreed to combine its consumer health care unit, whose products include Advil and Centrum multivitamins, with GlaxoSmithKline’s.

Based on several valuation exercises, including EV/EBITDA, free cash flow, and dividend yield, we establish fair value for Viatris at $23 per share. Given that the implied upside from the current share price exceeds 40%, it is our opinion that the market is not giving MYL credit for the many benefits it will receive from the merger with Upjohn, which include higher margins, a diversified product portfolio, improved geographic mix, and the institution of a dividend policy. Given the near doubling of earnings power, the current discounted trading multiple, and expected benefits, we rate the shares of Mylan at BUY ahead of the planned merger with Upjohn. While shares of MYL have underperformed over the last several years, we expect that the Upjohn merger will prove a catalyst for share price appreciation.

On a pre-spin basis, we value the shares of Pfizer at $43 per share, which includes $40 per share in value from post-spin Pfizer and $3 per share in value from VTRS shares to be received following the spin-off of Upjohn. Longer term, PFE shares may provide additional upside based on new drug introductions (potential COVID-19 vaccine upside) and a stable dividend yield. While for certain investors, the upside potential to our fair value may provide sufficient investment returns, especially when incorporating the current dividend yield, in the context of this spin/merge transaction, we favor the risk/reward profile of Mylan/Viatris, and thus we rate the shares of Pfizer at NEUTRAL.

On December 16, 2019, DuPont de Nemours Inc. (“DuPont”) (NYSE: DD) announced a definitive agreement to spin off its Nutrition & Biosciences (N&B) business, which will be acquired by International Flavors & Fragrances Inc. (“IFF”) (NYSE: IFF) in a Reverse Morris Trust (RMT) transaction. The transaction values the combined company at $45.4 billion on an enterprise value basis, reflecting a value of $26.2 billion for the N&B business based on IFF’s share price as of December 13, 2019. Under the terms of the agreement, DuPont shareholders will own 55.4% of the shares of the new company, and existing IFF shareholders will own 44.6%. Upon completion of the transaction, DuPont will receive a one-time $7.3 billion special cash payment, subject to certain adjustments. The spin-off of the N&B business, which is expected to be tax-free to shareholders, is expected to be completed in the first quarter of 2021.

The combination of IFF and N&B creates a global leader in high-value ingredients and solutions for the global food & beverage, home & personal care, and health & wellness markets, with estimated 2019 pro forma revenue of approximately $11 billion and EBITDA of $2.6 billion (EBITDA margin of approximately 23%), excluding synergies. The combined company will have leadership positions across key taste, texture, scent, nutrition, enzymes, cultures, soy proteins, and probiotics categories. IFF expects to realize cost synergies of approximately $300 million on a run-rate basis by the end of the third year following the closing. In addition, the combined company targets over $400 million in run-rate revenue synergies, which would result in more than $175 million of EBITDA, driven by cross-selling opportunities and a broader customer base.

For DuPont, the spin-off of the N&B business is another step in the company’s complex restructuring following the breakup of chemical giant DowDuPont. As background, the current DuPont Inc. is the result of the spin-off of Dow Inc. (NYSE: DOW), which took place in April of this year, followed by the spin-off of the agriculture business, Corteva Inc. (NYSE: CTVA), in June. The transaction underscores the consolidation of the food-flavoring industry, as growth appears to be slowing and flavor manufacturers struggle with volatile raw materials prices. DuPont is also said to be exploring further refinement of the business—specifically a potential divestiture of its Transportation business. Following the spin-off of the N&B business, DuPont will remain a global leader in technology-based materials. The post-spin company will be comprised of three business segments: (1) Electronics & Imaging , which supplies materials to manufacture photovoltaics and solar cells; materials and printing systems to the advanced printing industry; and materials and solutions for the fabrication of semiconductors and integrated circuits; (2) Transportation & Advanced Polymers, which manufactures engineering resins, adhesives, lubricants, and parts sold to engineers and designers in the transportation, electronics, healthcare, industrial, and consumer end-markets; and (3) Safety & Construction, which provides engineered products and integrated systems for the construction, worker safety, energy, oil & gas, transportation, medical device, and water purification and separation industries.

Post-merger IFF can be fairly valued at $150 per share. With the implied fair value estimate representing approximately 22% upside to the current consolidated share price, we rate the shares a BUY.  With the post-merger company’s market position strengthened by a presence in key growth markets (e.g. probiotics, protein solutions), coupled with the potential to extract further cost synergies, we see the potential for improved growth and profitability going forward. While COVID-19 remains a concern, it should be noted that approximately 85% of IFF’s portfolio serves end markets that remain in high demands with COVID-19, including food, beverage, hygiene and disinfection. IFF shares are flat year-to-date.

On a pre-spin basis, shares of DD are fairly valued at $65 per share. With he fair value estimate representing 12% upside to DD’s current share price ($58 as of this writing), we rate the pre-spin shares a NEUTRAL, owing to concerns over continued top line weakness and potential risk to forward estimates. Note that DD shares have declined approximately 10% year-to-date, versus a 4% gain for the S&P 500 over the same period. While the spin-off makes strategic sense, the divesture of this high-margin business will reduce the company’s profitability going forward. With the 2020 outlook for the North American and EMEA chemical sector calling for an average EBITDA decline of about 5% amid soft commodity prices and weak demand trends, we see little in the way of near-term catalysts for the shares. Additionally, ongoing litigation with Chemours Co. (NYSE: CC) over liabilities linked to PFAS remains an overhang for the shares. Post-spin, shares of DD can be valued at $36.

