The Weekly Wrap-Up provides summaries of recent publications from Hidden Opportunities including links to the full-length research reports.  If you haven’t engaged with the research over the past seven days, the Weekly Wrap-Up will quickly update you on our newest and highest conviction ideas. 

HIGH-CONVICTION RECOMMENDATIONS (LONG):

• Newpark Resources, Inc. (NR)
• TFI International Inc. (TFII)
• Luxfer Holdings (LXFR)
• TriMas Corporation (TRS)

RECENT INITIATIONS:

• Luxfer Holdings PLC (LXFR)
• APi Group (APG) 

LATEST PUBLICATIONS & UPDATES:

UPDATE: IAC inc. (IAC)

IAC to consider a potential spin-off of its ~85% ownership in ANGI; slightly raises the mid-point of full year 2024E adj. EBITDA guidance

IAC announced that the company was considering a spin-off of its 85% stake in home improvement marketplace Angi Inc. (NASDAQ: ANGI).  In terms of timing, while not committing to a specific timeline for a decision management indicated it would likely come by the end of 2Q 2025 (with anecdotal commentary suggesting the company is ultimately more likely than not to move ahead with a transaction). Also, IAC will begin to report Care. com as a standalone segment beginning in 4Q 2024 (currently in the Emerging & Other segment).

While the contemplation of an ANGI separation is not overly surprising given IAC’s long history of spins (i.e., Ticketmaster, ILG, Lending Tree, HSN, Expedia, TripAdvisor, Trivago, Match Group, & Bluecrew) the timing comes somewhat earlier than we would have expected as Angi is still going through a bit of a turnaround (with the focus on service & profitability as opposed to sales growth) and the valuation/stock price remains depressed.  That said, the transaction should create a leaner parent company that would be seemingly easier for investors to value (i.e., reduce its conglomerate discount) as well as provide ANGI’s stock with increased liquidity. 

Notably, we highlight that the implied value of IAC’s so-called “stub” has remained relatively flat over the last several quarters, which, for context, represents among the lowest implied valuation we have seen over the last several years and a material discount to our fair value estimate of ~$3.015 billion (see Exhibits #2 & 3 on pages 2-3). 

In terms of valuation, among its private holdings, based on IAC’s guidance and commentary, as well as peer and M&A valuations, we value Dotdash Meredith at ~$23 per share and Emerging & Other at $10 per share, which awards per share values of ~$7 and ~$3.50 to Care.com and Vivian Health, respectively, while assigning zero value to the other businesses (i.e., The Daily Beast, IAC Films and Newco). Search’s profits are assumed to partially offset corporate costs, while Turo is valued at ~$4 per share. For its public holdings, based on slightly discounted prices, we value ANGI at ~$11.00 per share and MGM at ~$33 per share. Accounting for remaining corporate costs as well as net debt yields a total sum-of-the-parts value of ~$72 per share (with bull and bear cases of ~$89 and ~$40.50 per share, respectively; see Exhibit #4 on page 4).

UPDATE: PAR Technology (PAR)

PAR reports solid 3Q 2024 results with ~25% organic ARR growth and the achievement of adj. EBITDA positivity; closed the sale of Rome Research during the quarter, which completes the divestiture of PAR Government resulting in the company becoming a pure-play restaurant technology platform; close coverage, as of today’s market bell

PAR reported ~41% top-line growth to ~$96.8 million (compared with consensus of ~$92.1 million), including ~25% organic annual recurring revenue (ARR) growth (which, on annualized basis, now stands at ~$248 million).  More importantly, the company achieved a key milestone/inflection point in its journey to profitability by generating adj. EBITDA of $2.4 million (as compared with a $6.6 million loss in the prior period and consensus of $0.6 million) in 3Q 2024.  Adjusted EPS improved to a loss of $0.09 (from a $0.35 loss in 3Q 2023 and the consensus loss forecast of $0.21).

Notably, the company also closed the sale of Rome Research Corp. (announced in June 2024 along with the sale the sale of its PGSC to Booz Allen Hamilton), which completes the divestiture of PAR’s Government segment.

In that context, with shares trading toward the higher-end of our bull/bear valuation scenarios in today’s trading (see Exhibit #1 on page 2) and the company’s transformation into a pure-play restaurant technology platform now complete we prefer to maintain a disciplined approach and focus our attention on names that better fit our broader “value plus catalyst” approach. 

As such, we will close coverage of PAR Technology Corp. (PAR), as of November 8th market close.

For context, shares of PAR have appreciated ~41% (outperforming the S&P 500 by ~10% and the Russell 2000 by ~29.5%) since our initial recommendation in December 2021. 

Radar Screen – November 2024

Monthly publication providing ongoing analysis on companies where we see potential for a value-unlocking event

Companies discussed this month:  Albany International (AIN), Alphabet Inc. (GOOG), Bloomin’ Brands (BLMN), California Resources Corp. (CRC),Comcast Corporation (CMCSA), Crown Castle Inc. (CCI), FedEx Corporation (FDX), Goodyear Tire & Rubber, Inc. (GT), Intel Corporation (INTC), Masimo Corp. (MASI), Matthews International Corp. (MATW), RCI Hospitality Inc. (RICK), Stanley Black & Decker (SWK), TFI International Inc. (TFII), TriMas Corporation (TRS)

Product Specialist

Rich Albanese
ralbanese@pcsresearchgroup.com
+1 646-839-5566

The Weekly Wrap-Up provides summaries of recent publications from the Spin-Off Report including links to the full-length research reports.  If you haven’t engaged with the research over the past seven days, the Weekly Wrap-Up will quickly update you on our newest and highest conviction ideas.

UPCOMING SPIN-OFFS AND EXPECTED COMPLETION DATES:

• Liberty Global (LBTYA) / Sunrise – November 12, 2024
• Spectrum Brands (SPB) / Home & Personal Care Business – 4Q 2024
• Western Digital (WDC) / HDD Business – 4Q 2024
• Holcim Ltd. (HOLN SW) / North American Business – 1H 2025
• DuPont Inc. (DD) / Electronics and Water Business – 2H 2025
• Topgolf Callaway Brands Corp. (MODG) / Topgolf – 2H 2025
• Fortive Corp. (FTV) / Precision Technologies Business – Mid 2025
• SKF AB (SKFB SS) / Automotive Business – 1H 2026

RECENT PUBLICATIONS:

UPDATE:  Berry Global (BERY) / Magnera (MAGN) – November 5, 2024

On November 4, after the market close, Berry completed the spin-off of it HH&S business, which was concurrently merged with Glatfelter Corp. (GLT) in a Reverse Morris Trust (RMT) transaction to form a new, independent, publicly-traded company dubbed Magnera Corp. (MAGN), which began regular way trading on November 5.

Upon completion, BERY shareholders collectively owned ~90% of Magnera with GLT investors controlling the remaining ~10%.  BERY shareholders received 0.276305 shares of MAGN for every BERY share owned (or 31.807098 million shares, accounting for the 13-for-1 reverse stock split effected by GLT on November 4th). This implies a post-spin share count at MAGN of 35.34 million (versus our previous assumption of ~34.7 million); consequently, we revise our post-spin price target for MAGN to $53 per share (from $54 per share) while our post-spin fair value estimate for BERY remains ~$75 per share.

We maintain BUY ratings on both post-spin BERY and post-spin MAGN.  Given the implied upside for each post-spin entity we think the greater return potential lies with MAGN (albeit with a higher degree of initial volatility).

Our initial thesis, which we think remains intact, was that the now consummated transaction was set to create two stronger companies with solid fundamentals. Both went through tough cyclical downturns, especially Glatfelter, and carried significant leverage, which weighed on their valuations. This transaction helps both companies reduce their debt, return capital, streamline operations, and positions them for growth just as signs of a recovery in demand are starting to emerge.

Shares of Magnera, the smaller entity, will likely face post-spin volatility given its size, which is not likely sufficient for inclusion in the S&P 500 index, but it is entering the public market with an attractive valuation.  Shares could offer material upside potential once the initial/natural shareholder rotation is exhausted, which, in our experience, historically persists for ~7-10 trading days following completion.

