On December 6, 2018, Mallinckrodt plc (NYSE: MNK) announced plans for the separation of its Specialty Generics business, to be named Mallinckrodt Inc., in a tax-free spin-off to shareholders. The transaction is expected to be completed in 2H 2019, subject to several conditions, including Form 10 effectiveness. The Specialty Generics business will retain the Mallinckrodt corporate name, while the parent company will adopt a new corporate moniker, Sonorant Therapeutics Inc. Following the separation, Mallinckrodt will focus on specialty generic products and active pharmaceutical ingredient (API) manufacturing, while the parent company will focus on “innovative specialty pharmaceutical brands.”

MNK’s generics business, which is to be based in St. Louis, MO, largely manufactures opioid drugs. The post-spin company will include a leading acetaminophen business, as well as a portfolio of API and generic finished-dose forms of controlled substances and other drugs. Additionally, the generics business will include the company’s laxative product, Amitiza (acquired in its $1.2 billion purchase of Sucampo in 2014), and a strong U.S. manufacturing footprint. The new generics business is expected to launch up to five new products in 2019. In 2018, the business reported revenue of $909 million.

Since 2016, Mallinckrodt has explored the sale of its generics business as a means of shifting the business toward higher-margin branded drugs. Despite the formidable size of the generics business, it has experienced a decline in recent years, particularly because many of its products are opioid-based painkillers, which have fallen out of favor with prescribers. For 2018, consolidated revenue of $3.2 billion was essentially flat. However, the company is facing a number of opioid-related lawsuits and is expected to experience a continued revenue decline due to falling generics prices. It should be noted that the generics business has been up for sale since late 2016 and has had two possible buyers express interest, according to industry media reports, but talks were ultimately unsuccessful.

The post-spin parent, Sonorant Therapeutics, will become a specialty pharmaceutical brands company and will focus on its portfolio of marketed and development products. The company will be led by current president and chief executive officer Mark Trudeau.

MNK currently trades at 5.7x consensus 2019E EBITDA, a significant discount to specialty pharmaceutical peers (which trade between  10x and 16x), owing to several headwinds, including: (1) declining Acthar sales, driven by payer pressure in the near term and by brand competitors expected to reach the market in 2021; (2) a combination of loss of exclusivity and brand competition in 2020-2021, particularly with the genericization of INOmax in 2020; and (3) pipeline programs that either target niche markets and/or have not yet demonstrated clinical efficacy.

At $16 currently, MNK shares are trading at one fifth of the 2015 peak of $134. In our view, shares of both post-spin companies will likely remain under pressure owing to several headwinds, and as such, we do not view the spin as a value-unlocking event. In addition, we see potential downside risk to revenue and earnings for both companies over the next 12 months. For Sonorant Therapeutics, competitor overhangs on the Acthar and INOmax franchises, which collectively accounted for over 70% of post-spin revenues, remain a primary concern. We expect a marginal revenue and earnings contribution from pipeline programs, given that terlipressin, inhaled xenon gas, OCR-002, and CPP-1x/sulindac lack strong clinical validation. For post-spin Mallinckrodt, pricing pressure in generics, coupled with opioid-related litigation risk remain key overhangs. Based on an analysis of revenue growth and EBITDA, we arrive at a pre-spin sum-of-the-parts fair value estimate of $17 for MNK. Post spin, Mallinckrodt and Sonorant are estimated to trade at enterprise values of $5.0 billion and $1.6 billion, respectively. Note, however, that final distribution ratio and capitalization have not been announced as of this writing; although management has noted that this will be a “levered spin.” For the purposes of this analysis, we assume $1.3 billion in debt is transferred to Mallinckrodt (approximately 5x 2020E EBITDA), which generates post-spin fair value estimates of $14 and $3 for Sonorant and Mallinckrodt, respectively. We note, however, that post-spin fair value estimates are subject to revision as more information on post-spin capitalization becomes available. With the pre-spin valuation approximating the current share price ($16 as of this writing), and the potential for several downside risks to revenues and earnings for both-post-spin companies over the next several months, pre-spin MNK shares are not recommended for purchase.

