On October 27, 2010, the South African conglomerate Mvelaphanda Group Limited (MVG SJ) formalized its previously announced intention to proceed with the unbundling of its 100 percent interest in Mvelaserve, an outsourcing services business focused on facilities management, security, catering and cleaning. Mvelaserve owns Protea Coin Group, South Africa’s largest bulk-cash mover and provider of guard services for mining operations.

The Board has completed its application for the separate listing of Mvelaserve and, pending approval by shareholders, plans to distribute 25 Mvelaserve shares for every 100 Mvelaphanda Group shares. The company has proposed a record date of December 3, 2010, with the shares expected to trade ex-entitlement on Monday, November 29, 2010. Shareholders are scheduled to vote on the proposed transaction on November 18, 2010.

The history of Mvelaphanda Group is intimately tied to the history of South Africa and the post-apartheid evolution of the South African economy. Tokyo Sexwaleone, the company’s founder and former chairman and chief executive officer, fought as a member of the armed wing of the African National Congress founded by Nelson Mandela. Like Mandela, Sexwaleone was convicted of terrorism and conspiracy to overthrow the government and ultimately served 13 years in prison from 1977 to 1990.

Upon his release, Sexwaleone entered politics and by the late 1990s was one of three viable contenders to replace the retiring Mandela. After being passed over for former president Thabo Mbeki, Sexwaleone left politics and founded Mvelaphanda Holdings. The company initially specialized in the mining and energy sectors, but over time diversified its asset base to include interests in financial services, infrastructure and construction, telecommunications and media, and consumer services. As a result, Sexwaleone has become one of South Africa’s wealthiest post-apartheid entrepreneurs.

In 2009, Sexwaleone relinquished control of Mvelaphanda Group in order to return to politics, appointing current chairman and co-founder Mikki Xayiya as his successor. Since the change of control, Mvelaphanda Group has decided that a process of unbundling the company’s assets and distributing the proceeds is the best means to unlocking value for shareholders.

The unbundling of Mvelaserve is simply a continuation of this strategic decision and is intended to eliminate the significant discount at which the company trades to its reported net asset value. Specifically, as of June 30, 2010, net asset value amounted to ZAR 4,894 million; relative to the current market capitalization of ZAR 2,466 million, the company trades at approximately 50 percent of NAV. Ergo, further study is warranted.

Grupo Carso (GCARSOA1 MM) is a diversified holding company controlled by noted investor Carlos Slim Helu (he and his family own 79% of the Grupo Carso capital stock). Through the years, Mr. Slim has amassed a great fortune by investing in various Mexican assets, many of which are infrastructure related. Grupo Carso is one of the finest examples of his diversified investment approach, as the company owns assets related to the following Mexican industries: telecommunications, energy, construction, automobiles, mining, real estate, civil infrastructure, and retail. Many would argue that Grupo Carso serves as a rough proxy for the Mexican economy.

Mr. Slim now appears poised to undertake yet another transaction that is designed to increase the value of Grupo Carso and, not by coincidence, his personal wealth. The company recently announced plans to spin off two of its subsidiary companies into separately traded listings on the Mexico Stock Exchange. The subjects of this transaction are the real estate assets, which will be named Inmuebles Carso, S.A.B. de C.V. (“Inmuebles Carso”), and the mining division, which will be known as Minera Frisco, S.A.B. de C.V. (“Minera Frisco”).

Given the mostly disparate assets owned at the holding company level, as is commonly the case with these types of entities, it is apparent that Mr. Slim is dissatisfied with the company’s current valuation (i.e. the “holding company discount”). A separation of the real estate and mining assets, which presumably is designed to isolate the distinct valuation features of these businesses, will still leave an agglomeration of businesses at Grupo Carso. However, the corporate structure will be, to a certain degree, less complicated than is currently the case, perhaps leaving investors with a more simplified asset base from which valuation models may be formulated. Although one cannot be certain, of course, it is clearly possible that this transaction might indicate a further disaggregation of the company’s assets which, if these are indeed undervalued in the current structure, could unlock this value over time.

Nevertheless, Inmuebles Carso will comprise the holding company’s real estate properties that include offices, department stores, hospitals, hotels, universities, country clubs/golf courses, and touristic developments. Inmuebles Carso will be a broadly diversified real estate development company, with ownership of assets across a wide spectrum of properties.

