On December 26, 2012, Liberty Media Corporation (NASDAQ: LMCA, LMCB) announced that it will complete the spin-off of all assets excluding the Starz business after the market close on January 11, 2013, pending final Board approval. Following the transaction Liberty Media will change its name to Starz LLC and trade on the NASDAQ under the symbols ‘STRZA’ and ‘STRZB.’ The spin company will adopt the Liberty Media Corporation name and will continue to trade on the NASDAQ under the symbols ‘LMCA’ and ‘LMCB.’ Shareholders of record as of January 10 will be distributed one share of either STRZA or STRZB for each share of LMCA or LMCB, respectively.

As noted in the initial Liberty Media Corporation Spin-Off Report (October 24, 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 fair value for post-spin Liberty Media of $118 per share remains intact. The Starz LLC fair value has been revised to $21 per share (from $23) reflecting a lower valuation multiple, partly offset by a lower than previously projected net debt level (see attached exhibit). The EV/OIBDA multiple has been reduced based on higher risks associated with the Starz business model versus the peer group, particularly given the recent announcement that Starz will no longer broadcast Disney (NYSE: DIS) content beginning in 2016.

Please see the Liberty Media Corporation Spin-Off Report, dated October 24, 2012, for further details.

On June 17, 2013, Ashford Hospitality Trust Inc. (NYSE: AHT), a hotel-focused real estate investment trust (REIT), announced its Board had approved a plan to spin off 80% of its ownership in an eight property portfolio in the form of a taxable special dividend to shareholders. The spin company, to be named Ashford Hospitality Prime Inc., is expected to trade on the NYSE under the symbol ‘AHP.’ Ashford Trust will maintain 20% ownership. Ashford Prime includes the premier hotels in AHT’s portfolio, generating RevPAR (revenue per available room) of about $140 in 2012. The spin entity will also enter into option agreements with Ashford Hospitality to acquire two additional upscale properties. Ashford Prime will be externally advised by Ashford Hospitality Advisors LLC, which is a subsidiary of AHT. Following the separation, AHT’s portfolio will consist of 115 hotels with 2012 RevPAR of approximately $95. The spin-off is scheduled to be completed by late 3Q 2013, and still requires an effectiveness declaration by the SEC. The Form 10 was filed on June 17. In 2012, Ashford Prime’s portfolio of hotels generated revenue of $221 million, estimated hotel EBITDA of $73 million and had debt of $628 million with no maturities until 2017. Management expects that Ashford Prime will eventually operate with a leverage ratio below 5x; however, no time table was specified to achieve this target.
 
The transaction appears to be management’s attempt to unlock value, as premium hotel REITs (generating RevPAR in excess of $140) trade at significantly higher valuation multiples than the overall group (see attachment). Premium hotel REITs include Pebblebrook Hotel Trust (NYSE: PEB), Chesapeake Lodging Trust (NYSE: CHP), Strategic Hotels & Resorts Inc. (NYSE: BEE), and Lasalle Hotel Properties (NYSE: LHO). This group trades at an average EV to forward EBITDA of 14.8x, while AHT trades at 11.5x. The separation of Ashford Prime from the weaker RevPAR Ashford Hospitality hotels should result in a lower cost of capital, which would allow Ashford Prime to fund acquisitions that are not feasible under the current corporate structure.
 
Applying a 14.8x multiple to Ashford Prime’s estimated hotel EBITDA of $73 million, and accounting for debt of $628 million, would result in a market capitalization of $452 million (see attachment). AHT’s current market capitalization totals only $948 million. However, investors may exercise caution as initial leverage levels are well above management’s goal. Given management’s stated efforts to expand the portfolio, it may raise questions about future equity offerings. Additional overhangs on post-spin shares may result from concerns over the corporate structure, whereby the portfolio is externally managed by an AHT subsidiary. Non-premium hospitality REITs generating similar RevPAR to post-spin AHT currently trade at an average 12.2x forward EBITDA. AHT may initially trade at a lower multiple post spin given the separation of the upscale properties, despite the parent maintaining a 20% stake.