COMPREHENSIVE REPORT:  Liberty Global (LBTYA) – November 1, 2024

In February 2024, Liberty Global announced the spin-off of Sunrise into a standalone public company listed on the SIX Swiss Exchange under the ticker SUNN. Post spin, the new entity (Sunrise Communications AG) will be the 2nd largest full-service telco operating solely in Switzerland. The record date was November 4, 2024 and the Nasdaq ADS’s expected regular trade date is November 13, 2024, 3) Class A shares (SUNN) will start trading on the SIX Swiss Exchange on November, 15 2024.

Post spin-off, Liberty Global will continue to operate all other businesses independently, including Belgium and Ireland operations, the Venture business, and the joint venture (JV) operations in the UK and Netherlands. The corporate name of Liberty Global will remain the same and will continue to trade on Nasdaq under the tickers LBTYA, LBTYB and LBTYK for its Class A, B and C shares, respectively.

As part of this transaction, Sunrise will issue American Depositary Shares (ADSs) to all share classes of Liberty Global shareholders, which will be convertible into the corresponding common Class A shares on the Swiss Exchange. Liberty Global shareholders will receive one Class A ADS for every five Class A or C shares owned, and two Class B ADSs for each Class B share. The Class A ADSs will trade on Nasdaq under the ticker ‘SNRE’ for ~9 months and can be converted into Class A shares on the SIX Swiss Exchange (SUNN). Class B shares of Sunrise will not be traded on any market. Class B shareholders in SUNN, primarily constituting management representatives, will have a 3.6% ownership and control ~27% voting rights.

Management’s rationale for the spin-off is to enable the standalone entity to grow independently with focused strategic priorities, faster decision-making and need-based capital allocation which will unlock value for Liberty Global shareholders. Management believes the spin-off will provide more transparency in evaluating the independent operational capability of Sunrise and potentially attract capital from local Swiss investors preferring dividends. Per management’s assessment, the current consolidated business of Liberty Global is undervalued (management’s implied internal share price estimate is $48 vs. the current market price of ~$20) due to a conglomerate discount. The standalone Sunrise, as a pure play Swiss telco player, has potential for an upward rerating. The transaction could also help de-risk/decouple its business from potential headwinds facing other Liberty operating entities in Belgium, Netherlands, the UK, and Ireland.

SUNN’s revenue, EBITDAaL and adj. FCF guidance are likely to be stable in 2024 and 2025.  Key tailwinds include volume growth and market share gains in the B2C space from privately held Yallo and ongoing traction in B2B offerings. However, the FCF outlook will be the key consideration for investors. Given no major capex plans such as FTTH (Fiber to the home)/Docsis 4.0 upgrades or spectrum investments over the next 3-4 years and a relatively comfortable leverage ratio of 4.2x net Debt/EBITDA post spin-off, we expect the company to deliver on its FCF outlook. Notably, management announced CHF 240 million in dividends for FY 2024 (which will be paid in 2025) with a targeted payout ratio of up to 70% of adjusted FCF going forward, subject to a net leverage ratio between 3.5-4.5x.

On a pre-spin, sum-of-the-parts basis, we value Liberty Global at $22 per share. We estimate SUNN (post spin) accounts for over half of Liberty’s current market capitalization ($12.00 per share from the new Class A common shares of SUNN). Post-spin, Liberty will retain its core European telecom assets, including the VMO2 JV (UK), Telenet (Belgium), Vodafone Ziggo (Netherlands), Virgin Media Ireland, and its venture investments. We value the remaining Liberty business at approximately $3.5 billion, or $9.60 per share, using a sum-of-the-parts approach.

Liberty has a strong track record of share repurchases, having reduced its share count by nearly 60% over the past seven years with an additional 10% planned for 2024. Further potential upside drivers include incremental value from its Venture holdings and potential monetization of UK NetCo and Benelux HoldCo.

We recommend purchasing shares of Liberty Global ahead of the planned separation due to 1) the implied upside to our fair value estimate of SUNN from any potential catchup to Swisscom’s (SCMN SW) dividend yield of ~4% (vs. SUNN’s implied dividend yield at 6.2%), 2) a potential buyback at the Liberty level rewarding post-spin Liberty shareholders, 3) the potential incremental value creation in Liberty post-spin from its holdings in the Venture business (conservatively valued at 30% discount to BV in our fair value estimate of $1.2bn, including ITV, Lionsgate, Pax8 and Edgeconnex at $901 million, versus Liberty’s internal fair value estimate of $3 billion; and 4) further value unlocking at Liberty post-spin from potential monetization of UK NetCo and Benelux HoldCo.

UPDATE: MDU Resources (MDU) / Everus Construction (EVG) – November 1, 2024

Radar Screen – November 2024

Monthly publication providing ongoing analysis on companies where we see potential for a value-unlocking event

Companies discussed this month:  Albany International (AIN), Alphabet Inc. (GOOG), Bloomin’ Brands (BLMN), California Resources Corp. (CRC), Comcast Corporation (CMCSA), Crown Castle Inc. (CCI), FedEx Corporation (FDX), Goodyear Tire & Rubber Co., Intel Corporation (INTC), Luxfer Holdings (LXFR), Masimo Corp. (MASI), Matthews International Corp. (MATW), RCI Hospitality Inc. (RICK), Stanley Black & Decker (SWK), TFI International (TFII), TriMas Corporation (TRS)

Spin-Off Report Calendar – November 2024

Published monthly, The Spin-Off Calendar provides one-page summaries of every spin-off under coverage from the announcement date, followed by the filing of the Form 10 and continuing 60 days post completion.

Spin-Off Report Compendium – August 2024

Murray Stahl’s commentary on various investing themes and single stock recommendations.

European Spin-Off Compendium – September 2024

Murray Stahl’s commentary on various investing themes and single stock recommendations in Europe. 

Bits & Pieces – October 2024

Covers mispriced stub securities, tracking stocks and other arbitrage opportunities.

Product Specialist

Rich Albanese
ralbanese@pcsresearchgroup.com
+1 646-839-5566

The Weekly Wrap-Up provides summaries of recent publications from Hidden Opportunities including links to the full-length research reports.  If you haven’t engaged with the research over the past seven days, the Weekly Wrap-Up will quickly update you on our newest and highest conviction ideas. 

HIGH-CONVICTION RECOMMENDATIONS (LONG):

• Newpark Resources, Inc. (NR)
• TFI International Inc. (TFII)
• Luxfer Holdings (LXFR)
• TriMas Corporation (TRS)

RECENT INITIATIONS:

• Luxfer Holdings PLC (LXFR)
• APi Group (APG) 

LATEST PUBLICATIONS & UPDATES:

UPDATE: PAR Technology (PAR)

PAR reports solid 3Q 2024 results with ~25% organic ARR growth and the achievement of adj. EBITDA positivity; closed the sale of Rome Research during the quarter, which completes the divestiture of PAR Government resulting in the company becoming a pure-play restaurant technology platform; close coverage, as of today’s market bell

This morning, before the market open, PAR reported ~41% top-line growth to ~$96.8 million (compared with consensus of ~$92.1 million), including ~25% organic annual recurring revenue (ARR) growth (which, on annualized basis, now stands at ~$248 million).  More importantly, the company achieved a key milestone/inflection point in its journey to profitability by generating adj. EBITDA of $2.4 million (as compared with a $6.6 million loss in the prior period and consensus of $0.6 million) in 3Q 2024.  Adjusted EPS improved to a loss of $0.09 (from a $0.35 loss in 3Q 2023 and the consensus loss forecast of $0.21).

Notably, the company also closed the sale of Rome Research Corp. (announced in June 2024 along with the sale the sale of its PGSC to Booz Allen Hamilton), which completes the divestiture of PAR’s Government segment.