Minera Frisco, which will be more narrowly focused, intends to utilize the mining claims it owns in various parts of Mexico to explore and develop deposits of lead, silver, zinc, copper, copper cathode, and gold. In essence, it will be a pure-play resource extraction firm.

The formal vote on this transaction is scheduled for November 4, 2010 at a special meeting for shareholders. If approved, the shares of both new companies are planned for listing on the Mexico Stock Exchange by January 3, 2011. Additionally, since Grupo Carso has a U.S. ADR program, owners of these depository receipts will receive the distributed shares in two separate newly-issued ADR receipts (each one representing the Minera Frisco and Inmuebles Carso shares)

On October 18th, the Australian gaming company Tabcorp (TAH AU) announced that it will pursue the demerger of its casino/hotel franchise from the diversified gaming business into two separately traded companies that will be listed on the Australian Stock Exchange. On a preliminary basis, it appears that existing Tabcorp shareholders will each receive one share of the new casino company for each existing Tabcorp share held.

The newly created casino company will contain the four hotel/casinos currently located in Australia, which are Star City, Jupiters, Treasury, and Jupiters Townsville. The company’s casinos, particularly the Star City location, are currently involved in expansion projects that will upgrade and refine the overall gaming experience through additional gaming space, restaurants, and nightlife attractions. Of course, casino expansion requires substantial upfront capital investment, which appears to be a partial impetus for the demerger transaction. With two separate capital structures, one entity may operate on a more decidedly leveraged basis without damaging the valuation characteristics of the other.

The surviving Tabcorp business will comprise a variety of gaming and betting operations. These will include over 2,000 fixed odds retail betting locations, on-course betting at 264 racecourses, retail gaming operations distributed via television, internet, and telephone, and 3,811 Keno (which is a form of lottery) terminals.

Although the operating profitability of both businesses is not dramatically dissimilar, with the casinos generating a 26.2% EBITDA margin and Tabcorp producing a 22.6% EBITDA margin, the capital expenditure requirements appear to be vastly different. The casinos currently anticipate roughly AUD 960 million of capital expenditures over the next 3-5 years, whereas reinvestment into the retail gaming operations appears to be minimal. It is not entirely known at this point if investors will apply divergent multiples to each business; however, the companies will have disparate cash flow dynamics.

Currently, the Tabcorp shares are halted for trading and will not resume activity until October 21st due to the proposed equity offering. The company, concurrent to the demerger announcement, disclosed that it will undertake a substantial equity offering—referred to as the “Entitlement Offer”—that is open to both institutional and retail investors. The price of this 68.5 million share offering will be AUD 6.25 per share, which is a 12% discount to the prior closing price of AUD 7.10. The proceeds of the offering, if fully subscribed, will be AUD 430 million and will be used to structure the capital bases of both companies following the demerger. It appears that that the majority of the proceeds will fund the expansion of the casino operations in order to avoid having this company begin its corporate life with an unduly leveraged balance sheet post-transaction.

While the customary shareholder and regulatory approvals will need to be obtained, Tabcorp has announced that the rough timeline for completion is July 1st, 2011.

On Thursday, September 23, 2010, Terra Nova Royalty Corporation (formerly KHD Humboldt Wedag International Ltd.) completed the third distribution of shares of KHD Humboldt Wedag International AG (formerly KHD Humboldt Wedag International (Deutschland) AG). Furthermore, on Monday, September 27, 2010, Terra Nova announced its intention to acquire all of the outstanding shares of Mass Financial Corp., the proprietary investing and financial services company run by Michael J. Smith.

As part of this announcement, Terra Nova notified investors of its intention to effect a fourth and final distribution of its remaining interest in the shares of KHD Humboldt Wedag International AG. The fourth distribution will complete the separation of the royalty and industrial businesses that began in the first quarter of 2010 and is expected to occur in November 2010.
Notably, in the course of the separation, KHD Humboldt Wedag International AG acquired a number of subsidiary companies formerly held by KHD Humboldt Wedag International Ltd., all of which were active in the industrial plant technology, equipment and service business. As a result, KHD Humboldt Wedag International AG is now the holding company for all the industrial plant technology, equipment and service business, with Terra Nova holding the mineral royalty interest associated with the Wabush iron ore mine in Newfoundland, Canada.

