On February 10, 2015, Starwood Hotels & Resorts Worldwide Inc. (NYSE: HOT) announced a plan to spin off its vacation ownership business, Vistana Signature Experiences, via a tax-free spin-off. On October 28, 2015, Interval Leisure Group (NASDAQ: IILG) and Starwood announced that the Boards of Directors of both companies had unanimously approved a definitive agreement under which a IILG would merge with Vistana in a Reverse Morris Trust transaction (RMT). The transaction values Vistana at approximately $990 million, or approximately $5.87 per Starwood share, based IILG’s current share price of $13.68.

HOT shareholders will receive approximately 0.43 shares of IILG for every share of Starwood owned as of March 28, 2016 (based on 72.4 million shares of IILG to be issued), the record date for the spin-off, with the Reverse Morris Trust expected to be completed on April 30, 2016. When-issued trading is expected to begin around the record date. IILG and HOT will trade in the when-issued market under the symbols “IILGV” and “HOT WI,” respectively.

On November 16, 2015, Marriott International, Inc. (NASDAQ: MAR) agreed to acquire Starwood for 0.92 shares of MAR plus $2.00 in cash per HOT share, with Starwood shareholders to own approximately 37% of the combined company’s common stock. Total consideration to be paid by Marriott totaled $12.2 billion, or $72.08 per Starwood share. However, on March 14th, Starwood received an unsolicited cash bid for $78 per share from a consortium of companies consisting of Anbang Insurance Group Co., Ltd., J.C. Flowers & Co. and Primavera Capital Limited. On March 21rst, Marriott submitted a counterproposal at an exchange ratio of 0.80 shares of MAR common stock for each share of HOT, plus an increased cash consideration of $21 per share, equating to $78.84 based on the current share price of MAR. MAR and HOT agreed to consummate the merger.

The acquisition of Starwood is not surprising given the rapid pace of global lodging mergers and acquisitions, which approached $50 billion in 2015, up from $37 billion in 2014. Six consecutive years of increased revenue per available room (RevPAR) have ripened deal conditions as asset-light operators with fewer brands sell properties at elevated valuations. Combined, Marriott and Starwood will have 1.1 million rooms in more than 5,500 hotels and pro forma fee revenue of over $2.7 billion for the 12 months ended September 30, 2015. On a pro forma basis, Starwood shareholders would own approximately 37% of the combined company’s common stock after completion of the merger (expected in 2Q 2016). The transaction is expected to accelerate Starwood’s planned cost savings program, Sheraton brand revival, and expansion plans.

The spin-off and merger announcement comes as Starwood has pursued an asset-light business model by selling its owned properties and entering into long-term agreements to franchise and/or manage the sold properties. The transaction accelerates an asset-light business model, allowing the company to focus on its fee-based business through management and franchise agreements. SVO primarily engages in the acquisition, development and operation of vacation ownership resorts (timeshares) and the marketing and selling of vacation ownership interests (VOIs). The company also provides financing to customers for purchase of VOIs. HOT owned 56% of its hotel properties in 2004, and the company currently owns or leases 36 hotels with a total of 13,500 rooms (including consolidated joint ventures), representing approximately 3% of the Starwood system.

For Interval Leisure Group, a global provider of non-traditional lodging, with a portfolio of leisure businesses ranging from exchange and vacation rental to vacation ownership, the acquisition of Starwood’s Vacation business diversifies and expands the combined company’s portfolio, generating increased scale, global reach, assets, inventory, and sales and marketing infrastructure to support increased growth. Post-merger, IILG’s portfolio expands to 200 resorts and 500,000 owners and will include the Sheraton Vacation Club, Westin Vacation Club, and Hyatt Residence Club brands. The combined businesses are expected to create savings of approximately $21 million three years from the closing of the transaction, and approximately $26 million five years from the closing. The transaction will also enhance Interval Leisure’s vacation ownership portfolio by giving the company the rights to use the Sheraton and Westin brands, while allowing existing timeshare owners in those resorts to continue using the Starwood Preferred Guest program.