In that context, with shares trading toward the higher-end of our bull/bear valuation scenarios in today’s trading (see Exhibit #1 on page 2) and the company’s transformation into a pure-play restaurant technology platform now complete we prefer to maintain a disciplined approach and focus our attention on names that better fit our broader “value plus catalyst” approach. 

As such, we will close coverage of PAR Technology Corp. (PAR), as of November 8th market close.

For context, shares of PAR have appreciated ~41% (outperforming the S&P 500 by ~10% and the Russell 2000 by ~29.5%) since our initial recommendation in December 2021. 

Radar Screen – November 2024

Monthly publication providing ongoing analysis on companies where we see potential for a value-unlocking event

Companies discussed this month:  Albany International (AIN), Alphabet Inc. (GOOG), Bloomin’ Brands (BLMN), California Resources Corp. (CRC),Comcast Corporation (CMCSA), Crown Castle Inc. (CCI), FedEx Corporation (FDX), Goodyear Tire & Rubber, Inc. (GT), Intel Corporation (INTC), Masimo Corp. (MASI), Matthews International Corp. (MATW), RCI Hospitality Inc. (RICK), Stanley Black & Decker (SWK), TFI International Inc. (TFII), TriMas Corporation (TRS)

Product Specialist

Rich Albanese
ralbanese@pcsresearchgroup.com
+1 646-839-5566

The Weekly Wrap-Up provides summaries of recent publications from the Spin-Off Report including links to the full-length research reports.  If you haven’t engaged with the research over the past seven days, the Weekly Wrap-Up will quickly update you on our newest and highest conviction ideas.

UPCOMING SPIN-OFFS AND EXPECTED COMPLETION DATES:

• Spectrum Brands (SPB) / Home & Personal Care Business – 4Q 2024
• Liberty Global (LBTYA) / Sunrise – November 12, 2024
• Western Digital (WDC) / HDD Business – 4Q 2024
• MDU Resources Group (MDU) / Everus Construction Group (ECG) – October 31, 2024
• Berry Global Group Inc. (BERY) / HH&S Business (to merge w/ Glatfelter) – November 4, 2024
• Holcim Ltd. (HOLN SW) / North American Business – 1H 2025
• DuPont Inc. (DD) / Electronics and Water Business – 2H 2025
• Topgolf Callaway Brands Corp. (MODG) / Topgolf – 2H 2025
• Fortive Corp. (FTV) / Precision Technologies Business – Mid 2025
• SKF AB (SKFB SS) / Automotive Business – 1H 2026

RECENT PUBLICATIONS:

COMPREHENSIVE REPORT:  Liberty Global (LBTYA)

November 1, 2024

In November 2020, Liberty Global (LBTY) acquired Sunrise through its Swiss subsidiary, UPC. Post acquisition the merged entity Sunrise-UPC became a wholly owned subsidiary of LBTY. In February 2024, LBTY announced the spin-off of Sunrise into a standalone public company listed on the SIX Swiss Exchange under the ticker SUNN. Post spin, the new entity (Sunrise Communications AG) will be the 2nd largest full-service telecommunications provider (or “telco”), with operations solely in Switzerland. Key timelines for the spin-off: 1) the record date is set to be 4th November 2024, 2) the Nasdaq ADS’s expected regular trade date is 13th November 2024, 3) Class A shares will start trading on the SIX Swiss Exchange on November, 15 2024.

Post the spin-off of Sunrise, LBTY will continue to operate all other businesses independently, including the fully integrated Belgium (Telenet) and Ireland operations, the Venture business, and the joint venture (JV) operations in the UK (VMO2-50%) and Netherlands (VodafoneZiggo- 50%). The corporate name of Liberty Global will remain the same and it will continue to trade on Nasdaq under the tickers LBTYA, LBTYB and LBTYK for its Class A, B and C shares, respectively. As part of this transaction, Sunrise will issue American Depositary Shares (ADSs) to all share categories of Liberty Global (LBTY) shareholders, which will be convertible into the corresponding common Class A shares on the Swiss Exchange. LBTY shareholders will receive one Class A ADS for every five Class A or C shares owned, and two Class B ADSs for each Class B share. The Class A ADSs will trade on Nasdaq under the ticker ‘SNRE’ for ~9 months and can be converted into Class A shares on the SIX Swiss Exchange (ticker – SUNN). Class B shares of Sunrise will not be traded on any market. Class B shareholders in SUNN, primarily constituting management representatives, will have a 3.6% ownership and control ~27% voting rights.

Management’s rationale for the spin-off is to enable the standalone entity to grow independently with focused strategic priorities, faster decision-making, agility and need-based capital allocation which in turn unlock value for LBTY shareholders. Management believes the spin-off will provide more transparency in evaluating the independent operational capability of Sunrise and potentially attract capital from local Swiss investors preferring dividends. Further, at least per management’s internal assessment, the consolidated business of LBTY is undervalued (i.e., management’s implied internal share price estimate is $48 vs. CMP at ~$20) due to conglomerate discount at Holdco Level. The standalone entity, as a pure play Swiss telco player, has potential for upward rerating. As well, the transaction could also help in derisking/decoupling its business from other operating entities from any potential headwinds across Belgium, Netherlands, the UK, and Ireland.

SUNN’s revenue, EBITDAaL and adj. FCF guidance are broadly stable in 2024, 2025 and the mid-term. We do not foresee significant challenges in meeting these targets unless there are major developments in the competitive dynamic within the Swiss telecom market. Key tailwinds for supporting the revenue outlook include volume growth/market share gains in B2C from privately held Yallo and ongoing traction in the B2B ICT offerings. However, we surmise that the FCF outlook will be the key consideration for investors. To that end, given no major capex plans such as FTTH/Docsis 4.0 upgrades or spectrum investments over the next 3-4 years and a relatively comfortable leverage ratio of 4.2x net Debt/EBITDA post the spin-off, we expect the company to deliver on its FCF outlook. Notably, management announced CHF 240 million in dividends for FY 2024 (which will be paid in 2025) with a targeted payout ratio of up to 70% of adjusted FCF going forward, subject to net leverage ratio between 3.5-4.5x.

On a pre-spin, sum-of-the-parts basis, we value LBTY at $22.00 per share. We estimate SUNN (post spin) accounts for over half of LBTY’s current market capitalization ($12.00 per share from the new Class A common shares of SUNN). Post-spin, LBTY will retain its core European telecom assets, including the VMO2 JV (UK), Telenet (Belgium), Vodafone Ziggo (Netherlands), Virgin Media Ireland, and its venture investments. We value the remaining LBTY business at approximately $3.5 billion, or $9.60 per share, using a sum-of-the-parts (SOTP) approach.

LBTY has a strong track record of share repurchases, having reduced its share count by nearly 60% over the past seven years and an additional 10% planned for 2024 (with 8% done through 3Q 2024). Further potential upside drivers include incremental value from its Venture holdings and additional value unlocking from potential monetization of UK NetCo and Benelux HoldCo. We recommend purchasing shares of LBTY ahead of the planned separation due to 1) the implied upside to our fair value estimate of SUNN from any potential catchup to Swisscom’s (SCMN SW) dividend yield of ~4% (vs. SUNN’s implied dividend yield at 6.2% based on our fair value estimate), 2) a potential buyback at the LBTY level rewarding post-spin LBTY shareholders, 3) the potential incremental value creation in LBTY post-spin from its holdings in the Venture business (conservatively valued at 30% discount to BV in our fair value estimate of $1.2bn, including ITV, Lionsgate, Pax8 and Edgeconnex at $901 million, versus LBTY’s internal fair value estimate of $3 billion; and 4) further value unlocking at LBTY post-spin from potential monetization of UK NetCo and Benelux HoldCo.

UPDATE: MDU Resources Group (MDU)

November 1, 2024

MDU Completes the Spin-Off of Everus Construction (ECG); Maintain NEUTRAL Initial Ratings

On October 31, 2024, after the market close, MDU Resources Group Inc. (NYSE: MDU), completed the 100% spin-off of Everus Construction Group (NYSE: ECG). Shares of ECG were distributed, on a 1- for 4-basis (i.e., one share of ECG for every four shares of MDU), to shareholders of record as of the market close on October 21, 2024.

