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:
- Jacobs Solutions Inc. (J) / Critical Mission Solutions – Late September 2024
- Spectrum Brands (SPB) / Home & Personal Care Business – 3Q 2024
- Western Digital (WDC) / HDD Business – 2H 2024
- MDU Resources Group (MDU) / Construction Services – 2H 2024
- Berry Global Group Inc. (BERY) / HH&S And Films Businesses (to merge w/ Glatfelter) – 2H 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
RECENT PUBLICATIONS:
Comprehensive Report: Jacobs Solutions Inc. (J)
On May 9, 2023, Jacobs Solutions Inc. (NYSE: J) announced its intention to spin-off its Critical Mission Solutions (CMS) business into an independent, standalone, publicly traded company, subject to customary closing conditions. Subsequently, on November 20, 2023, Jacobs announced a definitive agreement to spin off CMS (along with the Cyber & Intelligence portion of its Divergent Solutions business) and merge it with privately held Amentum in a tax-free, Reverse Morris Trust (RMT).
The combined CMS, C&I and Amentum (CombineCo) business generated ~$13.7 billion of annual sales (& ~$1.1 billion of adj. EBITDA, including $50-$70 million of synergies) for the last twelve months, and “create a leading provider of system integration & technology solutions” and “deliver expertise in the government’s highest priority areas of energy, space exploration, intelligence & analytics, and digital modernization”, at scale. On the flip side, management indicated that the post-separation parent (RemainCo) will be a “higher value” company focused on “technology-enabled solutions” for the “world’s most complex critical infrastructure & sustainability challenges” with “leading positions in the attractive water and environment, energy transition, transportation and advanced manufacturing sectors” with ~$11.4 billion in trailing annual sales.
Post-spin parent, Jacobs, and its shareholders were expected to own 58.5%-63% of the combined spin entity, Amentum, consisting of 51%-55% for J shareholders and the parent’s retainment of 7.5%-8.0%. The final ownership stakes will be determined based on reaching certain operating targets at CMS and C&I. Further, RemainCo will receive a ~$1 billion cash dividend, which is expected to primarily be directed toward debt repayment (in an effort to maintain an investment grade credit rating).
The company filed its initial Form 10 in late-July (16th), held a capital market day for Amentum on August 13, 2024 and expects to complete the transaction toward the second-half of its September-ending F2024. More recent commentary indicates the separation will be completed in the latter half of September 2024 (as the company has cleared all regulatory approvals for the transaction, save the private letter ruling from the IRS).
John Heller, the current chief executive of Amentum will serve as the combined company’s CEO (as well have a seat on the Board), while Dr. Steve Arnette, the current president of CMS, will serve as CombineCo’s chief operating officer (COO). Steve Demetriou, J’s current Executive Chairman, and former CEO from 2015 until 2023, will assume the same role at Amentum. Mr. Robert (Bob) Pragada, J’s chief executive from early-2023, will remain the CEO of the parent (and will assume the role of Board Chairman).
Our valuation analysis indicates that J’s current pre-spin stock price roughly aligns with our estimate of its fair value, suggesting limited immediate upside. However, depending on post-spin-off trading activity, there may be compelling opportunities for both the parent company and the spin-off entity.
ALERT: Fortive to Spin-Off its Precision Technologies Business
On September 4, 2024, after the market close, Fortive Corporation (NYSE: FTV) announced its Board of Directors would pursue a tax-free spin-off of its Precision Technologies (PT) business from its Intelligent Operating Solutions (IOS) and Advanced Healthcare Solutions (AHS) businesses. The company expects the transaction will be competed in 4Q 2025.
FTV currently operates three business segments: 1) Intelligent Operating Solutions (43% of consolidated sales in 2023 and ~49% of adjusted EBITDA); 2) Precision Technologies (35% of 2023 sales and 33% of adj. EBITDA); and 3) Advanced Healthcare Solutions (22% of consolidated sales in 2023 and ~18% of adj. EBITDA).
In terms of leverage and capital allocation, management indicated that it intends to use ~75% if the free cash flow generated between now and the spin toward share repurchases and while not finalized the current plan is to set both companies up with similar, investment-grade credit ratings and leverage ratios in the ~1.4x-1.7x.
In terms of post-spin leadership, upon completion of the transaction, James Lico will retire as president & chief executive (CEO) and the current head of the IOS business, Olumide Soroye, will take the helm at Fortive while Tami Newcomb, the current head of PT, will assume the chief executive role at SpinCo.
Management indicates the transaction will highlight RemainCo’s ~50% recurring revenue base (and ability to growth through M&A) as well as SpinCo’s leverage to key end-markets with long-term secular/organic growth prospects (i.e., mission critical technologies in test & measurement, specialty sensors and aerospace & defense subsystems).
In terms of valuation, Intelligent Operating Solutions (IOS) could be compared with Ametek, Inc. (NYSE: AME), Keysight Technologies (NYSE: KEYS) and Rockwell Automation (NYSE: ROK), which trade at nearly 17.5x 2025E EV/EBITDA while Advanced Healthcare Solutions (AHS) could be compared with Steris PLC (NYSE: STE), which trades at ~15.5x. Applying peer multiples to each segment’s respective 2025E EBITDA forecasts yields a combined (i.e., IOS & AHS) value of ~$22 billion. Precision Technologies (PT) could be compared with Keysight Technologies and Zebra Technologies (NASDAQ: ZBRA), which trade at nearly 17x 2025E EV/EBITDA (although Emerson acquired National Instruments in October 2023 the purchase price represented ~20.4x and 18.7x 2023E and 2024E consensus estimates, respectively).