On August 13, 2018, VF Corporation announced that its Board of Directors intends to separate the company into two independent, publicly traded companies: VF Corporation, a global apparel and footwear company, and Kontoor Brands Inc., which will hold VF’s Jeans and VF Outlet businesses and will be a global leader in the denim category. The company expects to create these companies through a tax-free spin-off of Kontoor to VF’s shareholders. The transaction is subject to final approval by the company’s Board of Directors, customary regulatory approvals, and tax and legal considerations. The post-spin parent company will a move its corporate headquarters from Greensboro, NC, to Denver, CO. The spin entity will be based in Greensboro.

The separation will be completed on May 22, 2019, with regular-way trading in Kontoor Brands beginning on May 23, 2019. Shareholders of record as of May 10, 2019, are expected to receive one share of Kontoor stock for every seven shares of VFC owned. Shares of Kontoor Brands will trade on the NYSE under the symbol “KTB”. Shares of VF Corp. will continue to trade under the symbol “VFC”. It is expected that shares of Kontoor Brands will begin trading in the when-issued market on or about May 9, 2019, under the symbol “KTB WI”.

VF Corporation is an American-based apparel and footwear company, with headquarters in Greensboro, NC. Currently, the company has over 20 well-known brand names under its corporate umbrella, generally falling into one of four categories: Outdoor, Active, Work, and Jeans. In F2017 the company generated $11.8 billion in revenue (7.1% growth), gross profit of $5.9 billion (50.6% gross margin), and $1.9 billion in EBITDA (15.8% margin). Recent sales performance has been substantially driven by mid-20% growth from its streetwear brand Vans, which is part of the company’s Active reported segment.

Whereas VFC’s Active segment (primarily the Vans brand) has been the highlight of the company’s performance, the clear laggard has been the  Jeans segment, which encompasses primarily Wrangler and Lee branded apparel. The Jeans business has struggled in recent years to keep pace with the sales trends at the other five top brands within the current VFC corporate structure. In this respect it makes sense for the stronger brands to be separated from the weaker. The remaining parent company brands exhibit a wider margin profile and better growth trends, excluding the Kontoor Brand portfolio. In general, we believe these two attributes should allow for a re-rating of the parent company’s shares to a higher multiple. VFC already trades at a premium to most other apparel and footwear companies, with a current EV/EBITDA multiple of 16.3x 2020E consensus. However, several companies, including Under Armour Inc. (NYSE: UA), Nike Inc. (NYSE: NKE), Lululemon Athletica Inc. (NASDAQ: LULU), and Canada Goose Holdings Inc. (NYSE: GOOS), trade at or above approximately 20x 2020E consensus. Notably these companies are experiencing significant revenue growth (except Nike, at ~9% annual sales growth forecast) and have similar margin profiles to VFC. In our view, the pace of growth at the Vans brand, and improving trends at The North Face and Timberland brands, should justify a multiple approaching that of UA, NKE, LULU, and GOOS. Conversely, we expect to see the spin company trade at a lower valuation than it has enjoyed within the larger VFC portfolio.

In order for the spin-off of the Jeans business to unlock value, shares of post-spin VFC need to be re-rated sufficiently higher to offset the decline in the trading multiple that Kontoor is likely to experience. Additionally, management must be able to improve performance at the North Face and Timberland brands in order to  offset any potential slowdown in sales at the Vans brand.

On a pre-spin basis, shares of VFC are fairly valued at $104 per share, consisting of $7 per share in value from Kontoor Brands operations and $97 per share from post-spin VFC shares. Post-spin shares of VFC and KTB are fairly valued at $97 per share and $51 per share, respectively. Given that the post-spin fair value estimate for VFC shares is higher than the current share price, it could be implied that negative value is being assigned to Kontoor within the current corporate structure. When combined with implied upside of just over 10% to the pre-spin fair value estimate, shares of VFC are recommended for purchase ahead of the spin-off and rated BUY. Post-spin, we would expect to see shareholder turnover in shares of Kontoor as investors favor the momentum at VFC’s brands versus the struggling Jeans division. In that context, we would suggest buyers of pre-spin VFC treat the distribution as a free dividend and exit KTB if the shares trade near our fair value. Investors with a longer time horizon may wish to hold KTB shares, or purchase the shares with a significant margin of safety (approaching 6x EBITDA) post-distribution in the expectation that management can right the current sales trends.

