On September 11, 2017, the NKT A/S Board of Directors announced that a plan for a demerger of Nilfisk from NKT A/S had been signed. The transaction will take place as a partial, tax-exempt demerger of NKT A/S, with a retrospective effective date of January 1, 2017, for accounting purposes. Following the separation, NKT shareholders will own shares in Nilfisk Holding A/S in the same proportion as they are shareholders in NKT A/S. The distribution of Nilfisk shares is to be made on a one-for-one basis to NKT shareholders on October 12, 2017. On a pre-spin sum-of-the-parts basis, shares of NKT A/S are fairly valued at DKK 606 per share, representing 11.7% upside from the current market price (DKK 542.50 as of this writing). Given the limited potential upside and short time frame until the spin-off, we do not currently recommend the shares for purchase. We would await the completion of the spin-off and look for entry points in the post spin entities at a minimum of 20% below our fair value estimates, in the event that one or both of the stocks experience a degree of selling pressure following the separation.

On August 21, 2017, NACCO Industries Inc. (NYSE: NC) announced its intention to spin off its wholly owned subsidiary, Hamilton Beach Brands Holding Company (HBB), resulting in two separately traded public companies. Based on an analysis of estimated 2018 EPS, EBITDA, dividend yield, and estimated free cash flow, a pre-spin sum-of-the-parts fair value estimate of $104 for NC can be derived. Post-spin, NC and HBB can be fairly valued at $36 and $34, respectively, the latter based on 13.6 million fully diluted shares outstanding (Class A and B shares). With the implied fair value estimate representing 25% upside to NC’s current share price ($83.15 as of this writing), the transaction appears likely to generate incremental upside. That said, we expect considerable near-term volatility as shareholders likely rotate out of NC into HBB.

CBS Corporation (NYSE: CBS) has formally announced its intention to split off CBS Radio, its broadcast radio business, which will be merged with Entercom Communications Corp. (NYSE: ETM) through an all-stock, tax-free Reverse Morris Trust transaction. Based on an analysis of projected EBITDA, projected free cash flow yield, and potential dividend yield, a pre-spin sum-of-the-parts fair value estimate of $77 for CBS can be derived. Post-spin/merger, ETM can be fairly valued at $11. With the implied fair value estimate representing 20% upside to CBS’s current share price ($64.34 as of this writing), the transaction appears to have the potential to generate significant upside. Thus, the pre-spin shares are recommended for purchase. Note, however, that post-spin shares could see some short-term volatility as investors rotate out of ETM shares, particularly given the disparities between market capitalization and business focus. Despite a modest 11% implied upside to our target for ETM, we recommend avoiding the shares for now, given the execution risk associated with a transaction of this scale, coupled with the secular challenges of the radio industry. Note that the shares have declined approximately 35% year-to-date. The Spin-Off Report

Marcus Corporation (NYSE: MCS) reports two distinct operating segments: (1) Theatres (60% of sales and 75% of EBITDA in 2016), which owns and/or operates 69 movie theatres, making it the fourth largest domestic operator; and (2) Hotels & Resorts (40% of sales and 25% of EBITDA in 2016), which owns 8 lodging properties and manages an additional 10 locations for third parties under long-term management contracts.

At ~7x 2018E EV/EBITDA, Marcus Corp. (MCS) is undervalued relative to the sum value of its parts, particularly its Theatre business, which consistently outpaces peers in both box office performance and profitability, as well its owned Hotels & Resort assets, which could be monetized as the company pursues a more asset-light approach to its lodging business. On the latter point, MCS could utilize IRS Section 1031 “like-kind” exchanges to minimize the tax leakage associated with any potential real estate transactions. As well, MCS will likely seek, where possible, to maintain facility management contracts with the properties’ new owners, which would increase its fee-related income stream. 

Considering our financial projections as well as peer and M&A valuations, value of $36 per share and $14 per share can be assigned to MCS’s Theatres and Hotels & Resorts (H&R) businesses. Accounting for corporate costs and projected net debt of ~$19 per share yields a sum-of-the-parts value of roughly $31 per share, which implies ~25% upside. Applying an asset-based valuation methodology to MCS’s owned H&R properties suggests a segment value of $16 per share, which implies a fair value of almost $32.50 per share, for potential upside of ~30%.

Potential catalysts include the tax-efficient monetization of owned hotel assets, new hotel management contracts, improved movie theatre attendance and/or investor sentiment on the sector as well as acquisitions. Potential risks include competition/technological disruption, increased operating costs, inadequate returns on capital investments, and/or a recession.

