On May 1, 2018, KLX Inx. (NASDAQ: KLXI) announced its intention to sell its Aerospace Solutions Group (ASG) business to The Boeing Company (NYSE: BA) and to spin off its Energy Services Group (ESG) business to KLXI shareholders. The post-spin ESG company, to be named KLX Energy Services Holdings Inc. (KLXE), provides technical and logistics services and related rental equipment to oil and gas exploration and production companies. Following the spin-off of KLXE, KLX will become part of Boeing Global Services. KLXI shareholders will receive $63 per share in cash following the spin-off of KLXE. The merger, which received shareholder approval on August 24, 2018, is expected to close in the fourth calendar quarter of 2018.

KLXI shareholders will receive 0.4 shares of KLX Energy Services common stock for every one share of KLXI common stock held as of the record date of September 3, 2018. When-issued trading for KLX Energy Services common stock began on Wednesday, August 29, 2018, under the ticker symbol “KLXEV.” As of this writing, KLEV shares are trading at $27. KLX will continue to trade on the NASDAQ under the ticker symbol KLXI, until the consummation of the Boeing/KLX merger.

The transaction with Boeing, which is valued at approximately $4.2 billion (based on KLXI’s current price and including $1 billion in assumed debt), implies a valuation for the Aerospace Solutions Group of 15.7x trailing EBITDA for F2017 (ended January 2018) and a multiple of 14.3x F2018 (ending January 2018) estimated adjusted EBITDA. Boeing expects the acquisition to have a neutral earnings impact through 2019 and be accretive thereafter, with annual cost savings growing to approximately $70 million by 2021 and further improvements realized over time. Boeing’s acquisition of KLX is conditional upon the successful divestment and separation of KLX Inc.’s Energy Services Group. Both the sale of KLX/ASG to Boeing for cash and the spin-off of ESG are expected to be taxable transactions to KLX shareholders. If KLXE’s market value at the time of separation is greater than its tax basis at such time, KLX would incur a tax liability. Boeing and KLX have agreed that any such liability would be borne by KLXE. KLXE will have intangible assets with a substantial basis for tax purposes, which will be recoverable through amortization deductions and are expected to shelter approximately $32 million per year in taxable income through January 31, 2029. According to the most recent filings, the company expects most, and possibly all, of the distribution to be tax-free.

KLX Inc. is the largest distributor of aircraft fasteners (e.g., nuts, bolts, screws, etc.), consumable products (e.g., spare aircraft seat parts), and supply chain services for the aerospace industry. KLX’s Aerospace Solutions Group generated F2017 (ended January 2018) revenue of $1.4 billion. The company was originally spun off from aircraft interior manufacturer B/E Aerospace in December 2014. Notably, at the time of the spin-off, the entire senior management team of BE Aerospace joined KLX, prompting conjecture that a sale of the company could ultimately take place. Since the spin-off, the ESG business, which comprised only 10% of KLX’s consolidated revenue, has been largely disconnected, both strategically and operationally, from the remainder of the company. On December 22, 2017, KLX announced that its Board had initiated a review of strategic alternatives to maximize stockholder value, including a possible sale of KLX or the sale of a division.

Post-spin, KLXE will become a pure-play provider of technical services and rental equipment to the oil industry. The company will initially be capitalized through a $50 million cash contribution from KLX. Since the spin-off from B/E Aerospace, the ESG business has suffered considerably, owing to excess capacity and lower oil prices, which have triggered a sharp reduction in exploration & production (E&P) budgets and a dramatic decline in U.S. onshore rig counts. Accordingly, in the midst of an industry downturn, management has focused on restructuring and cost-cutting actions. The business posted an adjusted EBITDA loss of $45.7 million in F2017 (ended January 2018) on revenue of $153.2 million. That said, the company is expected to generate F2018 (ending January 2019) revenue, adjusted operating earnings, and adjusted EBITDA of approximately $500 million, $65 million, and $110 million, respectively.