On November 11, 2019, before the market open, SunPower Corp. announced its intention to separate its solar panel business, Maxeon Solar Technologies, via a spin-off from the company’s storage and energy services operations. As part of the transaction, SunPower’s partner, Tianjin Zhonghuan Semiconductor Co. Ltd. (“TZS”), a manufacturer of silicon wafers, will make a $298 million investment in Maxeon Solar to help finance production capacity. The transaction, which is expected to be tax-free to shareholders, will be accomplished via a 100% distribution of shares in a new publicly traded company, to be named Maxeon Solar, to SPWR shareholders, followed by the TZS investment. After the completion of the transactions, TZS will own approximately 29% of the diluted ordinary shares of Maxeon Solar, with approximately 39% owned by majority owner Total S.A. (FP FP), and the remainder held by SunPower public shareholders.

The spin-off is expected to be completed on August 26, 2020, after the market close. SPWR shareholders of record as of the close of business on August 17, 2020, will receive one share of Maxeon Solar for every eight shares of SunPower owned. Following the separation, shares of Maxeon will trade on the NASDAQ under the symbol “MAXN”. “When-issued” trading in Maxeon shares is expected to begin on or about August 15, 2020.

At the time of the separation, the two companies will enter into a multi-year exclusive supply agreement covering sales within the U.S. and Canada of products manufactured by Maxeon Solar.  In conjunction with the spin-off announcement, the company formed Maxeon Solar in Singapore to hold businesses that will be controlled by post-spin Maxeon, included in SPWR’s non-U.S. manufacturing (France, Malaysia, Mexico, and the Philippines), international sales and distribution, and various JVs dealing with international sales and development businesses.

While green energy has been a focus of the energy sector in 2019 and 2020, especially in the context of the current political environment and  with increased sales and penetration throughout the world, the green energy industry has several defining characteristics that could prove difficult to overcome in terms of generating significant and consistent profit and free cash flow, while driving increased shareholder equity. Among the major concerns are the high capital costs of innovation, a reliance on subsidies to entice customers to purchase solar systems, and a steady decline in the average selling price of systems as technology advances (akin to Moore’s Law). Tariffs also play a role, as solar panel production outside of the U.S., particularly from China, is subject to tariffs of upward of 30%. SPWR has been exempted from those tariffs; however, future exposure is a possibility and is difficult to quantify.

On a pre-spin, sum-of-the-parts basis, shares of SunPower are fairly valued at $8 per share, consisting of $4 per share in value of Maxeon shares that will be distributed to SPWR shareholders, and $4 per share that is attributed to post-spin SPWR. On a post-spin basis, shares of SPWR are fairly valued at $4 per share, while Maxeon is fairly valued at $31 per share after accounting for the one-for-eight share distribution ratio and the post-spin sale of shares to TZS.

Given the downside from the current share price ($11.94 as of this writing) we rate shares of SPWR at SELL ahead of the spin transaction. While we acknowledge that the complexities of the solar industry, including company specific attributes, as well as a planned September post-spin SPWR investor day and a potential catalyst from the November election, may keep SPWRs trading multiple elevated in the near term, we think the risk reward scenario skews to the downside from the current share price as structural factors of SPWR’s industry may prevent the post-spin companies from achieving their financial targets.

Lydall, Inc. (NYSE: LDL), a diversified manufacturer of engineered products and materials, operates three segments: (1) Performance Materials (28.5% of 2019 consolidated sales and ~29% of adj. EBITDA); (2) Technical Nonwovens (~29.5% of sales and 36% of adj. EBITDA); and (3) Thermal Acoustical Solutions (42% of sales and 35% of adj. EBITDA). In our view, at less than 6x 2022E EV/EBITDA and a 10%-plus FCF yield, LDL is undervalued relative to the sum value of its parts, particularly considering the growth potential of its medical filtration and engineered materials businesses, which support, among other things, N95 mask production. In recent years, LDL has successfully executed on its top-line and end-market diversification goals but has lagged on its profitability target, which has contributed, in our view, to: (1) the stock’s substantial underperformance since the beginning of 2017; (2) a wholesale change in management, including the CEO and all three segment-level business heads; (3) the involvement of an activist investor, Juniper Investment Co., which currently owns a ~7% stake; and (4) the undertaking of a strategic review to evaluate its portfolio and end-markets with the goal of optimizing capital allocation and driving shareholder value. The conclusions of LDL’s review are expected in 2H 2020, but we think the outcome will likely involve an even greater focus on its filtration and engineered materials businesses, which could lead to the monetization of assets or other strategic alternatives that could potentially unlock value. Considering management commentary as well as peer and M&A valuations, value of $18 per share, $11 per share, and $7 per share can be assigned to LDL’s Performance Materials, Technical Nonwovens, and Thermal Acoustical Solutions businesses, respectively. Accounting for corporate costs and projected net debt of ~$18 per share yields a sum-of-the-parts fair value of $18 per share (with bull/bear cases of $22 and $14 per share, respectively).  Risks include execution, competition/commoditization, labor unrest, leverage, cost inflation, currency fluctuations, further end-market disruptions, particularly in auto, and/or a prolonged recession.