On May 23, 2016, after the market close, Varian Medical Systems Inc. (NYSE: VAR) announced that it intends to spin off its Imaging Components business as an independent, publicly traded company. The spin-off is expected to be completed via a tax-free distribution of shares in the new company, which will assume the name Varex Imaging Corp. Shares of Varex are expected to trade on the NASDAQ under the symbol “VREX”.

Shares of Varex Imaging Corp. will be distributed on January 28, 2017 to VAR shareholders of record as of January 20, 2017, after the market close. Shareholders of record will receive 0.4 shares of VREX for every share of VAR owned. Beginning on or about January 20, 2017, shares of Varex will trade “when-issued” under the symbol “VREXV”. “Regular-way” trading of VREX is expected to begin on January 30, 2017. Shares of Varian will also trade in the when-issued market (ex Varian) under the symbol “VAR WI” beginning on or about January 20, 2017.

VAR designs, manufactures, sells, and services a variety of hardware and software products used in the treatment of cancer patients, including radiotherapy, stereotactic radiosurgery, stereotactic body radiotherapy, and brachytherapy products. Additionally, the company designs, manufactures, sells, and services X-ray imaging components used in a variety of applications. X-ray applications include radiographic, mammography, special procedures, and industrial applications, among others.

The spin company will be composed of the Imaging Components business, whose products include X-ray imaging components such as X-ray tubes, flat-panel digital image detectors, image processing software and workstations, and automatic exposure control systems. Products are generally sold to original equipment manufacturers (OEMs), which then incorporate the components into medical diagnostic, dental, veterinary, and industrial imaging equipment. Included among the spin company’s products are security and inspection products used for cargo screening at ports and borders. Security products are also sold to OEM customers.

In terms of a rationale for the spin-off, recent share price performance can certainly be noted. Shares of VAR have underperformed the S&P 500 and the S&P Health Care Equipment indexes over the past five years. The underperformance of the Imaging Components business versus the oncology segment (revenue losses and strained margins), combined with no real overlap in R&D, should allow Varian to separate the two businesses with minimal incremental costs aside from standard standalone corporate costs, a circumstance that should be viewed favorably by VAR holders interested in the Oncology side of the business.

Following the spin-off, the parent company should be re-rated higher and more in line with peers that are currently trading at elevated multiples. Varex’s multiple should also expand, in our view; however, the valuation benefit is likely to be offset by declining revenues and margins at the spin company. An uncertain revenue scenario at Varex and delayed orders due to regulation and constrained budgets at Varian may prove challenging for each of the separated entities following the spin-off.

On a pre-spin basis, shares of Varian Medical Systems Inc. are fairly valued at $84 per share, consisting of $76 from post-spin Varian and $8 per share from Varex. On a post-spin basis, shares of Varex are fairly valued at $20 per share, based on 37.4 million shares outstanding (0.4-for-1 share distribution).

It should be noted that over the last three months, shares of VAR have underperformed the S&P 500 by over 10%, with the S&P returning 5.1% while VAR declined 5.3%. The drop in share price is likely due to concern over a deceleration in medical imaging industry growth trends. Given a fair value estimate below the current market price ($90.06 as of this writing) and concerns over near-term growth trends, shares of VAR are not recommended for purchase prior to the spin-off of Varex. Post spin, shares of Varian are preferable to those of Varex, given better revenue growth and cash flow generation ability; however, neither side of the transaction presents a compelling investment opportunity at this time. We would expect that current VAR shareholders would rotate out of Varex following the distribution, and thus significant selling pressure on VREX could allow us to revisit the spin company if the shares were priced at a significant discount to our fair value.

A quarterly digest dedicated to the uncommon wisdom of Murray Stahl and Steven Bregman.

On May 3, 2016, Biogen Inc. (NASDAQ: BIIB) announced that it intends to spin off its hemophilia business as an independent, publicly traded company, to be named Bioverativ Inc. Biogen shareholders will receive one share of Bioverativ for every two shares of Biogen common stock held as of the record date of January 17, 2017. The distribution is expected to be paid on February 1, 2017. Bioverativ has applied for listing of its common stock on the NASDAQ Global Select Market under the ticker symbol “BIVV”.

Founded in 1978, Biogen is one of the world’s oldest biotechnology companies and provides innovative therapies for neurological, autoimmune, and rare diseases, including multiple sclerosis (MS) and hemophilia. The consolidated company generated revenue of $10.8 billion for the year ended December 31, 2015. In late 2015, the company announced a corporate restructuring, which included the termination of a number of pipeline programs (primarily in immunology and fibrosis) and an 11% reduction in workforce. These changes are expected to reduce the current annual run-rate for operating expenses by approximately $250 million.