On a pre-spin basis, shares of KLXI can be fairly valued at $76 per share, consisting of $63 in value from the Boeing acquisition of the ASG business and $13 in value from KLXE. With, initial when-issued trading of KLXEV shares indicating at $27 as of this writing–approximately 15% below our fair value estimate, we recommend post-spin KLXE shares for purchase. Current when-issued trading implies a multiple of 6x EBITDA. With the energy services market in the early stages of a cyclical recovery, coupled with the potential for post-spin KLXE to become a strategic acquisition target over time as the industry continues to consolidate, we see the potential for several positive catalysts for the shares. Notably, over the past 12 months, KLXI shares have appreciated 58%, versus 19% for the S&P 500 Index (SPX), reflecting both a cyclical recovery in the energy services business and the potential for a value-unlocking transaction. KLXI’s current share price implies that the ESG business is being valued at approximately 14.5x trailing EBITDA, a slight discount to the consolidated shares (15x).

KLXE will be initially capitalized with a $50 million cash contribution from KLX, and is expected to be debt-free at the time of the spin-off. The company will make a payment to KLX for the amount, if any, of negative free cash flows from the date of the merger agreement to the distribution date. For the purposes of this analysis, we assume the company is cash flow positive and no such payment occurs. Note, however, that any potential tax consequences associated with the spin-off represent a risk to the fair value estimate.

“Standex International (NYSE: SXI), a multi-industry manufacturer, operates five reportable business segments: (1) Food Service (50.5% of sales and 31% of adj. EBITDA in 2017); (2) Engraving (14% of sales and 22% of EBITDA); (3) Engineering Technologies (12% of revenue and 15% of EBITDA); (4) Electronics (18% of revenue and 26% of EBITDA); and (5) Hydraulics (5.5% of revenue and 6% of adj. EBITDA in 2017). SXI has a history of acquisitions (e.g., Piazza Rosa, OKI Sensor, Horizon Scientific, Northlake Engineering) and divestitures (e.g., IR Engraving, American Foodservice, Air Distribution Products, the Consumer Group), and we discern a core focus on its Engraving and Electronics businesses, which have relatively higher growth and margin profiles. Given minimal inter-company synergies, we see optionality in other areas of SXI’s portfolio, which includes 12 business sub-divisions within the five broader operating segments, that could be monetized to provide incremental growth capital to core businesses and/or be returned to shareholders. By our calculation, at ~9x F2020E EV/EBITDA and a 6% free cash flow yield, SXI trades at a discount to the sum value of its parts. Considering our financial projections as well as peer, M&A and DCF valuations, value of $55 per share, $40 per share, $12 per share, $50 per share, and $7 per share can be assigned to SXI’s Food Service, Engraving, Engineering Technologies, Electronics, and Hydraulics businesses, respectively. Accounting for corporate costs and projected net debt of ~$30 per share yields a sum-of-the-parts value of roughly $133 per share. ” – The Hidden Opportunities Report

On December 14, 2017, Twenty-First Century Fox Inc. (NYSE: FOXA, FOX) announced its intention to separate selected properties into a separate, publicly traded entity (“New Fox”). The spin entity will include branded properties Fox News Channel, Fox Business Network, Fox Broadcasting Company, Fox Sports, Fox Television Stations Group, and sports cable networks FS1, FS2, Fox Deportes, and Big Ten Network (BTN). The transaction will also include the company’s studio lot in Los Angeles, and equity investments in Roku and Hulu.

The spin-off will be taxable to Twenty-First Century Fox, but not to its shareholders. New Fox will receive a step-up in its tax basis commensurate with the amount of the corporate tax relating to the spin-off that will generate annual cash tax savings over the next 15 years. Prior to completion of the spin-off, New Fox will pay an $8.5 billion cash dividend to 21st Century Fox, representing an estimate of the tax liability. If the final tax liability is less than this amount, the first $2 billion of that adjustment will be made by a net reduction in the amount of the cash dividend to 21st Century Fox from New Fox. 21st Century Fox’s shareholders will receive one share of common stock in New Fox for each same-class 21st Century Fox share held. Following the separation, New Fox will maintain two classes of common stock: Class A Common and Class B Common Voting Shares.

