Shares of The ADT Corporation are scheduled to be distributed to holders of Tyco International (NYSE: TYC) on September 28, 2012, with regular-way-trading commencing on Monday, October 1. The stock is expected to trade under the ticker ‘ADT’ on the NYSE. Shareholders of record as of September 17 will receive one share of ADT for every two shares of TYC. The when-issued market for ADT shares is expected to begin around the record date. The transaction still requires an effectiveness declaration from the SEC. Tyco is also spinning off its Flow Control segment and merging it with Pentair Inc. (NYSE: PNR) in a Reverse Morris Trust transaction.

As noted in our initial Tyco International Spin-Off Report (June 8, 2012), the fair value calculations would be adjusted based on the finalized distribution ratio, capital structure, dividend policy and changes in company/industry fundamentals. No change is made to the $27 per share fair value estimate for the post-spin parent. The Flow Control segment valuation is also unchanged at $10.50 per share based on TYC shareholders’ 52.5% ownership of New Pentair post merger (see the initial Tyco International report for calculations and methodology). The fair value estimate for ADT is raised to $19.50 per share (from $17 per share), or $39 per share, when taking into account the 1:2 distribution, based on stronger cash flow generation following the 2010 Broadview Security Inc. acquisition.

Previously the fair value estimate was based in part on a three-year average free cash flow (2009-11) for the segment of $350 million. Given that ADT is on pace to top $400 million in FCF for the second consecutive year (ending September 30), one might consider applying a multiple to the $400 million in cash flow, which appears sustainable, at least in the near term. In addition, The Spin-Off Report previously applied the multiple paid for the Broadview acquisition in terms of annual sales and customers. Given higher prices and better margins post purchase, the price paid per customer no longer appears valid and is excluded from the methodology. The changes to the valuation are shown in the attached table. As a result, the pre-spin Tyco International sum-of-the-parts fair value estimate is raised to $57 per share (from $54.50). Further revisions could be made following the Tyco International analyst day scheduled for September 18.

On August 30, 2012, SAIC Inc. (NYSE: SAI) announced plans to spin off its government technical services businesses, including enterprise IT operations, from its solutions-focused business via a tax-free distribution to SAI shareholders. The transaction is subject to final approval by the Board of Directors, favorable ruling from the IRS, likely Pentagon review, and effectiveness declaration from the SEC. The separation is expected to be completed in 2H F2014 (ending January 31). Management indicated the primary reason for the separation is to remove organizational conflict of interests (OCI) rules that prevent each entity from pursuing certain projects, particularly related to US Department of Defense (DOD) contracts.

Management estimates that technical services F2013 (ending January 31) revenue will approximate $4 billion, which is likely comprised largely of non-product sales in the current Defense Solutions segment. The solutions-focused business will be comprised largely of SAIC’s current Health, Energy and Civil Solutions, as well as the Intelligence and Cybersecurity segments. About 20% of revenue is generated from commercial enterprises. SAIC could potentially grow the health, engineering and energy businesses organically at a faster rate, in addition to having more M&A opportunities available. Management estimates that F2013 revenue for the solutions-focused business will approximate $7 billion.

The company expects the present dividend will be continued and remain essentially unchanged when divided between the two enterprises. The final capital structure and management team for each entity has not been determined. The technical services enterprise is likely to generate ample cash flow to fund future endeavors. The solutions business will be more likely to tap credit markets to fuel better growth opportunities, particularly in the commercial sector. One might expect the solutions business will receive a higher multiple due to slightly reduced risks related to sequestration and potential margin pressure for government and DOD projects re-competes.