IILG shares have been under recent selling pressure, having declined approximately 13% since the Starwood acquisition announcement, owing to fundamental concerns surrounding a weakening vacation economy, declining revenue per member trends, and the long-term implications of competition from alternative vacation rental websites (e.g., Airbnb). Importantly, merger arbitrage investors have been purchasing HOT shares and shorting the equivalent number of IILG shares. IILG’s short interest has nearly tripled in the last year and is now at approximately 12% of shares outstanding. Short interest is higher as a percentage of the float, as Liberty Ventures (NASDAQ: LVNTA) owns 29% of IILG. At 7x forward EBITDA, IILG shares trade below Marriott Vacations Worldwide Corp. (NYSE: VAC) at 9.3x.
On a pre-spin basis, HOT can be fairly valued at $90.32 per share, comprised of $82.60 for HOT and $7.72 for Vistana. Post-merger, MAR can be fairly valued at $77, representing 6% potential upside from MAR’s share price as of this writing ($72). With the pre-spin sum-of-the-parts fair value estimate for HOT representing 7.3% potential upside, HOT shares appear to be fairly valued for the impending acquisition and Vistana spin-off. Based on comparable valuations on EBITDA, revenue, assets, and dividend yield, post-merger Interval Leisure Group can be fairly valued at $18 per share. This implied fair value represents 32% potential upside from Interval Leisure’s current share price (approximately $14 as of the time of this writing), and implied EV/forward EBITDA multiple of 7.9x. While an increased offer for HOT would increase the near-term return in HOT shares, we view IILG as the more favorable risk/reward way to play this transaction.

• Matthews International Corp. (NASDAQ: MATW) reports three operating segments: (1) SGK Brand Solutions (56% of sales and 53% of EBITDA in F2015); (2) Industrial (8.5% of revenue and 7.5% of EBITDA); and (3) Memorialization (35.5% of sales and 39.5% of EBITDA).

• Over the last several years, MATW has added scale to each of its businesses, largely via acquisition, and it could ultimately move to separate the businesses into two distinct entities, with Brand Solutions likely to be paired with Industrial, and with Memorialization as a standalone. The businesses have limited synergies, given distinct manufacturing footprints, and a separation could benefit longer-term operations in terms of growth, margins, and/or capital allocation. Moreover, an elimination of the conglomerate structure could allow investors to more easily evaluate the businesses as well as better target their investment dollars. In terms of stock performance, MATW shares are up ~36% over the last five years, underperforming the Russell 2000 Index by 3% and the S&P 500 by almost 25%, which weakens the rationale for the current conglomerate structure, in our view.

• Considering peer valuations and recent M&A multiples as well as management’s financial guidance/commentary, respective value of $37 per share, $6 per share, and $36 per share can be assigned to the SGK Brand Solutions, Industrial, and Memorialization businesses. Accounting for projected net debt of $19 per share yields a sum-of-the-parts value of roughly $60 per share.

• Potential catalysts include the separation of MATW’s core Brand Solutions and Memorialization businesses, acquisitions, greater synergy realization, and/or accelerating end-market demand. Risks include a lack of execution on internal initiatives, particularly acquisition integration, an inability to access capital markets, shifts in technology or consumer preferences, commodity and currency fluctuations, and/or a recession.

Enersis S.A. is a Chilean corporation engaged in electricity generation, transmission and distribution in its home country, Brazil, Colombia, Peru and Argentina. It conducts the majority of its operations through two subsidiaries: 60% owned Empresa Nacional de Electricidad S.A. (“Endesa Chile”, ENDESA CI) and 99.1% owned Chilectra S.A. (CHILECTR CI). Enersis’ parent company, controlling 60.6% of the shares, is Italian utility Enel SpA (ENEL IM). Enersis has undertaken a reorganization plan, under which it will spin off its Chilean operations into a new entity named Enersis Chile, while the parent company will be renamed Enersis Américas. Prior to that, Endesa and Chilectra will also spin off their non-Chile operations into Endesa Américas and Chilectra Américas, respectively. Enersis Chile will be allocated the company’s shareholding in the two subsidiaries, and Enersis Américas will control the two spin entities. Subsequent to the completion of all the spin-offs, Enersis Américas will merge with its two subsidiaries. Based on the expected exchange ratio, Enersis Américas shareholders will own 84% of the combined entity.

Enersis’ spin-off was approved by the company’s shareholders on December 18, 2015. The separation became effective on February 1, 2016—i.e., the two companies are considered separate legal entities and the results of Enersis Chile are presented as discontinued operations. However, the spin-off, for capital market purposes, has not been competed yet, and shareholders in Enersis—which already trades under its new moniker Enersis Américas—are entitled to ownership in both companies. Shares of Enersis were expected to trade ex-distribution sometime in March. Given that a prospectus for the transaction is expected to be published a few weeks in advance of that date, it is highly likely that the separation will not take place until the second quarter of 2016.

