DuPont to Accelerate the Spin-Off of its Electronics Business but Retain its Water Segment

Last night, after the market close, DuPont de Nemours, Inc. (NYSE: DD) indicated that it intended to accelerate the tax-free spin-off of its Electronics business (with a targeted completion date of November 1, 2025) but retain its Water business (along with its core Healthcare segment). Per management, the decision to not pursue the separation of the Water business would provide the company with “greater strategic flexibility over time” as well as “another high growth business alongside healthcare”.  To that end, the company “evaluated all strategic alternatives” but ultimately decided the best path from a value creation perspective was to keep the business, which it continues to have “conviction” in a “strong” outlook for 2025. [Recall, on May 22, 2024, after the market close, DD announced its intention to separate into three independent publicly traded companies via the tax-free spin-offs of its Electronics and Water businesses. The separations were expected to be completed within 18 to 24 months of the announcement, subject to standard conditions including final approval from DuPont’s Board of Directors, receipt of a tax opinion from counsel, and SEC approval of the company’s Form 10 registration statements, amongst others. Shareholder approval was and still is not required.]

Concurrent with yesterday’s announcement, the company also reaffirmed its full-year 2024 guidance, which calls for full-year consolidated net sales of $12.365 billion with operating EBITDA of ~$3.125 billion and adjusted EPS of $3.90 (compared with its initial/previous guidance calling for net sales of $12.4-$12.5 billion, operating EBITDA of $3.060-$3.110 billion and adj. EPS of $3.70-$3.80).  Also, the company indicated it intends to hold its 4Q 2024 and full-year earnings conference call on February 11, 2024. 

SpinCo, as previously announced, will still be comprised of the current Semiconductor Technologies and Interconnect Solutions businesses, as well as the electronics-related product lines currently housed in the Industrial portion of the company’s Electronics & Industrial reporting segment. Applications will include materials (and solutions) for, among other things, the fabrication of semiconductors, integrated circuit boards, displays and electromagnetic shielding/thermal management, which are used in, among other things, high performance computing, electric vehicles, and mobile devices, as well as in the aerospace & defense, transportation, healthcare and medical device industries. For context, the proposed standalone Electronics business would have, per management, recorded net sales of ~$4.0 billion along with an operating EBITDA margin of approximately 29% in 2023. Further, peers to DD’s Electronics business trade at north of ~20x forward EBITDA (compared to consolidated DD currently trading at ~13.0x forward EBITDA, which is a multiple broadly in line with other diversified industrial companies). Valuing each of DD’s three businesses at a slight discount to their respective peer sets, and accounting for current net debt and shares outstanding, yields a preliminary, pre-spin sum-of-the-parts fair value estimate of ~$90 per share.

For more details/perspective, please refer to The Spin-Off Report Alert dated May 23, 2024.  [Note: The company’s predecessor DowDuPont completed the spin-off of Dow Inc. and Corteva in 2019 as well as the separation of International Flavors & Fragrances Inc. in 2021, which were all covered by this publication.]

Drop Coverage of Howard Hughes Holdings (HHH) and Seaport Entertainment Group (SEG), effective immediately

On July 31, 2024, after the market close, Howard Hughes (NYSE: HHH) completed the separation of Seaport Entertainment (NYSE American: SEG) into a separate, publicly traded company via a tax-free spin-off.

Given the transaction has now passed our 90-day post-spin coverage mandate, we DROP coverage of Howard Hughes Holdings (HHH) and Seaport Entertainment Group (SEG), effective immediately.

Going forward, our prior estimates & fair values for HHH and SEG will not be updated and should no longer be relied upon.

For more details/perspective, please refer to The Spin-Off Report dated July 8, 2024 and Updates from 7/19/2024 and 8/1/2024.

MATW to sell its stake in SGK Brand Solutions to SGS & Co. in a transaction valuing the combined business at ~$900 million or ~9x adj. EBITDA; $250 million of initial cash proceeds to be deployed toward debt reduction

This morning, prior to the market open, MATW announced a definitive agreement to sell its stake in SGK Brand Solutions to SGS & Co., a privately held global brand agency.  Per the agreement, which is expected to close in mid-2025, MATW will receive $350 million of upfront consideration, comprised of $250 million in cash, the retention of ~$50 million in securitized trade receivables and $50 million of preferred equity in the new entity. 