AbbVie Inc. to Begin ‘Regular Way’ Trading on January 2, 2013 On November 28, 2012, Abbott Laboratories (NYSE: ABT) announced that the Board approved the spin-off of the research-based pharmaceutical business AbbVie Inc. Shares of AbbVie will be distributed after the bell on January 1, 2013, to ABT shareholders of record as of December 12, 2012. Shares of AbbVie will commence regular-way trading on January 2, 2013, on the NYSE under the symbol ‘ABBV’. ABT shareholders will receive one share of ABBV for every share of ABT owned. The ‘when-issued’ market for ABBV shares is likely to commence around the record date. The transaction still requires an effective declaration of ABT’s Form 10 by the SEC. ABT has already received a private letter ruling from the IRS declaring the transaction tax-free for US shareholders of ABT.

As noted in our initial Abbott Laboratories Spin-Off Report (September 20, 2012), the fair value calculations would be adjusted based on the final distribution ratio, capital structure, dividend policy and changes in company/industry fundamentals. No change is made to the $27 per share fair value estimate for the post-spin parent (see the initial Abbott Laboratories report for calculations and methodology).

The fair value estimate for AbbVie is raised to $39 per share from $37 per share. The increase is based on management’s expectations to pay an annual dividend of $1.60 per share, above the prior estimate of $1.43. The fair value estimate is derived by utilizing a peer group P/E multiple to projected 2013 EPS and a revised dividend payout assumption, as shown in attachment.

Please see the Abbott Laboratories Inc. Spin-Off Report, dated September 20, 2012, for further details.

On June 8, 2012, Alexander & Baldwin Holdings Inc. (NYSE: ALEX) announced that the company’s board of directors approved the separation of its transportation and real estate businesses. The transportation business, Matson Inc., will trade under the ticker symbol ‘MATX’ on the NYSE. The real estate business will maintain the ‘ALEX’ ticker symbol. The record date for the transaction is June 18, 2012. The separation will be completed through a tax-free distribution of shares of New A&B on June 29, 2012, after the market close. Alexander & Baldwin received a positive private letter ruling from the IRS regarding the tax-free status of the transaction on June 6. Shareholders of Alexander & Baldwin will receive one share of New A&B for every share of ALEX. The holding company will then change its name to Matson. The ‘when issued’ market for both stocks is expected to begin on or about June 14, 2012. New A&B will include the real estate holdings and agricultural operations. Matson will keep the ocean transportation and logistics businesses. The transaction still requires SEC approval of the filings. Both companies have adopted shareholder rights’ plans pending the separation.

As noted in our initial Alexander & Baldwin Spin-Off Report (May 8, 2012), the fair value calculation would be adjusted based on the finalized distribution ratio, capital structure, dividend policy and changes in company/industry fundamentals. No change is made to the $19 per share fair value estimate for MATX, which is based on fleet replacement value and normalized free cash flow.

Shares of ALEX may see initial pressure as the complexity of the agricultural and real estate holdings presents investors with a challenge in deriving a valuation. An enterprise value of $144 million for the agricultural business would be derived when applying an average EV/EBITDA multiple for a basket of comparable stocks to the annual agricultural segment EBITDA during the past 10 years, excluding losses due to drought. If a 7x multiple, which is roughly in line with other food producers, including Fresh Del Monte Produce Inc. (NYSE: FDP) and Chiquita Brands International (NYSE: CQB), is applied to annual EBITDA of $21 million, an enterprise value of $145 million is reached. However, the agricultural land is likely an underutilized asset that is worth more on a cost per acre basis than the current EBITDA generation suggests. If $11,300 per acre is assigned to the agricultural acreage, based on previous sales of agricultural land by ALEX over the last five years, an enterprise value for the agricultural business of almost $653 million is derived.

If one considered the agricultural land based on EBITDA and added the segment value to the previously obtained values for the other A&B segments, a sum-of-the-parts fair value of $26 per share would be obtained. However, a fair value estimate of $38 is derived when valuing the agricultural land holdings on a per acre basis (see attachment).

One may see an opportunity for mispricing in The Spin-Off Report’s view, if the stock trades toward the former methodology as opposed to the latter. Please see the Alexander & Baldwin Spin-Off Report, dated May 8, 2012, for further details.