The spin entity, Bioverativ, will focus on the discovery and development of therapies for the treatment of hemophilia. Currently marketed products are ELOCTATE and ALPROLIX, indicated for the treatment of hemophilia A and B, respectively. Bioverativ generated revenue of $560.3 million in 2015. The spin entity is expected to continue to develop and commercialize ELOCTATE and ALPROLIX under Biogen’s existing collaboration agreement with Swedish Orphan Biovitrum AB (SOBI SS) (Sobi). In addition, Bioverativ plans to pursue programs with other third parties in hemophilia to bring longer-acting therapies utilizing XTEN technology (a proprietary recombinant polypeptide technology licensed from privately-held pharmaceutical company Amunix Operating Inc.) into clinical development in the first half of 2017 and to accelerate the development of bispecific antibodies and hemophilia-related gene therapy programs. Bioverativ will also conduct additional studies to confirm early data that suggest ELOCTATE’s potential to rapidly induce immune tolerance in hemophilia patients who develop inhibitors. John G. Cox, Biogen’s current Executive Vice President, Pharmaceutical Operations & Technology, will serve as the Chief Executive Officer of the new company. The spin entity is expected to be capitalized with a positive cash position and minimal debt.

Biogen has achieved strong profitability on the success of three marketed products in the fields of oncology and neuroimmunology; the company’s market-leading multiple sclerosis franchise, centered around its blockbuster drug Tecfidera, the most prescribed oral MS therapy globally, is unparalleled. Yet, revenue growth is faltering. In 2015, revenue growth declined to 10.9% from 40.0% in 2014; current consensus estimates call for 7% and 4% growth in 2016 and 2017, respectively. Notably, Tecfidera reached a peak in its U.S. business in early 2015, with analysts projecting 2017 sales of $4.19 billion, down from previous estimates of $9 billion. International sales of Tecfidera have been somewhat disappointing (owing to pricing pressure in Europe and several reported cases of a rare brain infection, progressive multifocal leukoencephalopathy [PML]), as has Tecfidera’s direct-to-consumer marketing effort in the U.S. For active, relapsing MS, Biogen’s beta interferon franchise is facing competition from oral agents and from exclusion of coverage for generic Copaxone by CVS Health Corp. (NYSE: CVS), as pharmacy health care providers gravitate toward lower-priced treatments. More recently, the company has focused on key long-term pipeline assets in Alzheimer’s disease, autoimmune, and rare diseases. While these offer significant potential, they are also high risk or have strong competition. Contribution to sales is not expected until beyond 2018. As a result of these factors, the company is under pressure to find new avenues for growth while operating with financial discipline.

The spin-off represents a first step in a longer-term growth strategy. Given that the neurology and hemophilia franchises target different physician and patient segments, the separation allows each post-spin company to pursue different strategic initiatives specific to its core commercial therapies and assets, while leveraging distinct capital allocation strategies. For investors, the separation should provide greater visibility into the financial and operational structures of each company and a clearer understanding of their respective strategies.

The separation allows post-spin Biogen to focus on its neurological and neurodegeneration business, and potentially seek acquisitions to bolster revenue. Outside of MS, Biogen has strong human genetic target validation for its neurology pipeline, creating the potential to offset pressure on MS drugs. Spinal muscular atrophy drug nusinersen could reach $2 billion in peak sales and launch in 2017, following strong phase III clinical data. Alzheimer’s drug aducanumab had strong phase I data that could allow for multibillion-dollar potential if approved (estimated 2020).

For Bioverativ, the company appears to have considerable long-term potential in its hemophilia franchise, which comprises ALPROLIX and ELOCTATE as well as several investigational drugs with favorable prospects.

Based on an analysis of comparable revenue, projected 2017 EPS, and cash flow, a pre-spin sum-of-the-parts estimate of $316 for pre-spin Biogen can be derived, consisting of $289 for BIIB and $28 for BIVV. Post-spin, assuming approximately 110 million shares outstanding (1:2 distribution ratio) Bioverativ can be fairly valued at $55 per share. The pre-spin sum-of-the-parts estimate represents 7% potential upside to BIIB’s current share price (approximately $294 as of this writing), suggesting that the shares are approaching a full valuation. Notably, at 13.9x forward earnings, BIIB’s current valuation represents a slight premium to its 10-year historical average of 12.9x (range of 6.5x to 18.8x).

