On March 22, 2011, the Board of Directors of Punch Taverns plc announced its decision to proceed with the spin-off of the managed pub business as Spirit Pub Company plc. The decision followed the announcement made in October 2010 that the company had begun a comprehensive review of company strategy, operating performance, and capital structure. The strategic review was initiated to address the sizeable debt burden in an environment of slowing discretionary spending, falling property values, and a UK ban on smoking that took effect on July 1, 2007, all of which contributed to the company’s significantly diminished profitability and market capitalization since peak valuations in mid-2007.
 
The demerger resolution was approved by the company’s shareholders on July 26, 2011. As a result, on August 1, 2011, 803 managed pubs-Punch Pub Company-as well as 549 leased pubs were spun off as part of Spirit Pub Company plc, with 5,080 pubs within the leased division-Punch Partnerships-continuing as Punch Taverns plc. Of the 549 leased pubs assigned to Spirit, it is expected that up to 100 will be converted to managed pubs, with the balance disposed of through periodic sales.
 
Of the 5,080 pubs assigned to Punch Taverns, periodic disposals since the demerger have reduced the size of the estate by 76 pubs. Of the remaining 5,004 pubs, the company’s core estate comprises 2,951 pubs, with the remaining 2,053 pubs having been designated as non-core, turnaround pubs to be disposed of over the next five years at an average rate of approximately 500 per annum. In addition, Punch Taverns continues to hold a 50 percent joint venture interest in Matthew Clark (Holdings) Limited, a drinks wholesaler and distributor operated in partnership with CHAMP Private Equity.
 
Based on the financial information presented below, one could argue that the overleveraged nature of the company’s capital structure-with net debt of approximately ten times EBITDA-and the proximity to certain covenants within the company’s securitizations precludes the possibility of establishing an equity position with a favorable risk/reward outcome. However, despite the precarious state in which the company continues to operate, it is worth observing that-at the current price-cash and investments held outside of the securitizations may very well provide one with a margin of safety sufficient to justify such a position. Specifically, with £113 million in unrestricted cash and a 50 percent joint venture interest in Matthew Clark carried at £43 million-not held as collateral for the securitizations-the liquidation value of £156 million is equivalent to 23.5 pence per share, more than double the current share price of 11 pence.

This unusual risk/reward opportunity appears to be a consequence of the following: a spin-off of the wrong profile (i.e., debt-laden), brought to market at the wrong time (i.e., post-financial crisis environment), and now priced (both equity and debt) as if there is a high probability of failure; yet, which appears to have a reasonable possibility of accretively deleveraging-and is in the initial phases of doing so-and for which the current pricing permits a multiples-of-money return in exchange for the obvious risk. Ergo, the asymmetrically positioned common equity of Punch Taverns plc is submitted for your consideration.

On December 21, 2011, Orascom Construction Industries (ORSCY US, ORSD LI, OCIC EY) announced that its Board of Directors has decided to demerge the company’s construction business from the fertilizer business. Orascom Construction is the largest publicly-traded company in Egypt, with an enterprise value of approximately US$9.5 billion. In 2010, total revenue, EBITDA, and net income amounted to US$4.9 billion, US$1.1 billion, and US$594 million, respectively, with approximately 55 percent of revenues coming from the Middle East and North Africa and approximately 30 percent coming from Europe. The performance of the respective businesses is presented below.

On September 6, 2011, the Board of Directors of Open Range Energy Corp. (Ticker: ONR CN) announced its intention to spin off wholly-owned subsidiary Poseidon Concepts as a potentially high-growth, dividend paying company focused on the expansion of the company’s low-cost, high-capacity fracturing fluid handling systems business. Subsequent to the completion of the transaction, Open Range Energy Corp. will continue to operate the natural gas exploration and production business.
Open Range Energy Corp. was founded in 2005 as a development-stage natural gas exploration company focused on the Ansell/Sundance play in the Deep Basin of west-central Alberta. As of June 30, 2010, the company’s exploration operations reported production output of approximately 4,400 barrels of oil equivalent per day on a proved and probable resource base of approximately 20 million barrels of oil equivalent.1 On a net asset value basis, the company values such reserves at approximately C$226 million, or C$3.62 per fully diluted share. This compares to the current price of C$9.38 per share.
Importantly, however, the company has used its familiarity with natural gas fracturing operations to establish Poseidon Concepts, a subsidiary focused on the design and production of modular, easily-transportable, low-cost, and high-capacity (i.e., 9,000 to 41,000 bbls) fracturing fluid handling systems.2 The company’s products are rented out to natural gas exploration and production companies.
The cost advantage of the Poseidon system over conventional steel fracturing fluid tanks-in conjunction with the rising demand for fracturing equipment-has resulted in rapidly increasing revenue and operating income since the company first brought its products to market on May 3, 2010. There are approximately 35,000 horizontal wells drilled in North America annually. Poseidon Concepts currently provides its fluid handling systems to less than five percent of the North American horizontal well completions market.