As well, MATW will receive a common equity interest of 40% in the new, privately held entity, which is expected to have an initial enterprise value of $900 million (or ~9x trailing-12-month adjusted EBTIDA). [Note: MATW will also retain its German roto-gravure packaging business, which is currently included in the SGK segment].

The immediate use of the $250 million in initial cash proceeds will be toward debt repayment (with any further/future proceeds also being earmarked for leverage reduction). 

For context, in November 2024 management announced that given the “growth opportunities” and perceived valuation disconnect the company had retained J.P. Morgan to explore strategic alternatives (which, we note, is a process that remains on-going despite this transaction).  While the review was expected to be comprehensive it, at least anecdotally, seemed to be primarily focused on the Industrial Solutions business (which we note itself is comprised of MATW’s Energy Storage, Warehouse Automation and Product Identification offerings). 

Subsequently, in December 2024, Barington Capital, currently a ~2% owner (up from its initial stake of 0.6%) who had previously served as a consultant to Matthews pursuant to a cooperation agreement struck in December 2022, sent a public letter to the Board calling for, among other things, the prompt replacement of the CEO, the addition of three new independent Board members and the divestment of the SGK Brand Solutions business, along with cost & debt reduction initiatives.

Specifically, the investors asserted, which in our view is a matter of objective fact, that at least from a stock price perspective Mr. Bartolacci’s 18-year term at the helm of MATW has not been a profitable one for investors. In that context, both the cost structure and leverage profile, which currently stands at 3.6x (i.e., high but not existential), have risen and the share price has languished; as a remedy, Barington recommended $50-$80 million of cost reductions as well as the proceeds of any divestments be directed toward debt reduction.  (Anecdotally, the company has targeted a long-term leverage target of “at or below 3.0x” and indicated that improving its leverage profile remains a “priority” in F2025.)

Additionally, the investor has nominated three directors to the company’s Board, which is currently comprised of 10 members (of whom 9 are deemed independent), at the 2025 Annual Meeting.

In terms of F2025 guidance, which still includes the SGK business, recall the company recently provided a “cautious” full-year adjusted EBITDA outlook of $205-$215 million, reflecting the expectations for continued stability at Memorialization, growth at SGK and on-going uncertainty within the Industrial Technologies segment. 

Our base case fair value estimate for MATW is revised to $40 per share, reflecting a blended multiple of ~9.5x multiple on our F2026E adjusted EBITDA of $~$167.5 million and net debt of ~$319.5 million.

PCS Research Group welcomes and encourages your feedback.  Please feel free to call us if we can be of service.

Holcim AG (HOLN SW) is one of the world’s leading building materials manufacturers. The company, which has a presence in North America, Latin America, Europe and AMEA, has announced its intention to spin off the North America operation in 2025. Holcim has yet to release financials for the segment or details of the transaction, but it is clear that a separate listing for this business could unlock significant value for shareholders. The company believes large, US-based investment funds are looking for a pure-play, US dollar-denominated business through which they can gain exposure to the growth in the country’s infrastructure spending. This spending will be financed by the Infrastructure Investment and Jobs Act (also known as the Bipartisan Infrastructure Law) and the Inflation Reduction Act, with incremental growth coming from the on-shoring of manufacturing capacity and the need to address the country’s housing shortage. Based on these trends, Holcim believes the North American business can increase revenues from $11 billion in sales as of 2023 to $20 billion in sales by 2030, with the company already having secured over 150 infrastructure projects in the coming years.

The downside to the consolidated company’s current valuation is minimal when considering that Holcim is a world leader in its markets, yet trades at a significant discount to peers despite a straightforward growth trajectory over the coming years. This is an asymmetric risk/reward scenario that offers significant near-term upside for shareholders once the US listing is active. The strong growth pipeline in North America and in the rest of the world should support future returns, and the eventual addition of the US listing to the S&P 500 should significantly boost demand for the US shares. For these reasons, shares of Holcim are recommended for purchase prior to the spin-off of the North America business.