Wyndham Worldwide Corp. (NYSE: WYN), a global hospitality concern, operates three business segments: (1) Wyndham Hotel Group, a hotel franchise model (23% of revenue and 26% of EBITDA in 2015); (2) Wyndham Destination Network, a vacation accommodation exchange and rental program (27.5% of sales and 26% of EBITDA); and (3) Wyndham Vacation Ownership, a timeshare business (49.5% of revenue and 48% of EBITDA).

With the shares trading at ~7.5x 2018E EV/EBITDA and with a free cash flow yield of ~10%, we find WYN undervalued relative to the sum value of its parts. As well, the lodging sector has experienced a notable degree of restructuring and M&A activity in recent years, including transactions at MAR, ILG, HOT, DRII, and HLT, which not only provide standalone comparisons for more accurate valuation of WYN’s businesses but could also portend an eventual value-unlocking transaction.

Recent management commentary indicates that while WYN constantly evaluates opportunities, including a potential separation, and is likely to continue to do so given the sector’s recent activity, the internal view is that the portfolio currently works well despite the businesses’ divergent growth, margin, risk, and capital intensity profiles. That said, we perceive WYN’s management as focused on creating shareholder value and suggest that to the extent “the market” fails to award fair value to the portfolio, management’s view on potential strategic alternatives would likely evolve.  

Considering management’s financial commentary, peer and M&A valuations, and discounted cash flows, value of $44 per share can be ascribed to Hotels, with $31 and $59 being assigned to Destination Network and Vacation Ownership. Accounting for corporate costs and projected net debt of ~$39 per share yields a base-case sum-of-the-parts value of roughly $95 per share. Notably, a bull-case scenario suggests upside to $110 per share, while a more bearish case implies a valuation of $80 per share.

Above please find the Global Spin-Off Report on Snam SpA.

Snam SpA, an Italian natural gas infrastructure company, announced on June 29, 2016, its intention to spin off its Italian gas distribution subsidiary, Italgas. The transaction was completed on November 7, 2016, with shareholders receiving one Italgas SpA share for every five Snam share owned. Snam will retain a 13.5% ownership stake in the new entity.

Following the spin-off, Snam owns and operates regasification, transportation, and storage assets in Italy. It is also involved in several large cross-border and transcontinental projects. Italgas is the owner of an extensive Italian gas distribution network. The two companies have distinct operating profiles: Snam undertakes large scale, complex infrastructure projects that require significant amounts of capital and undergo a lengthy regulatory approval process, whereas Italgas is a local business that requires small scale investments and involves more customer interaction. Furthermore, their gas distribution assets differ on a technical basis−with the parent company operating a high pressure network as opposed to Italgas’ low pressure one.

Their respective markets also differ and offer distinct opportunities: the Italian gas distribution market is very fragmented, and Italgas, as a market leader, is expected to act as a consolidating force. Snam’s operations, on the other hand, have high barriers to entry and there are only a handful of other European competitors. Lastly, the two firms cater to different geographical markets. Snam shareholders will own an entity whose fortunes are closely intertwined with the major European countries, while Italgas investors will only be exposed to the Italian market.

The majority of Snam’s domestic activities are regulated—its EUR 19.2 billion in regulatory asset base (“RAB”) as of year-end 2015 allows for a pre-tax return on capital between 5.4% and 6.6%, depending on the sector. Its international assets, comprising stakes in four pipeline systems—three currently operating and one in the early stages of construction—may not be subject to specific WACC1 restrictions, but are still heavily regulated by numerous countries.

Snam’s strategy is built upon Europe’s new energy landscape; one that will require both higher as well as more diversified natural gas imports. In that context, Snam is undertaking projects that will transform Italy into an important energy hub that will serve as a gateway for imported natural gas to central Europe. International expansion is also important; the Trans Adriatic Pipeline (“TAP”), expected to be completed by 2020, will not only allow for increased European natural gas imports but also help the continent further diversify its energy natural gas sources. Snam’s domestic and international projects are interconnected. TAP, for example, will transport Caspian gas to Southeast Italy, with the firm’s domestic transportation comprising the last leg of the journey towards central Europe.