L Brands Inc (NYSE: LB) operates several retail brands across three business segments: (1) Victoria’s Secret (~55.5% of sales and 39% of EBITDA in F2018), which primarily sells women’s intimate apparel; (2) Bath & Body Works (35% of revenue and ~59% of EBITDA), which sells body care and home fragrance products; and (3) International (4.5% of sales and 2% of EBITDA in F2018), which consists of LB’s operations outside of North America. In our view, at less than 6x F2020E EV/EBITDA and with a nearly 10% free cash flow yield, LB shares are undervalued relative to the sum of its parts, particularly the well-performing and high-margin Bath & Body Works brand, which consistently posts solid same-store sales growth and a 20%-plus operating margin. In that context, the market is seemingly ascribing little value to LB’s ancillary (yet iconic) Victoria’s Secret brand, which is in the midst of a turnaround that we estimate could potentially unlock substantial incremental value. To that end, VS is under new leadership and has indicated “everything is on the table” in the pursuit of improved performance. The broader retail sector has seen a recent trend toward increased “focus” and “flexibility” via the separation of divergent brands, including pending transactions at The Gap, Inc. and VF Corp., which are conducting tax-free spin-offs of Old Navy and Kontoor (a denim business), respectively. Given this budding trend, coupled with LB’s history of divestitures and the fact that its shares have significantly underperformed indexes and peers over the last one, three, and five years, it is not overly surprising that LB has attracted attention from an activist investor, Barington Capital, which has suggested a range of operational and transactional initiatives, including a spin-off of Victoria’s Secret or an IPO of Bath & Body Works. Based on management commentary, peer and M&A valuations, value of $12 per share can be assigned to LB’s Victoria’s Secret and International businesses and $38 per share to its Bath & Body Works brand, respectively. Accounting for corporate costs and projected net debt of $14 per share yields a base case sum-of-the-parts fair value of roughly $36 per share (with bull and bear cases of $43.50 and $28.50, respectively).

On August 17, 2018, A.P. Moller-Maersk A/S (MAERSKB: DC) announced that, following a strategic review, the company would seek a separate listing of Maersk Drilling Holding A/S, which is to be named The Drilling Company of 1972 A/S. Maersk Drilling shares will be distributed to A.P. Moller-Maersk shareholders on April 5, 2019, the demerger record date.

Every A or B share in MAERSKB of nominally DKK 1,000 will receive 2 new shares of nominally DKK 10 and every A or B share of MAERSKB of nominally DKK 500 will receive 1 new share of nominally DKK 10 as of the cut-off date of April 3, 2019. All shares of The Drilling Company of 1972 will have the same rights and a single share structure, and will trade on Nasdaq Copenhagen A/S beginning on April 4, 2019.

Maersk, a Danish conglomerate, is primarily an integrated container marine shipping and logistics company. The company’s exit from its drilling operations business following the sale of Maersk Oil to Total S.A. is the culmination of a strategic refocus on the shipping and logistics industry. Notably, the Maersk Oil sale generated proceeds in both cash and Total stock, and the company has indicated plans to spin off a large portion of its Total ownership stake. It has been reported that Maersk sought bids for the drilling business prior to the de-merger announcement; however, management was underwhelmed by the resultant bids. Management has noted that in conjunction with the de-merger, $1.5 billion in debt financing has been secured to ensure that Maersk Drilling has an adequate capital structure.

In conjunction with the strategic refocus of its business lines, Maersk also re-designated its segment reporting, and now operates under four segments: Ocean (primarily the Maersk Line business as well as strategic trans-shipment hub ownership); Logistics & Services (including logistics and supply chain management under the Damco brand, operations of inland service facilities including container storage, warehousing, and local transportation),; Terminals & Towage (operation of landside port activities with customers including carriers and towage services under the Svitzer brand); and Manufacturing & Other (production and sale of reefer and dry containers based out of factories in China, as well as other ancillary businesses). Maersk Drilling, which is now reported under discontinued operations, is the owner and operator of offshore drilling rigs, with a focus on ultra-deepwater and harsh environment locales.

When management began its strategic review almost two years ago, it was posited that a possible break-up would likely be more value-accretive if it were implemented by means of a spin-off as opposed to a sale or carve-out. Given the state of the energy sector at the time (energy prices have rebounded, yet Maersk’s share price has not benefited from its exposure), any sale would risk taking place at depressed values, without accounting for the long-term earnings potential of those businesses. In a market that favors pure-play companies, management considered that the spin-off of the drilling company might unlock the most value while retaining upside potential for existing shareholders.