FedEx to Separate its Freight and Parcel Businesses in a Tax-Efficient Distribution

On December 19, 2024, after the market close, FedEx Corporation (NYSE: FDX), a global transportation company, announced that following an assessment of its Freight division, which began in mid-2024, the company intends to pursue a separation of its core-Parcel and Freight businesses into two standalone, publicly-traded companies via a “tax efficient capital market transaction” (i.e., a tax-free spin-off). The transaction is expected to be executed within “the next 18 months” (i.e., mid-2026), subject to customary conditions, including regulatory and final Board approvals.

Notably, as a standalone, FedEx Freight, which for those that have followed the industry is the product of the Viking, American Freightways & Watkins acquisitions in the late-90’s – early-2000’s, will be the industry’s largest pure-play less-than-truckload (LTL) carrier by sales and second by profitability (albeit not including the burden of unallocated corporate costs).  As well, strategic review aside, this development was, in our view, the logical move within the context of recent industry trends, which have demonstrated a material (and we think well-deserved considering the step-function improvement in margin profiles amid attractive underling industry dynamics) expansion in valuation multiples for standalone LTL carriers over the last several years as well as the impressive share price performance of XPO, Inc. (NYSE: XPO), which became a standalone LTL carrier following the spin-offs of GXO Logistics, Inc. (NYSE: GXO) in August 2021 and RXO, Inc. (NYSE: RXO) in November 2022 (although we would note that the performance was, in no doubt, aided by the industry-wide impact from the bankruptcy of Yellow Corp. [formerly NASDAQ: YELL] in August 2023). Additionally, the standalone company, which will maintain the FedEx Freight moniker, should benefit from a “continuing commercial collaboration” with its former parent as well as an expanded (and dedicated) sales force and an LTL-centric pricing paradigm.

As of the November-ending 2Q F2025, FedEx reported two primary operating segments: 1) FedEx Express (88% of consolidated sales and ~79.5% of adj. EBITDA in F2024), which was previously reported under the FedEx Express, Ground & Services segments (but consolidated under the company’s DRIVE initiative); and 2) FedEx Freight (12% of sales and ~20.5% of adj. EBITDA).  In terms of guidance, while we contend this transaction will undoubtedly unlock value, the transportation market (both parcel & freight) remains challenged in the near-term; to that end, FDX, in conjunction with mixed 2Q F2025 results, lowered its full-year F2025 guidance and now projects consolidated sales to be “approximately flat” year over year (versus the prior outlook of a “low-single digit percentage increase”) with diluted EPS (before market-to-market retirement plan accounting adjustments) of $16.45-$17.45 (versus the prior guide of $17.90-$18.90).  Adjusted EPS, which excludes so-called business optimization costs, is expected to be $19-$20 (compared with the prior forecast of $20-$21).  The effective tax rate (ex- retirement plan accounting adjustments) is expected to be 24% (down from 24.5%) while the capital spending budget remained steady at $5.2 billion (and will continue to be primarily focused on network optimization/efficiency, fleet modernization and automation).

In terms of valuation, FDX’s Express segment (again, formerly Express, Ground & Services) could collectively be compared with parcel peers, such as United Parcel Service, Inc. (NYSE: UPS) and Deutsche Post (DPW EU), which trade, on average, at ~7.5x 2026E EV/EBITDA (in a range of ~6x-9x) while the potentially standalone Freight division could be compared with Old Dominion (NASDAQ: ODFL), Saia, Inc. (NASDAQ: SAIA), XPO, Inc. (NYSE: XPO) and TFI International (NYSE: TFII), which trade at ~15.0x 2026E EV/EBITDA (in a range of 9x-20.5x with XPO and SAIA at ~13x & 16x, respectively).  Based on management commentary/guidance, industry trends and current consensus estimates, it could be reasonably projected that a standalone Freight division could generate F2026E adj. EBITDA of ~$2.1 billion, which at the peer multiple implies value of ~$31.5 billion.  Assuming the remaining Express business generates ~$9.25 billion in F2026E adj. EBITDA and were valued at the peer multiple implies value of ~$69.25 billion

Accounting for corporate costs, capitalized at the blended corporate average, as well as projected net debt implies a sum of the parts fair value of nearly $85 billion or ~$342.50 per share (based on a diluted share count of ~248 million).