The transaction will result in the creation of two companies, one focused on the domestic market and one operating in South America excluding Chile. Given Enersis’ complicated business structure, which includes partial ownership of numerous subsidiaries in all five countries of operations, the spin-off should result in a simplified organizational chart. At the same time, the merger of Enersis Américas with Endesa Américas and Chilectra Américas should eliminate cross-shareholding among the firm’s non-domestic subsidiaries. Furthermore, the two resulting companies will have very different profiles and cater to different investors. Enersis Chile will operate in a country with a higher standard of living and significantly less risk, although it will have few opportunities for growth. Enersis Américas, on the other hand, will have abundant growth opportunities across all four countries of operations, but will have to navigate more uncertain political and market environments.

Lastly, the spin-off is expected to create shareholder value in two ways: Firstly, it will allow each company and management team to focus on their core competencies, setting appropriate strategies and adopting more efficient capital structures. Secondly, Chilean utilities trade at a premium to their non-Chilean South American peers. Due to the company’s complicated structure and operations in both high and low growth markets, Enersis currently trades at a discount not only to its domestic peers but also to its international ones. Consequently, the proposed separation has the potential to lead to a multiple expansion—in line with peers—and increase Enersis’ sum-of-the-parts value.

Following the spin-off, Enersis Américas will be a utility corporation providing electricity generation and distribution in Colombia, Peru, Brazil and Argentina. Once the company merges with its two subsidiaries, most of the cross-shareholdings will be eliminated, and Enersis Américas will own directly interests in the local subsidiaries. In 2015, the company generated pro forma revenues and EBITDA of CLP 5,301 billion and CLP 1,615, respectively. Despite short-term hurdles faced in the markets in which it operates, primarily due to the decline in commodity prices—longer term Enersis Américas has the opportunity to expand rapidly.

Its leverage will be moderate for a utility, albeit appropriate for a company that expects to spend considerable cash in expansionary capital expenditures and that faces a wide range of risks, from economic to political, in its markets. Based on peer price-to-book and enterprise value-to-EBITDA multiples, the corporation is valued at between CLP 140 and CLP 140 per share.

The spin entity, Enersis Chile, will not merge with its subsidiaries. Rather, it will keep operating as a holding company. As Chile’s economy is the most advanced in the region—based on various metrics—and the country already consumes more energy per capita than the any other South American nation, Enersis Chile’s growth will be more limited. That being said, the country still has a long run to reach the energy consumption of developed nations.

The company will indeed have a more moderate growth profile, but will also face less risks as Chile has demonstrated remarkable political stability for many decades. Its pro forma net debt-to-EBITDA of 1.3x is low compared to the leverage of utilities in developed nations, and even on the lower end compared to its domestic peers. As a result, Enersis Chile may opt to take on more debt in order to increase its return on equity. Based on price-to-book and enterprise value-to-EBITDA multiples, Enersis Chile’s shares are valued between CLP 60 and CLP 100.

The resulting sum-of-the-parts target price range for Enersis is CLP 205 to CLP 240 per share, offering a 10% to 30% upside. Consequently, shares of the company are recommended for purchase prior to the spin-off to investors who are comfortable with the risk profile of Enersis Américas following the separation of the two firms. It is noteworthy that Enersis currently trades at an enterprise value-to-EBITDA multiple of 5.9x, that represents a discount to both its Chilean and South American peers’ valuation.

On February 23, 2015, Armstrong World Industries Inc. (NYSE: AWI) announced a plan to spin off its Flooring business from its Ceilings (Building Products) business via a tax-free spin-off. The post-spin company, to be called Armstrong Flooring Inc., is expected to trade on the NYSE under the symbol “”AFI.”” The transaction is expected to be completed on April 1, 2016, and is subject to the customary closing conditions, including execution of intercompany agreements, the effectiveness of a Form 10 registration statement filing with the Securities and Exchange Commission, and final approval by the company’s Board of Directors. Shareholders of record as of March 21, 2016, will receive one share of AFI for every two shares of AWI owned. When-issued trading is expected to begin on or shortly before the record date. Regular way trading is expected to begin on April 4, 2016.