Besides the critical role Snam can play in shaping Europe’s energy map and the financial rewards that it can reap, the company and its investors still face numerous risks. Firstly, its capital expenditures over the next four years are estimated at EUR 3.4 billion for the domestic business alone, with costs associated with the development of the TAP reaching up to EUR 1 billion at Snam’s share. Secondly, as a provider of critical infrastructure, Snam’s activities are subject to heavy regulations that range from the need to bid for and/or renew storage concessions in Italy to approvals required for the construction of the TAP. Lastly, one has to consider the impact of interest rates on the company’s valuation. Lower interest rates have allowed Snam to take on more debt at a lower cost, thus boosting net income. A higher interest rate environment would lead swiftly to higher interest payments, while the allowed returns from the firm’s regulated activities would not reflect a higher risk-free rate for several years.

On a pro forma basis, Snam generated EUR 2.6 billion in revenue and EUR 2.1 billion in EBITDA during 2015. With net debt of EUR 10.8 billion, its net debt-to-RAB and its net debt-to-EBITDA ratios stand at 56% and 5.4x, respectively. Snam’s net regulatory asset base is EUR 8.7 billion, or EUR 2.5 per share. Alternatively, based on peer multiples, the company’s shares are valued between EUR 3.5 and EUR 3.6.

As a natural gas distribution company, Italgas relies heavily on regulated assets and state-granted concessions. It has EUR 5.7 billion in regulatory assets, eligible for a real pre-tax WACC ranging from 6.1% to 6.6%. Italgas is the single largest natural gas distributor in Italy, with a market share of over 30%. The market is, however, very fragmented; there are over 200 operators, with approximately half of them having fewer than five thousand clients and distributing a mere 10% of aggregate natural gas volume in 2015.
Consequently, Italgas’ strategy going forward will revolve around industry consolidation—where as the leading player it intends to play a prominent role. It expects the majority of the small and medium operators to disappear by 2020, with their concessions awarded—as they expire, of course—to larger, financially stronger, entities. This theme is critical to the company’s success, as it will allow for significant economies of scale and, as a result, operating costs below the level allowed by existing regulation—leading to returns above the allowable WACC.

Italgas faces similar interest rate risks to its former parent—with net debt of EUR 3.4 billion comprising 59% of its RAB, upside from higher leverage is limited, while higher interest rates are likely to result in lower earnings before any meaningful increase in the regulatory WACC. Moreover, upon being granted new concessions, Italgas has to pay the previous owner-operator an amount equal to the “fail value” of the assets its taking over—a process that is estimated to require EUR 1.3 billion in the next four year.
Italgas’ 2015 revenue and EBITDA, on a pro forma basis, were EUR 1.4 billion and EUR 0.7 billion, respectively. Based on its RAB, peer multiples as well as our estimated WACC, the firm is valued between EUR 2.5 and EUR 3.7 per share.

On January 29, 2016, Xerox Corporation (NYSE: XRX) announced its plans to separate its Document Technology (hardware) and Business Process Outsourcing (BPO) services businesses via a tax-free spin-off to shareholders. Xerox’s Document Technology business will remain with the parent, while the BPO services business will be spun off as a company to be called Conduent, Inc. The company plans to complete the separation by year-end, subject to the customary closing conditions, receipt of regulatory approvals, tax considerations, securing any necessary financing, and final approval of the Xerox Board of Directors. As part of its ongoing restructuring, Xerox also announced a three-year strategic transformation program, targeting a cumulative $2.4 billion savings across all segments. The company expects $700 million in annualized savings in 2016.

On the distribution date of December 31, 2016, Xerox shareholders will receive one share of Conduent common stock for every five shares of Xerox common stock they hold as of the close of business on December 15, 2016, the record date for the distribution. Beginning on or about December 13, 2016, and continuing until the distribution date, Conduent shares will trade on a when-issued basis on the New York Stock Exchange (NYSE) under the ticker symbol “CNDT WI.” On Tuesday, January 3, 2017, Conduent common stock will begin trading regular-way on the NYSE under the ticker symbol “CNDT.” Xerox will continue to trade on the NYSE under the ticker symbol “XRX.” Jeff Jacobson, currently President of the Xerox Technology segment, will become CEO of the post-spin parent. Ashok Vemuri, President, Chief Executive Officer, and a member of the Board of Directors of IGATE Corporation [currently part of Capgemini (CAP FP)], is slated to be CEO of Conduent.

The spin-off appears to be the culmination of mounting activist pressure from Carl Icahn, who in November 2015 acquired an additional 7.1% stake in the company and argued it was “undervalued,” causing Xerox to announce a capital allocation review that same month. Icahn is currently Xerox’s second largest shareholder, with approximately 99 million shares (9.8% outstanding). In conjunction with the spin-off, Xerox announced governance provisions for the post-spin BPO company, which will include a Board of Directors composed of nine members, three of whom will be selected by Icahn.