Ingersoll-Rand to Spin Off Security Business On December 10, 2012, Ingersoll-Rand plc (NYSE: IR) announced its intention to spin off its commercial and residential security business into a stand-alone public company. The new entity, which will have annual revenue of about $2 billion, will be comprised of the Security Technology segment, as well as a portion of the Residential Solutions segment. The company will sell electronic and mechanical security products, including brands such as Interflex, Kryptonite and Falcon. In addition, IR announced it will increase its overall debt and leverage ratio to fund a new $2 billion share repurchase program and a 31% increase to the quarterly dividend. The spin-off is still subject to regulatory approvals including the effective declaration of the company’s Form 10 filing and the receipt of a ruling from the IRS regarding the tax-free status of the transaction. The transaction is expected to be completed within the next 12 months.

Activist investor Nelson Peltz has been advocating for corporate restructuring of IR for several months. In August 2012, Peltz presented several strategic alternatives, including a call for the company to split into three separate companies. IR has been highlighted on The Spin-Off Report Radar Screen since September 2012. The majority of the new company’s revenue will be derived from the Security Technologies segment, which has margins significantly above the remainder of the company. In 2011 Security Technologies generated an operating margin of 20.3% versus a consolidated 5.8% for the whole company. Over the past ten years, IR has driven revenue growth mainly through its Climate Solutions business, which may have obscured the higher margin Security Technologies business. Revenue from the Security segment has been essentially flat since 2004. The new company could be compared to Assa Abloy AB (Stockholm: ASSAB) or Tyco International Ltd. (NYSE: TYC).

On average, these two security focused companies trade at 1.8x EV/sales and 10.5x EV/forward EBITDA. Both of these companies have projected EBITDA margins below that of IR’s security technologies division. Assa trades at a higher multiple, at least in part due to higher margins. (Tyco is comprised of the commercial fire and security businesses following a three-way spin-off earlier this year.) Applying a 1.8x multiple to the new security company would result in an enterprise value of $3.6 billion for the proposed spin-off entity.

The remaining businesses will generate annual revenue of $12 billion on a pro forma basis and could be compared to a group of large global industrial conglomerates, which trade at approximately 8.5x forward EBITDA, slightly below where IR currently trades.

On August 1, 2012, United Online Inc. (NASDAQ: UNTD) announced plans to separate its FTD business from its Content & Media and Communications operations via a tax-free distribution to UNTD shareholders. The transaction is subject to final approval by the Board of Directors, favorable ruling from the IRS and effectiveness declaration from the SEC. The separation is expected to be completed within the next twelve months with a tentative target date of first quarter 2013. The remaining businesses are under strategic review, which may include the eventual spinning off of the Content & Media segment.

The spin-off entity will comprise UNTD’s FTD business, an Internet and telephone marketer of flowers and specialty gifts. FTD utilizes a clearinghouse network of independent FTD florists that provide delivery services. FTD was acquired by United Online in August 2008 for $441 million. FTD was the only UNTD business segment to report sales and OIBDA growth in 1H 2012. FTD’s closest direct competitor 1-800-Flowers.com (NASDAQ: FLWS) currently trades at 6.2x trailing EBITDA. If one were to apply that multiple to FTD’s 2011 EBITDA of $79 million, an enterprise value of $488 million could be derived, which approximates UNTD’s current enterprise value. It should be noted that FTD will have increased costs as a standalone public company not included in 2011 results.

The parent company will retain the Content & Media and Communications businesses. The Content and Media segment provides online social networks focused on reconnecting with people from your past. Sites include Memory Lane, Classmates and StayFriends. The Communications segment primarily provides dial-up internet service under the NetZero and Juno brands. The company has also recently entered into the mobile broadband arena. If FTD were to be valued as above, investors would essentially receive the remaining businesses for free. However one might question the long-term viability of dial-up internet and the company’s nostalgia based websites as profitable growth businesses.