Barington Capital, a ~2% holder, issues a public letter to MATW’s Board calling for the CEO’s ouster, the addition of three new Board members, cost & leverage reductions as well as the expansion of the ongoing strategic review; base case fair value remains $44 per share

This morning, before the market open, Barington Capital, currently a ~2% owner (up from its initial stake of 0.6%) who has served as a consultant to Matthews pursuant to a cooperation agreement struck in December 2022, sent a public letter to the Board calling for, among other things, the prompt replacement of the CEO along with the addition of three new Board members, the divestment of the SGK Brand Solutions business, as well as cost & debt reduction initiatives.

Specifically, the investors asserts, which in our view is a matter of objective fact, that at least from a stock price perspective Mr. Bartolacci’s 18-year term at the helm of MATW has not been a profitable one for investors. In that context, both the cost structure and leverage profile, which currently stands at 3.6x (i.e., high but not existential), have risen and the share price has languished; as a remedy, Barington recommends $50-$80 million of cost reductions as well as the proceeds of any divestments be directed toward debt reduction.  (Anecdotally, the company has targeted a long-term leverage target of “at or below 3.0x” and indicated that improving its leverage profile remains a “priority” in F2025.)

Additionally, the investor intends to nominate three directors to the company’s Board, which is currently comprised of 10 members (of whom 9 are deemed independent), at the 2025 Annual Meeting.

For context, in November 2024 management announced that given the “growth opportunities” and perceived valuation disconnect the company had retained J.P. Morgan to explore strategic alternatives.  While the review was expected to be comprehensive it, at least anecdotally, seems to be primarily focused on the Industrial Solutions business (which we note itself is comprised of MATW’s Energy Storage, Warehouse Automation and Product Identification offerings).  To that end, Barongton’s position calls for the review to widen to include the SGK Brand Solutions business (which we view, for our part, as non-core).

In terms of F2025 guidance, recall the company recently provided a “cautious” full-year adjusted EBITDA outlook of $205-$215 million (compared with the consensus estimate of $205 million, at the time), reflecting the expectations for continued stability at Memorialization, growth at SGK and on-going uncertainty within the Industrial Technologies segment. 

Our base case fair value estimate for MATW remains $44 per share, reflecting a blended multiple of ~9.0x multiple on our F2026E adjusted EBITDA of $~$223.5 million and net debt of ~$632 million (see Exhibit #1 on page 2).

PCS Research Group welcomes and encourages your feedback.  Please feel free to call us if we can be of service.

Newpark Resources (NR) to rebrand as NPK International (NPKI) following the sale of its Fluid Systems business; fair value estimate remains $10 per share  

Today, Newpark Resources announced the company’s formal rebranding into NPK International, Inc. (NPK), effective immediately, along with the launch of its new corporate website at www.npki.com, reflecting its transformation into a pure-play worksite access solutions business following the sale of its Fluid Systems business (to private equity investor SCF Partners) in September 2024.

Accordingly, the company will also change its trading ticker on the New York Stock Exchange (NYSE) to NPKI (from NR), as of December 19, 2024.

The new NPK will henceforth go to market as a “vertically integrated, pure-play provider of work access solutions” noting an “established based of global infrastructure customers, including those in the utility and energy markets”.

In terms of capital allocation priorities, NPK International/NPKI (formally Newpark Resources/NR) will be focused on organic growth investments in its composite matting rental fleet (which, we highlight, has historically generated 25%-plus cash-on-cash returns), opportunistic/complementary acquisitions (in adjacent worksite access markets), and buybacks through its $50 million share repurchase authorization, which at current prices represents ~8% of the common stock.  (Notably, while the company did not repurchase any shares on 1H 2024 prior to the commencement of its strategic review NR repurchased nearly 12% of its stock in 2022-2023.)