On a pre-spin, sum-of-the-parts basis, shares of Maersk A/S are estimated to have a fair value of DKK 11,276 per share, consisting of DKK 2,022 per share for The Drilling Company of 1972 A/S and DKK 9,254 per share for post-spin Maersk A/S. With the pre-spin sum-of-the-parts estimate representing approximately 27% upside to Maersk’s current consolidated share price (DKK 8,854 per share as of this writing), the transaction appears to unlock significant upside. In addition, a recovery scenario could generate upside of 48% from current levels. It is important to note, however, that there are several overhangs on the shares which may limit near-term appreciation. Foremost, the International Maritime Organization’s (IMO) 2020 sulphur cap regulations will likely cause marine fuel prices to continue to fluctuate widely this year. New regulations, changing economic conditions, and trade tensions could also potentially trigger significant and lasting marine fuel price volatility. That said, at current share prices, the shares appear sufficiently discounted for these risks. Notably, Maersk shares have declined 34% over the past 5 years, versus a 46% return for the OMX Copenhagen 20 Index over the same period. Year-to-date, the shares have appreciated 4% (versus a 12% return for the OMX Copenhagen 20 Index). At current prices, we think the shares are sufficiently discounted for industry and macroeconomic uncertainties. Longer term, the quality of the company’s industry-leading shipping assets–combined with the earnings potential of the remaining businesses, and potential for regulatory changes to shift the supply/demand balance to more normalized levels–could offer meaningful upside potential with minimum downside risk.

On June 29, 2018, Novartis AG (SIX: NOVN; NYSE: NVS) announced that following a strategic review, the company will seek shareholder approval to spin off 100% of its Alcon eye-care devices business. In addition, the company announced plans to institute a share repurchase program of up to US$5 billion through 2019. Alcon CEO Mike Ball has been designated Chairman, while COO David Endicott has been promoted to Alcon CEO; both appointments were effective July 1, 2018.

Novartis will distribute 1 Alcon share for every 5 dividend bearing share of Novartis AG shareholders and ADR holders held as of April 8, 2019. As of January 22, 2019, there were 337 million ADRs outstanding, each representing one Novartis share (approximately 13% of total Novartis shares issued). The separation is to take place April 9, 2019. No dividend in kind will be declared on treasury shares held by Novartis AG or its fully owned subsidiaries. Alcon shares will be listed on both the SIX Swiss Exchange and the New York Stock Exchange under the symbol “ALC.” Novartis shares will continue to trade on the SIX under the ticker “NOVN” and its ADRs will continue to trade on the NYSE under the symbol “NVS.”

Novartis AG, a Swiss pharmaceutical company, announced on January 25, 2017, that it was examining options to maximize the shareholder value of its Alcon division. The potential outcomes of the strategic review ranged from capital markets transactions such as an IPO or a spin-off to the retention of the business.

The Alcon division currently comprises the firm’s ophthalmic surgical and vision care products—with the former group developing and manufacturing surgical products used by ophthalmologists and the latter manufacturing contact lenses and other eye-care products. Until 2015, the division also housed Novartis’s ophthalmic pharmaceuticals business, which was recently transferred to the firm’s core Innovative Medicines division. The decision to commence a review of Alcon’s strategic options was likely triggered by the division’s lackluster performance under the Novartis umbrella. In 2017, it generated US$6.0 billion in revenue, compared to US$7.2 billion in 2010, Alcon’s last year as a publicly traded entity. It should be noted that 2017 represented the first year of sales growth for Alcon since 2014, albeit a mere 3.6%. Furthermore, the division’s EBITDA margin has contracted substantially. As a public company, Alcon’s EBITDA margin ranged from 30%-40%, having significantly expanded over the course of the first decade of the 21st century. Yet, in 2018, the company’s EBITDA margin was 19%.

Alcon was acquired by Novartis in a series of purchases that took place from 2008 until 2011. The eye-care company went public in 1971, and in 1978 it became a subsidiary of Swiss food company Nestlé, its majority owner with a 77% stake. In 2008, Novartis acquired a 25% interest in Alcon from Nestlé, followed by the purchase of the latter’s remaining 52% stake two years later. In early 2011, Novartis bought out the minority shareholders; over the course of three years, the Swiss pharmaceutical company spent US$51 billion to acquire Alcon.