On Tuesday, March 1, 2011, the Board of Directors of Carrefour SA (CA FP) announced its decision to proceed with plans to spin off the company’s 100 percent interest in hard discount store operator Dia as well as a 25 percent interest in real estate operator Carrefour Property. The proposed spin-offs will be voted on by shareholders at the annual general meeting of Carrefour on June 21, 2011 and at the annual general meeting of Carrefour Property on June 23, 2011. If approved, it is expected that the proposed spin-offs would take place in July 2011.
With sales of over EUR 85 billion in 2009, Carrefour is the world’s second-largest retailer and the largest in Europe. The company currently operates four main grocery store formats: hypermarkets, supermarkets, hard discount, and convenience stores. In 2009, the breakdown of sales by both format and geographic region was as follows:

On Tuesday, February 15, 2011, the Board of Directors of Shinsegae Co. Ltd. (004170 KS) announced its decision to proceed with the separation of the company’s department store and discount store operations. The effective split date is scheduled for May 1, 2011, at which point Shinsegae will be separated into a department store operator named Shinsegae Co. Ltd. and a discount store operator named E-Mart Co. Ltd. Shinsegae is the second largest retailer in South Korea in terms of both market capitalization and sales, with roughly 80 percent of the company’s sales generated by the discount store operations of E-Mart.
The shares will be suspended from trading from April 28, 2011 through June 9, 2011, with the re-listing of both entities scheduled for June 10, 2011. The spin-off plan is subject to approval by shareholders during the general meeting scheduled for March 18, 2011. If approved, holders of Shinsegae stock will receive 26.1 shares of the department store operator (i.e., Shinsegae) and 73.9 shares in the discount store operator (i.e., E-Mart) for every 100 they hold in the company.
Originally part of the Samsung Group-South Korea’s largest chaebol-Shinsegae was spun off in the 1990s following the death of Samsung Group founder Lee Byung-chull. The spin-off of Shinsegae was part of the larger breakup of the Samsung Group, which also included the spin-off of CJ Group (i.e., Food/Chemicals/Entertainment) and Hansol Group (i.e., Paper/Telecom).

On November 11, 2010, Straits Resources Limited (“Straits Resources”) (Ticker: SRL AU) announced that the company had entered into a proposed scheme of arrangement with PTT Mining Limited (“PTTML”)—a subsidiary of PTT Plc (Ticker: PTT TB)—under which PTTML would acquire 100 percent of the issued shares of Straits Resources at a price of AUD 1.72 per share.

According to the proposed structure—as set forth in the Demerger Scheme Booklet and Acquisition Scheme Booklet released on Monday, December 20, 2010— the acquisition of Straits Resources will occur subsequent to the demerger of the Straits Resources metals business. Following the demerger, newly named Straits Metals Limited (“Straits Metals”) will hold the following assets:

· 100 percent interest in the Tritton Copper Project with copper mine operations in New South Wales, Australia;
· 100 percent interest in the Mt. Muro gold mine in Central Kalimantan, Indonesia;
· 100 percent interest in Hillgrove, a gold and antimony mine in New South Wales, Australia;
· 71 percent interest in Goldminco Corporation (Ticker: GCP CN), a mineral exploration company, which holds porphyry copper-gold and gold exploration tenements in New South Wales, Australia;
· Exploration projects in Australia, including the right to earn a 70 percent interest in the Torrens Joint Venture, a joint venture between Argonaut Resources NL and Straits Metals, which is exploring for iron-oxide copper-gold systems in the Stuart Shelf region of South Australia;
· Magontec, a supplier of magnesium products with plants in Germany and China.