Carlisle Cos. Inc. (NYSE: CSL) is an industrial conglomerate operating five distinct business segments: (1) Construction Materials (56% of 2016 sales and 60% of EBITDA); (2) Interconnect Technologies (23% of sales and 25% of EBITDA); (3) Fluid Technologies (7% of sales and 7% of EBITDA); (4) Brake & Friction (7% of 2016 sales and 3% of EBITDA); and (5) Foodservice Products (7% of 2016 revenue and 5% of EBITDA).

Carlisle has a history of acquisitions (e.g., Drexel Metals, Arbo, San Jamar, Star Aviation, Micro-Coax, Graco’s Finishing Brands) and divestitures (e.g., Transportation Products), and we discern a core focus on the company’s CCM, CIT, and CFT segments, which have comparably higher growth and margin profiles. With minimal inter-segment synergies among the company’s de-centrally managed businesses, we see optionality for Carlisle’s CBF and CFS businesses, which could be monetized to provide incremental growth capital to core businesses and/or to be returned to shareholders.

By our calculation, at less than 9x 2018E EV/EBITDA and a ~6.5% free cash flow yield, CSL trades at a discount to the sum value of its parts. Considering financial commentary as well as peer and M&A valuations, value of $77 per share, $33 per share, $17 per share, $4 per share, and $9 per share can be assigned to Carlisle’s CCM, CIT, CFT, CBF, and CFS businesses. Accounting for corporate costs and projected net debt of ~$14 per share yields a sum-of-the-parts value of roughly $126 per share, implying ~30% upside potential.

Future potential catalysts include acquisitions of either complementary or new businesses, divestitures of less core business lines, share repurchases, and/or earnings leverage to improved industry fundamentals. Potential risks include cyclical downturns, particularly in the non-residential construction and aerospace sectors, integration issues, pricing pressure, raw material inflation, and/or a lack of management execution.

On March 30, 2016,Metro AG announced plans to split into two independent companies, a Wholesale and Food Specialist group and a Consumer Electronics group. The spin-off will be accomplished via an internal reorganization, followed by a distribution of shares in METRO Wholesale & Food Specialist AG (MWFS) to current MEO shareholders on a one-for-one basis. Following the distribution, the parent company will adopt the corporate moniker CECONOMY, after which the spin entity will change its name back to METRO AG. The spin entity’s operations will encompass the current MCC and Real segments of METRO, while the parent entity will control the Media-Saturn segment. It is expected that the spin-off will be completed on or about July 13, 2017.

METRO AG (MEO GR), in its current form, operates as a wholesale and food specialist group and as a consumer electronics group. The company, headquartered in Düsseldorf, Germany, owns and operates retail locations, including wholesale warehouses, retail hypermarkets, grocery stores, and consumer electronic stores. Its locations are found across Europe and in certain Asian countries.

In theory, the separation and reduced complexity should allow both entities to receive an increased valuation multiple versus current levels. Shares of MEO currently trade at 3.5x enterprise value to 2017 consensus EBITDA, while averaging 4.8x forward estimates over the past five years. Meanwhile, a basket of European listed grocers, food distributors, and hypermarket operators currently trade at 8.7x forward consensus. Consumer electronics companies, which include a more geographically diverse set of operators, currently trade at 5.2x forward estimates.

In reality, MWFS is likely to benefit more than the parent entity from the separation. MWFS, particularly the METRO segment, has generated positive like-for-like sales over the past three and a half years and has experienced a degree of margin expansion, lending credibility to management’s ability to continue growth and profitability improvements. Conversely, the parent company’s operations have been hampered by restructuring charges and relatively flat sales and margins. At the consumer electronics segment, management’s expectations appear to hinge more on a completion of restructuring and on growing online sales & add-on services as the traditional brick-and-mortar business slows across the industry.

Based on an analysis of the post spin entities earnings, cash flow and dividend potential, pre-spin shares of MEO are fairly valued at EUR 36 per share. On a post-spin basis, accounting for final share counts, the spin company, which will assume the METRO name, is fairly valued at EUR 20 per share, while shares of CECONOMY are fairly valued at EUR 16 per share, which includes the company’s 10% ownership stake in the new METRO. For further details, please see the full report via the link above.

