On November 12, 2015, Liberty Interactive Corp. (NASDAQ: LVNTA, LVNTB, QVCA, QVCB) announced that the company’s Board of Directors had approved the tax-free spin-off of two companies: CommerceHub Inc. and Liberty Expedia Holdings Inc. CommerceHub Inc. will include the CommerceHub business, a software-as-a-service platform for online retailers and their suppliers. Liberty Expedia Holdings will comprise Liberty Interactive’s entire ownership interest in Expedia, Inc. (NASDAQ: EXPE), as well as Liberty Interactive’s subsidiary Bodybuilding.com, LLC.

Liberty Ventures (NASDAQ: LVNTA, LVNTB) (Ventures) is a tracking stock that has been attributed some of the assets and liabilities of Liberty Interactive, including the assets to be spun off into the two new publicly traded companies. Ventures shareholders of record will receive 0.5 shares of Liberty Expedia stock for every share of respective Ventures shares held. In the spin-off of CommerceHub, shareholders of Series A Liberty Ventures (LVNTA) common stock will receive 0.1 shares of the Series A CommerceHub common stock for each share of LVNTA held. Series B (LVNTB) shareholders will receive 0.1 shares of Series B CommerceHub shares and 0.2 shares of Series C CommerceHub shares.

The various Liberty-related entities, all controlled by John Malone, have a long history of creating tracking stocks and spin-offs that have generally resulted in increased shareholder value and/or have monetized low-cost-basis investments in a tax-efficient manner. With the separation of Liberty Expedia and CommerceHub, it is posited that the current difficulty in valuing the standalone businesses would be reduced. Separate structures should provide for greater transparency; additionally, by essentially isolating the EXPE ownership position, the separation should allow for a smoother transition to eventually combining Liberty Expedia with Expedia Holdings in the future.

On a sum-of-the-parts basis, shares of Liberty Expedia are assigned a fair value estimate of $34 per share. The fair value is derived using the current market price of EXPE and assigning an earnings-based market value to Bodybuilding.com’s operations. Upside potential to $43 per share of Liberty Expedia exists based on price appreciation potential from the underlying EXPE holdings.

CommerceHub will be a far smaller entity than Liberty Expedia and Liberty Ventures post-spin in terms of market capitalization. Additionally, the company will have far fewer shares outstanding than the other two entities, with a float that is further reduced when considering that insiders will control 14.2% of shares outstanding. The combination of these factors should make the post-spin entity less attractive to major institutional investors and result in share price volatility in early trading.

Interestingly, CommerceHub will introduce a C class of shares in the distribution. Management has noted that one reason for transferring CommerceHub into a standalone entity is so that the company can use its own equity as currency to potentially grow via acquisition. The C shares would likely be used in that scenario, similarly to how C class shares have been used in other Liberty-related entities. On a recent earnings conference call, management stated that “it’s not inconceivable that this company could be part of a larger enterprise,” suggesting the potential for it to be acquired more easily following the spin given “a very, very, very low tax basis inside” the current structure.

CommerceHub is fairly valued at $45 per share when accounting for $23 million in net cash and 15.6 million shares outstanding and valuing the shares at a discount to peers. If the shares were to be awarded a multiple toward the low end of the peer range, CommerceHub could be valued at $59 per share, although for the reasons noted above, this scenario would probably materialize only in a potential takeout situation.

On a pre-spin sum-of-the-parts basis, shares of Ventures are fairly valued at $44 per share, representing 15% potential upside from the current share price. When incorporating optionality on Liberty Expedia and Ventures post-spin, upside to the fair value exists to $57 per share on a pre-spin basis. Given the current discount to estimated NAV, combined with optionality from appreciation potential for the underlying holdings of Liberty Ventures, Ventures shares are recommended for purchase prior to the separation of Liberty Expedia and CommerceHub.