For investors, the spin-off creates in Novartis a more direct exposure to pharmaceutical growth assets while focusing the company’s US$5 billion share buyback program to drive stronger earnings growth. Novartis has a strong product growth story over the next several years, comprised of new product approvals, launches, and rollouts. In 2019, Novartis is expected to benefit from numerous key catalysts and events that, in our view, could offer upside to consensus estimates and valuation. These include approval and launch of key treatments as well as Phase III and Phase II data for over 10 products with greater than US$20 billion of peak sales potential. The company should experience double-digit earnings expansion (10% appears reasonable by 2020, in our view), driven by a transformation from a diversified healthcare company with weak cost control into a focused innovative biopharma story with a robust new product cycle. Key risks include an intensifying competitive environment—especially for Cosentyx, Novartis’s IL-17A inhibitor for the treatment of psoriasis, psoriatic arthritis, and ankylosing spondylitis. In addition, a key risk factor is the potential for a generic competitor to Novartis’ oral multiple sclerosis drug Gilenya, which would negatively affect 2019-2020 EPS.

After a period of heavy reinvestment and management turnover starting in 2016, Alcon is a mature, market-leading company which appears well-positioned for improved revenue growth and profitability, owing to favorable market dynamics, including a growing aging population and potential expansion into under-penetrated countries seeking increasing access to eye care. In theory, Alcon resembles a more classic pattern of spin-offs in that it may be able to improve revenue growth and profitability as an independent company—particularly if it can outgrow the market through new products and geographic expansion. That said, a key risk is increasingly competitive end markets, particularly in the growing addressable market for contact lenses, which could limit the pace of the post-spin company’s earnings expansion.

Based on an analysis of projected revenue, EBIT, and dividend yield, Novartis can be fairly valued at CHF 102 per share, on a pre-spin sum-of-the-parts basis—consisting of CHF 7 per share for Alcon Inc. and CHF 95 per share for post-spin Novartis AG. Post-spin, Alcon shares can be fairly valued at CHF 33, based on a 1:5 distribution ratio. With the pre-spin sum-of-the-parts estimate representing approximately 10% upside to Novartis’s current consolidated share price (CHF 93 per share as of this writing), pre-spin shares appear to be approaching full valuation for the transaction and are not recommended for purchase at this time. Year-to-date, Novartis shares have appreciated 5%, versus 11% for the S&P 500 over the same period.

On March 23, 2018, MTG AB announced plans to demerge into two businesses – Modern Times Group MTG AB and Nordic Entertainment (NENT) Group – by distributing all of the shares in Nordic Entertainment Group to MTG’s shareholders, and listing these shares on NASDAQ Stockholm. Shares of NENT will be distributed to MTG shareholders on a one for one basis for both class A and class B shares. Shares will be distributed on March 26, 2019, to shareholders of record as of March 22, 2019.

The company has made significant changes to its overall portfolio in recent years, and the spin-off is the culmination of transforming from a traditional broadcaster to a mixed media company comprised of streaming, broadcast and radio assets focused on the Nordic region, which has also branched out into esports/video games. As background, the spin announcement came on the heels of a failed sale attempt of the NENT assets to TDC A/S (formerly TDC.CO). Given the differing business models between the esports/gaming and broadcast/streaming operations, and management’s focus on growing the gaming side of the business, it appears to make sense for the company to separate the operations especially in light of the gaming business appearing to be at an inflection point, in terms of profitability.

Following the spin-off, NENT will be primarily focused on growing its subscriber base for its premium video on demand (PVOD) services. The company will look to leverage its current customer exposure throughout the Nordic region, its technologies in streaming, and content creation to drive revenue and earnings from its subscription video on demand (streaming) services. The company’s content offerings include movies and TV streaming from major Hollywood production houses as well as Nordic based offerings, and live sports broadcasts from the biggest leagues such as UEFA Champions League and NFL American football.

MTG will be focused on esports, online gaming, and digital video content (Zoomin.TV, Engage Digital Partners). Additionally, the company has what it refers to as MTG VC Fund, in which the company looks to invest in early stage game developers. As the esports business looks to turn profitable, the stable earnings from the legacy games and SEK 1.8 billion from the sale of the Bulgarian TV operations will be able to fund growth for the foreseeable future.