In so-called “when-issued” (WI) trading), which began on October 28th, Everus (ECG) opened at ~$49 per share (versus our $51 pe share fair value estimate) while MDU has traded around ~$16 per share (versus our ~$18 per share fair value estimate). Considering Everus will join the S&P Small Cap 600 Index (with a global industry classification standard or GCIS classification as an “Industrial”) and MDU will remain in the same index (albeit reclassified with GCIS classification as a “Utility”) we expect a expect a relatively orderly open (with initial indications suggesting MDU trading at ~$16 per share and ECG poised to open slightly ahead of our fair value estimate). To that end, we maintain an initial stance of NEUTRAL.

Recall, we downgraded shares of pre-spin MDU (from BUY) on October 17th following a ~22% rise in the stock following our initial recommendation in June 2024 (compared with a 9.25% increase in the S&P 500 and a 12.85% rise in the Russell 2000). That said, at the time, we indicated that our longer-term bias was toward the post-spin Everus as it should experience a degree of re-rating toward its engineering & infrastructure construction (E&C) peers over time and has a solid (albeit likely more volatile) growth outlook, in part driven by the expected benefits from, among other things, large government spending programs, such as the Infrastructure Investment & Jobs Act and the Inflation Reduction Act while the post-spin parent, MDU, could be more attractive/suitable for investors seeking stability in earnings and cash flow (with a dividend payout target of 60%-70% and no foreseeable equity issuance prior to 2027) in a now pure-play regulated utility (see Exhibit 3 on page 3). In that context, we will continue to monitor shares for potential opportunities in initial trading over the coming days.

UPDATE:  Berry Global Group Inc. (BERY)

October 23, 2024

GLT Shareholders Approve Spin/Merger with BERY; Completion Date Set for Nov. 4^th; Pre- & Post-Spin BERY Values Unchanged, Post-Spin MAGN Moves to $54 Per Share Reflecting a 13-for-1 Reverse Stock Split Ratio (Previously 5-for-1)

COMPREHENSIVE REPORT:  Berry Global Group Inc. (BERY)

October 22, 2024

Radar Screen – October 2024

Monthly publication providing ongoing analysis on companies where we see potential for a value-unlocking event

Companies discussed this month:  Albany International (AIN), Alphabet Inc. (GOOG), Bloomin’ Brands (BLMN), California Resources Corp. (CRC), Crown Castle Inc. (CCI), FedEx Corporation (FDX), Goodyear Tire & Rubber Co., Intel Corporation (INTC), Luxfer Holdings (LXFR),  Masimo Corp. (MASI), Matthews International Corp. (MATW), Netgear Inc. (NTGR), RCI Hospitality Inc. (RICK), Stanley Black & Decker (SWK), TFI International (TFII), TriMas Corporation (TRS)

Spin-Off Report Calendar – November 2024

Published monthly, The Spin-Off Calendar provides one-page summaries of every spin-off under coverage from the announcement date, followed by the filing of the Form 10 and continuing 60 days post completion.

Spin-Off Report Compendium – August 2024

Murray Stahl’s commentary on various investing themes and single stock recommendations.

European Spin-Off Compendium – September 2024

Murray Stahl’s commentary on various investing themes and single stock recommendations in Europe. 

Bits & Pieces – October 2024

Covers mispriced stub securities, tracking stocks and other arbitrage opportunities.

Product Specialist

Rich Albanese
ralbanese@pcsresearchgroup.com
+1 646-839-5566

The Weekly Wrap-Up provides summaries of recent publications from Hidden Opportunities including links to the full-length research reports.  If you haven’t engaged with the research over the past seven days, the Weekly Wrap-Up will quickly update you on our newest and highest conviction ideas. 

HIGH-CONVICTION RECOMMENDATIONS (LONG):

• Newpark Resources, Inc. (NR)
• TFI International Inc. (TFII)
• Luxfer Holdings (LXFR)
• TriMas Corporation (TRS)

RECENT INITIATIONS:

• Luxfer Holdings PLC (LXFR)
• APi Group (APG) 

LATEST PUBLICATIONS & UPDATES:

UPDATE – Luxfer Holdings PLC (LXFR)

LXFR increases full year 2024E adj. EBITDA, EPS and FCF guidance, including the recovery of prior period legal expenses and a property sale; timing for the closing of the closing of the Graphics Arts sale pushed to 1H 2025 (from 2H 2024); fair value remains $16.50 per share

Last night, after the market close, LXFR reported 3Q 2024 consolidated sales up 2.1% to $99.4 million (a marked inflection from the 10.7% top-line declines posted in 1H 2024 albeit largely driven by currency and some customer pull-forwards ahead of hurricane season and potential port strikes) with adj. EBITDA and EPS of $15.4 million and $0.32, respectively. (Excluding legal/insurance recoveries of litigation costs related to the so-called U.S. Ecology case, adj. EBITDA was up ~23% year-over-year to $13.5 million and EPS grew ~35% to $0.27 in 3Q 2024). 

By segment, sales at the Elekton segment increased 7% to $48.8 million with adj. segment EBITDA of $10.8 million while the Gas Cylinders segment posted a top line decline of ~5% to $42.6 million with adjusted segment EBITDA. [The discontinued Graphic Arts segment posted sales of $8 million and was roughly flat from an EBITDA perspective in 3Q 2024.]

Free cash flow (FCF) was $9.3 million in 3Q 2024, and the company ended the September quarter with net debt of $66 million (down from $69.9 million in 2Q 2024), including $3.5 million of cash and debt of $69.5 million.  LXFR’s net leverage ratio at quarter-end was 1.4x (or 1.3x, excluding the Graphic Arts segment), versus ~1.8x at end of 2023 and 2Q 2024. Notably, the company closed the sale of a land property in Lakehurst, NJ late in 3Q 2024 and expects to bank cash proceeds of $7.3 million in 4Q 2024.  The company expects to end 2024 with a leverage ratio of 1.2x (or 1.1x, ex-Graphic Arts).

In terms of financial guidance, management LXFR increased its full year guidance for adj. EBITDA, EPS and FCF to $52-$54 million, $1.09-$1.14 and $35-$37 million, respectively (compared with previous guidance of $47-$50 million, $0.90-$1.00 and $24-$27 million; see Exhibit 1 on page 2).  Excluding the recovery of prior period legal expenses, LXFR’s adj. EBITDA and FCF forecasts would be $45-$47 million, $0.88-$0.94, respectively (versus its previous guide of $42-$45 and $0.75-$0.85). 

In terms of the Graphic Arts sale process, management indicated the timing for the closing of the sale of its Graphic Arts is now expected to be in 1H 2025 (versus previous commentary suggesting 2H 2024). Anecdotally, on this morning’s conference call, management further indicated that the “original buyer” it had identified on last quarter’s earnings call ultimately did not meet the company’s valuations expectations and management is now re-engaged with other interested parties.  [For context, on the 2Q 2024 conference call, LXFR indicated that it was in the last stages of a competitive bid process (that included ~100 prospective buyers) and it had entered exclusive discussions with a single (but unnamed) counterparty.] When pressed on its confidence in the new timing for a transaction management responded that given the level of interest it thought 1H 2025 was a “reasonable” expectation.

Tangentially, the company also reiterated its cognizance that the Gas Cylinders and Elektron businesses have “no material synergies” and that it is committed to continuously evaluating market conditions for opportunities to unlock value (that said, the divestment of the Graphic Arts business is seemingly its top current priority).

Our base case fair value estimate for LXFR remains $16.50 per share, reflecting values of ~$8 per share, ~$10 per share, and ~$0.50 per share for the Gas Cylinders, Elektron and Graphic Arts businesses, respectively. Accounting for projected net debt of ~$2 per share yields a base case sum-of-the-parts fair value of ~$16.50 per share (with bull and bear cases of ~$19 per share and ~$14 per share, respectively; see Exhibit #2 on page 2).