Idorsia, while having no revenues, appears to have retained a large share of the management team who founded Actelion and turned it into a $30 billion company since its founding 20 years ago. With sufficient funding to operate at least three years, the company seems to have sufficient time to explore the opportunities to commercialize its drug pipeline. The CEO has stated that he want to bring two to three products onto the market within the next five years, and if that actually were to happen, Idorsia could be a multi-billion company, very similar to Actelion. On the other hand, if it fails to obtain any approvals and its revenue-sharing agreements turn out to be fruitless, the company could be bankrupt in 3-4 years. Consequently, investors need to evaluate the prospects for success versus failure, which is clearly difficult for anyone not intimately familiar with these drugs and the potential market sizes for these drugs. Thus, it comes down to, perhaps, how relevant one believes it is that so many of Actelion’s senior management team, such as the CEO, Chairman and Chief Scientific Officer, have decided to lead Idorsia rather than remaining with Actelion. Obviously, individuals in such positions have a much better grasp of the probability for success than outside investors do. As such, it appears reasonable that Idorsia deserves to trade at a premium to its book value of CHF400 million, perhaps even a 3-4x premium as other biotechnology companies without revenues do.

In the case of successful approvals and commercialization of just one of its drugs, investors should keep in mind that there are examples where the stock market placed a $6 billion valuation on companies that were 3-4 years away from generating $100 million in revenues, so Idorsia’s upside in success-mode could be substantial. Of course, the probability for an outsized investment return depends highly on the price at which the shares can be purchased. Perhaps because its size compared to Actelion is a rounding error, there is a strong possibility that many of the Actelion investors who will receive the Idorsia shares, many of which are arbitrageurs who were exploiting the price differential between the CHF280 per share in cash offered by Johnson & Johnson and the prevailing Actelion share price, which was lower for much of the time, will quickly dispose of the shares, regardless of valuation. That could create a good opportunity for risk-tolerant, long-term, investors to purchase shares of Idorsia.

On October 31, 2016, Vornado Realty Trust (NYSE: VNO) announced a tax-free spin-off of its Washington, DC business, known as Vornado/Charles E. Smith, and a definitive agreement to merge SpinCo with the operating company and certain selected assets of The JBG Companies, a leading Washington, DC real estate firm. The combined company, to be named JBG Smith Properties, will subsequently trade on the New York Stock Exchange under the ticker symbol “JBGS” and will be the largest pure-play Washington, DC real estate company. Vornado shareholders are expected to own approximately 73% of the combined company, JBG’s limited partners are expected to own approximately 21%, and JBG management is expected to own approximately 6% (all percentages subject to closing adjustments). The distribution is expected to be made on a pro rata 1:2 basis to VNO shareholders. The transactions are scheduled to be completed in 2Q 2017, subject to effectiveness of the SEC registration statement, filing and approval of JBG Smith’s listing application, meeting Hart-Scott-Rodino anti-trust requirements, receipt of regulatory approvals and third-party consents by both Vornado and JBG, and formal declaration of the distribution by Vornado’s Board of Trustees. Vornado anticipates that the combination of post-spin Vornado and JBG Smith’s dividends will be at least equal to Vornado’s current annualized dividend of $2.84 per share (3.11% yield).

The transaction mirrors Vornado’s 2015 spin-off of its shopping centers to form Urban Edge Properties (NYSE: UE). Since the beginning of 2017, VNO shares have declined 11% versus flat performance for the Vanguard REIT ETF (VNQ). Notably, VNO is trading at a relative NAV discount to its peers despite having outsize cash net operating income (NOI) growth, excellent liquidity, and relatively low leverage. Consequently, management has grown increasingly vocal about its frustration with the current price of its stock, which it deems as trading at an unwarranted discount to net asset value. In particular, management contends that investors are mispricing the DC assets, which have faced operational challenges in recent years and are in turn weighing on the valuation of the New York properties. A potential spin-off has been discussed since late 2015, amid significant EBITDA declines in this market. In this context, a spin-off of the Washington, DC assets makes sense given the perceived undervaluation of Vornado’s premier New York City assets. The DC assets comprise approximately 20% of VNO’s total NOI, but are declining as a percentage of this total given the redevelopment of 1200 M Street in Northeast DC.