In addition to the spin-off, 21st Century Fox entered into a definitive agreement to combine the rest of its businesses with The Walt Disney Company (NYSE: DIS). Initially, Disney offered $28 per share for the Fox assets (valued at $52.4 billion); however, after an unsolicited all-cash bid from rival Comcast Corp. (NASDAQ: CMCSA, valued at $65 billion), Disney amended its offer to $71.3 billion in a combined cash and stock offer, up to a maximum cash amount of $35.7 billion. Disney’s offer allows 21st Century Fox stockholders to elect to receive their consideration, on a value equalized basis, in the form of cash or stock, subject to 50/50 proration. The collar on the stock consideration ensures that 21st Century Fox shareholders will receive a number of Disney shares equal to $38 in value if the average Disney stock price at closing is between $93.53 and $114.32. The per share consideration is subject to adjustment up or down for tax liabilities arising from the spin-off. On July 27, 2018, DIS and FOX shareholders approved the merger, which includes Fox’s film and television studios, cable entertainment networks, and international TV businesses: the movie studio 20th Century Fox, the company’s TV production arm 20th Century Fox Television, Fox-owned cable networks (including FX and National Geographic), and the company’s stakes in international networks (e.g., Star TV and Sky). The most significant unknown variable in the transaction is the outcome of the current bidding war between Fox and Comcast for European satellite provider Sky Plc. Should Fox acquire Sky, Sky would transfer to Disney.

21st Century Fox, with a consolidated market capitalization of $163 billion, controls one of the world’s leading portfolios of cable, broadcast, film, pay TV, and satellite assets. The transaction is consistent with a strategy of focusing on its far more profitable sports and news businesses. The Disney acquisition was initially considered a possibility in November 2017. Importantly, the transaction resolves the professional fates of Rupert Murdoch’s sons Lachlan and James and the fortunes of the four other Murdoch children who do not play a role in the company.

For Disney, the acquisition brings the company Fox’s television and film holdings, leadership in television and movie production, major cable properties, and a vast network of local sports cable channels into the fold of Disney’s ESPN programming. In particular, Disney will own the rights to the original Star Wars film (also known as Star Wars Episode IV: A New Hope), to which Fox has previously owned full distribution rights in perpetuity, along with the home video distribution rights for Episodes II through IV (which were originally supposed to revert to Disney in 2020). The company also gains greater international distribution. From a leadership perspective, Disney CEO Robert Iger, who has already extended his term past its expected date, will likely stay on with the company. That said, Rupert Murdoch has urged Iger to take on James Murdoch as a senior deputy to oversee the former Fox properties.

Disney appears driven by increasing competition from Netflix Inc. (NASDAQ: NFLX), Amazon (NASDAQ: AMZN), and others. The company, which is looking to open its own streaming service, now gains a larger catalog of content that it could feasibly offer exclusively through its service. Importantly, Disney stands to gain a significant international presence should 21st Century Fox succeed in its bid to acquire broadcaster Sky Plc (SKY LN).

Post-spin Fox generated annual revenue of approximately $10 billion and EBITDA of approximately $1.8 billion in F2017 (June). New Fox will house the country’s largest cable news channel, and a stations group that is present in 9 of the 10 largest metro areas in the U.S. Its broadcast and cable sports brands will have long-term sports rights to the NFL, MLB, World Cup soccer, and NASCAR, as well as assets including Fox News Channel (FNC), Fox Broadcasting Company (FOX) and Fox Business Network (FBN).

Assuming 100% ownership of Sky, post-merger Disney can be fairly valued at $132 per share, based on an analysis of estimated EBITDA, EPS, projected dividend yield, and FCF, and an estimated 2.1 billion shares outstanding (includes 607.2 million shares issued to FOX and FOXA shareholders, based on an exchange ratio of 0.1615). With fair value estimate suggesting 14% upside to the current DIS share price ($116 as of this writing), pre-merger shares are recommended for purchase. We note, however, that the outcome of the bidding war for Sky represents a risk for the shares. Assuming Disney was to sell its 39% interest in Sky at the most recent offer price of £14.75, DIS shares can be fairly valued at $125.