On a pre-spin, sum-of-the-parts basis, shares of MTG are fairly valued at SEK 360 per share. With our fair value estimate representing less than 10% upside from the current share price, MTGB is not recommended for purchase prior to the separation of NENT. Following the spin-off, we would not recommend chasing shares of MTG as investor interest in the fast growing esports business may push shares beyond a reasonable level, especially in light of execution risk in launching new successful games while the inflection point to the esports business’ profitability may be further out than anticipated. We would be positive on shares of NENT if they were to sell off in initial post-spin trading given the stable but growing subscriber base for the company’s streaming products, history of a growing dividend, and the breadth of reach the company has (TV, radio, streaming). On a post-spin basis, shares of MTGB are fairly valued at SEK 162 per share and NENTB shares are fairly valued at SEK 198.

On June 27, 2018, after the market close, The Madison Square Garden Company (NYSE: MSG) announced that its Board of Directors had authorized the company’s management to explore a possible spin-off that would create a separately traded public company comprised of its sports businesses, including the New York Knicks and New York Rangers professional sports franchises. On October 4, 2018, MSG issued a press release announcing that the company had confidentially filed an initial Form 10 registration statement with the SEC related to the sports business spin-off.

If the company proceeds with the spin-off of its sports businesses, it would be structured as a tax-free transaction to all MSG shareholders. Upon completion of the contemplated separation, shareholders of record of MSG common stock would receive a pro rata distribution, expected to be equivalent, in aggregate, to an approximate two-thirds economic interest in the pure-play sports company. The remaining common stock, expected to be equivalent to an approximate one-third economic interest in the sports company, would be retained by the entertainment company. These shares are expected to be used to raise capital and/or be exchanged for the common stock of the entertainment company. James L. Dolan is expected to be the Executive Chairman and Chief Executive Officer of both companies.

One company would be a leader in live entertainment, with a growing portfolio of assets, including state-of-the-art music and entertainment-focused venues, MSG Productions, other strategic entertainment joint ventures, approximately one-third interest in the post-spin sports company, and approximately $1 billion in cash. The live entertainment company will also continue to move forward with the development of MSG Sphere. The first MSG Sphere is expected to open in Las Vegas around the end of calendar 2020, followed by a second MSG Sphere in London approximately one year later.

In terms of rationale, the separation of Sports from Entertainment makes sense as the Entertainment company looks to expand its portfolio of owned venues to drive earnings growth. The posited structure of the separation, with Entertainment retaining a 33% stake in Sports and approximately $1 billion in cash, will allow the company to largely finance its ambitious Spheres project without having to tap the debt markets or dilute Entertainment shareholders. The Entertainment business will be a hybrid of an asset-based stock (derived from the ownership of venues) and operating assets consisting primarily of a growing events promotion business that leverages the prime assets of the company (e.g. Madison Square Garden and the planned Spheres) and majority interest in the TAO Group.

The Sports business will be driven by the value of the NY Knicks and NY Rangers NBA and NHL franchises. Historical increases in the value of professional sports teams, and comparable sales transactions should provide a stable, yet growing, asset-based valuation at MSG Sports. Further, if the Dolan family were to sell an ownership interest in either of the sports franchises (or potentially take one or both teams private), significant upside optionality would arise, given the “whisper numbers” that have been reported on team valuations.

On a pre-spin sum-of-the-parts basis, shares of MSG are fairly valued at $362 per share. With our fair value estimate approximating 25% upside potential from the current share price, shares of MSG are recommended for purchase prior to the spin-off. The fair value consists of $151 per share in value assigned to post-spin MSG Entertainment and $211 per share derived from post-spin MSG Sports. The post-spin fair value estimates are subject to change. It should be noted that in more bullish scenarios additional value could be realized. This could include valuing the air rights above MSG, which could be worth $25 per share alone, or monetizing the Knicks and/or Rangers. Although the latter is highly subjective, if the Dolan “whisper number” for the Knicks is used, this would add $1 billion in fair value to the pre-spin sum-of-the-parts assuming the Rangers were valued at just the adjusted Forbes estimate, which excludes any value associated with the arena. That said, the typical rebuttal on the valuation of a sports franchise is that it is only worth what someone will pay, and that is dependent on the current owners’ willingness to sell. In the absence of two willing parties, the sports franchises will likely be valued at a reasonable valuation approximating the Forbes value.

On March 1, 2018, Brunswick Corporation (NYSE: BC) announced that its Board of Directors had authorized proceeding with a tax-free spin-off of its Fitness business, Life Fitness Holdings Inc., as an independent publicly traded company. The transaction is expected to be completed by the end of 1Q 2019, subject to final approval from Brunswick’s Board and other customary conditions.