UPDATE – APi Group (APG)

4 results; modestly lowers full-year sales & adj. EBITDA guidance while raising FCF conversion to 75%; anecdotal commentary decidedly bullish on 2025E (& longer-term); maintain $42 per share fair value

This morning, before the market open, APG reported 3Q 2024 consolidated sales up 2.4% to $1.82 billion (compared with consensus of $1.87 billion and guidance of $1.86-$1.91 billion) with ~9.5% growth in adj. EBITDA of $245 million (slightly ahead of the consensus estimate of $243.9 million and at the mid-point of guidance); on a high-level, the modest top-line miss and adj. EBITDA beat reflects some project delays in the Specialty and HVAC verticals along with management’s focus on project selection and margins. [Note: Beginning in 2025, APG will realign the reporting of its project-heavy HVAC business into the Specialty Services segment from the Safety Services business.]

By segment, sales at the Safety Services segment rose 9.7% (3.1% organically) with adj. EBITDA growth of ~24.5% to $210 million while Specialty Services posted a top line decline of ~13.5% (7.7% organically) to $493 million with a ~19.5% decline in adj. EBITDA to $67 million.

APG generated $227 million in adj. free cash flow (FCF) in the quarter, implying a conversion rate of ~93%, and ended 3Q 2024 with a leverage ratio of 2.4x (down from 2.7x in 2Q 2024 & within its long-term target of 2.0x-2.5x), reflecting net debt of $2.365 billion (comprised of cash of $487 million & debt of $2.85 billion).

In terms of guidance (see Exhibit #1 on page 2), APG lowered its full-year sales outlook to ~$7 billion (from $7.15-$7.35 billion, although anecdotal commentary pointing to the “lower-end” left consensus at $7.1 billion) with adj. EBITDA of $890-$900 million (versus the prior guide of $885-$915 million & consensus of $894 million), implying growth of 14%-15%. (Anecdotally, the reduction in top-line guidance reflects ~$150 million of timing delays for projects primarily in the Specialty and HVAC verticals.) The company increased its estimate for adj. FCF conversion (as a % of adj. EBITDA) to “at or above 75%” (up from ~70%), suggesting FCF per share of ~$2.40 per share and a yield of ~7%, by our math.

Without providing specific guidance, management indicated “confidence in reaccelerating growth in 2025 and beyond” as well as its ability to achieve (or outperform) its 13% adj. EBITDA margin target (implying adj. EBITDA of $1 billion-plus was in its “sights”). Additionally, APG intends to host an Investor Day in May 2025 at which it expects to “set new meaningfully higher targets for the following 3-years”.

Our base case fair value estimate for Api Group (APG) remains ~$42 per share, reflecting a blended multiple of ~13.5x on F2025E adjusted EBITDA of ~$975 billion along with projected net debt of ~$1.55 billion and a diluted share count of ~284 million (see Exhibit #2 on page 2).

For context, since our initial recommendation in March 2023 APG shares have appreciated ~84.9% (versus a ~38.8% increase in the S&P 500 Index and a ~16.8% rise in the Russell 2000).

That said, with shares trading roughly in-line with our $40 fair value estimate, which reflected a blended multiple of ~12.5x on F2025E adjusted EBITDA of ~$1.01 billion along with projected net debt of ~$1.4 billion and a diluted share count of ~281.5 million (see Exhibit 2 on page 2), we prefer to maintain a disciplined approach and focus our resources on more currently compelling situations; as such, we will close coverage of APG, as of today’s close.

As always, we will continue to monitor the shares for an opportunity to re-recommend if valuation shifts or more tangible steps toward potential strategic alternatives materialize.

COMPREHENSIVE REPORT – APi Group (APG)

Radar Screen – October 2024

Monthly publication providing ongoing analysis on companies where we see potential for a value-unlocking event

Companies discussed this month:  Albany International (AIN), Alphabet Inc. (GOOG), APi Group Corp. (APG), Bloomin’ Brands (BLMN), California Resources Corp. (CRC), Carrier Global Corp. (CARR), Crown Castle Inc. (CCI), FedEx Corporation (FDX), Goodyear Tire & Rubber, Inc. (GT), Masimo Corp. (MASI), Matthews International Corp. (MATW), Natura & Co. (NTCO), Netgear Inc. (NTGR), Newpark Resources (NR), RCI Hospitality Inc. (RICK), Stanley Black & Decker (SWK), TFI International Inc. (TFII), TriMas Corporation (TRS)

Product Specialist

Rich Albanese
ralbanese@pcsresearchgroup.com
+1 646-839-5566

The Weekly Wrap-Up provides summaries of recent publications from the Spin-Off Report including links to the full-length research reports.  If you haven’t engaged with the research over the past seven days, the Weekly Wrap-Up will quickly update you on our newest and highest conviction ideas.

UPCOMING SPIN-OFFS AND EXPECTED COMPLETION DATES:

• Spectrum Brands (SPB) / Home & Personal Care Business – 4Q 2024
• Liberty Global (LBTYA) / Sunrise – November 4, 2024
• Western Digital (WDC) / HDD Business – 4Q 2024
• MDU Resources Group (MDU) / Everus Construction Group (ECG) – October 31, 2024
• Berry Global Group Inc. (BERY) / HH&S And Films Businesses (to merge w/ Glatfelter) – 4Q 2024
• Holcim Ltd. (HOLN SW) / North American Business – 1H 2025
• DuPont Inc. (DD) / Electronics and Water Business – 2H 2025
• Topgolf Callaway Brands Corp. (MODG) / Topgolf – 2H 2025
• Fortive Corp. (FTV) / Precision Technologies Business – Mid 2025
• SKF AB (SKFB SS) / Automotive Business – 1H 2026

RECENT PUBLICATIONS:

UPDATE: Berry Global group Inc. (BERY)

October 23, 2024

GLT Shareholders Approve Spin/Merger with BERY; Completion Date Set for Nov. 4^th; Pre- & Post-Spin BERY Values Unchanged, Post-Spin MAGN Moves to $54 Per Share Reflecting a 13-for-1 Reverse Stock Split Ratio (Previously 5-for-1)

On October 23, 2024, Glatfelter Corp.’s (NYSE: GLT) shareholders approved the proposed merger with Berry Global Group’s (NYSE: BERY) Health, Hygiene & Specialties (HH&S) business, whose pending spin-off does not require shareholder approval.

Separately, last night, after the market close, the two companies set the record date for the transaction as the close of business on November 1^st with an expected completion date of November 4^th.

To that end, on November 4, 2024, BERY will: 1) distribute all the stock of its HH&S business (or SpinCo) to BERY shareholders of record; 2) SpinCo will then be merged into a subsidiary of Magnera; and 3) the shares of SpinCo received by BERY stockholders will convert into the right to receive shares in Magnera (NYSE: MAGN). In terms of trading, shares of Magnera are not expected to begin trading before the start of “regular way” trading at the market open on November 5^th.

For BERY, shares will trade with “due-bills”, including the right to receive shares of MAGN, from November 1st-4^th and “ex-distribution” beginning on November 5^th. As previously announced, upon completion of the transaction, BERY shareholders will collectively own ~90% of Magnera with GLT investors controlling the remaining 10%.

Notably, the actual/exact share count for post-spin Magnera will still be determined by several factors, including the fully diluted share counts at closing for both BERY and GLT, which, for reference, stood at 115.06 million and 45.95 million, respectively, as of October 20^th (slightly higher than the reported figures of 114.5 million and 45.3 million at quarter-end),  as well as the 13-for-1 stock split that GLT expects to enact just prior to the transaction (i.e., 12:01 a.m. eastern time on Nov 4^th). 

We were previously assuming a 5-for-1 reverse split at GLT; to that end, while our pre- & post-spin fair value estimates for BERY remain intact (at $90 per share and $75 per share, respectively) our post-spin target for MAGN moves to $54 per share (previously $21 per share, based on 5-for-1 split ratio) to reflect the 13-for-1 ratio that was approved by GLT’s Board this morning (see Exhibits on page 2-3). 