Accounting for the DIS merger consideration, pre-spin Fox can be fairly valued at $53 per share. With the implied fair value estimate representing 16% upside to the shares’ current price ($46 as of this writing), pre-spin FOX shares are recommended for purchase. Notably, pre-spin FOX offers exposure to both post-spin entities as well as attractive long-term fundamentals. That said, there is potential near-term downside risk should the company fail in its bid to acquire Sky. FOXA shares have had a strong recent run, having appreciated 32% year-to-date, versus 1% and 14% for the S&P 500 and S5MOVI (Movies & Entertainment Sector Index), respectively. Post-spin, FOX can be fairly valued at $15. While both pre-spin DIS and FOX shares appear to offer attractive upside, we view DIS as a longer- term story, owing to potential execution risk relating to the company’s digital transformation strategy.

National Presto Industries Inc. (NYSE: NPK) operates two distinct business segments: (1) Housewares/Small Appliances (29% of sales and 11% of EBITDA in 2017), which distributes household products and kitchen appliances under the Presto brand; and (2) Defense (71% of revenue and 89% of EBITDA in 2017), which primarily manufactures 40-millimeter ammunition for the U.S. Department of Defense (DoD). The company divested its Absorbent Products segment in January 2017.  With the shares up ~26% year to date (versus a ~7.5% gain in the Russell 2000) and trading at 13.5x 2018E EV/EBITDA, NPK could be entering a period of underperformance over the next several quarters, as its Housewares business is likely to see continued deterioration, and its Defense segment faces difficult comparisons following the end of a large supply sub-contract with Chemring Ordnance. More broadly, it appears likely that reduced overall spending by the U.S. military on 40mm ammunition in coming years as well as the loss of NPK’s sole-source contractor status with the DoD (as General Dynamics and American Ordnance have recently gained footholds) are likely to create longer-term headwinds. Considering our financial projections as well as peer and M&A valuations, value of $4 per share can be assigned to NPK’s Housewares/Small Appliance segment, while its Defense segment could be valued at $75 per share. Accounting for projected net cash of ~$24 per share yields a base case sum-of-the-parts value of ~$103 per share, which suggests almost 20% potential downside.  (Notably, a more bearish but still reasonable valuation scenario implies downside of 30% to ~$88 per share.) 

On December 14, 2017, DDR Corporation (NYSE: DDR) announced its intention to spin off a portfolio of 50 assets, comprised of 38 continental U.S. assets and the entirety of the Puerto Rico portfolio (12 assets), into a separate publicly traded REIT to be named Retail Value Inc. The transaction will take place via a taxable pro rata stock distribution. Shareholders of DDR will receive one RVI common share for every 10 common shares of DDR held at the close of business on the record date of June 26, 2018. Note that on May 21, 2018, DDR completed a 1-for-2 reverse stock split of its common stock.

Post-spin, DDR’s dividend will be adjusted to reflect the smaller size of the company. DDR does not expect to make any change to its recurring quarterly dividend prior to the spin-off of RVI. Proceeds from a $1.35 billion mortgage financing are expected to be used to repay debt at DDR, positioning the post-spin company (“New DDR”) to achieve its previously stated goal of 6.0x net debt/adjusted EBITDA in 2018.

When-issued trading of RVI and DDR common shares is expected to begin on the NYSE on or about June 25, 2018, under the ticker symbols “RVI WI” and “DDR WI,” respectively, and will continue through the distribution date of July 1, 2018. Regular-way trading will begin on July 2, 2018—the first trading day following the distribution date. RVI expects to receive approval prior to the distribution date to list its common shares on the New York Stock Exchange under the ticker symbol “RVI.”

Based on an analysis of estimated NOI, implied cap rates, projected dividend yield, and projected FFO, pre-spin DDR can be fairly valued at $21 per share, consisting of $16 and $5 for DDR and RVI, respectively. Post-spin, assuming a 1:10 distribution ratio, RVI can be fairly valued at $48. With the implied fair value estimate representing approximately 16% upside to DDR’s current share price ($18 as of this writing), the transaction appears to unlock near-term upside. At DDR’s current share price, investors are essentially getting post-spin DDR at its NAV, and paying just over $1 for RVI.

It is important to note several risks associated with the shares. For RVI, our fair value estimate may take time to be realized, as it is directly linked to the success of future asset dispositions. Further, these proceeds will be distributed to shareholders only after the company’s $1.35 billion mortgage loan and DDR’s $525 million preferred investment are repaid. Additionally, post-spin DDR shares could experience considerable volatility around RVI’s asset dispositions and their impact on management income. Finally, fair value estimates are sensitive to cap rates as well as the pace of redevelopment activity (and associated costs).