The Bidvest Group Ltd is a South African conglomerate founded in 1988 by Brian Joffe. In October 2015, the company announced a wide restructuring of its operations with the creation of three independently-managed units, Bidvest Foodservice International Limited, Bidvest Industrial Holdings Proprietary Limited and Bidvest Capital Proprietary Limited. On April 14, 2016, the company announced its decision to proceed with the spin-off of its foodservice operations through a pro rata distribution of shares to its shareholders. The transaction was approved by Bidvest’s shareholders at the General Meeting held on May 6. According to the terms of the spin-off, Bidvest shareholders as of May 30 will receive one share in the new entity—which is called Bid Corporation (“Bidcorp”)—for each share owned. Shares of Bidcorp will be distributed on June 6. The spin-off is expected to be completed on a tax-free manner (for domestic shareholders). Furthermore, US and potentially other non-South African investors are ineligible for the distribution in-specie. The shares they are entitled to will be sold by Bidvest—which will then distribute the cash proceeds on a pro rata basis.

The spin-off will result in the separation of Bidvest’s single largest division. Fueled by organic and acquisitive growth, the foodservice segment has grown far more rapidly than the rest of the company. Having expanded significantly over the past few years, the foodservice business has reached a point where it is contributing almost half of the company’s operating income—with Bidvest’s remaining operating income being generated by dozens of other operations. Furthermore, Bidcorp will generate upwards of 90% of its operating income outside of South Africa, and particularly from developed countries. With these factors in mind, it is clear the foodservice division is a unique business within Bidvest’s portfolio, with far brighter prospects. The transaction, besides separating two distinct businesses, has further implications. Firstly, it will lead to increased management focus. With the foodservice business being the single largest division within Bidvest, it only appears reasonable for its executives to be directly compensated based on their business’s performance. Secondly, the spin-off can potentially unlock shareholder value; wholesale food distributors such as Bidcorp typically trade at double-digit enterprise value-to-EBITDA multiples due to the consumer staples characteristics of their operating model. Lastly, the spin-off is executed to facilitate the company’s succession planning. After almost three decades, Bidvest CEO Brian Joffe will limit his involvement and allow for new chief executives in each company, who will be operating—at least initially—under his watch.

As a standalone entity, Bidcorp will be a wholesale food distributor, with operations in mainland Europe, the UK, Australia and New Zealand, South Africa, China as well as other emerging markets in Asia and South America. With significant investments by its former parent company, Bidcorp has expanded rapidly since FY2013[1], growing its revenue and operating income by 43% and 77%, respectively. Acquisitions have also contributed to the rapid expansion. With net debt-to-EBITDA of only 0.7x and ZAR 3.7 billion in cash, the company has the capacity to make further investments in organic growth and pursue acquisitions. On a positive note, while Brian Joffe is stepping down as CEO of Bidvest, he will become the Executive Chairman of Bidcorp. His decision to maintain an executive position in the new company indicates his preference towards that business. That being said, top and bottom-line growth—still at the high teens—is decelerating. As the business becomes larger, new expansion opportunities are harder to find, while some existing operations may turn out to be laggards. Indeed, the company is already rationalizing subsidiaries that are not performing as expected. Based on peer enterprise value-to-EBITDA, price-to-earnings and price-to-free cash flow multiples, Bidcorp’s equity is valued between ZAR 153 and ZAR 183 per share.

Following the spin-off, Bidvest will remain a diversified conglomerate with operations primarily in South Africa and secondarily in Namibia. Its subsidiaries engage in sectors such as banking, insurance, car rental, automotive retailing, freight management, logistics, electrical products distribution, manufacturing, office supplies and furniture, printing solutions, and facility management, among others. The prospects for the company are not exciting. Its major market, South Africa, is facing severe macroeconomic headwinds, including high unemployment and inflation and electricity shortages. Even though Bidvest managed to increase its top and bottom lines on a pro forma basis during FY2015, in FY2016 it is experiencing a deterioration of its financial performance. Revenue is poised to decline, while the operating margin is shrinking by more than 100 basis points. On top of any negative financial results and tough operating environment, prospective investors should take note that Mr. Joffe will vacate any executive position following the spin-off. He will remain at Bidvest as Non-Executive Director—a decision that does not demonstrate faith in the company’s prospects, especially when compared to his appointment to an executive role at the spun entity. Based on historical enterprise value-to-EBITDA and price-to-earnings multiples, Bidvest’s shares are valued between ZAR 114 and ZAR 133. While Bidvest will have reasonable leverage—albeit higher than Bidcorp—and sufficient liquidity to pursue further acquisitions, the stars are not aligned for an investment unless the company’s stock trades at a very large discount to our valuation estimates.