All told, we maintain our pre-spin BUY recommendation on BERY where our $90 per share pre-spin target suggests more than 30% upside for the stock from current levels. 

To that end, we think the pending transaction is set to create two stronger companies with solid fundamentals. Both went through a tough cyclical downturn, especially Glatfelter, and carried significant leverage, which weighed on their valuations. This deal will help both companies reduce their debt, return capital, streamline operations, and position them for growth just as signs of market recovery start to emerge. Magnera, the smaller entity post-spin, will likely face some selling pressure due to its size, which is not likely to be sufficient for inclusion in the S&P 500 index, but it’s likely entering the public market with an attractive valuation, and could offer material upside potential once the initial/natural shareholder rotation is exhausted, which, in our experience, historically persists for ~7-10 trading days following completion (see Exhibits on pages 2-3).

COMPREHENSIVE REPORT: Berry Global Group Inc. (BERY)

October 22, 2024

On February 7th, 2024, Berry Global Group, Inc. (Berry) unveiled its plan to spin off most of its Health, Hygiene & Specialties (HH&S) segment, including its global nonwovens and films business, and merge it with Glatfelter Corporation (GLT) to create a new company named Magnera. This strategic move is designed to establish Magnera as a global leader in specialty materials, focusing on the healthcare, hygiene, and specialty markets. Berry is expected to retain approximately 90% ownership of Magnera, which will have an enterprise value of $3.6 billion, while GLT shareholders will hold the remaining 10%. Magnera’s market capitalization is anticipated to be around $1.8 billion.

The rationale behind this transaction is clear for both companies. For Berry, the spin-off allows it to sharpen its focus on becoming a pure-play leader in sustainable global packaging solutions. Post-transaction, Berry will emerge with approximately $10.2 billion in revenues and EBITDA of around $1.8 billion, while maintaining net leverage below 3.5x. The streamlined company will have a strong presence, ranking #1 or #2 in over 75% of the markets it serves. With a portfolio concentrated on fast-moving consumer products and sustainable packaging solutions, Berry aims to achieve more predictable and stable growth, reducing earnings volatility. Additionally, it is rebranding its Engineered Materials segment as “Flexibles,” to better reflect its focus on high-value products. This reorientation is expected to elevate Berry’s margin profile, supported by ongoing lean initiatives, ultimately leading to improved returns on invested capital (ROIC) and more consistent free cash flow generation.

For Magnera, the merger with Glatfelter creates a global powerhouse in the specialty materials sector. The combined company is expected to generate revenues of $3.5 billion and EBITDA of $455 million, with a targeted pipeline of cost synergies of $120 million and the potential for further operational improvements. The merger enhances the operating leverage and cost absorption across the combined network, optimizing capital expenditures and network utilization. By bringing together leading resin and fiber technologies, Magnera will be able to offer broader solutions and innovation opportunities to its customers, deepening relationships with major brand owners. This strategic combination is set to create a differentiated industry leader, positioned to serve attractive segments as well as several highly profitable niches.

The Berry-Glatfelter spin-off and reverse merger will create two stronger companies by reducing debt and streamlining operations after a challenging period and ahead of a likely upward cyclical inflection. Magnera, the smaller entity post-spin, may face initial selling pressure but enters the market with an attractive valuation. While both Berry (Pre-Spin), with a target price of $90, and Berry (Post-Spin), with a price target of $75, offer value, the biggest upside is with Magnera, which offers potential material upside to $21, assuming a 5-1 reverse split.

Radar Screen – October 2024

Monthly publication providing ongoing analysis on companies where we see potential for a value-unlocking event

Companies discussed this month:  Albany International (AIN), Alphabet Inc. (GOOG), Bloomin’ Brands (BLMN), California Resources Corp. (CRC), Crown Castle Inc. (CCI), FedEx Corporation (FDX), Goodyear Tire & Rubber Co., Intel Corporation (INTC), Luxfer Holdings (LXFR),  Masimo Corp. (MASI), Matthews International Corp. (MATW), Netgear Inc. (NTGR), RCI Hospitality Inc. (RICK), Stanley Black & Decker (SWK), TFI International (TFII), TriMas Corporation (TRS)

Spin-Off Report Calendar – October 2024

Published monthly, The Spin-Off Calendar provides one-page summaries of every spin-off under coverage from the announcement date, followed by the filing of the Form 10 and continuing 60 days post completion.

Spin-Off Report Compendium – August 2024

Murray Stahl’s commentary on various investing themes and single stock recommendations.

European Spin-Off Compendium – September 2024

Murray Stahl’s commentary on various investing themes and single stock recommendations in Europe. 

Bits & Pieces – October 2024

Covers mispriced stub securities, tracking stocks and other arbitrage opportunities.

Product Specialist

Rich Albanese
ralbanese@pcsresearchgroup.com
+1 646-839-5566

The Weekly Wrap-Up provides summaries of recent publications from Hidden Opportunities including links to the full-length research reports.  If you haven’t engaged with the research over the past seven days, the Weekly Wrap-Up will quickly update you on our newest and highest conviction ideas. 

HIGH-CONVICTION RECOMMENDATIONS (LONG):

• Newpark Resources, Inc. (NR)
• TFI International Inc. (TFII)
• Luxfer Holdings (LXFR)
• TriMas Corporation (TRS)

RECENT INITIATIONS:

• Luxfer Holdings PLC (LXFR)

LATEST PUBLICATIONS & UPDATES:

UPDATE – U-Haul Holdings Co. (UHAL)

Close coverage of UHAL, as of Monday’s close, with shares trading roughly in-line with our fair value estimate 

Shares have appreciated ~49.5% (outperforming the S&P 500 and Russell 2000 Indexes by ~6% and ~23.5%, respectively) since our recommendation in May 2021.

While we continue to think U-Haul (formerly Amerco) is a high-quality operator in space where it has durable competitive advantages with shares trading roughly in line with our $76.50 per share fair value estimate (with bull and bear cases of $62-$90 per share) we prefer to maintain a disciplined approach and close coverage/withdraw our recommendation, as of today’s close.

We will continue to monitor shares for an opportunity to re-recommend if valuation shifts or incremental steps toward potential strategic alternatives materialize.

Radar Screen – October 2024

Monthly publication providing ongoing analysis on companies where we see potential for a value-unlocking event

Companies discussed this month:  Albany International (AIN), Alphabet Inc. (GOOG), APi Group Corp. (APG), Bloomin’ Brands (BLMN), California Resources Corp. (CRC), Carrier Global Corp. (CARR), Crown Castle Inc. (CCI), FedEx Corporation (FDX), Goodyear Tire & Rubber, Inc. (GT), Masimo Corp. (MASI), Matthews International Corp. (MATW), Natura & Co. (NTCO), Netgear Inc. (NTGR), Newpark Resources (NR), RCI Hospitality Inc. (RICK), Stanley Black & Decker (SWK), TFI International Inc. (TFII), TriMas Corporation (TRS)

Product Specialist

Rich Albanese
ralbanese@pcsresearchgroup.com
+1 646-839-5566

The Weekly Wrap-Up provides summaries of recent publications from the Spin-Off Report including links to the full-length research reports.  If you haven’t engaged with the research over the past seven days, the Weekly Wrap-Up will quickly update you on our newest and highest conviction ideas.