On March 6, 2013, Time Warner Inc. (NYSE: TWX) announced plans to spin off its publishing subsidiary, Time Inc., into a separately-traded independent company, leaving behind the company’s television networks and film-related businesses. The spin-off entity publishes 21 magazines in the US, including People, Sports Illustrated, InStyle, and Time, and over 70 magazines internationally. The tax-free distribution of shares to TWX shareholders is subject to an effective declaration of the company’s Form 10 filing by the SEC, receipt of a private letter ruling from the IRS, and final approval by the Board. The transaction is expected to be completed by the end of 2013. Following the separation, Time Inc. CEO Laura Lang will step down from her position. A search for her successor has begun. The announcement follows a February, 2013, Reuters report that TWX was in talks to sell most of its magazine division to Meredith Corp. (NYSE: MDP). TWX was highlighted in the March edition of The Spin-Off Report Radar Screen. According to various media reports, talks broke down in part over concerns about a potential culture clash between the two units. MDP is based in Iowa, Time Warner in New York City.

The spin-off will allow TWX to focus on the more profitable film and television businesses, while separating the lagging, low-margin publishing segment. The remaining businesses will include television programmer Turner Broadcasting System Inc., which operates networks such as TNT, TBS, CNN among others, and Home Box Office Inc., as well as filmed entertainment through Warner Brothers Entertainment. Time Inc.’s revenue declined 6.5% in 2012 while operating income decreased 25%. The segment generates only 11.6% of total TWX revenue and 6.6% of operating income.

The trends in Time Inc.’s business are not surprising given the secular decline in the publishing industry, which has seen dramatic decreases in subscriber counts and advertising rates. It could be argued that the publishing business may have been a drag on the company’s valuation as television and film peers trade at a higher multiple than the publishing group. As such, the separation could be seen as a way for TWX to lower its cost of capital. While the film and television segments generated no revenue growth in 2012, operating income expanded by 4.7%.

A basket of media companies involved in magazine and newspaper publishing, including MDP, Scholastic Corp. (NASDAQ: SCHL), The Washington Post Company (NYSE: WPO) and Gannett Co. Inc. (NYSE: GCI), currently trades at 5.5x trailing EBITDA. In 2012, TWX’s publishing segment generated about $511 million in EBITDA. If that peer group multiple were to be applied, and it were to be assumed that no debt is placed on the spin company, TWX’s publishing segment could be valued at $2.8 billion, or $3.01 per share. However, that peer group multiple may in fact prove high, as TWX’s magazine publishing segment provides far less diversification than is included in the larger structure of those peers. Post separation, the remaining film and television business could be compared to the likes of Scripps Networks Inc. (NYSE: SNI) AMC Networks Inc. (NASDAQ: AMCX), and Viacom Inc. (NASDAQ: VIA), which currently trade at an average of 10.7x 2012 EBITDA.

Applying that multiple to TWX’s remaining operations would result in an enterprise value of $69.5 billion. However, TWX’s business may be most comparable to VIA, which includes filmed entertainment as well as television network programming. If Viacom’s multiple is solely applied, an enterprise value of $60.4 billion is derived. Using an average of the two valuations, and the same assumption that no debt is placed with the spin company, a fair value estimate of $51 would be derived. The assumption of placing no debt with the spin company is likely to change as the capital structure is finalized. It can be noted that a combined market capitalization would increase with if more debt is placed with the spin company as the parent receives a higher multiple.

Investors will recall this is not TWX’s first experience with a spin-off transaction. In 2009, the company separated AOL Inc. (NYSE: AOL) via a spin-off. In the two years following that transaction shares of AOL decreased 37%, shares of TWX increased 2.3%. The S&P 500 increased 6.2% over the same time period. TWX also spun off its cable operations Time Warner Cable Inc. (NYSE: TWC), in a two-stage transaction. TWX distributed its remaining 84% stake in the cable operator to TWX shareholders in March 2009, although TWC had already been trading since February 2007 as a result of a transaction to acquire Adelphia Cable in exchange for 16% of TWC. In the two year from the final separation, TWC shares were up almost 200%, TWX rose almost 120%, while the S&P was up less than 70%.

CST Brands Inc. (NYSE: CST) began trading on a ‘when-issued’ basis on April 17, 2013. The distribution of 80% of shares by Valero Energy (NYSE: VLO) to shareholders is scheduled for May 1 with regular way trading commencing the following day. VLO reported 1Q 2013 EPS this morning. The retail segment, which comprises the CST spin-off, posted EBITDA growth of about 7% year over year to $72 million as stronger US fuel spreads more than offset weaker Canadian fuel volume. CST has recently traded around $30 per share in the when-issued market, which appears to take into account 5-7% EBITDA growth, while applying a peer group EV/EBITDA multiple (see attached exhibit). However, as noted in the initial Valero Energy Spin-Off Report (January 17, 2013), longer-term investors may consider CST’s ability to improve merchandise gross margins after separation from VLO, which could raise the valuation by about $5 per share.