On February 10, 2016, Wilh. Wilhemsen ASA, a rolling cargo shipping company based in Norway, announced its plan to demerge its wholly-owned subsidiary, Den Norske Amerikalinje AS, into a separately listed company by the name of Treasure ASA. This subsidiary’s only asset is a 12% equity interest in the publicly-traded Hyundai Glovis, although it will receive $18 million in cash prior to the separation. Shareholders will receive one share of Treasure ASA for every share owned of Wilh. Welhemsen ASA (“WWASA”). The last day to purchase shares of WWASA inclusive of the right to the distribution is scheduled to be June 7, 2016. Shares of Treasure ASA are scheduled to begin trading on June 8, 2016, as are shares of WWASA exclusive of the right to the distribution.

The demerger of the Hyundai Glovis stake from WWASA should serve to highlight the true market value of this equity holding, as this asset appears to be underappreciated by the market based on the market capitalization of the parent company. Based on the current share price, the 12% interest in Hyundai Glovis is valued at $700 million, relative to a market capitalization of $1,050 for WWASA. Despite the troubles that WWASA may have going forward, – and there are a few – the pre-demerger company is undervalued relative to conservative valuation metrics and assumptions.

CSC is an information technology (IT) services company that provides consulting and outsourcing services through two
business segments focused on distinctly different end-markets. The larger segment provides services to commercial sector clients, while the other focuses on public sector entities, such as federal, state, local and foreign governments.

The IT services industry has increasingly looked to separate commercial and government-focused IT assets over the last few years, as the former trade at almost 15% premiums to the latter, given higher margin and growth profiles. As well, commercially focused businesses are less susceptible to variability in government spending/decision-making. Separations have also aimed to sharpen management focus as well as eliminate any perceived conflicts of interest in bidding on government contracts. In 2012-2013, L-3 Communications, SAIC Inc., and Exelis all announced tax-free spin-offs of IT services assets.

CSC’s is in the midst of an operational turnaround, which seems to be gaining traction and is likely management’s main near-term focus. As well, its public comments have downplayed potential conflicts of interest and highlighted possible cross-selling opportunities between segments, indicating comfort with the current operating structure. That said, management does not rule out any measure that would create value for shareholders and potential catalysts for a split could emerge in FY2015-2016.

Considering peer group multiples, we value the commercial business segment at $79 per share and the public sector segment at $22 per share. Accounting for corporate costs of about $16 per share as well as net debt and other liabilities of $9.50 per share, a sum-of-the-parts valuation of $75 is derived. Future potential catalysts include a spin-off or sale of the government business, an uptick in IT spending, acquisitions, and share repurchases. Potential risks include inaction on a split or sale, a lack of execution on turnaround plans, and a recession.

On September 30, 2014, Masco Corp. (NYSE: MAS) announced a plan to spin off the company’s Installation and Other Services businesses (“Services Business”) into a separately traded public company. Shares in the new company, which will be named TopBuild Corp., will be distributed to MAS shareholders via a tax-free spin-off. The transaction is expected to be completed by mid-2015 and is subject to any required regulatory approvals, receipt of an opinion from counsel as to the tax-free status of the spin-off, an effectiveness declaration of the company’s Form 10 filing with the SEC, and final approval by Masco’s Board of Directors. Concurrent with the announcement of the spin-off, MAS announced a series of strategic initiatives, including a share repurchase program of 50 million shares and an expense reduction program estimated to achieve between $35 million and $40 million in annual cost savings (excluding $30 million in one-time charges), primarily through headcount reductions. Jerry Volas, currently Masco Group President, will become Chief Executive Officer of the spin-off company, which will be headquartered in central Florida. Keith Allman, current Chief Executive Officer of Masco, will remain with the parent company, which will continue to be headquartered in Taylor, Michigan.