UPCOMING SPIN-OFFS AND EXPECTED COMPLETION DATES:

• Spectrum Brands (SPB) / Home & Personal Care Business – 4Q 2024
• Liberty Global (LBTYA) / Sunrise – November 4, 2024
• Western Digital (WDC) / HDD Business – 4Q 2024
• MDU Resources Group (MDU) / Everus Construction Group (ECG) – October 31, 2024
• Berry Global Group Inc. (BERY) / HH&S And Films Businesses (to merge w/ Glatfelter) – 4Q 2024
• Holcim Ltd. (HOLN SW) / North American Business – 1H 2025
• DuPont Inc. (DD) / Electronics and Water Business – 2H 2025
• Topgolf Callaway Brands Corp. (MODG) / Topgolf – 2H 2025
• Fortive Corp. (FTV) / Precision Technologies Business – Mid 2025
• SKF AB (SKFB SS) / Automotive Business – 1H 2026

RECENT PUBLICATIONS:

COMPREHENSIVE REPORT:  Spectrum Brands Holdings, Inc. (SPB)

October 18, 2024

On July 2, 2024, Spectrum Brands disclosed it had confidentially filed a Form 10 registration statement with the Securities & Exchange Commission (SEC) in connection with its previously disclosed separation plans for the Home & Personal Care (HPC) business.  SPB indicated on its 3Q F2024 conference call that given the on-going improvements at HPC, which is “exceeding last year by every key metric,” management remains confident that “the time is right to separate the business.” To that end, the company indicated it is still exploring multiple avenues for the separation of the business, including a sale, merger or spin-off transaction. Anecdotally, management expects to “provide an update on our next earnings call,” which has historically occurred in mid-November, “or sooner if there is news to share.” SPB’s chief executive, David Maura, further commented that, “Look, we’ve got multiple bids from financial players, strategic players on this asset. And we’ve got the spin path. And so we just got to work through all those options and see where we come out…there is a lot of interest in this asset.” 

Currently, Spectrum Brands, a diversified global branded consumer products and home essentials company, reports results in three segments: 1) Global Pet Care (GPC; 39% of consolidated F2023 sales and ~62% of adj. EBITDA)  2) Home and Garden (H&G; 18.5% of sales and ~24% of adj. EBITDA) and 3) Home & Personal Care (HPC; 42.5% of consolidated sales and ~14% of adj. EBITDA in F2023), whose products include small kitchen appliances (e.g., toasters, slow cookers, & air fryers, etc.) along with personal care products (e.g., hair dryers, straighteners, electric shavers, nose & ear trimmers, amongst others). On a consolidated basis, SPB generated $2.9 billion in September-ending F2023 sales, representing a ~7% year-over-year decline (~8% organically), with adjusted EBITDA of $303 million, a $20 million (or 7% year-over-year) increase, as pricing and cost reductions offset volume declines.

At current levels, shares of SPB trade at approximately 8.0x F2025E EV/EBITDA estimates, roughly in line with HPC peers (ex-outliers, such as Shark Ninja and P&G), but a discount to public comparisons for the GPC and H&G segments, which trade at ~12x (albeit in wide ranges of ~7.0x-16.5x). On the earnings front, it appears reasonable to forecast that, on a consolidated basis, SPB generate sales just shy of ~$3 billion in F2025 with adjusted EBITDA approaching ~$370 million. In terms of valuation, based on a blended multiple of ~9.0x while accounting for corporate costs, capitalized at the weighted segment average, as well as projected net debt implies a pre-spin, sum-of-the parts fair value of ~$2.9 billion or ~$101.50 per share (with bull and bear cases of $113 per share and ~$90.50 per share, respectively).

Considering the limited implied upside from current levels, which reflects a ~40% gain since its post-4Q 2023 low in November 2023 and a ~12% rise since its latest 3Q F2024 results in August 2024, our NEUTRAL initial stance seems appropriate. That said, the separation of Spectrum into two focused companies mirrors many characteristics of past successful spin-offs where a higher-growth, higher-margin business is expected to achieve a higher valuation as a standalone/independent entity while a lower-growth, lower-margin business, in this case focused on the consumer products sector, is expected to benefit from internal initiatives executed by a more focused management team (and investor base) with improved capital allocation priorities.  We will continue to monitor shares for any potential market, sector or company specific volatility for a more attractive pre-spin entry point, absent which we can envision that the typical post-spin shareholder turnover could present investment opportunities for both short-term and long-term investors.

ALERT:  Honeywell International to Spin-Off its Advanced Materials Business

October 8, 2024

Honeywell (HON) announces plans for a tax-free spin-off of its Advanced Materials business into an independent, publicly traded entity.  The transaction is expected to be completed in late 2025 or early 2026 and comes within the context of an overarching corporate strategy focusing on what management views as three “compelling megatrends” – automation, aviation and the global energy transition.  In terms of valuation, on this morning’s conference call, management indicated that given its outsized margin profile relative to peers, the standalone Advanced Materials (AM) business should trade at a premium to competitors such as Chemours (NYSE: CC) and Arkema (AKE FP).  Applying peer multiples across Honeywell’s business segments and accounting for corporate costs and projected net debt yields an initial sum-of-the-parts value estimate of $137.5 billion or $210 per share.

Radar Screen – October 2024

Monthly publication providing ongoing analysis on companies where we see potential for a value-unlocking event

Companies discussed this month:  Albany International (AIN), Alphabet Inc. (GOOG), Bloomin’ Brands (BLMN), California Resources Corp. (CRC), Crown Castle Inc. (CCI), FedEx Corporation (FDX), Goodyear Tire & Rubber Co., Intel Corporation (INTC), Luxfer Holdings (LXFR),  Masimo Corp. (MASI), Matthews International Corp. (MATW), Netgear Inc. (NTGR), RCI Hospitality Inc. (RICK), Stanley Black & Decker (SWK), TFI International (TFII), TriMas Corporation (TRS)

Spin-Off Report Calendar – October 2024

Published monthly, The Spin-Off Calendar provides one-page summaries of every spin-off under coverage from the announcement date, followed by the filing of the Form 10 and continuing 60 days post completion.

Spin-Off Report Compendium – August 2024

Murray Stahl’s commentary on various investing themes and single stock recommendations.

European Spin-Off Compendium – September 2024

Murray Stahl’s commentary on various investing themes and single stock recommendations in Europe. 

Bits & Pieces – October 2024

Covers mispriced stub securities, tracking stocks and other arbitrage opportunities.

Product Specialist

Rich Albanese
ralbanese@pcsresearchgroup.com
+1 646-839-5566

The Weekly Wrap-Up provides summaries of recent publications from Hidden Opportunities including links to the full-length research reports.  If you haven’t engaged with the research over the past seven days, the Weekly Wrap-Up will quickly update you on our newest and highest conviction ideas. 

HIGH-CONVICTION RECOMMENDATIONS (LONG):

• Newpark Resources, Inc. (NR)
• TFI International Inc. (TFII)
• Luxfer Holdings (LXFR)
• TriMas Corporation (TRS)

RECENT INITIATIONS:

• Luxfer Holdings PLC (LXFR)

LATEST PUBLICATIONS & UPDATES:

UPDATE – U-Haul Holdings Co. (UHAL)

Close coverage of UHAL, as of Monday’s close, with shares trading roughly in-line with our fair value estimate 

Shares have appreciated ~49.5% (outperforming the S&P 500 and Russell 2000 Indexes by ~6% and ~23.5%, respectively) since our recommendation in May 2021.

While we continue to think U-Haul (formerly Amerco) is a high-quality operator in space where it has durable competitive advantages with shares trading roughly in line with our $76.50 per share fair value estimate (with bull and bear cases of $62-$90 per share) we prefer to maintain a disciplined approach and close coverage/withdraw our recommendation, as of today’s close.

We will continue to monitor shares for an opportunity to re-recommend if valuation shifts or incremental steps toward potential strategic alternatives materialize.

Radar Screen – October 2024

Monthly publication providing ongoing analysis on companies where we see potential for a value-unlocking event

Companies discussed this month:  Albany International (AIN), Alphabet Inc. (GOOG), APi Group Corp. (APG), Bloomin’ Brands (BLMN), California Resources Corp. (CRC), Carrier Global Corp. (CARR), Crown Castle Inc. (CCI), FedEx Corporation (FDX), Goodyear Tire & Rubber, Inc. (GT), Masimo Corp. (MASI), Matthews International Corp. (MATW), Natura & Co. (NTCO), Netgear Inc. (NTGR), Newpark Resources (NR), RCI Hospitality Inc. (RICK), Stanley Black & Decker (SWK), TFI International Inc. (TFII), TriMas Corporation (TRS)

Product Specialist

Rich Albanese
ralbanese@pcsresearchgroup.com
+1 646-839-5566

The Weekly Wrap-Up provides summaries of recent publications from the Spin-Off Report including links to the full-length research reports.  If you haven’t engaged with the research over the past seven days, the Weekly Wrap-Up will quickly update you on our newest and highest conviction ideas.