Separating the New York and Washington, DC divisions will allow investors to value the portfolios independently, while allowing each management team to focus on their respective operational and capital allocation decisions. The spin-off creates two focused companies while addressing key challenges for each. Following the transaction, Vornado will be a best-in-class, highly focused, New York-centric office and prime retail REIT that will own 18.7 million square feet of Class A Manhattan office properties; the largest, highest-quality, and unique Manhattan high street retail portfolio, encompassing 3.1 million square feet in 72 properties; and prime franchise assets in San Francisco (the 1.8 million square foot 555 California Street) and Chicago (the 3.7 million square foot commercial building, “theMART”). For post-spin VNO, a key issue is the formulation of specific long-term plans for the redevelopment of Penn Plaza in New York City. The type of vision that management has set forth for redeveloping its assets is ambitious and is likely to take many years and require substantial capital. In this context, the spin-off of the DC assets makes sense. In particular, if the DC assets were to remain a fundamental drag and in need of capital, they could prove to be a distraction from VNO’s much larger Penn Plaza ambitions.

The combined JBG Smith Properties portfolio will consist of 50 office properties totaling approximately 11.8 million square feet, 18 multifamily properties with 4,451 residential units, and 11 other properties that total approximately 0.7 million square feet. These assets are located in premier submarkets within the Washington, DC metropolitan area, concentrated in the Downtown District of Columbia, Crystal City and Pentagon City, the Rosslyn-Ballston Corridor, Reston, and Bethesda. In addition, the combination is expected to result in approximately $35 million of synergies. JBG brings to the VNO portfolio a particularly strong skill set and a record of improving assets and submarkets. For the post-spin company, the primary issue likely to overhang the stock is the question of when the Washington DC market will recover. Building vacancies, which spiked during the recession, were further exacerbated by the government shutdown and slowing federal spending. While the local economy has begun to rebound, the recovery has been spotty. In the DC suburbs, vacancy rates have been on the rise for five years in a row and are about double that of the District. That said, the combined entity should be better positioned to address long-term fundamental prospects for the DC portfolio (particularly the difficult Crystal City submarket, which has suffered due to federal job cuts).

Based on an analysis of projected funds from operations (FFO), EBITDA, estimated capitalization rate, and potential dividend yield, a pre-spin sum-of-the-parts fair value estimate of $114 for VNO can be derived. Post-spin, VNO and JBG can be fairly valued at $102 and $22, respectively, the latter based on a 73% ownership interest by VNO shareholders. With the implied fair value estimate representing 25% upside to VNO’s current share price ($91.26 as of this writing), the transaction appears to generate significant upside. Thus, the pre-spin shares are recommended for purchase.

For post-spin VNO, we still believe there is room for sentiment to improve, with a key catalyst being the continued simplification of the story through asset sales, the spinoff of its DC division, and better communication around significant NOI that should begin to accrue from increased renewal of lease rates in the coming two years. A strong liquidity position with modest leverage (debt net of cash to EBITDA of 5.5x) and well-staggered debt maturities should prove strong assets in a market where investors are sensitive to balance sheet risk, and over time could help close the shares’ approximately 32% discount to net asset value.

In the near term, we expect JBG shares to remain range-bound owing to investor uncertainty around potential growth. Over time, the shares could see upside should the DC market rebound from steep declines in office space occupancy resulting from U.S. government-related base closures and realignment. Over time, JBG has the potential to invest more meaningfully in its challenged Crystal City assets. In addition, given a more conservative office outlook, we expect the company to increasingly become a major developer of multifamily assets, and believe that in due course its portfolio will become more balanced between office and multifamily assets.

The separation of SCA’s hygiene business, to be named Essity, from the forest products business should unlock significant value for shareholders, as these businesses imply 15% upside to the current share price for the pre-spin off company when valued as separate entities. The distribution of Essity shares is expected to occur during June 2017, which implies that this pricing inefficiency should be unlocked in the short term. Given this upside potential, shares of pre-spin off SCA are recommended to those investors who will not be taxed on the distribution of Essity shares.

Once the distribution occurs, investors should consider investments in Essity and SCA relative to their fair value estimates of SEK275 per share and SEK75 per share, respectively. Essity, as one of the largest consumer products companies in the world, has the benefit of a robust return on invested capital, as well as leading global brands in a number of markets. In addition, it still has the potential to expand its business meaningfully via acquisition; something that is increasingly difficult for its larger peers, such as Proctor & Gamble, to achieve.

The forest products company, which will retain the SCA name, has the potential to be an interesting investments, as it has a number of characteristics that speak to a potential for these shares to be overlooked by the market. For starters, the forest products company is the much smaller entity and, therefore, not likely to be the reason investors own share of pre-spin off SCA. In addition, any relative valuation analysis based on various earnings metrics is likely to significantly undervalue to company’s large land holdings, as only a small portion of these assets contribute to earnings in any given period. These holdings, equivalent in size to more than 5% of all of Sweden, have meaningful value and should be reflected in the company’s share price.