Based on comparable multiples and cash flow generation potential, a fair value of $1.93 per share is derived for TopBuild. Post-spin Masco is fairly valued at $31 per share based on comparable multiples and incorporating cost reduction and a reduced share count. Shares of Masco Corp. are valued at $33 per share on a sum-of-the-parts basis and are recommended for purchase prior to the spin-off of TopBuild. Following the separation it may be expected that shares of TopBuild would be sold by existing holders, as the larger, higher-margin, more stable business is preferred to TopBuild.

On May 13, 2015, Danaher Corp. (NYSE: DHR) announced its intention to separate its science and technology and diversified industrials businesses into two independent, publicly traded companies via a tax-free spin-off to shareholders. The transaction is expected to be completed on July 2, 2016, to holders of record of Danaher common stock at the close of business on June 15, 2016, the record date for the distribution. Fortive intends to apply to list its common stock on the NYSE under the symbol “”FTV””. Trading will begin on a “”when-issued”” basis on or shortly before the record date for the distribution and will continue up to the distribution date. “”Regular-way”” trading in the Fortive common stock will begin on the first trading day following the completion of the distribution. After the distribution, Danaher will continue to trade on the NYSE under the symbol “”DHR””.

Danaher is a global medical and industrial conglomerate consisting of technology, medical, science, and industrial products, with a market capitalization exceeding $68 billion and revenue of $20.6 billion and $19.1 billion in 2015 and 2014, respectively (8% revenue growth). The company’s revenue mix consists of Test & Measurement (13% of 2015 revenue); Environmental (18%), which primarily consists of water quality instrumentation systems; Life Sciences & Diagnostics (40%), which consists of analytical instruments used by hospitals and laboratories; Dental (13%); and Industrial Technologies (16%).

The post-spin parent, a science and technology growth company that will retain the Danaher name, generated approximately $14.6 billion in revenue in 2015. Post-spin Danaher, which will consist of the company’s Environmental, Life Sciences & Diagnostics, and Dental segments, is expected to generate gross margins in excess of 50% and operating margins in the mid-teens, while 60% of sales are into the aftermarket channel. In recent years, Danaher has begun to focus its product portfolio more narrowly. Notably, in October 2014 Danaher announced plans to split off its communications test business, which was acquired by NetScout Systems (NASDAQ: NTCT) in a Reverse Morris Trust (RMT) transaction (completed July 2015). For more details, please refer to The Spin-Off Report dated March 26, 2015.

The spin entity, Fortive Corporation, is a diversified industrial growth company, consisting primarily of Danaher’s industrial automation and test & measurement businesses, generating approximately $6 billion in revenue in 2015. The business is expected to generate gross margin of approximately 50%, operating margins in the high teens, and approximately $1 billion of free cash flow. Fortive enjoyed a mid-teens CAGR in operating profit from 2002-2008, with 40 acquisitions being completed over the same period. Although Fortive anticipates that it will likely pay quarterly dividends following the distribution, the amount has not yet been determined as of this writing.

Danaher is characterized by a well-defined business strategy and efficient operating philosophy rooted in a proprietary, standardized continuous-improvement culture instituted by its founders, Steven and Mitchell Rales. Danaher has a long history of highly successful, diversified acquisitions, but more recently has been looking to consolidate its Life Sciences business, which represented approximately 40% of 2015 revenue. Danaher completed or announced 18 acquisitions in 2014 for a total consideration of about $4 billion. This trend is likely to continue (and possibly accelerate) in 2016 and beyond, as some market observers speculate that Danaher is pursuing both larger and more numerous merger and acquisition transactions, with an emphasis on less cyclical end-markets with more consistent earnings growth and on business models characterized by high-margin, recurring revenue streams. In this context, a spin-off of a more volatile industrial business makes sense.