One may contend that cash flow generated from the retail business was previously funneled into the capital intensive refining operations. CST has generated about $260 million in annual free cash flow (cash flow from operations minus maintenance cap-ex) over the past three years (see page 27 of the initial report). Following the spin-off, CST may be able to utilize more cash inside the stores, increasing prepared food offerings to raise US gross merchandise margins to the peer group average 34% (compared to 29% for CST in recent years, see page 10 of the initial report). In CST’s road show presentation, management highlighted increased prepared food offerings in new stores and internal store redesigns.

Based on a 34% margin, CST would add about $53 million annually to gross profit. Even assuming certain additional marketing and administrative costs, increasing EBITDA or free cash flow by $45 million would seem attainable. Applying the peer group EV/EBITDA multiple of 8.7x, and a 7% free cash flow yield, the valuation would rise $5 per share (see attached exhibit). Based on about a $35 per share fair value, assuming US merchandise gross margin improvement, the stock is recommended for purchase.

On May 3, 2013, Covidien plc (NYSE: COV) announced that shares of spin-off entity Mallinckrodt plc are expected to be distributed after the market close on June 28, 2013, with regular-way trading likely to commence on the NYSE under the symbol ‘MNK’ on July 1. The share distribution ratio, and record date have yet to be finalized. Management also offered operating guidance for both entities following the spin-off. The transaction still requires an effectiveness declaration by the SEC.
 
As noted in the initial Covidien Spin-Off Report (March 6, 2013), the fair value calculations would be adjusted based on the finalized distribution ratio, capital structure, dividend policy and changes in company/industry fundamentals. Mallinckrodt will have a net debt position of $753 million, below the prior estimate of $1.4 billion, which was based on comparable leverage ratios of peers. In addition the fair value now reflects guidance, which included revenue growth of 7% – 11% and EBITDA margin of 17% – 21%.
 
The fair value estimate for Mallinckrodt has been revised to $6.51 per share (from $6.71) by applying a peer group multiple of 9x to projected F2013 EBITDA of about $425 million. The prior estimate incorporated revenue growth of 4.9% and EBITDA margin of 21.1%. Longer-term investors may see upside to approximately $9.52 per share based on historic takeout multiples. Over the past eight years, on average, companies in the generic pharmaceutical industry were acquired at 12.0x trailing EBITDA and 2.75x trailing revenue, according to Bloomberg. It should be noted that there may be tax implications preventing a takeout of the spin company within two years of the transaction. The revised calculations are shown in the exhibit below.
 
The fair value estimate for COV has been revised to $57.45 per share (from $56.98) to reflect updated capital structure assumptions and management guidance, which includes revenue growth of 4%-5%, operating margin of 22%-22.5%, and an effective tax rate of 17%-17.5%.
 
Previously, the tax rate for New Covidien was unknown, largely due to uncertainties in the distribution of NOLs. As such, the prior fair value estimate was derived in part using EBITDA to avoid an incorrect tax rate assumption. Given management’s guidance surrounding corporate tax rate, New Covidien’s valuation is now reached by applying a peer group multiple to projected EPS and normalized free cash flow. The revised calculations are shown in the attached exhibit.
 
COV is not recommended for purchase prior to the spin-off transaction given limited upside to the $64 per share sum-of-the-parts valuation. Please see the Covidien plc Spin-Off Report, dated March 6, 2013, for further details.

On May 24, 2013, Covidien plc (NYSE: COV) announced that the company’s Board had given final approval for the distribution of shares after the close on June 28, 2013, of spin-off entity Mallinckrodt plc. Regular-way trading will commence on the NYSE under the symbol ‘MNK’ on July 1, 2013. Holders of COV, as of the close on June 19, 2013, will receive one share of MNK for every eight shares of COV. ‘When-issued’ trading is likely to begin around June 17, 2013. Covidien has already received a private-letter ruling from the IRS affirming the tax-free status of the distribution. The transaction still requires an effectiveness declaration by the SEC.
 
The spin company will be a leading manufacturer of generic drugs in the US, including acetaminophen. The pharmaceuticals business accounts for about $2 billion of COV’s $11.6 billion in annual sales. The parent (‘New Covidien’), a diversified medical products and supplies company, was spun off from Tyco International (NYSE: TYC) in 2007 and is based in Dublin, Ireland. The company sells a wide variety of vascular, respiratory, operating room monitoring, and nursing care products. About 80% of the parent’s revenue (post-separation) is generated from medical device sales.
 