On October 16, 2012, Murphy Oil Corporation (NYSE: MUR) announced its Board had approved a plan to separate its downstream operations, Murphy USA, from its exploration and production (E&P) business by distributing shares off the new entity via a tax free spin-off to MUR shareholders. The transaction will be subject to an affirmative ruling from the IRS and effective declaration by the SEC. The spin-off is expected to be completed in 2013. The company also announced plans for a $2.50 per share special dividend and a $1 billion share buyback program. The potential transaction has been highlighted on The Spin-Off Report Radar Screen since March 2012.

Murphy USA’s operations consist of a chain of over 1,100 retail gasoline outlets, as well as seven product distribution terminals and two ethanol production facilities located in North Dakota and Texas. The parent will become a pure play independent E&P company with principle operations focused in the United States (primarily the Eagle Ford Shale in South Texas), Canada and Malaysia. The United Kingdom retail operations will also remain with the parent, although Murphy continues to evaluate strategic options for these assets.

The separation follows in the footsteps of other integrated oil breakup announcements in the past year and a half, including those of Marathon Oil (NYSE: MRO) and ConocoPhillips (NYSE: COP). MUR is essentially the last remaining integrated oil company that continues to own and operate a substantial chain of retail gas stations, as ExxonMobil (NYSE: XOM), BP (NYSE: BP), and others sold their stations over the previous decade to focus on higher returns from exploration and production. Most of MUR’s retail stations in the US are located in Wal-Mart Stores Inc. (NYSE: WMT) parking lots. As a result, it should be noted that MUR stations based in or near Wal-Marts typically sell gasoline only and thus miss out on the more steady margins from food sales.

A peer group of U.S. retail gas station operators trade about 0.2x last fiscal year’s sales and 6.6x previous fiscal year EBITDA (see attached Exhibit). If one applied the average EV/EBITDA multiple from PTRY and SUSS to MUR’s retail and refining segment 2011 EBITDA of $441 million, the business could be valued at about $2.6 billion. We exclude CASY from the calculation given that its earnings appear to rely more heavily on food and snack sales.

When one considers the post-separation parent, one may start by comparing proved reserves, standardized measure of discounted future net cash flows, and EBITDAX to peers. MUR’s PV-10 and proved reserves at year-end 2011 stood at $7.9 billion and 534 million barrels of oil equivalent (mmboe) respectively. One should take caution in using these data points in a valuation exercise as the data is only released annually and is now almost a year old. Applying multiples from a basket of comparable E&P companies to Murphy’s 2011 EBITDA, and 2011 year-end PV-10 and averaging with a comparable multiple applied to proved reserves results in an enterprise value of slightly more than $10 billion. One might note that MUR’s proved reserves consist of 65% oil and syncrude and thus the valuation could be understated compared to gassier companies.

Penn National Gaming Announces Plan to Spin Properties into REIT On November 15, 2012, Penn National Gaming (NASDAQ: PENN) announced its intention to separate its retail property assets into a publicly traded real estate investment trust (REIT) through a tax-free spin-off to shareholders. PENN has already received a private letter ruling from the IRS in regard to the transaction. The separation will still require additional gaming regulatory approvals, final Board approval and agreement by certain preferred shareholders and is expected by 2H 2013 with REIT election effective in January 2014. Annual rent paid by PENN to the spin-off entity is expected to approximate $450 million, or about half of 2013 projected EBITDA by management. The spin-off will be conducted as a tax-free dividend to PENN shareholders, who are expected to receive spin-off shares in a 1:1 distribution as well as $5.35 per share cash. PENN also has a non-binding agreement to exchange $975 million of its preferred shares into approximately 14.6 million non-voting PENN common shares. In addition, PENN has the right to purchase $417.5 million of non-voting PENN common stock following the exchange. In total, those transactions could reduce PENN’s shares outstanding by as much as 13.3 million shares.