Based on an analysis of projected revenue, EBITDA, assets, free cash flow, and comparable valuations, a pre-spin sum-of-the-parts estimate of $104 for pre-spin DHR can be derived. Post-spin, DHR and FTV can be fairly valued at $81 and $45, respectively. With the pre-spin fair value estimate approximating DHR’s current share price ($99.66 as of this writing), the shares appear to be fully valued for the transaction. As such, the pre-spin shares are not recommended for purchase. Note that the subdued sales outlook for Fortive will likely keep a cap on the valuation in the near term. For post-spin Danaher, over the next 12 months, the ensuing shift of its investor base from an industrial bias to more of a healthcare and life sciences focus supports the case for multiple expansion. In addition, the company should be positively impacted by an improving economy while also benefiting from its defensiveness in a tougher market, a function of its non-organic growth opportunities and less exposure to cyclical businesses.

· Viad Corp. (NYSE: VVI) operates two distinct segments: (1) Marketing & Events (90% of sales and 60% of EBITDA in 2015); and (2) Travel & Recreation (10% of revenue and 40% of EBITDA). The shares trade at 6.5x 2017E EBITDA.

· VVI’s Marketing & Events (M&E) and Travel & Recreation (T&R) businesses offer negligible synergies and have vastly divergent margin, growth, and capital-intensity profiles. In our view, a separation could benefit longer-term operating performance, unlocking incremental value above any potential re-rating, particularly of the Travel & Recreation segment, which generates 30%-plus EBITDA margins and could be reasonably expected to attract acquisition interest as a standalone or via a more tax-efficient Morris Trust transaction. As well, an elimination of the conglomerate operating structure could allow investors to better focus their investments to the benefit of shareholder stability.

· In December 2012, under pressure from an activist shareholder, VVI initiated a strategic review, which concluded in April 2014 with some important corporate governance and capital allocation improvements but without the de-conglomeration actions some investors may have desired. At the time, VVI concluded that focusing on its strategic plans, which included growing M&E sales to $1 billion and executing on a “Refresh, Build, Buy” growth plan to double revenue at T&R, was the best course to maximize long-term shareholder value. That said, it is our contention that given the lack of synergies and the resulting conglomerate discount the shares receive, management’s stance will evolve as each of VVI’s businesses gains sufficient scale.

· Considering management’s financial commentary and peer and M&A valuations, as well as a discounted cash flow analysis, value of $23 per share and $21 per share can be assigned to VVI’s M&E and T&R businesses. Accounting for corp. costs and projected net debt of ~$6 per share yields a base-case sum-of-the-parts value of roughly $38 per share, which implies almost 25% upside. Under more bullish valuation scenarios, we could envision 50% potential upside to $47 per share, while we see relatively limited downside to $29 under a more bearish set of assumptions. As such, we perceive an attractive risk/return dynamic.

On August 6, 2015, Emergent BioSolutions Inc. (NYSE: EBS) announced its intention to separate the Biosciences business into a separate, stand-alone publicly traded company, to be called Aptevo Therapeutics. Following the spin-off, Emergent will become a pure-play biodefense company, while Aptevo will consist of Emergent’s non-biodefense therapeutics and biotech pipeline, with a focus on hematology/oncology, including immuno-oncology. The separation is to be completed via a tax-free distribution to EBS shareholders and is expected to be concluded by mid-2016, subject to favorable opinion by tax counsel, a private letter ruling from the Internal Revenue Service, execution of inter-company agreements by Emergent and the new Biosciences company, the effectiveness of the Form 10 registration statement, and final approval of the transaction by Emergent’s board of directors. Emergent expects to provide the spin entity with a fixed cash contribution of $50-$70 million. In addition, within six to 12 months following the distribution, it is expected that Emergent will transfer to Aptevo an additional $20 million in cash pursuant to a non-negotiable, unsecured promissory note that Emergent will issue to Aptevo prior to the distribution. Additional sources of cash to support research and development investment will include commercial product sales and partnership funding. Obligations under the company’s 2.875% convertible senior notes due 2021 will remain with the parent company upon completion of the transaction. Following the spin-off, the parent company will retain the Emergent BioSciences name and will continue to trade on the NYSE under the ticker “”EBS””. Aptevo shares are expected to trade on the NASDAQ (ticker has not been announced as of this writing).