Brunswick, with a market capitalization of $4.3 billion, and 2018 consolidated revenues of $5.2 billion, is a broad-based manufacturer of recreational products. The company operates two distinct recreation-focused business segments: (1) Marine (80% of sales in 2018), which manufactures boats as well as marine engines and parts; and (2) Fitness (20% of sales in 2018), which produces fitness and strength-training equipment, such as treadmills, stair climbers, exercise bicycles, and weights. The Fitness segment also includes a small billiards and game-room furniture business that was retained following the divestiture of the company’s bowling businesses in 2014.

Life Fitness, headquartered in Rosemont, IL, will remain a global leader in commercial fitness equipment and billiards game tables and furnishings. The company will continue to manufacture and sell its strength and cardiovascular equipment and game tables and accessories under the Life Fitness, Hammer Strength, Cybex, Indoor Cycling Group, SCIFIT, and Brunswick Billiards brand names. James Worthy will lead Life Fitness upon completion of the transaction. Life Fitness revenue was $1.04 billion and $1.03 in 2018 and 2017, respectively. 

Following the spin-off, Brunswick, comprised of the Marine Engine and Boat segments, will remain a global leader in recreational marine products. The Marine Engine segment, which consists of Mercury Marine, manufactures and distributes a broad range of marine propulsion systems and related parts and accessories. The Boat segment manufactures and distributes a range of recreational boats under 14 boat brand names including Boston Whaler, Bayliner, Lund, Lowe, Harris and others. These businesses generated approximately $3.5 billion in sales in 2017.

Based on an analysis of projected revenue, EBITDA, earnings, free cash flow, and dividend yield, Brunswick can be valued at $56 per share on a pre-spin, sum-of-the-parts basis. Post-spin, Brunswick and Life Fitness can be fairly valued at $50 and $6, respectively. Note that final capitalization information and distribution ratios have not been announced as of this writing. Therefore, the fair value estimates are subject to revision as more information becomes available. With the fair value estimate implying 13% in potential upside from current levels ($50 as of this writing), the shares appear to be fairly valued for the transaction. As such, pre-spin BC shares are not recommended for purchase at this time. Note that BC shares have appreciated 7% year-to-date, versus 9% for the S&P 500 Index.

For post-spin BC, we see several positive industry trends, including increasing parts & accessories content on boats and higher-horsepower engines. Additionally, the business has the potential to achieve mid- to high-teens segment margins vs. 14% currently, with healthy double-digit EPS growth. That said, we believe a near-term cautious outlook is warranted given 1) recent stock market volatility, which may weigh on discretionary spending; and 2) increased recession risk. BC shares are likely to to underperform leading into a recession, as fundamentals tend to lag a broader economic recovery.

For post-spin Life Fitness, the business has recently experienced weakening performance, a loss of exclusivity at its largest customer, and an unplanned change in senior leadership—which may weigh on valuation. In addition, the fitness industry is experiencing a decline in traditional gyms, a rise in boutique and budget clubs, and increases in customized group exercise classes—changes which may negatively impact the company’s forward revenue and earnings growth With the expected valuation potentially lower than initial expectations, the Board may also potentially delay the transaction or explore other strategic alternatives, including a sale of the business.

GCI Liberty (NASDAQ: GLIBA) primarily consists of an operating business, GCI Communications, Alaska’s largest communications provider, as well as ownership stakes in three publically-traded companies, Liberty Broadband (NASDAQ: LBRDK), Charter Communications (NASDAQ: CHTR) and LendingTree Inc. (NASDAQ: TREE).  (The company also owns Evite, the on-line invitation and event planner.)  GLIBA, inclusive of net debt, trades at a more than 15% discount to the current market value of its publically-traded holdings, the purchase price of its operating company, GCI Communications, and net debt.  Notably, GLIBA is lapping the anniversary of its purchase of GCI on March 13^th and we think the stock’s current discount to net asset value (NAV) could be narrowed (or eliminated) via a range of potential transactions with Charter Communications.  In that context, we view the merger transaction between DirecTV and Liberty Entertainment in 2009 as offering a relevant roadmap for an all-stock or Reverse Morris Trust transaction’s potential to unlock value (at both GLIBA and LBRDK).  Longer-term, we discern incremental upside optionality from the potential appreciation of GLIBA’s holdings, particularly CHTR, which itself has been speculated to be an acquisition target, toward estimated fair value. Based on management commentary, peer and M&A valuations, value of $61 per share can be assigned to GLIBA’s ownership stakes in LBRDK, CHTR and TREE while $21 per share can attributed to its operating business, GCI.  (For purposes of this discussion, we assign no value to the company’s majority stake in Evite.) Accounting for net debt of ~$25 per share yields a base case sum-of-the-parts fair value of roughly $58 per share, which suggests ~30% upside.  In a more bullish scenario shares could reasonably be valued close to $70 per share, implying ~60% upside, while a more bearish scenario suggests nominal downside to around $44 per share.