Xerox Corporation, which offers business process and IT outsourcing support services, employs over 147,000 employees worldwide and generated 2015 (FY December) sales of $18,161 million. The spin-off should increase strategic and operational focus for both companies. Notably, in June 2015 Xerox sold its IT outsourcing business to digital services company Atos SE (ATO FP), signaling increased focus on its BPO and document outsourcing (DO) businesses, where it has more of a competitive advantage.

Notably, the separation parallels a similar transaction at Hewlett-Packard Company, which in November 2015 spun off its enterprise networking business, Hewlett Packard Enterprise (NYSE: HPE), from its legacy printing business, HP, Inc. (NYSE: HPQ), which was facing digital competition. Xerox, like HP, appears to be employing a similar strategy of separating its declining legacy business. As enterprises increasingly perform back-office tasks electronically, rather than on paper, Xerox’s Document Technology business is in the midst of a secular decline.

Importantly, the spin-off represents a reversal of the 2010 acquisition of Affiliated Computer Services (ACS), for which Xerox paid $6.4 billion in an attempt to enter the growing BPO market. With the shares having declined 33% since their five-year peak in December 2014, the integration of the services and hardware business has failed to create any strategic value.

The spin entity, Conduent, Inc., is a BPO company offering global services ranging from claims reimbursement and electronic toll transactions to the management of human resources (HR) benefits, and serves multiple end-markets, including transportation, healthcare, commercial, and government services. As companies continue to outsource business processes in order to rationalize costs and de-risk operations, the global BPO market is estimated to grow to approximately $260 billion in 2016, expanding in the mid-single digits through 2019.

BPO has been viewed by investors as offering a business model with relatively recurring revenue and underpenetrated markets, given that the majority of revenue comes from long-term customer contracts. Consequently, BPO firms generally trade at higher multiples than many IT hardware firms. That said, Conduent’s growth and margin profile currently lags those of peers. Ultimately, the post-spin BPO services company could become an acquisition target, particularly for a higher-margin services competitor such as Accenture plc (NYSE: ACN).

Based on an analysis of comparable revenue, EBITDA, dividend yield, and projected 2017 EPS, a pre-spin sum-of-the-parts fair value estimate of $10.35 can be derived for XRX, consisting of $6.61 for XRX and $3.74 for CNDT. Post-spin, based on a 1:5 distribution ratio and approximately 202.8 million shares outstanding, CNDT can be fairly valued at $18.68. The pre-spin sum-of-the-parts represents 8.5% upside to XRX’s current share price ($9.54 as of this writing), suggesting that the shares appear fairly valued. Post-spin Xerox is likely to face significant secular headwinds—the most important of which is its exposure to black-and-white printing, which is in terminal decline. Accordingly, a significant improvement in margins and revenue growth appears elusive. While Conduent should benefit from relatively healthy macro trends and an underpenetrated addressable market, the company’s revenue growth and margins lag those of peers. Over time, we see the potential for a strategic acquirer to offer scale and potentially drive higher margins. Moreover, any potential acquirer with a large enough IT services business could also benefit from eliminating redundant expenses and cost synergies. However, given the challenges facing both businesses and the potential for continued near-term volatility and risk to forward estimates, the pre-spin shares are not recommended for purchase at this time. Notably, at 8.4x forward earnings, XRX is currently trading at a modest discount to its 10-year historical average of 9.1x (range of 8.1x-10.8x), reflecting these challenges.

On February 26, 2016, Hilton Worldwide Holdings, Inc. (NYSE: HLT) announced plans to spin off the bulk of its real estate business into a publicly traded real estate investment trust (REIT), to be named Park Hotels & Resorts Inc. (“Park”), as well as to spin off its timeshare business, Hilton Grand Vacations (“HGV”), as a separate publicly traded company. Following the spin-offs, the parent entity will focus on its core hotel management and franchising operations. HLT has received a private letter ruling from the Internal Revenue Service on certain issues relevant to the designation of the spin-offs as tax-free. The company intends to complete both spin-offs by the end of 2016, with Park trading on the NYSE under the symbol “PK” and Hilton Grand Vacations trading on the NYSE under the symbol “HGV”.