In terms of guidance, recall that on its 3Q 2024 earnings call NR guided to Industrial Solutions segment sales of $217-$233 million, implying growth of ~5%-12%, with adj. segment EBITDA of $77-$81 million.  Total Industrial Solutions segment capital expenditures are expected to be $33-$35 million in 2024E (of which ~75% is anecdotally expected to be deployed towards growth in the rental fleet, which again historically generates 25%-plus cash on cash returns).

For our part, the initial thesis was that aside from the incremental financial flexibility/opportunity for capital returns provided by a successful transaction for Fluid Systems we estimated a deal (even despite its somewhat underwhelming purchase price) could precipitate a significant re-rating of NR (soon to be NPKI) shares toward a valuation more in-line with specialty rental & services peers as opposed to a legacy oilfield services provider (i.e., high single-digit to low double-digit multiples versus low- to mid-single digit-type valuations).  

Our base case fair value for NR (again, soon to be NPKI) remains ~$10 per share based on a 10.5x multiple on 2025E adjusted EBITDA, while accounting for corporate costs and projected net debt/cash (see Exhibit #1 on page 2).

GTX announces a long-term capital allocation framework, including a $0.06 quarterly dividend, a $250 million share repurchase program for 2025 and the intent to return at least 75% of adj. FCF to shareholders; base case fair value remains ~$12 per share

This morning, just prior to the market open, GTX announced a long-term capital allocation framework, which included a quarterly dividend, a new share repurchase program for 2025 and the articulated intent to return “75% or more” of adjusted free cash flow to shareholders.

On the dividend front, the company announced a $0.06 per share quarterly dividend (to be paid on January 31, 2025, to shareholders of record as of the close on January 15^th); at current levels, we note the payout, which amounts to roughly $50 million annually, implies a ~2.8% yield.

On the share repurchase front, GTX’s Board authorized a new $250 million share repurchase program for 2025.  (Recall, GTX is on-track to exhaust its previous $350 million repurchase program for 2024). At current levels, the new authorization would further reduce the outstanding share count by ~13%, by our calculation, in addition to the ~10% already repurchased so far in 2024 (through the September-quarter).

For context, GTX ended 3Q 2024 with net debt of $1.399 billion with a net leverage ratio of 2.26x (with a relative near-term target of ~2.0x).

As well, on the guidance front (see Exhibit #2 on page 2), we note that management currently expects full-year 2024 sales of $3.4-$3.5 billion, representing a 10%-12 year-over-year decline on a constant currency basis, with GAAP net income and adjusted EBITDA of $240-$255 million and $585-$605 million, respectively. Cash flow from operations is projected to be $348-$398 million, resulting in adj. free cash flow (FCF) of $300-$350 million.  (Importantly, we highlight that, at the midpoint, management’s FCF outlook implies a current yield of nearly ~17.5%.  Moreover, while the company has not yet provided specific guidance for 2025 the aforementioned capital allocation framework would, by our calculation, suggest a baseline of ~$400 million in FCF for 2025.)

In terms of the longer-term outlook, on which we remind investors that management has solid visibility (with ~80% of sales over the next 5-years have already been award by its OEM customers), we broadly concur with management’s contention that the core turbocharger business is likely to be bigger in 2030 than it is today and that GTX will generate free cash that equals or exceeds the company’s current market capitalization over the next five years.

Our base case fair value estimate for GTX remains ~$12 per share, reflecting an 8.5x multiple on our 2025E adjusted net income forecast of $264 million and a fully diluted share count of ~190 million (see Exhibit #3 on page 2).

PCS Research Group welcomes and encourages your feedback.  Please feel free to call us if we can be of service.

The Radar Screen highlights 15 to 20 companies each month that are potential candidates for a breakup, restructuring or takeout. This report provides a summary of each situation, and covers a wide range of potential restructuring stories with varying degrees of upside potential.