On July 8th, the Board of Jubilant Organosys Limited (JOL: India) announced the approval of the company’s proposed demerger plans. Jubilant Organosys is a diversified pharmaceutical and life sciences company that, for those who are unaware of its business background due to its Indian status, is quite similar in character to the U.S. companies Sigma Aldrich or Thermo Fisher. Jubilant operates and provides services in numerous areas of the pharmaceutical and biotechnology industries. For instance, it manufactures chemicals and compounds used as ingredients by pharmaceutical companies to produce therapeutic drugs and treatments. The company also manufactures radiopharmaceutical kits that are utilized within the oncology, kidney imaging, and cardiology fields of medicine. In contrast to its U.S. counterparts, Jubilant at times participates in partnerships formed with drug manufacturers, whereby it provides R&D support throughout the drug discovery and pre-clinical phases. A final business, which is the subject of the current demerger, produces chemicals used for both industrial purposes, such as in the agricultural industry, and consumer uses, which take the form of sealants and adhesives.

At the moment, the pharmaceutical and life sciences businesses represent the vast majority of the company’s operations. For instance, during the 2010 fiscal year, this segment produced 89% of overall revenue and 98% of EBITDA. The industrial and consumer assets, then, are fairly insignificant, even despite a high growth rate. It appears the company believes that these assets are detracting from the valuation that could otherwise be achieved as a pure pharmaceutical, or biotechnology R&D-focused firm. The proposed spin-off, then, would isolate the two distinctly different companies.

Under current terms, the pharmaceutical and life sciences business will be renamed Jubilant Life Sciences and will retain its listings on the Bombay and National Stock Exchanges in India. The agricultural company will be renamed Jubilant Industries Limited, and will be listed separately on these two exchanges. The spin-out ratio will be 1:20, with shareholders receiving 1 share of Jubilant Industries for every 20 shares of Jubilant Life Sciences held. In terms of a timeline, the company plans to present its demerger filing to the India High Court this August. Pending regulatory approval, the new Jubilant Industries shares are expected to begin trading sometime in January 2011.

On balance, this transaction has some interesting qualities, if nothing other than a renewed focus that may be placed by investors on the underlying business of Jubilant. Undoubtedly, the fields of pharmaceutical and biopharmaceutical drug production hold enormous promise, given the vast advancements that have been made in medical treatment technology. Yet, the actual drug manufacturing firms all encounter one serious problem. That is, with each successive blockbuster treatment produced, an increasing number of commercially-successful products are required to achieve a satisfactory long-term corporate growth rate. This is an unenviable position in which these companies are placed, given the costs and high failure rates of the novel drug discovery process. Indisputably, though, a robust R&D program is the only mechanism that can enable these companies to replicate prior drug discovery achievements. In this way, it seems logical that the more prudent and risk averse strategy to participate in the biopharmaceutical industry is through investments in those companies that service the R&D process, rather than those engaged in actual discovery.

On a final note, one might make an initial valuation observation. On a standard p/e basis, it appears that Jubilant trades at about 11.5x the 2011 fiscal year consensus earnings estimate. This is quite low, considering the company’s 5-year annualized revenue growth rate of 32.6%, and 29.4% annualized record of after-tax profit growth. It would appear, as well, that the company has a reasonably sound long-term growth profile, given the industry in which it operates. Initially, it does not seem plausible that the soon-to-be spun out agricultural business is entirely responsible for this valuation predicament, given its relatively small size within the company; however, further analysis is required to make an informed opinion on the company’s merits as a potential investment opportunity.

On July 7th, the Canadian oil exploration firm known as UTS Energy Corporation (TSX: UTS) announced a transaction that appears to have some intriguing merits. UTS owns interests in a variety of Athabasca oil sands assets in the Canadian province of Alberta, primarily the Fort Hills (20%), Equinox (50%), and Frontier (50%) projects. These are development-stage assets that are not scheduled to provide commercial oil production for at least a few years. This being the case, UTS currently has no revenues, other than interest earned on cash investments and occasional proceeds from the sale of selected properties (e.g., Lease 421).

The French E&P firm Total SA (NYSE: TOT) has agreed to acquire UTS for approximately CAD 3.08 per share in cash, which is a considerable premium to the pre-announcement price of CAD 2.11 per share. However, Total will not be acquiring the entirety of the UTS assets. Under terms of the agreement, Total will only purchase the 20% working interest in the Fort Hills project. This asset is of interest to Total for two reasons. Logically, it expands the company’s asset base in the Athabasca oil sands region of Canada, an area of burgeoning strategic importance. Secondarily, the Fort Hills project is operated and 60%-owned by Suncor (TSX: SU), which has long been the dominant and most successful Canadian oil sands producer in this region.

