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.

On Thursday, August 1st, Amcor Limited (Ticker: AMC AU, Market Capitalization: AUD 12.96 billion) announced its intention to demerge the fiber, metal, glass and packaging distribution segment known as Australasia & Packaging Distribution (AAPD). Amcor is an international packaging company, offering packaging products, distribution and recycling services. Based in Melbourne, the company derives the majority of its revenues from the United States and Australia. Though the company has yet to publish detailed information related to the respective pro forma financial performance and capital structures of post spin-off Amcor and AAPD, it expects to do so at some point in November. And though the precise date for the shareholders’ meeting has yet to be scheduled, completion of the spin-off is expected during December 2013, with the spun off company expected to be listed on the Australian Securities Exchange (ASX).

Amcor comprises five business segments (including AAPD). The largest segment is Flexible Packaging, which manufactures products such as fresh and processed food packaging, hospital supplies and specialty packaging. Amcor also operates in tobacco packaging through its Tobacco and Specialty Packaging unit and through its 48 percent stake in AMVIG Holdings Limited. Additionally, Amcor, through its Rigid Plastics business, is the world’s largest manufacturer of PET containers. In contradistinction, while the parent company is expected to retain those assets focused on flexible and rigid plastics, the spin-off will comprise those operations involved in the production of fiber, glass and aluminum can products in Australasia and packaging distribution in North America and Australia (i.e., AAPD).

On Thursday, August 1st, Amcor Limited (Ticker: AMC AU, Market Capitalization: AUD 12.96 billion) announced its intention to demerge the fiber, metal, glass and packaging distribution segment known as Australasia & Packaging Distribution (AAPD). Amcor is an international packaging company, offering packaging products, distribution and recycling services. Based in Melbourne, the company derives the majority of its revenues from the United States and Australia. Though the company has yet to publish detailed information related to the respective pro forma financial performance and capital structures of post spin-off Amcor and AAPD, it expects to do so at some point in November. And though the precise date for the shareholders’ meeting has yet to be scheduled, completion of the spin-off is expected during December 2013, with the spun off company expected to be listed on the Australian Securities Exchange (ASX).

Amcor comprises five business segments (including AAPD). The largest segment is Flexible Packaging, which manufactures products such as fresh and processed food packaging, hospital supplies and specialty packaging. Amcor also operates in tobacco packaging through its Tobacco and Specialty Packaging unit and through its 48 percent stake in AMVIG Holdings Limited. Additionally, Amcor, through its Rigid Plastics business, is the world’s largest manufacturer of PET containers. In contradistinction, while the parent company is expected to retain those assets focused on flexible and rigid plastics, the spin-off will comprise those operations involved in the production of fiber, glass and aluminum can products in Australasia and packaging distribution in North America and Australia (i.e., AAPD).

With respect to the relative financial metrics of the two companies, AAPD comprised 23.7 percent of revenues and 13.5 percent of profits before interest and taxes (PBIT) and operated with a 5.0 percent PBIT margin—compared to a 10.5 percent margin for the non-AAPD business—on a trailing twelve month basis through December 31, 2012. Based on Amcor’s current market capitalization of AUD 12.96 billion, the new entity could be valued at approximately AUD 1.75 billion. It should be noted, however, that Amcor currently trades at a significant premium to its peers, both on a price-to-earnings basis (i.e., 29 times compared to 17 times) and on a price-to-sales basis (i.e., 1.07 times compared to 0.84 times). 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 the demerger scheme document in November.

On Monday, July 8th, Pharmstandard OJSC (Tickers: PHST RU, PHST LI; Market Cap: US$2.2 billion) announced that its Board of Directors has decided to spin off the company’s branded over-the-counter pharmaceuticals business. On Wednesday, July 10th, the company held an investor conference call and confirmed that the spin-off would indeed be publicly listed on the Moscow Exchange (MICEX). Given past spin-off activity in Russia, there were concerns that the spun-off entity would not maintain a public listing, much to the detriment of its minority shareholders. Most notably, however, many details surrounding the ultimate structure of the transaction continue to remain unknown and under suspicion. 

For example, the company’s recent proposal to acquire Bever Pharmaceutical Pte. Ltd. appears to be a related party transaction with one of the company’s board members, and, yet, management not only refuses to acknowledge this conflict of interest but has failed to release any salient details regarding the transaction—that is, apart from the purchase price of US$630 million. What exactly is being acquired is not yet clear. Also cause for confusion and concern is management’s decision to offer those shareholders opposed to the spin-off proposal RUB2,180 per share—or approximately US$16.50—a discount of nearly 25 percent to the trailing 30 day average price of the more liquid global depositary receipts and cause of the recent 30 percent drawdown. 

Pharmstandard is Russia’s largest publicly-traded pharmaceuticals company and is 54 percent owned by Augment Investments Limited, the investment holding company of Chairman Viktor Kharitonin, et alia. Until 2008, Augment’s shareholders also included noted Russian oligarchs Roman Abramovich and Evgeny Shvidler. 

Pharmstandard produces more than 250 pharmaceutical products, including drugs for treatments of cardio-vascular diseases, diabetes, growth hormone deficiency, gastroenterological, neurological, contagious diseases, metabolic disorders, cancer and other diseases. The company’s branded over-the-counter pharmaceuticals business is Russia’s second largest by sales—Novartis being the country’s largest provider—and includes 27 branded over-the-counter products, including drugs for the cold and flu, non-narcotic analgesics and antipyretics (e.g., aspirin), and multivitamins. 

During 2012, Pharmstandard reported revenue and EBITDA of RUB51.4 billion and RUB13.5 billion, respectively. By comparison, the branded over-the-counter pharmaceuticals business reported revenue and EBITDA of RUB12.7 billion and RUB4.5 billion. 

Additional information will be released in the forthcoming circular, which is expected to be published in August or September. Following shareholder approval, the spin-off shares are expected to begin trading in either November or December of this year.”