PENN Chairman and CEO Peter Carlino will assume those duties at the spin-off entity while remaining Chairman of PENN. COO Tim Wilmott will become CEO of PENN. The spin-off REIT is expected to initially own 17 PENN properties, including Hollywood Casinos in Pennsylvania, Ohio, Missouri and West Virginia. Based on management’s 2013 guidance, the spin-off is projected to pay a $2.36 per share initial annual dividend (based on a 95.9 million diluted share count assumption) and generate adjusted funds from operations (AFFO) of about $269.2 million. The properties will be leased back to PENN under 35-year agreements. The REIT may also pursue additional acquisitions to diversify its asset base.

REITS do not pay federal income tax but are required to return 90% of earnings to shareholders as dividends. The beneficial tax rules and high payout rates have made REITS particularly popular in recent years as investors pursue strong yields. PENN will be the first casino to pursue a REIT structure for its real estate, but the idea that casino-based REITS could be useful ways to unlock shareholder value has gained attention recently through a presentation on Las Vegas Sands (NYSE: LVS) put together by hedge fund Land & Buildings. The concept was highlighted in the October edition of The Spin-Off Radar Screen. According to Bloomberg, LVS Chair Sheldon Adelson has said he would consider separating or selling certain assets. Based on price/AFFO of a comparable group of lodging REITS, one could value the proposed PENN REIT at about $31 per share. Adding the $5.35 special dividend, values the spin-off at $36.35 per share.

The valuation implies a remaining value for PENN of $16 per share, based on last night’s after-hours trading of more than $52 per share. Following the transaction, PENN will continue to operate the 17 casinos placed in the REIT while owning certain other racetracks and joint ventures not part of the transaction. Management has guided for 2013 adjusted EBITDA of $905 million and EPS of $2.62 (based on diluted share count of 107.4 million). The $16 per share after-hours trading implies a P/E multiple of only about 6x. This is modestly below the P/E for regional casino operators, such as Pinnacle Entertainment Inc. (NYSE: PNK) and Ameristar Casinos (NASDAQ: ASCA). However, this becomes an apples to oranges comparison as the other operators own their properties. If one applies the average multiple of ASCA and PNK of about 10x to the guidance of $2.62 in EPS, the value of the casino operations is about $26 per share.

On Tuesday, August 27th, Fraser and Neave Limited (Ticker: FNN SP, Market Cap: SGD 8.24 billion1) announced its intention to demerge its property arm, Frasers Centrepoint Limited (FCL), following the completion of the process of exploring strategic alternatives designed to unlock shareholder value. Fraser and Neave is a conglomerate with interests in Food & Beverage, Publishing & Printing, and Property businesses operating in the Asia Pacific region. Its largest shareholder, with approximately 90% ownership, is Thai billionaire Charoen Sirivadhanabhakdi, who controls FNN through ThaiBev and TCC Assets. The demerger is expected to be completed by November or December 2013 and is subject to the necessary regulatory and shareholder approvals. It should be noted that the spin-off is already expected to be approved at the Extraordinary General Meeting (where simple majority is required), since TCC Assets—FNN’s largest shareholder with 61 percent of shares outstanding—has announced that it will vote in favor of the transaction. Shareholders will receive two shares of FCL for each FNN share. The spun-off company is expected to be listed on the Singapore Exchange Securities Trading Limited (SGX-ST). 

Fraser and Neave will distribute its Property business, which includes direct ownership of real estate assets as well as a 41 percent stake in retail REIT Frasers Centrepoint Trust (Ticker: FCT SP, Market Cap: SGD 1.46 billion) and a 27 percent stake in office REIT Frasers Commercial Trust (Ticker: FCOT SP, Market Cap: SGD 0.79 billion). Additionally, FCL will examine the feasibility of establishing a hospitality REIT.2 FNN’s property business’ trailing twelve months net income is SGD 377 million.3 Post spin-off, Fraser and Neave will comprise the Food & Beverage and Publishing & Printing businesses, with the former being responsible the majority of its SGD 60 million trailing twelve months net income. 