The separation will create two companies with differing end-markets: AFI will sell 65% to the residential housing market (remodels and new construction), while the parent company will make 95% of its sales to commercial markets (including office, hospital and educational buildings). The spin-off makes sense in that the two businesses have minimal operating synergies under the current corporate structure and operate with vastly different margin profiles. Flooring and ceilings have separate manufacturing facilities and distinct go-to-market capabilities. In addition, increased investor transparency and the ability to use the relevant currencies to raise capital and/or fund acquisitions as needed should benefit each of the companies following the spin-off. However, it is also likely that a driving force behind the separation is the significant underperformance of AWI shares over the last one, three, and five years versus the S&P 500 and the S&P 500 Building Products Industry Index. A separation of the lower-margin flooring business should allow the parent company to be rerated more in line with other higher-margin building products companies that trade at a premium to the current and historic levels of AWI, thus unlocking value.

Following the separation from Armstrong World Industries Inc., Armstrong Flooring Inc. (AFI) will control the Resilient Flooring and Wood Flooring segments previously with AWI. The company generated $1.2 billion in pro forma revenue in 2015 and will report in two segments: Resilient Flooring and Wood Flooring. Post-spin, Resilient Flooring, which consists of linoleum and vinyl flooring products, will contribute 60% of revenue and 63% of operating income. AFI will initially operate with mid-single digit EBITDA margins, and is expected to experience low-single digit revenue growth. Longer-term operating goals include EBITDA margins of 10%.

AWI will transform into a ceilings-systems-focused business controlling the former Building Products segment. On a pro forma basis, in 2015 AWI would have generated $1.3 billion in revenue (including $97 million from the WAVE JV) and $303 million in adjusted EBITDA (including corporate costs), representing a 23.6% margin. Increased earnings are expected to arise from new product innovations and greater sales in higher-return architectural specialties products.

On a pre-spin, sum-of-the-parts basis, shares of AWI are assigned a fair value estimate of $48 per share, consisting of $10 per share in value from AFI and $38 per share in value from post-spin AWI. The pre-spin fair value estimate implies 15.9% upside from the current share price of $41.53.

Given the approximate 16% implied upside from the current share price, shares of AWI are recommended for purchase. It should be noted that the timeline until completion of this transaction is short; shares of AFI and AWI are expected to begin when-issued trading on March 21, 2016. Holders of AWI should be cognizant of initial trading in AFI shares, as large cap shareholders will likely favor the wider margin, larger ceilings business over the smaller capitalization flooring business. Pre-spin AWI shareholders may wish to exit their flooring position (AFI) ahead of selling pressure if shares trade at or above the $20 per share fair value estimate.

Post-spin, if selling pressure does occur in AFI, longer-term investors may wish to revisit the spin company, as stated operational goals imply there could be significant upside at the right price. If shares of AFI trade below $15 per share they would be recommended for purchase post-spin.

On July 21, 2015, Pinnacle Entertainment Inc. (NASDAQ: PNK) announced that the company had agreed to sell substantially all of its real estate assets to Gaming and Leisure Properties Inc. (NASDAQ: GLPI). Previously, on November 6, 2014, PNK had announced plans to spin off its real estate assets into a standalone, publicly traded real estate investment trust (REIT) via a tax-free distribution of shares to PNK shareholders. Following PNK’s initial spin-off announcement, in March 2015 GLPI announced it had submitted an unsolicited offer to purchase PNK’s real estate assets for $36 per share. GLPI itself was a spin-off from Penn National Gaming (NASDAQ: PENN) in proceedings similar to PNK’s originally proposed REIT spin transaction.

To effect the real estate sale, PNK will distribute shares in a new, publicly traded company (referred to within this report as OpCo, or PNK Entertainment) that will conduct all of the businesses and operations conducted prior to the separation by PNK, other than ownership or leasing of real property, with the exception of Belterra Park and excess land at certain locations, which will be included in the OpCo. PNK shareholders of record will receive one share of OpCo for every share of PNK owned as of the yet-to-be-determined record date. The distribution of OpCo will be treated as a taxable dividend. GLPI will hold special meetings of stockholders on March 15, 2016, in connection with GLPI’s acquisition of PNK’s real estate assets.