Following the completion of the demerger and prior to its acquisition by PTTML, Straits Resources will be renamed International Coal Holdings Limited (“Straits ICH”) and will hold the following assets through its 40 percent interest in PTT Asia Pacific Mining Pty Ltd (“PTTAPM”): a 45.6 percent interest in Straits Asia Resources Limited (Ticker: SAR SP), which operates the Sebuku and Jembayan coal mines in Indonesia; a 35 percent interest in a joint venture with FEE Pty Ltd (“FEE”) relating to certain rights to survey a coal resource in Brunei; a 33.5 percent interest in Red Island Minerals (“RIM”), owner of exploration rights to coal deposits in the Sakoa basin in Madagascar; and a 100 percent stake in the Yannarie salt exploration licenses in Western Australia.

The Demerger Scheme Meeting is scheduled for Friday, January 21, 2011. Should shareholders approve the proposed transaction, Straits Resources shares will trade ex-entitlement to Straits Metals shares on February 2, 2011. Straits Metals shares will begin trading on a when-issued basis on February 2, 2011, with regular-way trading beginning February 11, 2011.  Notably, as of December 20, 2010, total shares outstanding of Straits Resources amounted to 255,203,614; at the proposed offer of AUD 1.72 per share, this amounts to a total purchase price of approximately AUD 439.0 million. Relative to the current market capitalization of AUD 576.8 million, this would imply a value for Straits Metals of approximately AUD 137.8 million.

Immediately prior to the demerger, however, 55,000,000 convertible notes will be converted at a conversion rate of approximately 1.11 shares per note; as a consequence, shares outstanding will increase by 61,139,220 to a total of 316,342,834.

If the market value of the company’s equity were to increase by an amount equivalent to the face value of the extinguished convertible notes, or AUD 79.8 million, the revised market capitalization, ceteris paribus, would be AUD 656.6 million. Relative to the revised purchase price of AUD 544.1 million, this would imply a value for Straits Metals of approximately AUD 112.5 million.  With pro forma shareholders’ equity of AUD 331.6, these figures represent discounts of 58 percent and 66 percent, respectively. Undoubtedly, financial resources (i.e., cash) will be expended in order to advance the development-stage projects highlighted above; however, such discounts warrant further analysis.

On March 31, 2010, RMB Holdings Limited (“RMB Holdings”), a South African investment holding company, announced its intention to consider a restructuring of its existing investment portfolio. On Wednesday, December 15, 2010, the company decided to proceed with the restructuring of its banking and insurance portfolio through the spin-off of certain insurance interests.

Currently, the company’s portfolio of strategic investments in South African financial services groups comprises both insurance interests and a 30 percent interest in FirstRand Limited, one of South Africa’s largest diversified financial services companies. The insurance interests include MMI Holdings (18 percent), Discovery Holdings Limited (“Discovery”) (25 percent), FirstRand STI Holdings Limited (“OUTsurance”) (45 percent), and RMB-SI Holdings Limited (“RMB-SI”) (76 percent).

As part of the restructuring, the company will separate the insurance and banking interests through the spin-off of the insurance interests as Rand Merchant Insurance Holdings Limited (“RMI Holdings”). The spin-off is expected to be completed on Monday, February 28, 2011 (i.e., ex date and commencement of trading). It is expected that a circular describing the proposed transaction will be posted to shareholders on January 26, 2011. According to the company, the strategic rationale underlying the proposed transaction is as follows:

“The two separately listed entry points will provide investors with greater flexibility in terms of their investment choices: [RMB Holdings] investors will have access to a strategic investment in a premier Southern African banking group, owning pre-eminent banking brands that control significant elements of the profit pools of their segments; while investors in RMI Holdings will have access to a strategic portfolio of insurance investments with significant shares in the profits of various segments of the insurance market.”

On December 9, 2010, Aker Solutions (Ticker: AKSO NO) announced its intention to split its existing operations into three independent companies. Aker Solutions is a leading Norwegian oil services, engineering and construction company serving a variety of industries, namely oil and gas, refining and chemicals, mining and metals, and power generation.

The existing operations will be split as follows: Aker Solutions, a provider of engineering, technologies and services for the oil and gas industry; Aker Contractors, an engineering, procurement and construction (i.e., EPC) company with operations in the North Sea field development market; and Process & Construction International, a global supplier of engineering and construction (i.e., E&C) services to onshore industry segments.

As the first step of the separation process, it is expected that Process & Construction International will be listed on the Oslo Stock Exchange through an initial public offering. This process is expected to be
completed in the second quarter of 2011 and may be followed by a secondary share offering at a later date. Aker Contractors will also be listed on the Oslo Stock Exchange, though it is expected that this will be accomplished via a dividend of shares to existing Aker Solutions shareholders. This is targeted to occur in the third quarter of 2011.