This month’s Radar Screen includes the following companies:

• Albany International (AIN)
• Alphabet Inc. (GOOG)
• Bloomin’ Brands (BLMN)
• California Resources Corp. (CRC)
• Crown Castle Inc. (CCI)
• FedEx Corporation (FDX)
• Goodyear Tire & Rubber Co. (GT)
• Honeywell International Inc. (HON)
• IAC Inc. (IAC)
• Intel Corporation (INTC)
• Luxfer Holdings (LXFR)
• Masimo Corporation (MASI)
• Matthews International Corp. (MATW)
• RCI Hospitality Holdings Inc. (RICK)
• Stanley Black & Decker (SWK) 
• TFI International Inc. (TFII)
• TriMas Corporation (TRS)

PCS Research Group welcomes and encourages your feedback.  Please feel free to call us if we can be of service

Unilever Shifts Focus of Ice Cream Separation to a Demerger/Spin-Off (From a Sale)

In conjunction with a capital markets event, held on November 22, 2024, Unilever (ULVR LN, UNA UA), indicated that its focus for the separation of its Ice Cream business has shifted toward a demerger/spin-off.  The shift in strategy seemingly comes following a tepid response to its efforts to sell the “underperforming” asset, which was announced in March 2024. The company is still targeting completing a separation transaction by the end of 2025 (with more detailed strategic/financial disclosures slated for 1Q 2025 and an internal separation potentially occurring in mid-2025).

Currently, Unilever reports five segments: 1) Beauty & Wellbeing (21% of consolidated 2023 sales and 22.5% of adj. EBITDA), which focuses on hair & skin care products with brands, such as Dove, Vaseline, Pond’s TresSemme, Sunsilk, and Dermalogica and Nutrafol; 2) Personal Care (~23% of consolidated sales and 27% of adj. EBITDA), which supplies skin cleansers, deodorants and oral care products with a portfolio of brands, including Dove, Axe, Pepsodent, Rexona, Lux, and Lifebuoy; 3) Home Care (~20.5% of consolidated sales and 15.5% of adj. EBITDA), which provides fabric cleaners & enhancers along with home hygiene products under an umbrella of brands, such as Comfort, Radiant, Surf, Cif, Omo, Sunlight and Domestos; 4) Nutrition (~22% of consolidated sales and 24% of adj. EBITDA), which supplies food, condiments, cooking aids and mini-meals via brands, such as Hellmann’s Knorr and Horlicks; and 5) Ice Cream (13.5% of consolidated 2023 sales and 11% of adj. EBITDA), which operates the Ben & Jerry’s, Wall’s, Cornetto and Magnum brands.

In terms of financial guidance, for full year 2024, management expects underlying consolidated sales growth of 3%-5% (within its targeted multi-year range), which is expected to be largely driven by volume, with an underlying operating margin of at least 18%.  Within the company’s Growth Action Plan 2030 (dubbed GAP 2030), which includes the separation of the Ice Cream division as well as ~€800 million of cost savings/operational efficiencies, management targets 2%-plus compound annual volume growth along with gross margin expansion while also targeting a total shareholder return (TSR) in the top 1/3^rd of its peer group.

In terms of valuation, the Ice Cream division’s closest peer is likely Nestle SA (NESN SW), which trades at ~14x 2025E EV/EBITDA (and to a lesser degree GIS, which trades at ~12x).  Applying a 12x multiple to 2025E EBITDA implies a segment valuation of ~€16.2 billion.  The Beauty & Wellbeing, Personal Care and Home Care segments could be compared with a broad range of peers, including Beiersdorf AG (BEI GY), Colgate-Palmolive (NYSE: CL), Church & Dwight (NYSE: CHD), Estee Lauder (NYSE: EL), Kenvue Inc.  (NYSE: KVUE), Kimberly-Clark (NYSE: KMB), L’Oreal (OR FP), Procter & Gamble (NYSE: PG), and Reckitt Benckiser (RKT LN), which trade at ~16x 2025E EV/EBITDA (in a range of 13x-19.5x.  Applying a blended multiple (based on margin profiles) in-line with the peer average implies aggregate value of €128.7 billion.  Lastly, the Nutrition segment could be compared with peers, such as Danone SA (BN FP), Kraft Heinz (NYSE: KHC) and General Mills (GIS), which trade at ~13x 2025E EV/EBITDA.  Applying the peer average to 2025E segment EBITDA implies value of ~€40.5 billion. 

Accounting for corporate costs as well as projected net debt (and minority interest) yields a preliminary base case valuation of ~€149 billion or ~€59 per share.