UPCOMING SPIN-OFFS AND EXPECTED COMPLETION DATES:

• Spectrum Brands (SPB) / Home & Personal Care Business – 4Q 2024
• Western Digital (WDC) / HDD Business – 4Q 2024
• MDU Resources Group (MDU) / Everus Construction Group (ECG) – October 31, 2024
• Berry Global Group Inc. (BERY) / HH&S And Films Businesses (to merge w/ Glatfelter) – 4Q 2024
• Holcim Ltd. (HOLN SW) / North American Business – 1H 2025
• DuPont Inc. (DD) / Electronics and Water Business – 2H 2025
• Topgolf Callaway Brands Corp. (MODG) / Topgolf – 2H 2025
• Fortive Corp. (FTV) / Precision Technologies Business – Mid 2025
• SKF AB (SKFB SS) / Automotive Business – 1H 2026

RECENT PUBLICATIONS:

Honeywell International to Spin-Off its Advanced Materials Business

On October 8, 2024, before the market open, Honeywell International Inc. (NYSE: HON) announced plans for a tax-free spin-off of its Advanced Materials business into an independent, publicly traded entity.  The transaction, which does not require shareholder approval, remains subject to customary closing conditions, including the filing & effectiveness of a Form 10 registration statement with the Securities & Exchange Commission (SEC), receipt of various regulatory approvals and the final consent of HON’s Board of Directors, is expected to be completed by “the end of 2025 or early 2026”.

Currently, HON manages its business in four primary operating segments: 1) Aerospace; 2) Building Technologies; 3) Performance Materials & Technologies; and 4) Safety & Productivity Solutions. The Advanced Materials (AM) business, which presently resides as a unit within the Performance Materials & Technologies segment provides sustainability-focused specialty chemicals & materials under such brands as Solstice, Spectra, Hydranal and Aclar, is expected to generate sales of $3.7-$3.9 billion with an EBITDA margin profile greater than 25% in F2024.  As a standalone, management envisions the Advanced Materials company, which has a large-scale domestic manufacturing base, will benefit from more flexible/optimized capital allocation and allow investors to focus their capital more acutely.

In terms of background, this morning’s announcement comes within the context of HON’s overarching corporate strategy of focusing on what management views as three “compelling megatrends”, specifically automation, aviation and the global energy transition.  Toward that end, we note that the company spun-off of its home business, Residio (NYSE: REZI), and its transportation systems (i.e., turbochargers) business, Garrett Motion (NASDAQ: GTX) in 2018.  Anecdotally, while no detailed post-spin financial information has been provided as of yet, management indicated on this morning’s conference call that unlike its prior two spins the intent was not to set free the AM business with a similarly disadvantaged financial profile, both from an income statement (i.e., royalty) or balance sheet (i.e., un-related liability) perspective.  That said, while the company indicated that the spin-off would leave RemainCo with a similar long-term organic growth rate (forecasted to be ~4%-7%) and a similar margin profile but with less cyclicality (seemingly a reference to the historical swings in pricing within the AM business) and capital intensity (to the benefit of its free cash flow profile).  [Tangentially, HON’s chairman & chief executive, Vimal Kapur, indicated that “portfolio management” would be a hallmark of his tenure, suggesting other divestitures may be in the offing over time; to that end we would note that it was reported in the financial press that HON has considered selling its personal protective equipment business seeking a reported price tag of ~$2 billion and as well as the potential of taking its Quantinuum business public at a ~$10 billion valuation.]

In terms of financial guidance, in conjunction with 2Q 2024 results, HON updated its full-year outlook calling for consolidated sales of $39.1-$39.7 billion (up from $38.5-$39.3 billion), implying organic growth of 5%-6% (previously 4%-6%), with segment margin of 23.3%-23.5% (previously 23.8%-24.1%) and adjusted EPS of $10.05-$10.25 (previously $10.15-$10.45), implying growth of 6%-8% (previously 7%-10%).  Operating cash flow is projected to be $6.6-$7.0 billion (versus prior outlook of $6.7-$7.1 billion) with free cash flow of $5.5-$5.9 billion (compared with previous commentary of $5.6-$6.0 billion).  For 3Q 2024 specifically, management projected EPS growth of 3%-7% to $2.45-$2.55 (although on this morning’s conference call management notably indicated that intra-quarter trends were pointing toward earnings coming in toward “upper-half” of its previously articulated range).

In terms of valuation, on this morning’s conference call, management anecdotally indicated its thinking that given its outsized margin profile relative to peers the standalone Advanced Materials (AM) business should trade at a premium to competitors, such as Chemours (NYSE: CC) and Arkema (AKE FP), which trade at ~6x 2025E EBITDA, while a wider group, including ABB Ltd. (ABB SS), Emerson Electric (NYSE: EMR), Rockwell Automation (NYSE: ROK) and Schneider Electric (SU FP), bring the overall group’s average up to ~13.5x 2025E EBITDA.  Applying a 13x multiple to estimated Performance Materials & Technologies segment 2025E EBITDA implies value of ~$36.6 billion. Applying a 16.5x multiple, which is in-line with peers, such as Garmin Ltd. (NYSE: GRMN), L3Harris Technologies (NYSE: LHX), Northrop Grumman (NYSE: NOC), RTX Corp. (NYSE: RTX), Safran SA (SAF FP), and Thales SA (HO FP), to estimated 2025E Aerospace segment EBITDA implies a segment value of $84.8 billion. Next, the Buildings Technologies segment could be compared with Carrier Global (NYSE: CARR), Johnson Controls (NYSE: JCI), Schneider Electric (SU FP) and Siemens AG (SIE GY), which trade at ~15.5x 2025E EV/EBITDA.  Applying the peer multiple to estimated 2025 segment EBITDA implies a value of ~$36.6 billion.  Lastly, applying a 12.5x peer multiple, in-line with peers, such as 3M (NYSE: MMM), Kion Group (KGX GR), MSA Safety (NYSE: MSA), TE Connectivity (NYSE: TEL), Carrier Global (NYSE: CARR) and Zebra Technologies (NASDAQ: ZBRA), to the estimate 2025 segment EBITDA at Safety & Productivity Solutions, implies a segment value of ~$12.9 billion. Accounting for corporate costs as well as projected net debt yields an initial sum-of-the-parts fair value estimate of ~$137.5 billion or ~$210 per share (based on a diluted share count of ~655.5 million).

Radar Screen – October 2024

Monthly publication providing ongoing analysis on companies where we see potential for a value-unlocking event

Companies discussed this month:  Albany International (AIN), Alphabet Inc. (GOOG), Bloomin’ Brands (BLMN), California Resources Corp. (CRC), Crown Castle Inc. (CCI), FedEx Corporation (FDX), Goodyear Tire & Rubber Co., Intel Corporation (INTC), Luxfer Holdings (LXFR),  Masimo Corp. (MASI), Matthews International Corp. (MATW), Netgear Inc. (NTGR), RCI Hospitality Inc. (RICK), Stanley Black & Decker (SWK), TFI International (TFII), TriMas Corporation (TRS)

Spin-Off Report Calendar – October 2024

Published monthly, The Spin-Off Calendar provides one-page summaries of every spin-off under coverage from the announcement date, followed by the filing of the Form 10 and continuing 60 days post completion.

Spin-Off Report Compendium – August 2024

Murray Stahl’s commentary on various investing themes and single stock recommendations.

European Spin-Off Compendium – September 2024

Murray Stahl’s commentary on various investing themes and single stock recommendations in Europe. 

Bits & Pieces – September 2024

Covers mispriced stub securities, tracking stocks and other arbitrage opportunities.

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Rich Albanese
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