Given the nature of this transaction, which in effect is more financial engineering in nature than a traditional spin-off it should not be expected, in itself, to unlock incremental value. However, the current period of market volatility, in which some levered companies have been disproportionately punished despite underlying fundamentals, appears to have created an attractive opportunity for a long-term investor. The purchase of PNK’s real estate assets should give GLPI increased scale and diversification, while adding high-margin rental income due to the minimal associated costs of the triple-net lease structure. The pullback in GLPI’s share price places it at the lower end of peer comparables’ multiple range and appears to present an attractive risk/reward scenario.

Initial trading in post-merger GLPI can be expected to approximate pre-merger levels. Given the fixed exchange ratio to PNK shareholders, initial trading for PNK can be expected to approximate $6.65 per share (based on current share prices of $26.19 for GLPI and $28.91 for PNK).

On a pre-spin, sum-of-the-parts basis, shares of PNK can be assigned a fair value estimate of $33 per share, consisting of $25 for the parent company (to be merged with GLPI, 0.85 * GLPI FVE of $30 per share), and $7.49 for the spin company, which will be renamed Pinnacle Entertainment. The fair value estimate represents 13% implied upside to the current share price ($28.91 as of this writing). However, it should be noted that this fair value estimate will likely take time to be realized. The majority of the value is assigned to the real estate portion of the transaction. GLPI will carry almost $5 billion in net debt, placing it at the higher end of peers. In the current market environment, heavily levered companies have been assigned an additional risk premium, whether warranted or not. REIT peers with leverage in excess of 5x are generally awarded lower multiples, which supports the use of lower AFFO multiple and dividend yield in GLPI’s valuation. GLPI’s discount to peers is likely to shrink as the company delevers its balance sheet. Also of note is the current state of the regional gaming industry, which, while improving, may still see difficulties in meaningfully expanding revenue in the absence of acquisitions. Given all these factors, GLPI is favored as an investment for longer-term holders. Shares of PNK are not recommended for purchase prior to the spin-off, while it is suggested that post-spin PNK only be considered at levels below our estimated initial trading levels.

On January 8, 2015, MeadWestvaco Corp., which subsequently merged with RockTenn in July 2015 to form WestRock Company, announced a plan to spin off its Specialty Chemicals business, Ingevity Corporation, via a tax-free distribution to shareholders. Management had previously indicated that this was its preferred route to maximize value from this business, as tax considerations make an outright sale challenging, and there are many issues involved in considering a Reverse Morris Trust transaction in terms of finding the right partner and coming to terms on valuation. The transaction is expected to be completed by May 2016, with Ingevity expected to trade on the NYSE under the ticker “NGVT”. WestRock is expected to receive approximately $376 million in a tax-free cash dividend from Ingevity at the time of the spin (to be financed through new debt issued by Ingevity).

WestRock (“WRK”) is North America’s second-largest containerboard producer (with a 20% market share) and the largest producer of paperboard (with a 25% share) on the continent. WestRock is also the number-two containerboard producer in Brazil (with a 20% share) and has a small presence in the Indian corrugated market.

The spin-off of the Specialty Chemicals business will result in a consumer-focused global packaging company. That said, WestRock has substantial work ahead in improving overall operating performance. In conjunction with the spin-off, the company has outlined a comprehensive plan to implement substantial cost reductions and improve margins. As a result of the merger of MeadWestvaco and RockTenn, management has previously noted that it expects to achieve total annual run-rate deal synergies of $300 million by the end of the third year (the majority by the end of year two). In addition to the deal synergies, the RockTenn platform was already on track to realize annual productivity gains of $200 million annually in F2016-2018 (partially offset by approximately $75 million per year of inflation headwinds), while the MeadWestvaco side of the business still has further runway ahead on its own two major cost-saving initiatives.

Based on an analysis of comparable revenue growth, EBITDA, assets, and dividend yield, we arrive at a pre-spin sum-of-the-parts valuation of $41 for WRK, comprising $35 for post-spin WRK and $5.40 for NGVT. The pre-spin fair value estimate implies approximately 26% upside to the shares’ current price ($32 as of this writing). As such, the pre-spin shares are recommended for purchase. The fair value estimate for NGVT represents a multiple of 7.2x estimated F2016 EBITDA, in line with specialty chemicals peers. For post-spin WRK, the fair value estimate represents a multiple of 7.5x EBITDA—a premium to peers (6.2x), owing to the company’s significant potential EBITDA growth ahead (over 7% three-year CAGR) associated with anticipated merger-related synergies, as well as existing capital and non-capital margin improvement initiatives. Going forward, continued cost reductions and share repurchases represent primary upside catalysts. Key risks include lower containerboard and/or paperboard prices due to capacity additions and/or increased imports, a slowdown in the U.S. economy reducing packaging demand, and an escalation of wood and recycled fiber costs, that would erode margins.