On April 23, 2018, Henry Schein Inc. (NASDAQ: HSIC) announced plans to spin off its Animal Health business, Henry Schein Animal Health (HSAH), and merge it with Vets First Choice (privately held), a leading provider of technology-enabled animal health care services. Immediately following the transaction, which is structured as a Reverse Morris Trust (RMT) and tax-free to HSIC shareholders, HSAH will combine with Vets First Choice to form a new publicly traded company, to be called Covetrus Inc. Upon completion of the transaction, Henry Schein shareholders will own approximately 63% (including the investors participating in the “share sale”), and Vets First Choice shareholders will own approximately 37% of the new company. Henry Schein Inc. expects to receive approximately $1.2 billion in cash on a tax-free basis from the spin company, which will be used for general corporate purposes, including share repurchases, debt repayment, and acquisition opportunities.

The transaction is scheduled to be completed on February 4, 2019. Shareholders of record as of January 17, 2019, the record date, will receive 0.4 shares of Covetrus Inc. for every share of HSIC owned. Shares of Covetrus Inc. are expected to trade on the NASDAQ under the symbol “CVET”. Covetrus shares are expected to trade on a when-issued basis no later than January 28, 2019, under the symbol “CVETV”. HSIC is also expected to trade when-issued, under the symbol “HSICV”. Following the completion of the transaction, shares of Henry Schein will continue to trade under the symbol “HSIC”.

HSAH is a leading veterinary supply chain, technology, and software provider in the animal health market. The company has leading positions in North America, Australia, and Europe, with growing South America and Asia exposure. In 2017, the company generated $3.6 billion in revenue and $135 million in operating income, while serving approximately 100,000 customers. Products and services include the sale of pharmaceuticals, nutrition products, consumable products, diagnostic tests, small and large equipment, and lab and surgical products, among others. HSAH also offers technology solutions and services, including practice management software, client communication tools, and data-driven applications. The supply chain segment at Henry Schein Animal Health accounts for 97% of revenue and 83% of segment operating income. The customer base includes animal health practices and clinics for companion animal and equine markets in North America, Europe, and Australia; it includes over 90% of veterinary practices in those markets and 45,000 European customers. The company also has a 50% market share in practice management solutions for veterinarians in the U.S.

Vets First Choice, which was incorporated in 2010, is a technology-enabled services firm that provides veterinarians with insights designed to increase customer engagement and enhance veterinary practices. The company’s technology platform “encompasses and integrates the core functionality of pharmacy services and prescription and inventory.” It counts approximately 6,800 veterinary practices as customers, with approximately 900,000 active therapies under management. The company defines active therapy under management as a prescription on the Vets First Choice platform from the date it is written until the earlier of 180 days if never filled or 90 days after the prescription should have been completed. The number of active therapies under management has increased dramatically over the past three years, with a compounded annual growth rate of 65% through December 2017. A larger number of active therapies results in greater revenue for Vets First Choice. The company generated $129 million in sales in 2017 and earned net income of $807,000, its first profit in three years.

On a pre-spin basis, shares of Henry Schein are fairly valued at $76 per share. The pre-spin fair value estimate is comprised of approximately $6 per share in value from the 53.1% ownership of Covetrus and approximately $70 per share in value from post-spin Henry Schein Inc. On a post-spin basis, Covetrus is fairly valued at $14 per share, based on 111 million post-spin, post-merger shares outstanding, while HSIC is fairly valued at $70 per share.

Following the spin-off, investors may approach both post-spin entities with caution. Risks at HSIC are associated with its ability to improve margins via the current restructuring plan, especially in light of pricing pressure risk from Dental Service Organizations. For Covetrus, we would expect that high-single-digit revenue growth and the potential for significant synergies from the combination of HSAH and Vets First may result in demand for shares of CVET in initial trading, limiting attractive entry points.