Emergent BioSolutions is a biopharmaceutical company that offers specialized products to healthcare providers and governments to address medical needs and emerging health threats. The company has two operating divisions—Biodefense and Biosciences. The Biodefense division is a pharmaceutical business focused on countermeasures that address CBRNE (chemical, biological, radiological, nuclear and explosives) threats. Marketed products are BioThrax; BAT (Botulism Antitoxin Heptavalent); Anthrasil (treatment for inhaled anthrax); VIGIV (vaccinia immune globulin, for the treatment of complications relating to smallpox vaccination); and RSDL (Reactive Skin Decontamination Lotion, a skin decontamination product for removal of chemical warfare agents and pesticide-related chemicals). BioThrax is the only vaccine approved by the FDA for the prevention of anthrax. Investigational-stage product candidates include NuThrax (a next-generation anthrax vaccine), PreviThrax (a post-exposure anthrax vaccine), and GC-072 (an antibiotic which fights a broad spectrum of bacterial pathogens). Emergent also provides biologics manufacturing, regulatory and quality affairs support, and marketing and sales support for BioThrax, and a product development infrastructure in support of investigational product candidates. EBS’s consolidated sales were $522.8 million in 2015 (December), $450 million in 2014, $313 million in 2013, and $282 million in 2012, with Biodefense representing 86%, 82%, 100%, and 98% of sales in those years, respectively.

The spin entity, Aptevo Therapeutics, consists of EBS’s Biosciences division. Aptevo is a biopharmaceutical company focused on novel oncology and hematology therapeutics and is composed primarily of products acquired via EBS’s 2010 acquisition of Trubion Pharmaceuticals Inc. Among Aptevo’s products are the ADAPTIR (modular protein technology) platform, including bi-specific therapeutics based on redirected T-cell cytotoxicity (RTCC), a new approach within immuno-oncology; MOR209/ES414, a bi-specific therapeutic for metastatic castration-resistant prostate cancer that is currently in Phase I clinical development in partnership with MorphoSys AG (MOR GY); and a commercial product portfolio consisting of IXINITY, WinRho, HepaGam B, and VARIZIG. Aptevo generated 2015 (FY end December) sales of $33.6 million and a net loss of $59.3 million.

The decision to spin out the money-losing Biosciences group represents a realistic appraisal of the cost-benefit tradeoff of continuing to fund what has been a significant cash drain on EBS for years. EBS has historically funded biosciences product development through internally generated cash flow from BioThrax sales. Accordingly, the post-spin parent, which will maintain its medical countermeasure focus, is likely to experience considerable earnings leverage following the spin-off. Notably, the company’s largest product, BioThrax, had sales of $280 million and $246 million in 2015 and 2014, respectively, but is expected to grow to almost $500 million by 2018, primarily through a new manufacturing facility, which the company expects will triple capacity in 2016. Following the spin-off, EBS is expected to target acquisitions in the CBRNE space in order to diversify its customer base and bring in immediately accretive assets where EBS’s manufacturing expertise can improve margins.

Based on an analysis of projected revenue, EBITDA, and assets, as well as comparable valuations, a sum-of-the-parts estimate of $42.98 for pre-spin EBS can be derived. Post-spin, EBS and Aptevo can be fairly valued at $34.83 and $8.14, respectively. The pre-spin fair value estimate implies 9% potential upside relative to EBS’s current share price ($39.47 as of this writing), implying the pre-spin shares are approaching a full valuation. Moreover, we think investors are likely to perceive post-spin Aptevo as more speculative investment idea despite a promising pipeline (which includes a phase 3 drug for hemophilia B, phase 2 antibody for leukemia, and early stage prostate cancer treatment), owing to its small scale, coupled with high research and development costs. As such, despite the modest potential upside, we would recommend staying on the sidelines approaching the spin-off, and believe the post-spin shares could experience some selling pressure owing to investor churn—particularly given the vastly different investment profile of Aptevo relative to EBS.