The remaining interests in the Equinox and Frontier projects will be transferred to a newly-listed company to be known as SilverBirch Energy Corporation. Following a 10:1 conversion of UTS shares, current shareholders will own an identical proportionate interest in SilverBirch. Thus, if the transaction is approved by shareholders, the current UTS owner will receive both the cash consideration from Total and the newly issued shares of SilverBirch.

Although a different corporate identity, SilverBirch will again resemble a development-stage oil sands company. It will own 50% working interests in both Frontier and Equinox, which are estimated to contain 891 million barrels (net to SilverBirch) of contingent bitumen resources, as well as 23,040 acres of undeveloped lands in the Athabasca oil sands region, and CAD 50 million of working capital. Current UTS CEO Dr. William Roach will also lead the newly formed company.

This transaction more or less amounts to the monetization of the Fort Hills asset vis-à-vis the sale to Total. Many investors have contended that UTS has long been undervalued, which was not lost on the ears of company executives. Rather than attempting to create immediate value recognition through the sale of the entire company, perhaps at suboptimal oil prices, thereby further disenchanting shareholders, UTS appears to have reached a reasonable solution that provides near term satisfaction, as well as future appreciation potential through the residual SilverBirch entity. Importantly, though, the transaction must gain two thirds majority shareholder approval at a special meeting to be convened in September of this year. The company reports that 15%-shareholder West Face Capital has already supported the transaction, a maneuver no doubt intended to persuade existing owners.

Finally, should the deal close, Total will clearly benefit from a seasoned and well-capitalized development partner in Suncor; however, one must acknowledge that Suncor may wish to prevent the disclosure of many operational details to which Total would be privy should the two parties become partners. Apart from the strategic motivation to launch a counter offer, the value proposition alone appears compelling.

Using the recent Athabasca Oil Sands Corporation-PetroChina transaction of CAD 0.63 per contingent barrel, the 1.8 contingent barrels per share to which SilverBirch shareholders will be entitled is arguably worth CAD 1.13 per share. Care of the CAD 3.08 in cash and an additional CAD 0.10 per share in working capital, a conservative valuation, then, is CAD 4.31 per share, a 19% premium to where the shares currently trade. For reasons both strategic and opportunistic, it is important to note the potential for future share price appreciation prior to the targeted closing in September.

While not a formal spin-off per se, the inherent value that appears to reside in UTS in its current structure, as well as in the proposed SilverBirch structure, nevertheless justifies a more comprehensive study of the transaction. It is therefore brought to the reader’s attention.

On June 16th, Guinness Peat Group plc (GPG.LN, also listed in New Zealand and Australia) announced that it would be separating its holding company operations into two geographically separate listed companies. This demerger, if completed, would divide the company’s Australian operations from its United Kingdom and New Zealand assets, with current GPG shareholders owning shares of both companies following the transaction.

Guinness Peat is a diversified holding company that invests mostly in publicly listed securities, although the portfolio contains private equity assets as well. It is managed by the noted New Zealand value investor Sir Ron Brierley. Perhaps “value” investor is a rather inappropriate or cavalier term for an individual who many characterize as a shrewd corporate raider and a fierce activist investor. Nevertheless, since Mr. Brierley acquired Guinness Peat in 1990, the company has reported an impressive book value per share growth record of 15% per annum since 1992.

As proposed, GPG Australia will be listed on both the Australian and New Zealand exchanges, and will comprise the company’s portfolio of strategic investments in Australia. As of April 2010, the net asset value of this entity was reported to be US$407 million. GPG plc Group will then retain the UK and New Zealand investment portfolios with a reported net asset value of US$860 million as of April 2010. This entity will be listed on both the London and New Zealand exchanges. Technically, this is not a pure spin-off due to the fact that GPG plc Group will initially retain a 20% interest in GPG Australia. Rather, it is a majority interest carve out of the Australian investment portfolio.

As to the timeline, the company expects to present the demerger details by September of this year, followed by a shareholder vote on the transaction to be held in November. With this in mind, trading of the new shares might be expected to occur by the end of 2010.