As noted in the initial Covidien Spin-Off Report (March 6, 2013) and FLASH (May 3, 2013), the fair value calculations would be adjusted based on the finalized distribution ratio, capital structure, dividend policy and changes in company/industry fundamentals. The fair value of $57.45 per share for post-spin COV remains intact.
 
The fair value estimate for Mallinckrodt has been revised to $57.16 per share (from $6.51) to reflect the 1:8 distribution ratio and an increase in the peer group multiple. The fair value is derived by applying a peer group multiple of 9.7x (previously 9.0x) to projected F2013 EBITDA of about $425 million (see attachment).
 
Longer-term investors may see upside to approximately $76 per share based on historic takeout multiples. Over the past eight years, on average, companies in the generic pharmaceutical industry were acquired at 12.0x trailing EBITDA and 2.75x trailing revenue, according to Bloomberg.
 
The fair value for MNK utilizes the pro forma net debt as of December 31, 2012. The valuation could be adjusted based on revised Form 10s, which may show a change in the net debt position as of March 30.
 
Please see the Covidien plc Spin-Off Report, dated March 6, 2013, and FLASH, dated May 6, 2013, for further details.

On May 29, 2013, Sallie Mae (NASDAQ: SLM) announced its Board had approved a plan to spin off its education loan management business through a 100% tax free distribution to shareholders. The company also announced that COO John Remondi will replace Albert Lord as CEO effective immediately. Remondi is expected to lead the loan management business following the completion of the spin-off. The transaction requires final Board approval, a private letter ruling from the IRS, and an effectiveness declaration by the SEC. The transaction is expected to be completed within 12 months. Management is targeting a 1Q 2014 separation date. Following the transaction, Sallie Mae will retain its consumer banking operation, which originates and services private education loans, as well as offers student insurance and college savings programs. Executive Vice President Joseph DePaulo will become CEO of this business.
 
The education loan management portfolio, currently referred to as NewCo, will include about $118 billion in Federal Family Education Loan Program (FFELP) loans, $32 billion in private education loans, and $8 billion of other interest-earning assets, as well as the federal loan servicing platform. About 95% of current SLM assets and 100% of senior indebtedness will be included in this business. FFELP was eliminated in 2010 through the passage of the Health Care and Education Reconciliation Act. The government replaced private lenders in extending federally backed loans to students. As a result most of this portfolio is in run-off mode and may be hiding the greater growth prospects in the consumer bank. Since 2010, SLM has focused on private loans to students, holding about 47% share of this growing market. SLM private loan originations expanded from $2.3 billion in 2010 to $3.3 billion in 2012.
 
The consumer banking business will include nearly $10 billion in private education loans, deposits of $7.8 billion, as well as the private loan origination and servicing platforms. The consumer banking business will have an approximate book value of $1.6 billion with a targeted ROE of 16% – 20%. Assuming a 16% to 20% ROE on $1.6 billion in capital, annual net income would total $256 to $320 million. Other consumer banks with mid teen ROEs, including KeyCorp (NYSE:KEY), Eagle Bancorp Inc. (NASDAQ: EGBN), BankUnited Inc. (NYSE: BKU), and German American Bancorp (NASDAQ: GABC), trade in a range of 12x to 14x projected 2013 EPS. Applying that multiple range to projected net income yields a market value of $3.1 to $4.5 billion (see attached exhibit).
 
The education loan management business is expected to have total capital of $3.5 billion. Since 2010, SLM has traded between 1.8x and 2.0x book value. Applying this multiple range to the far larger entity, results in a market value of about $6.3 to $7 billion. This valuation assumes investors largely ignored growth prospects and higher returns generated from the consumer bank.
 
Continued growth in consumer banking originations would likely result in the higher-end of the multiple range and upside to the current stock price. Legislative changes to the federally-backed student loan program offer potential downside risk to NewCo. A sum-of-the-parts valuation provides a range of $9.4 to $11.5 billion.

On December 14, 2012, PPG Industries Inc. (NYSE: PPG) announced a deal to acquire AkzoNobel NV’s (AKZA:NA) North American architectural coatings business for $875 million cash and the assumption of $175 million in underfunded Canadian pensions, or about 0.7x annual sales of $1.5 billion. This follows plans to separate PPG’s commodity chemicals business and merge with Georgia Gulf Corp. (NYSE: GGC) in a Reverse Morris Trust transaction, which is likely to be conducted as a split-off in early 2013. The fair value estimate of PPG is unchanged at $126 per share (see PPG Industries Spin-Off Report, dated October 17, 2012, for initial calculations). The fair value estimates for GGC of $41 per share immediately following the transaction and $67 per share longer-term are also unchanged.