Going forward, EBS represents a defensive play in the specialty pharmaceuticals space, given its base of signed procurement and development contracts with several U.S. government agencies, and as such, it should be more insulated relative to other small-capitalization biotechnology stocks in a volatile market.

On March 18, 2014, Hertz Global Holdings Inc. (NYSE: HTZ) announced long-awaited plans to spin off its equipment rental business through a tax-free distribution of shares to HTZ shareholders. Following the spin announcement, Hertz disclosed reporting errors in prior year SEC filings, after which activist investor Carl Icahn disclosed an initial ownership stake and planned to engage management in talks concerning, among other things, shareholder value, the accounting issues, and a lack of confidence in management.

In early September 2014, HTZ’s CEO resigned, citing “personal reasons”; shortly afterwards, Mr. Icahn was granted three Board positions. HTZ has since found a permanent CEO and filed restated financials, while Mr. Icahn has increased his ownership to 15%. With accounting and management issues seemingly behind it, the company looks to complete the equipment rental spin-off in 2Q 2016. Notably, since the initial accounting issues were disclosed, the shares have declined 75% versus a 1% decrease in the S&P 500 over the same time period. The spin-off still requires final Board approval and an effectiveness declaration from the SEC of the company’s Form 10 filing.

The spin-off will be structured such that shareholders of record will receive one share of New Hertz for every five shares of HTZ owned. New Hertz will contain the U.S. and International car rental businesses. Following the separation, the parent entity will adopt the corporate moniker HERC Holdings Inc., while the spin company will continue to be known as Hertz Global Holdings and will trade on the NYSE under the symbol “HTZ”. A shareholder vote is not required to complete the spin-off; however, HTZ will seek shareholder approval for a reverse stock split that would be effective immediately following the spin-off and would affect only the parent entity HERC.

HTZ operates its car rental business under four brands: Hertz, Dollar, Thrifty, and Firefly, each of which provides differing levels of service and products at different price points. The company also offers Hertz 24/7, a car-sharing service through which customers rent cars from various locations by the hour or day. The company has 1,635 airport locations within the U.S. and 1,320 internationally. Off-airport locations total 2,800 and 4,225 in the U.S. and internationally, respectively.

While increased air travel and business spending historically have been positives for the rental car industry, new disruptive entrants into the market may slow the expected growth for New Hertz. Technology-focused taxi-like and ride-sharing applications such as Uber and Lyft may be siphoning demand away from the traditional rental car model. Supporting the notion that the rental car industry may be under pressure, on April 11, 2016, HTZ pre-announced 1Q 2016 earnings, in which it disclosed that the company expected 1Q U.S. rental car revenue and EPS to be lower than previously expected, while affirming guidance for full year 2016 consolidated EBITDA of $1.6-$1.7 billion (including HERC). The lower 1Q results were attributed to “excess industry capacity”. On the positive side, in the same release the company reiterated its goal of achieving $350 million of incremental savings in 2016, which should allow for margin expansion despite a challenging revenue environment. Based on 2017 estimated EBITDA of slightly over $1 billion, post-spin New Hertz can be fairly valued at $27 per share when incorporating the company’s stake in CAR Inc., a $1.8 billion payment from HERC and the planned 1:5 share distribution.

Hertz’s equipment rental business (HERC) generates revenue from the rental of equipment, primarily in North America. HERC offers equipment rental, equipment re-rental, sale of used rental equipment, sales of new equipment, parts and supplies, and service and support. Equipment rental uses include aerial (bucket trucks, boom lifts, etc.), earth-moving, and material handling, among a variety of other purposes. In 2015 the company generated $1.7 billion in revenue and $601 million in EBITDA.