On June 28, 2016, Old Mutual plc announced that, as part of the broad restructuring of its operations, the company intends to de-merge and distribute to its shareholders its wealth management unit. The new entity, which will be listed in the UK and South Africa, will be rebranded Quilter. The company held a shareholder meeting on May 25, 2018, to approve the separation. Shares of Quilter are scheduled to begin trading on June 25, 2018.

Following the de-merger investors will own shares in two separate companies: Quilter plc, which will control the South African and emerging markets business (OMEM) and the NED shareholdings; and Old Mutual Limited, which will control the UK focused wealth management business (OMW). The separation and cost reduction should help alleviate the company’s current trading multiple discount to peers, however significant exposure to the politically unstable South African economy will likely result in a continued discount to peers for both post spin entities.

On a pre-spin, sum-of-the-parts basis, shares of OML are fairly valued at GBP 2.37 per share, implying 13% upside from the current share price. Given limited upside shares of OML are not recommended for purchase prior to the transaction. Post demerger, shares of new OML are preferable to shares of QTL given less exposure to developing and unstable operating environments. On a sum-of-the-parts basis, shares of New OML (post-demerger) are fairly valued at GBP 1.84 per share and include the value of OML’s banking operations plus the NED at the current market price and at the QLT ownership at fair value estimate. Post-spin Quilter shares are assigned a fair value estimate of GBP 0.53 per share.

On January 16, 2017, Atlas Copco, a Swedish industrial conglomerate, announced its decision to split into two companies through a tax-free spin-off of a business focusing on mining and civil engineering customers. The transaction, which was approved by shareholders at the company’s 2018 Annual General Meeting on April 24, 2018, is expected to be completed on June 18, 2018; the spin-off entity is to be named Epiroc AB. Atlas Copco A shareholders as of the record date of June 14, 2018 will receive one series A share in Epiroc AB, and holders of series B shares in Atlas Copco AB will receive one series B share in Epiroc AB. Epiroc Series A and B shares will begin trading on the Nasdaq Stockholm on June 18, 2018 under the tickers “EPI A” and “EPI B”, respectively.

Based on an analysis of projected revenue and EBIT growth, along with projected dividend yield, Atlas Copco (ATCOA) can be fairly valued, on a sum-of-the-parts basis, at SEK 354 per share. Post-spin, assuming a 1:1 distribution ratio, ATCOA SS and EPI SS can be fairly valued at SEK 275 per share and SEK 79 per share, respectively. Note that as of June 13, 2018, Atlas shares began to trade without Epiroc share entitlement, at an intraday price of SEK 276 per share—essentially in line with our post-spin fair value for Atlas of SEK 275.  With the fair value estimate approximating Atlas’ current consolidated share price (SEK 368 per share as of yesterday’s close), the shares appear fairly valued for the transaction. Post-spin Epiroc shares will likely see considerably volatility given uncertainties around valuation (and potential downside risk). Additionally, ATCOA shares have had a strong recent run, having appreciated 12% in the last 12 months, versus a 5% decline for the OMX Stockholm 30 Index (OMX) over the same period.

On December 12, 2017, Autoliv Inc. (NYSE: ALV) announced its intention to separate its Electronics business, to be named Veoneer Inc., into an independent publicly traded company. The transaction, which will be conducted via a tax-free spin-off of Veoneer shares to ALV shareholders in both the U.S. and Sweden, is expected to be completed on June 29, 2018. Autoliv’s current Passive Safety segment will continue to operate under the Autoliv name, with continued listings on the New York Stock Exchange (NYSE) and Nasdaq Stockholm. Veoneer Inc. will be listed in the U.S. and Sweden. Both companies are to be headquartered in Stockholm, Sweden.

Autoliv shareholders, including holders of shares represented by Swedish Depository Receipts (SDRs) as of the record date of June 12, 2018, will receive one share of Veoneer common stock for each share of Autoliv common stock. When-issued trading of Autoliv and Veoneer is expected to begin on or about June 11, 2018, continuing up to the distribution date of June 29, 2018, under the symbols “ALV.WI” and “VNE.WI”, respectively.