Park’s portfolio will include 67 hotels and 35,418 rooms, forming one of the largest and most geographically diverse publicly traded lodging REITs. The REIT will have a high-quality portfolio of luxury and upper upscale assets, located across high-barrier-to-entry urban and convention markets, top resort destinations, select international regions, and strategic airport locations. Hilton Grand Vacations will manage nearly 50 club resorts in the U.S. and Europe and will have an exclusive, long-term license agreement with Hilton Worldwide to market, sell, and operate resorts under the Hilton Grand Vacations brand.

In terms of strategic rationale, the separation makes sense in the context of attempting to garner a greater valuation for the entities as individual companies rather than as part of the current corporate structure. The transactions will complete the transformation of Hilton Worldwide Holdings, the parent, into an asset-light model whereby the company can capture a high-margin franchise as well as management fees, allowing it to generate significant free cash flow. Hilton Grand Vacations will be re-rated (lower), in line with other timeshare operators. HGV has already transitioned into an asset-light business model, allowing for cash flow generation from management fees and sales commissions, which would give it greater operating flexibility as a standalone entity. The timeshare industry has seen some consolidation, and as a standalone entity the company could become a more attractive target to either a strategic or a financial buyer. As a REIT, Park Hotels & Resorts will be afforded preferential tax treatment, allowing it to pursue acquisitions of strategic properties at a faster pace than is possible within the current corporate structure.

On a pre-spin, sum-of-the-parts basis, shares of HLT can be fairly valued at $30 per share, consisting of $19 for the post-spin HLT parent, $8 per share for PK, and $3 per share for HGV. On a post-spin basis, HLT, PK and HGV are assigned fair value estimates of $19, $40, and $31 per share, respectively. The pre-spin fair value estimate implies 24% price appreciation potential from the current share price ($24.49); thus, shares of HLT are recommended for purchase prior to the planned spin-offs. The post-spin fair value estimates are based on the current projected earnings and capital structures for each entity and are subject to revision based on final share distribution ratio, changes in fundamentals, and/or changes in peer valuations.

Graham Holdings Co. (NYSE: GHC) is a holding company with a conglomeration of businesses reported in three distinct segments: (1) Education, which operates the for-profit education brand Kaplan Inc.; (2) TV Broadcast, which operates a stable of local television stations; and (3) Other, which includes various manufacturing (Dekko, Forney, and Joyce/Dayton), healthcare (Celtic and Residential), and media (Slate and Foreign Policy) assets, as well as a social media marketing firm (SocialCode).

In our view, GHC’s diverse portfolio of assets, which lack significant synergies, as well as its provision of somewhat limited (albeit improving) financial granularity and general lack of shareholder engagement, leave the company underfollowed and significantly undervalued on a sum-of-the-parts basis. That said, we perceive myriad avenues of optionality for GHC to unlock value for shareholders. To that end, albeit operationally opaque and tightly controlled by insiders, GHC has a history of proactive asset monetization, including, among others, the spin-off of Cable ONE Inc. (NYSE: CABO) and the sale of Kaplan Campuses in 2015, an asset swap with Berkshire Hathaway and the sale of several internet properties in 2014, as well as the sale of The Washington Post and a valuable real estate asset in 2013. The company has also shown a willingness to repurchase shares and expand into new business lines via acquisition in an effort to generate future growth/increase shareholder value.

Based on peer and M&A appraisals, value of $138 per share and $344 per share can be assigned to GHC’s Education and TV Broadcast businesses, respectively, while the company’s hodgepodge of Other assets could be valued at ~$92 per share. Accounting for corporate costs, projected net cash, and the company’s overfunded pension plan yields a base-case sum-of-the-parts value of roughly $623 per share, which implies potential upside of roughly 40%. To that end, we think GHC shares represent an attractive value proposition.

esure Group Plc is a British insurance company that was founded in 2000 by its Chairman, Sir Peter Wood, who still owns 31% of the shares. On September 13, 2016, the company announced its intention to spin off its price comparison website Gocompare.com into a new publicly traded company through a pro rata distribution in-specie to its shareholders.

The spin-off is subject to shareholder approval at the General Meeting that will be held on November 1, 2016. It is expected that the following day, November 2, will be the last day of trading esure shares on a cum-distribution basis, while shares of the new entity will commence trading on November 3.

The decision follows esure’s June 7, 2016 announcement that it would undertake a strategic review of Gocompare.com. The demerger will create two more focused businesses with independent management teams that will be able to pursue their respective strategies, optimize their capital structures and better align employee incentives. Indeed, the core competencies required by each respective management team are disparate, with the spin entity comprising a technology business as opposed to its insurance parent.