The equipment rental industry appears to be in better shape than the rental car industry. Following equipment rental revenue declines due to the Great Recession of 2008, the industry has returned to growth, experiencing positive percentage increases over the past four years. Management expects the equipment rental industry to grow at a 5.8% CAGR through 2019. Given a return to growth, the industry has also continued a trend of consolidation. For its part, HERC has participated in a growth via acquisition strategy and has made 11 acquisitions since 2009 in a variety of specialty rental markets that broadened its industrial market exposure and allowed the company to expand into adjacent end-markets. Based on multiples of estimated EBITDA, assets, and book value, shares of HERC are assigned a fair value estimate of $3.46 per share.

The separation of the car rental business from equipment rental should allow both companies to be re-rated in-line with specific market peers. It is reasonable to assume that HERC will be re-rated to a lower multiple than the rental car business based on peer comparisons and long-term average multiples. Conversely, the separation of the equipment rental business should allow multiple expansion at New Hertz. New Hertz’s higher multiple should more than offset the lower multiple assigned to the equipment rental business, in our view, and thus the spin-off should unlock value.

Following the spin, we favor the equipment rental business, as HERC’s large industry presence and macro tailwinds (increasing levels of construction) should aid the company in increasing its earnings and cash flow, as well as allowing for debt retirement and/or acquisitions. Separately, over a longer time frame, it is not unreasonable to assume that a larger competitor may be interested in HERC’s assets.

On a pre-spin basis, shares of HTZ are assigned a fair value estimate of $9 per share, consisting of $3.46 for HERC and $5.46 for New Hertz. The fair value estimate represents 16% implied potential upside from the current share price of $7.70 as of this writing. Given the upside potential and a lack of near-term earnings risk due to the recent pre-announcement, coupled with the recent share price decline, shares of HTZ currently present an attractive risk reward scenario. As such, shares of HTZ are recommended prior to the spin-off.

Since being spun off from Li & Fung, shares of Global Brands Group have declined by 51% since their first day of trading and are 59% below their peak—reached within the first month trading. The combination of Global Brands Group’s lower market value and higher profitability has led to a very attractive valuation of its shares on both an absolute and a relative basis. Currently the firm trades at a 2015 enterprise value-to-EBITDA and price-to-earnings multiples of 5.1x and 8.4x, respectively. Both multiples are below every single publicly-traded peer as well as very low on absolute standards, given the company’s cash generative business, strong earnings growth rate and diverse brand portfolio.

The valuation is even cheaper once the effect of the 2015 acquisition is included in earnings. Although management has not provided concrete estimates, based on comments on the company’s latest conference call and historical margins, EBITDA should increase by a bare minimum of US$21 million—5.9%—as a result of the acquisition of three controlled brands, Jones New York, Joe’s Jeans and Buffalo. In fact, it can be hypothesized that the decline in Global Brands Group’s equity value is due to its US$333 million increase in net debt in 2015—a result of acquisition spending and higher inventories—which precedes an increase in profitability, thus distorting the company’s trailing-twelve-month financial picture.

A further improvement in the company’s fundamentals can be achieved as Global Brands winds down its consideration payable for acquisitions—i.e., its liability associated with earn-ups and earn-outs of previous acquisitions. Fueled by a large number of acquisitions prior to the spin-off from Li & Fung, the company’s consideration payable ballooned to US$947 million in 2011 and has resulted in annual cash expenses of approximately US$150 million. Currently, that liability stands at US$292 million, and should be materially depleted within two years, thus boosting Global Brands’ free cash flow substantially. It is indicative that the company’s 2015 free cash flow, after the amount payable for prior acquisitions of US$147 million, was US$93 million, implying a 10.2% yield. Excluding said payment, 2015 free cash flow would have been US$240 million and Global Brands would trade at a 26.1% free cash flow yield.

During the company’s 20-month lifespan as an independent entity, Global Brands has on one hand increased its EBITDA and COP significantly, expanded its margins and reduced its liability associated with past acquisitions by more than US$300 million, while, on the other hand, it has seen its equity value cut by half. Given the very attractive valuation, expectations for further EBITDA and free cash flow expansion—due to recent acquisitions and lower payables for past acquisitions, respectively—as well as very strong insider buying, spearheaded by Mr. Rockowitz’s US$37 million investment during that period, shares of Global Brands Group are recommended for purchase.