On a pre-spin, sum-of-the-parts basis, shares of Autoliv can be fairly valued at $172 per share, consisting of $44 per share from Veoneer and $128 per share from post-spin ALV. The accelerating growth at Veoneer adds optionality to VNE’s potential share price, on the order of almost 60% above the fair value estimate. With the pre-spin fair value estimate representing approximately 12% upside from the current share price ($154 as of this writing), shares of ALV are recommended for purchase prior to the VNE distribution.

VNE’s long-term prospects are a further reason for our recommendation to purchase shares of ALV prior to the spin-off, as we expect strong investor interest in shares of Veoneer in initial trading. Despite the strong recent run in the stock, the company’s leadership position and strong demand trends, coupled with the secular move toward increasing automotive safety, render the stock a key long-term holding, in our view. With respect to post-spin ALV, pre-spin owners of ALV are not likely to sell off positions, in our view, and instead are more likely to maintain ownership in what is a solid cash flow story that has the potential to benefit from several industry trends. We would not recommend chasing shares of post-spin ALV if they trade at or above our fair value estimate.

Amerco (NASDAQ: UHAL), the parent company of U-Haul, North America’s largest do-it-yourself (DIY) moving company, operates three reportable segments: (1) Moving & Storage (91% of sales and 96% of EBITDA in F2018), which rents trucks, trailers, and towing equipment as well as owns/operates a large portfolio of self-storage space; (2) Property & Casualty Insurance (2% of sales and 2% of EBITDA), comprised primarily of Repwest Insurance, which provides insurance to U-Haul customers and equipment; and (3) Life Insurance (7% of revenue and 2% of EBITDA in F2018), which  serves the senior citizen market via its Oxford Life Insurance subsidiary.  UHAL is the dominant player in the DIY moving & storage market, with durable competitive advantages in proximity, availability, and price. In our view, at ~5.5x F2020E EV/EBITDA, UHAL is undervalued relative to the sum value of its parts, particularly the high-margin/low incremental capex Storage portion of its core Moving & Storage business. While we think the company will continue to gain share and has ample room to expand margins over the next several years (to the benefit of shareholders), we see several potential strategic options, including (in order of likelihood) the tax-efficient monetization of attractive real estate (e.g. Chelsea), the sale of non-core assets (e.g. Oxford) and/or the spin-off of the Storage segment as a real estate investment trust. Considering our financial projections as well as peer valuations, value of $551 per share and $28 per share can be assigned to UHAL’s Moving & Storage and Insurance businesses. Accounting for projected net debt of ~$109 per share yields a sum-of-the-parts value of roughly $470 per share.

On July 3, 2017, BGEO Group PLC (BGEO LN) announced plans to demerge BGEO Group into two separately listed, publicly traded companies: one company will focus on BGEO’s banking business (Bank of Georgia) while the other will focus on BGEO’s investment business (to be rebranded as Georgia Capital). The transaction will be completed on May 29^th, 2018, prior to the market open. Following the demerger, Georgia Capital will retain a 19.9% stake in Bank of Georgia. Shareholders of record as of 6:00 p.m. May 25, 2018, will receive one share of Georgia Capital for each share of BGEO owned. Georgia Capital is expected to trade on the London Stock Exchange under the ticker “CGEO”.

On a pre-spin, sum of the parts basis, shares of BGEO can be fairly valued at GBP 36 per share, implying 10% upside from the current share price. Post spin, shares of Bank of Georgia can be fairly valued at GBP 20 per share while Georgia Capital is fairly valued at GBP 17 per share, including the GHG and Bank of Georgia ownership stakes. As such, the separation of the investment business from the banking operations appears to unlock value. While 10% upside heading into a spin-off typically results in a pre-spin recommendation, given the uniqueness of BGEO’s regional focus, we suggest awaiting post spin trading prior to initiating positions. We would suggest either a minimum of 15% to 20% discount to the fair value estimates would provide a better margin of safety, or at least one quarter’s performance as stand-alone entities to show management’s ability to drive financial performance before recommending shares.