Applying a 16.5x multiple to our 2025E segment EBITDA forecast implies segment value of nearly $5.5 billion. Accounting for corporate costs, capitalized at the weighted segment average, as well as net debt yields an initial, pre-spin, sum-of-the-parts value of ~$26.65 billion or ~$77.50 per share, representing 9% upside from the current share price.
ALERT: Topgolf Callaway Brands Corp. (NYSE: MODG)
On September 4, 2024, after the market close, Topgolf Callaway Brands Corp. (NYSE: MODG) announced its Board of Directors intended to pursue a separation of its Callaway and Topgolf businesses into two publicly traded entities. At least initially, the company is envisioning the transaction as a tax-free spin-off although management will continue to evaluate a range of options to maximize shareholder value (i.e., a sale). In pursuit of the contemplated transaction, MODG will look to spin off at least 80.1% of Topgolf, a key threshold in qualifying for tax-free status, but is considering retaining a “limited ownership for a “period of time”.) MODG expects the transaction will be competed in 2H 2025.
MODG’s Callaway business, which primarily provides golf equipment (i.e., clubs, where it is the #1 player, balls, where it is #2, & accessories), generated ~$2.45 billion in trailing 12-month (TTM) sales with adjusted EBITDA of ~$268 million while Topgolf, which was acquired in March 2021, operates golf-related entertainment venues (i.e., gamified driving ranges), comprised ~$1.8 billion of TTM sales with adj. EBITDA of ~$333 million (or $245 million, excluding VFCI or cash venue financing interest). For 2024E, management has guided Callaway segment sales of $2.4-$2.5 billion with adj. segment EBITDA of $260-$280 million while Topgolf is projected to generate segment sales of ~$1.8 billion with adj. EBITDA of $310 million (or $210 excluding VFCI). [Note: 2024E guidance does not include $25 million and $50 million of expected net dis-synergies and transaction expenses, respectively.]
This announcement comes in the broader context of MODG’s stock having been under significant pressure in recent months (off a high around $16 per share), partly driven (as evidenced by analyst commentary on recent quarterly conference calls) by declining/disappointing same store sales (SSS) trends at Topgolf (i.e., SSS was up 7% in full-year 2022, 11% in 1Q 2023 and 1% in 2Q 2023 before turning negative in 3Q 2023 and 4Q 2023 with declines of 3% before accelerating to 7% and 8% declines in 1Q 2024 and 2Q 2024, respectively). To that end, the company announced a strategic review on its 2Q 2024 earnings conference call (in early-August) to evaluate “both organic and inorganic”, including a potential spin, to improve performance and maximize shareholder value. At the time, management indicated that “we have been disappointed in our stock performance for some time, as well as the more recent same venue sales performance. As a result, we are in the process of conducting a full strategic review of Topgolf”. (Anecdotally, the company thinks that recent trends are largely driven by cyclicality as well as a “post-Covid reversion” and that it sees the long-term sales store sales trends for the business as being positive. That said, management acknowledges that a return to consistent positive comparisons will likely “take some time.)
While not finalized, commentary on management’s conference call was that Callaway would likely retain all company debt and that Topgolf will be spun out debt-free (other than its venue-related financing obligations) with roughly ~$200 million in cash. Despite the lopsided allocation of debt, management plans, via a combination of free cash flow and the monetization of its retained stake in Topgolf, to reduce parent-company leverage to 3.0x or lower within 12-months following the separation transaction (which it thinks will mitigate the risk of any potential downgrades to its investment grade by the rating agencies).
In terms of valuation, as mentioned earlier Calloway is the #1 player in clubs and #2 in balls (behind Acushnet), could be compared with golf-focused public-players, such as Acushnet (NYSE: GOLF) and Mizuno (8022 JT), as well as, to a lesser degree, a broader set of sporting good peers, such as Thule Group (THULE SS), Yeti Holdings (NYSE: YETI) and Amer Sports (NYSE: AS), which, on average trade at ~11x 2025E EV/EBITDA (in a range of 8.5x-12x). Applying a slightly discounted peer multiple of ~10.0x, reflecting the post-spin entities leverage profile, to forecasted 2025E Calloway segment EBITDA implies a valuation of $2.7 billion. Standalone Topgolf, for its part, could be imperfectly compared with a range of entertainment/leisure concerns, including Six Flags, which is in the process of being acquired by Cedar Fair (NYSE: FUN), Life Time Group (NYSE: LTH), MSG Entertainment (NYSE: MSGE), and Vail Resorts (NYSE: MTN), which trade at ~9.0x 2025E EV/EBITDA (in a range of ~6.0x-12x). Applying a lower-end multiple of ~6.5x, which we think is warranted awaiting more clarity of the resiliency on same store trends, implies Topgolf segment value of ~$1.95 billion. Accounting for projected net debt of ~$2.35 billion yields an initial, pre-spin, sum-of-the-parts value of ~$2.3 billion or ~$12.50 per share, representing 21% upside from the current share price.
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), Crown Castle Inc. (CCI), FedEx Corporation (FDX), Goodyear Tire & Rubber Co., Luxfer Holdings (LXFR), Goodyear Tire & Rubber, Inc. (GT), Masimo Corp. (MASI), Matthews International Corp. (MATW), Netgear Inc. (NTGR), Newpark Resources (NR), RCI Hospitality Inc. (RICK), Stanley Black & Decker (SWK), TFI International (TFII), TriMas Corporation (TRS)
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.
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