Following the spin-off, esure Group will be a pure-play insurance company with a focus on motor and home insurance products, sold through the esure and Sheilas’ Wheels brands. Gross written premiums for 2015 amounted to GBP 550 million. As of June 30, 2016, esure had in-force policies of 2.076 million, compared to 2.001 million by the end of 2015.

The company’s market share is still very limited: 5% of the motor market and 2% of the home insurance market. As a result, esure intends to grow organically by increasing its in-force policies. At the same time, it targets a coverage level against its solvency capital requirements of 130% to 150%—with excess funds distributed in the form of dividends.

Currently, esure’s motor insurance business is benefitting from a “hard” market, i.e., one in which premiums are increasing. Despite that, overall profitability actually declined during the first quarter of 2016. The group faces numerous additional challenges. First and foremost, the low interest rate environment is capping the amount of investment income it can generate.

Perhaps even more importantly, esure may face negative consequences from the planned Brexit that could be summed up in two broad categories. Firstly, a UK recession would likely reduce its gross written premiums and consequently its profitability. Secondly, the rapidly depreciating pound could lead to inflation, eroding consumers’ purchasing power and forcing them to allocate a smaller amount of their budget to home and auto insurance policies. Based on peer multiples, post spin-off esure Group is valued between GBp 80 and GBp 129 per share.

Gocompare.com Group Plc will be the owner of the eponymous price comparison website. Gocompare.com was founded in 2006. esure Group gradually acquired a 50% stake by 2012; in the spring of 2015, the insurance firm acquired the remaining 50% it did not already own. Gocompare.com offers information on pricing as well as features of insurance plans, with the aim of making consumers’ decisions easier. It does not accept advertisements on its website; rather, it generates its income from fees paid by insurance companies when someone purchases a policy through their website.

The company appears to have ample opportunity to grow, aided by a number of factors. Firstly, as consumers become more tech-savvy, they tend to do more research online and as a consequence are more prone to find and use price comparison websites. Secondly, the market for price comparison services is growing, and expanding beyond financial products. Currently, similar websites offer price comparison tools on services such as utilities and broadband as well. Gocompare.com generates the bulk of its income from insurance firms. It recently expanded into other areas, and should intensify this effort going forward.

The spin-off may also prove to be a positive catalyst for Gocompare.com. Owned by an insurance company itself, it could have been perceived as a biased service provider. Such perception could have led insurance companies to opt out of participating in its website or consumers to use alternative price comparison companies. Furthermore, as a standalone company, Gocompare.com will have the flexibility to operate more as a technology company, both in terms of compensation and work environment. This is very critical for its success, for it requires search engine optimization techniques and data analytics in order to increase its website interactions while minimizing marketing and distribution expenses.

Besides growth, Gocompare.com intends to pay a dividend that will likely represent 20% to 40% of its net income. Due to its low capital expenditure requirements, such policy would retain sufficient cash for reinvestment and deleveraging. The latter issue is of outmost importance; as part of the spin-off, the company will take on GBP 75 million in debt that will be used for the payment of a dividend of equal amount to esure Group. Consequently, Gocompare.com’s shareholders’ equity will become negative. That amount of debt, however, can be managed by the spin entity, due to its strong profitability and cash generation: net debt-to-2016E EBITDA stands at just 1.8x. Valued against its publicly-traded peer Moneysupermarket.com Group, Gocompare.com’s shares are worth between GBp 81 and GBp 97.

On a sum-of-the-parts basis, pre-spin esure Group is valued between GBp 161 and GBp 225, well below the stock’s current share price of GBp 272. As a result, shares of esure Group are not recommended for purchase prior to the spin-off. Given the significant premium of the company’s valuation over our SOTP analysis, investors may not come across any bargains following the demerger. However, Gocompare.com has significant opportunities to expand—aided by secular trends—and as such should remain on their radars for some time after the closing of the spin-off.

On November 18, 2015, ConAgra Foods, Inc. (NYSE: CAG) announced its intention to spin off its Lamb Weston business into a separate, publicly traded company via a tax-free distribution to shareholders. The distribution is scheduled to take place on November 9, 2016, to shareholders of record as of November 1, 2016. When-issued trading is expected to begin on or about October 28, 2016. Lamb Weston will be listed on the New York Stock Exchange under the symbol “LW.” In conjunction with announcing the above dates, the company announced an increase to its existing share repurchase program, authorizing $1.25 billion of total expenditures on the program. The authorization is contingent on the completion of the spin-off and has no expiration date.

