On Wednesday, January 23rd, Siemens AG held its Annual Shareholders’ Meeting, at which time 98
percent of shareholders approved the proposed spin-off of the company’s lighting unit, Osram Licht AG.
Osram is one of the world’s top two lighting manufacturers, Royal Philips Electronics NV (Tickers: PHIA
NA, PHG US) being the company’s primary competitor. The company’s portfolio includes the most basic
lighting components such as light bulbs, as well as more technologically advanced products, including
light-emitting diodes, light management systems and high-efficiency lighting solutions.

During fiscal 2011 and 2012, Osram generated revenue of €5,032 million and €5,400 million, respectively,
a year-over-year increase of 7.3 percent. During the same periods, pre-tax net income amounted to a profit
of €486 million (2011) and a loss of €87 million (2012), respectively.1 Notably, however, the pre-tax loss
of €87 million reported for fiscal 2012 includes pre-tax impairment costs of €443 million, resulting in an
adjusted pre-tax profit of €356 million. The company has stated that as part of the spin-off plan aggressive
cost cutting measures are expected, including a 20 percent reduction in the company’s workforce. The
company expects such measures to result in a pre-tax profit of €512 million by 2015.

The decision to spin off Osram is a departure from the company’s original plan to dispose of the division
through an initial public offering, a plan that was originally proposed in March 2011. The spinoff is
expected to take effect as soon as it is entered in the German Commercial Registers, a step that is expected
to take place in April 2013 at the earliest.

Osram shares are then to be immediately admitted to trading in the Regulated Market of the stock
exchanges in Frankfurt and Munich as well as in the Prime Standard of the Frankfurt Stock Exchange. For
every ten Siemens shares, Siemens shareholders will receive one share of OSRAM Licht AG. Notably,
after the spin-off, Siemens AG intends to hold a 17 percent stake in Osram, with the Siemens Pension Trust
receiving a 2.5 percent stake in the new company.

On Monday, January 14th, United Parcel Service, Inc. (Ticker: UPS US) withdrew its €9.50 per share all cash offer for Dutch express delivery company TNT Express NV (Ticker: TNTE NA). TNT Express was originally recommended by this publication following its spin-off from Dutch incumbent mail services provider PostNL NV (Ticker: PNL NA) in May 2011. 

As a result of what we presume to be significant selling pressure from the merger arbitrage community, the share price of TNT Express has declined substantially and now trades at approximately €5.30 per share. It has been suggested that prior to the failure of merger negotiations over 30 percent of the shareholder base was comprised of arbitrageurs. 

We expect that as selling pressure from the merger arbitrage community dissipates, shares of TNT Express will trade substantially closer to our original fair value estimates. And, of course, should additional bids arise, we would expect such offers to approximate the €9.50 offer from United Parcel Service. It is important to note that the failed bid by United Parcel Service was due to antitrust concerns held by the European Commission. In other words, a similar bid from private equity, for example, would be unlikely to meet the same fate. 

The current share price of €5.30 compares to our original fair value estimate of between €8.00 and €9.50 per share. We believe that such fair values still hold, especially in light of the €9.50 offer price. With €7,246 million in sales during 2011 and a normalized operating margin of at least six percent, we think it is reasonable to expect normalized operating income of at least €430 million per annum. At the current enterprise value of approximately €2,800 million, this suggests that the shares currently trade at a normalized enterprise value-to-EBIT multiple of 6.5 times, a steep discount to the United Parcel Service and FedEx average of 12.5 times. Ergo, shares of TNT Express are once again recommended for purchase

On Thursday, November 29, 2012, Gold Fields Limited (Tickers: GFI SJ and GFI US) announced the proposed unbundling of the company’s 100 percent-owned subsidiary, Sibanye Gold Limited, which comprises the company’s KDC and Beatrix gold mines as well as various service entities located in South Africa. The listing of Sibanye Gold is expected to occur on February 11, 2013, with Gold Fields ordinary and ADR shareholders receiving one share of Sibanye Gold for every one share of Gold Fields. Notably, the unbundling does not require shareholder approval and the necessary approvals to list the company have already been granted by the South African Reserve Bank. Further details regarding the proposed unbundling are scheduled to be released in a pre-listing statement on January 10, 2013.

On May 17, 2012, the Board of Directors of Cookson Group PLC (Ticker: CKSN LN) announced that it was initiating a strategic review to consider a number of options for the company, including a potential demerger or separation of its main divisions. On Thursday, November 1, 2012-following an extensive review of restructuring options-Cookson Group announced that its Board of Directors has decided to demerge the company’s Performance Materials division from the Engineered Ceramics and the Precious Metals Processing divisions. Cookson Group’s Performance Materials division will accordingly be demerged to form a new London Stock Exchange-listed specialty chemicals company, called Alent plc. Cookson Group, consisting principally of the Engineered Ceramics division, will be renamed Vesuvius plc. A presentation for analysts and investors will take place on November 27, 2012. If the proposal is approved and the demerger becomes effective, shareholders will receive one Alent share and one Vesuvius share for every one Cookson Group share. The Court Meeting and General Meeting to approve the demerger are scheduled for November 26, 2012, with the demerger expected to become effective on December 19, 2012.

Autoneum Holding Ltd, a Switzerland-based auto parts manufacturer, was spun off from Rieter Holding AG on May 13, 2011. It was a classic example of an industrial conglomerate separating two distinctly different businesses by way of a spin-off. Since that time, the shares of Autoneum have fallen by 63%, and those of Rieter Holding by 47%. The balance of this report will focus on the potential opportunity that exists in the Autoneum shares.
Neither of these companies appeared overvalued at the time of the transaction, as readers should reference in the original report issued on May 12, 2011. Thus, it cannot really be asserted that the separation of the two companies isolated a degree of prior overvaluation that has manifest sharply lower share prices only one year later.

On April 18, 2012, Brazilian energy company MPX Energia S.A. (MPXE3 BZ) and German power generation company E.ON AG (EOAN GR) announced the creation of a 50/50 joint venture, which will create the largest private energy company in Brazil. In order to finalize the deal, the transactions below must first take place:

NovaGold Resources Inc. (NG CN, NG US), a Canadian precious metals exploration and development company, has decided to spin off its interest in the Ambler project located in Northwestern Alaska as NovaCopper Inc. The Ambler district of Alaska hosts volcanogenic massive sulfide deposits that contain copper, zinc, lead, gold and silver and is one of the richest and most-prospective copper districts in one of the safest geopolitical jurisdictions in the world.
The spin-off will be transacted by way of a statutory plan of arrangement under the Companies Act of Nova Scotia. Pursuant to the terms of the arrangement, 100 percent of the outstanding common shares of NovaCopper, will be distributed to holders of common shares of NovaGold such that each NovaGold shareholder of record on the effective date of the arrangement will receive one NovaCopper share for every six common shares of NovaGold. A special meeting of NovaGold shareholders will be held on March 28, 2012. The record date for determining those entitled to receive notice of and vote at the meeting is February 24, 2012. The effective date of the spin-off is expected to be on or about April 30, 2012.
The directors of the company believe that the creation of two separate public companies-one focused on gold and one focused on the copper-dominant Ambler district-will enhance their respective business operations and provide holders of NovaGold securities with additional investment choices and enhanced flexibility.

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.