The acquisition includes 600 home paint stores throughout North America, as well as leading brands, such as Glidden home paints and Liquid Nails adhesive products. About 60% of AkzoNobel’s North American sales are in the United States, 30% in Canada and the remainder primarily in the Caribbean. The PPG fair value derivation is shown in the attached exhibits. The fair value estimate incorporates the likelihood of a split-off transaction related to the separation of the commodity chemicals business, EBITDA and normalized SCF growing $80 million based on the acquisition, and higher net debt due to the deal.

On December 14, 2012, Elan Corporation plc (NYSE: ELN, DUBLIN: ELN) announced that shares of spin-off entity Prothena Corporation plc will be distributed after the market close on December 20, 2012, with regular way trading commencing on the NASDAQ the following day. Elan shareholders of record at the close of business on December 14, 2012, will receive one share of ‘PRTA’ for every 41 shares of ELN. PRTA is expected to begin ‘when-issued’ trading on December 18, 2012.

As noted in the initial Elan Corporation plc Spin-Off Report (December 12, 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 fair value estimate for post-spin ELN of $10 per share remains intact. The fair value estimate for PRTA has been revised to $4.61 per share (from $5.64) to reflect a higher than previously estimated share count. The PRTA fair value estimate is derived through an average of the projected year-end 2013 cash balance and a multiple of initial book value. The revised calculations are shown in the attached exhibit.

Please see the Elan Corporation plc Spin-Off Report, dated December 12, 2012, for further details.

In an SEC filing on October 10, 2012, Comverse Technology Inc. (NASDAQ: CMVT) disclosed that shareholders had approved the spin-off of Comverse Inc. (NASDAQ: CNSI). Shares will be distributed on a 1:10 basis to holders of record as of October 22, 2012. A when-issued market is likely to commence around the record date. Shares will be distributed on October 31, 2012, after the market close with regular-way trading expected to commence on November 1, 2012. The transaction still requires an effectiveness declaration by the SEC, final Board approval and acceptance of the ticker symbol by the NASDAQ. CMVT will retain the holdings in Verint Systems Inc. (NASDAQ: VRNT), a provider of a suite of enterprise workforce optimization applications, which capture, distill, and analyze underused information sources such as voice and video. Those shares will be merged with VRNT in a transaction expected around January 2013. CMVT will also have about $30 million in cash to continue operations as a holding company until the merger closes. It will also hold $25 million in escrow to be paid to CNSI at the time of the merger.

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 $779 million, based on the current VRNT stock price, or about $3.56 per CMVT share. When subtracting that value, plus the approximately $299 million in cash expected to be held by CNSI after the closure of the merger, CNSI has an adjusted enterprise value of only about $302 million. The stub is valued at $1.38 per share or 0.48x F2013E sales (see attached exhibit). Notably this calculation excludes the value of NOLs, which totaled about $1.5 billion as of January 2012.

The EV/sales ratio is well below the historic trailing 12 month EV/sales ratio for CMVT dating back to 2001, excluding the period of delisting from NASDAQ. Since mid 2010, the stock has traded about 1.1x trailing sales. It is also well below the current peer group EV/sales of about 1.0x (see attached exhibit). Potential growth products for CNSI in coming years include converged billing software and visual voicemail, which could benefit from growth in smart-phone usage and telecom service bundling.

One may reasonably choose to place a discount on CNSI given its lack of history as a standalone company, and ability to return to profitability. Applying a 0.8x to the 2013E sales of $630 million and adding back the $299 million cash results in a fair value of $36.67 per share for CNSI following the spin (based on a 1:10 distribution). One could also argue that VRNT has upside given the merger of the CMVT stake will increase liquidity, the float, and raise the potential that it could be added to ETFs, while also removing the overhang of CMVT control. VRNT’s closest rival NICE Systems Ltd. (NASDAQ: NICE) trades at about 14x consensus current year projected EPS ,compared to an 11x multiple for VRNT. If one considers the higher multiple for VRNT and averages it with the current price, the value of CMVT’s VRNT holdings rises to $4.08 per share. As a result, the sum-of-the-parts valuation for CMVT ahead of the transaction is $7.74 per share (see attached exhibit). If one prefers to consider CMVT based only on the current VRNT share price, the fair value is $7.22.For more background on this transaction, please see the Comverse Technology Spin-Off Report (July 26, 2012).