Until last year, Fraser and Neave owned an interest in Asian brewer Asia Pacific Breweries through a joint venture with Heineken. When Fraser and Neave tried to sell its stake, Heineken made an offer. Coincident with the sale, one of Thailand’s richest men, Charoen Sirivadhanabhakdi—through his ThaiBev and TCC Assets corporations—made a bid for Fraser and Neave directly. While the company decided to sell its stake to Heineken, Mr. Sirivadhanabhakdi increased his investment in Fraser and Neave and made an unconditional offer to its shareholders. 

Currently, through his two vehicles, he owns slightly above 90% of the shares outstanding. On April 19, 2013, he decided to keep the company public; however, under the Singapore Exchanges’ regulations, he has to reduce his stake to below 90%. The initial deadline for that was July 17, 2013. However, the majority shareholder failed to do so and was granted an extension until the end of 2013. 

Fraser and Neave’s property units generated trailing twelve months net income of SGP 377 million, compared with SGD 60 million for the rest of the company. Income from its Brewery division—included in the company’s financials as income from discontinued operations—has been excluded. The average price-to-earnings multiple of five Singaporean real estate investment and development companies is 12.5. The resulting equity value of Fraser and Neave’s property business is SGD 4.70 billion. As far as the remaining company is concerned, several beverage and brewing companies in Southeast Asia, Australia and China can be examined. Given the growing middle class and consumer demand in those countries, the average price-to-earnings multiple is 24.9. That leads to an equity valuation of SGD 1.49 billion. The combined equity value of the two entities would be SGD 6.19 billion, compared to Fraser and Neave’s current market capitalization of SGD 8.24 billion

On Monday, August 12th, UGL Limited (Ticker: UGL AU, Market Capitalization: AUD 1.25 billion) announced its intention to demerge the global property services subsidiary known as DTZ following the completion of the strategic review process that began on March 26th. UGL is an Australian engineering and property services company with FY2013 revenues of AUD 4.2 billion (USD 3.8 billion, at the current AUD/USD exchange rate of 1.0925) and with operations in the Americas, Europe, Asia and Oceania (the fiscal year ends June 30th). The demerger is expected to be complete by FY2015 and is subject to the necessary regulatory and shareholder approvals. The spun-off company is expected to be listed on the Australian Securities Exchange (ASX). 

Over the past decade, CEO Richard Leupen expanded into the property services sector in order to reduce revenue volatility owing to the engineering business, a unit that is very dependent on mining. The property services business expanded rapidly and, following the acquisition of DTZ’s trading arm, now comprises a significant portion of UGL’s revenues and operating income. Currently, UGL operates under three segments: DTZ, Engineering, and Operations & Maintenance, with sales of AUD 1.9 billion, AUD 1.8 billion and AUD 0.5 billion, respectively. During FY2013, DTZ’s EBIT of AUD 113.4 million surpassed the combined results of the Engineering and Operations & Maintenance segments. Accounting for the pro rata portion of unallocated corporate expenses of AUD 40.4 million results in an adjusted EBIT of AUD 89.9 million and, preliminarily, an enterprise value of approximately 1,750 million (i.e., based on property services companies such as CBRE Group and Jones Lang LaSalle). 

In contradistinction, post-demerger UGL will be comprised of the remaining two segments, which have significant exposure to the level of Australian mining expenditures. Their combined EBIT and adjusted EBIT are AUD 81.6 million and AUD 64.7 million, respectively. Similar Australian companies include Downer EDi, WorleyParsons and Monadelphous Group. Using the average enterprise value-to-EBIT multiple of 8.86 times results in an enterprise valuation of AUD 573.3 million. Therefore, after factoring in AUD 581.0 million of net debt, UGL’s combined fair value market capitalization would be approximately AUD 1,743 million, compared to the company’s current market capitalization of AUD 1,252.2 million. Additional details regarding the potential valuations of both the parent and the spin-off will follow in our full report to be published following the release of additional information within the next year.