Notably, however, the separation of Aker Contractors from Aker Solutions will be completed in stages, with Aker Solutions initially retaining an interest of over 50 percent in Aker Contractors. The company has said that it eventually plans to distribute the remaining interest to shareholders, though the timing of a complete distribution has yet to be determined.

As of September 30, 2010, Aker Solutions recorded NOK 24,287 million in revenues and NOK 2,575 million in EBITDA; Aker Contractors recorded NOK 8,000 million in revenues and NOK 400 million in EBITDA; and Process & Construction International recorded NOK 3,199 million in revenues and NOK 394 million in EBITDA.1

On July 28, 2010, the Board of Directors of ArcelorMittal (Ticker: MT NA) announced its intention to conduct an assessment of the potential spin-off of the company’s stainless steel business. On December 8, 2010, the company confirmed that it has concluded the assessment and has decided to proceed with the spin-off. Subject to shareholder approval, shares in the stainless steel business will be distributed to shareholders in the first quarter of 2011.

It is expected that shareholders will receive one stainless steel business share for every twenty ArcelorMittal shares held on the record date. Shares in the stainless steel business will be listed on Euronext Paris, Amsterdam, and in Luxembourg. In the United States, they will trade on the over-the counter market in the form of NY Registry Shares. A prospectus describing the stainless steel business and the transaction will be published later this month.

Following the spin-off, the stainless steel business will have approximately USD 1 billion of net financial debt which will comprise a combination of existing ArcelorMittal debt transferring with the stainless steel business and new debt raised by this business. As a result, the transaction is expected to be broadly neutral to ArcelorMittal’s net debt to EBITDA leverage ratio. Additionally, the spin-off is expected to result in a non-cash impairment charge of approximately USD 800 million, as the stainless steel business will be accounted for as an asset held for distribution in accordance with IFRS 5. No such impairment charge would be expected had the stainless steel segment remained in the scope of activities of ArcelorMittal.

The stainless steel unit has plants operating in Belgium and Brazil and produced 1.59 million metric tons of steel and USD 4.18 billion in sales in the first nine months of 2010, equivalent to approximately 6.8 percent of ArcelorMittal’s total revenue for the period. The spin-off comes as producers are struggling with lower stainless steel prices and higher raw material costs, namely that of iron ore. The company’s primary competitors include China’s Taiyuan Iron & Steel Group Co. Ltd. (Private) , South Korea’s POSCO (005490 KS), Taiwan’s Yieh United Steel Corp. (9957 TT), and Germany’s ThyssenKrupp AG (TKA GR). In light of falling stainless steel prices, the spin-off is likely to result in takeover bids for the asset as competitors attempt to consolidate production in an industry struggling with the effects of overcapacity.

On December 2, 2010, TNT N.V. (Ticker: TNT NA) announced its intention to proceed with the demerger of its Express division. TNT, through its two divisions—Express and Mail—is part of the global document, parcel, and freight transportation and distribution industry. In 2009, TNT reported EUR 10,402 million in revenues, operating income of EUR 648 million, and cash from operating activities of EUR 1,016 million. TNT N.V. is listed and traded on Euronext Amsterdam and has a current market capitalization of EUR 7,470 million and an enterprise value of EUR 8,700 million.

TNT Mail is one of the world’s leading postal operators. It is the incumbent postal company in the Netherlands, with international operations focused on Germany, the United Kingdom, and Italy. As a
result of the decline in traditional mail volume, however, TNT Mail is currently involved in a dialogue with its trade unions about the need for restructuring in the Netherlands. There have been three days of strikes and the government has appointed an independent investigator to look into the issues of the postal market.

In light of the continued substitution of traditional mail with electronic alternatives, the industry’s long-term growth prospects appear rather bleak. In contradistinction, TNT Express is the European leader in intra-European business-to-business express mail; as well, the division has significant operations in both China and South America and a growing focus on expanding operations in India. In the company’s own words:

“Mail is faced with a continuously declining mail market in the Netherlands and has to focus on sustaining solid cash flows and operational efficiency. Express’ priorities are to grow its existing strong European networks, to continue to grow the intercontinental business from and to Europe into adjacent markets and to secure contributions from its existing strong positions in China, South America and India.”

The transaction is expected to be approved at the General Meeting of Shareholders in May 2011. Notably, in order to proceed with the demerger, Mail will initially be required to retain a 29.9 percent stake in Express in order maintain the required positive equity position post-demerger. It is expected that this interest will ultimately be returned to shareholders in a subsequent distribution.