For fiscal 2016 (ended May), ConAgra generated consolidated sales of $11.6 billion and adjusted EBITDA of $1.9 billion. Lamb Weston, the company’s frozen specialty potato business, generated $2.9 billion in fiscal 2016 revenue. The company also has interests in two joint ventures, Lamb Weston / Meijer in Europe and Lamb-Weston RDO, a potato processing venture with RDO Frozen Co. Inc.

The post-spin parent company, to be renamed ConAgra Brands, Inc., will be led by CEO Sean Connolly and will be composed primarily of the operations currently reported as the company’s Consumer Foods segment. This business, which generated approximately $8.6 billion in fiscal 2016 revenue, consists of popular leading brands such as Marie Callender’s®, Hunt’s®, RO*TEL, Reddi-wip®, Slim Jim®, PAM®, Chef Boyardee®, Orville Redenbacher’s®, P.F. Chang’s, and Healthy Choice®. ConAgra Brands is also expected to include several businesses currently reported within the Commercial Foods segment, including the traditional Foodservice business, Spicetec Flavors & Seasonings®, and JM Swank, as well as certain private label operations that were moved to the Consumer Foods reporting segment in the first quarter of fiscal 2016. ConAgra Brands is also expected to retain the company’s stake in the Ardent Mills joint venture. The post-spin parent is expected to generate higher margins, as higher-margin branded items comprise over 90% of sales. In addition, post-spin CAG will maintain an attractive dividend (currently a 2% yield for the consolidated company), while continuing to optimize operational efficiency, investing in the business, and pursuing strategic acquisitions.

With volumes declining, CAG has been focused on reducing costs and divesting underperforming and non-strategic assets. Importantly, the recent sale of the company’s private label business to Treehouse Foods, Inc. (NYSE: THS) generated a capital loss carry-forward of approximately $4.2 billion (which translates to an approximate tax value of $1.3 billion as of 1Q F2017), which can be used to offset potential future capital gains over the next four years. Thus, given that a spin-off would not monetize this tax asset, many investors have expressed the view that there may have been a dual-track process at work. A potential sale would also support the case for a continuation of the industry consolidation trend that is currently being led by The Kraft Heinz Company (NASDAQ: KHC). Indeed, the spin-off announcement is believed by some market observers to represent a trigger for a strategic acquirer like Post Holdings, Inc. (NYSE: POST) to reopen acquisition discussions. It appears that a large number of investors have held CAG shares partly in anticipation of a divestiture of Lamb Weston—not via the announced spinoff into a standalone entity, but rather via a Reverse Morris Trust with Post Holdings. With the public markets having recently begun to value food businesses at higher multiples relative to historical levels, ConAgra appears to have two strong options at its disposal for optimizing the value of this attractive division.

While investor sentiment ebbed recently as it appears that Lamb Weston will be spun off and not sold, the shares have recovered following the positive outlook expressed by management at the company’s recent investor day. For the purposes of this report, we assume Lamb Weston will be spun off as announced. For post-spin CAG, the spin-off and augmented share repurchase authorization are part of a broader capital allocations strategy that includes debt reduction, dividend expansion, and strategic growth investments. Management has noted that it plans to use the proceeds from the private label sale ($2.7 billion) for debt reduction and has also stated its intention to focus on improving business performance, including a $300 million efficiency plan. Moreover, following a Lamb Weston spin-off, there would appear to be other assets remaining in the post-spin parent company that could be divested, possibly including ConAgra’s stake in Ardent Mills (co-owned with Cargill, private), other underperforming consumer brands, and potentially some of its former private label businesses that it will not sell to THS, including categories such as canned pasta. It is also reasonable to expect that CAG will become more aggressive with its cost-cutting program, especially regarding its supply chain footprint.

Based on an analysis of comparable valuations on projected EBITDA, EPS, and dividend yield, a pre-spin sum-of-the-parts fair value estimate of $55 can be derived. Post-spin, CAG and LW can be fairly valued at $44 and $32, respectively, based on a 1:3 distribution ratio. The pre-spin sum-of-the-parts fair value estimate represents 14% potential upside to CAG’s current share price ($48.05 as of this writing), suggesting that the transaction should unlock incremental value. As such, pre-spin shares are recommended for purchase. As background, comparable spin-offs in the food and beverage space have resulted in multiple expansion on an EV/EBITDA basis in the six-month period post-spin.