On a final note, on June 25th, or just a few days after the demerger announcement, Mr. Tony Gibbs, who had been on the Guinness Peat Board of Directors, released a statement expressing his dissatisfaction with the spin-off proposal, and recommended that shareholders vote against it. As one might expect, Mr. Brierley did not welcome these dissenting remarks, and immediately terminated Mr. Gibbs’s service. Whether or not this will portend a shareholder battle of sorts that, ironically, defined the career of Mr. Brierley, remains to be seen. In any event, attention is called to this proposed transaction, which is worthy of further study.

On July 14, 2010 Arrow shareholders will attend, either in person or by proxy, a Demerger Scheme Meeting to be followed by the General Meeting. The purpose of the meetings is twofold. At the Demerger Scheme Meeting, shareholders are being asked to approve the decoupling of Dart Energy from Arrow Energy. In the second instance, which is contingent on a positive vote to demerge, shareholders will vote on whether to accept an all cash offer of $4.70 for their Arrow Shares ex. Dart Energy.

If approved, Dart Energy, which is expected to trade on the Australian Stock Exchange, will be distributed on the basis of one share for every two shares of Arrow held by the stockholder. Its operations will include Arrow’s international assets and businesses in China, India, Indonesia, and Vietnam as well as Arrow’s stock ownership positions in Australian listed Bow Energy Limited (13.92 million shares recently traded at $1.20) and Liquefied Natural Gas Limited, (16 million shares recently traded at $0.40).

A third investment holding is 42.09 million shares of Apollo Gas Limited, recent quote at $0.59. Based on the 371 million fully diluted shares of Dart to be issued, if the Scheme is approved, the three holdings would be worth approximately $0.097 per share.

Dart’s other significant asset at demerger is Arrow’s two farm-in agreements with Macquarie Energy, a wholly owned subsidiary of Apollo Gas. Terms of those agreements make it possible for Dart to gain up to a 50% interest in acreage located in Australia’s New South Wales’ Gunnedah Basin.

It should be noted that the terms of the demerger call for Dart shares to be distributed solely Australian shareholders. Foreign investors, unless their stock is held through an Australian Registered Nominee, will receive a cash payout. If the Demerger Scheme is approved, Arrow shareholders will then have an opportunity to further vote at the General Meeting on an Acquisition Scheme. The proposal calls for the post demerger Arrow to be acquired, in an all cash transaction for $4.70 per share, by a joint venture company owned by Royal Dutch Shell and PetroChina Company Limited.

Thus, if both Schemes are approved, current non-Australian, Arrow shareholders will be completely cashed out and have no equity holdings going forward.

The company currently expects to distribute the second tranche of KHD shares on June 30, 2010 with the record date of June 27, 2010. This distribution will be for 7,571,228 KHD shares, or approximately 23% of total issued. The tax on the distribution will be neutral for Terra Nova but it will be subject to withholding for shareholders. An example would be if you are a United States tax payer you would expect to pay 15%, which will be withheld by Terra Nova and paid to the Canadian taxation authority. Shareholders can claim this amount as a credit on their United States tax return.

Furthermore, the company currently expects to distribute the third tranche on August 30, 2010 with a record date of August 27, 2010. The distribution will be for 9,383,728 KHD shares, or approximately 29% of the total issued. The tax treatment for this tranche will depend on, among other factors, paid up capital (“PUC”) for tax calculations. If the company has enough PUC, it will be without any withholding tax for shareholders. It will be tax neutral for Terra Nova. The balance of the KHD shares, representing approximately 19% of KHD’s outstanding shares, will be retained by Terra Nova until the bank guarantees issued by Terra Nova (prior to the spin-off), on behalf of KHD, expire in the normal course of business.

Please refer to our published Global Spin-Off Report on KHD Humboldt Wedag International AG, dated March 29, 2010, for additional information.

Swire Pacific (19: HK and 87: HK) has announced that the record date for the distribution of Swire Properties shares will be April 26, 2010. Swire Pacific shareholders are expected to receive 1 Swire Properties share for every 10 Swire Pacific ‘A’ shares held, and 1 Swire Properties share for every 50 Swire Pacific ‘B’ shares held. The distribution of shares is conditional upon a global offering of Swire Properties shares, as well as a listing on the Hong Kong Stock Exchange. That said, a listing date for Swire Properties shares has not yet been determined.