On October 7, 2015, Brookfield Asset Management Inc (BAM US, “BAM”) announced its intention to pursue a partial spin-off of its private equity investments through a special dividend of shares in Brookfield Business Partners LP (BBU US, “BBP”). It is expected that BAM will distribute 21 million units of BBP to its shareholders, granting them a 30% stake in the new company while retaining the remaining 70%. BAM investors will receive one BBP share for every 50 BAM shares owned. The partial spin-off is expected to be completed in the first quarter of 2016, with the BBP shares qualifying as a taxable dividend. The partial demerger appears to be a continuation of Brookfield Asset Management’s strategy to divest its proprietary investments into publicly-traded firms while retaining its various asset management operations at the parent company level. Additionally, the creation and listing of Brookfield Business Partners will allow BAM to acquire corporations through the spin entity using BBP’s stock as an acquisition currency. Lastly, the public listing of BBP will allow investors to better assess the value of BAM’s private equity investments.

Brookfield Business Partners will comprise BAM’s proprietary investments in business services and industrial corporations. As an investment holding company it will benefit from its permanent capital and its potentially indefinite horizon. Despite that, BBP will be externally managed by BAM-pursuant to a Master Services Agreement-and more specifically its Private Equity team. Unlike BAM’s other limited partnerships, such as Brookfield Property Partners LP (BPY US), BBP’s focus is on capital appreciation over dividend distributions. Its approach, similar to what BAM has employed in other sectors, will be highly opportunistic and will frequently involve the acquisition of distressed companies, either directly or through debt-to-equity swaps.

Brookfield Business Partners’ business services primarily consist of construction services. The segment is responsible for more than half of BBP’s revenues. Additional business services operations include residential real estate services, such as brokerage and relocation services, and facilities management. The company’s industrial operations comprise oil & gas exploration and production in Canada and Australia, specialty metals and aggregates mining, graphite electrodes production, bath and shower products manufacturing, and infrastructure support products manufacturing. As an opportunistic investor BBP expanded its industrial operations rapidly in 2015, with the addition of significant oil & gas assets and the acquisition of graphite electrodes manufacturer GrafTech International Ltd. Despite having permanent capital, Brookfield Business Partners operates like a private equity company. Besides its opportunistic approach, which includes acquiring the debt of distressed companies with the ultimate goal of exchanging it for equity, the company also uses considerable leverage. BBP’s significant expansion in oil & gas production during the past year is a testament to its contrarian approach. Going forward, it is likely that the company will continue an aggressive acquisition program, aided by publicly-traded stock that can be used as currency. As an acquisitive company, and one that does not intend to pay significant dividends, BBP’s success will be highly dependent on Brookfield Asset Management’s prudent investment decisions.

The new corporation is expected to have shareholders’ equity of approximately $25 per share. Based on the price-to-book value multiple of peer companies, BBP’s stock is valued at $21. However, a sum-of-the-parts approach results in a considerably lower valuation-a mere $6 per share. That can be explained by the fact that many recently acquired companies are struggling and are suffering from low profitability-hence they became BBP’s targets. If BBP’s investments prove successful and companies such as GrafTech International increase their earnings to more normal levels, shareholders have a lot to gain. In the same SOTP analysis, an increase in EBITDA to normalized levels at GrafTech and the construction services operations alone-excluding the oil & gas division, which due to the collapse in the price of oil has significant turnaround potential-could result in a price target of $24 per share. The uncertainty regarding the Brookfield Business Partners earnings-based intrinsic value should lead investors to demand additional margin of safety and return on their capital. As a result, BBP’s tangible shareholder equity, estimated at $12.6 per share, could present an attractive entry point for most outside shareholders-save for those putting their faith in Brookfield Asset Management’s successful investment decisions.

· Harsco Corp. (NYSE: HSC), an industrial services & engineering concern, reports three distinct operating segments: (1) Metals & Minerals (65% of sales and 62% of EBITDA in 2015); (2) Industrial (21% and 20%); and (3) Rail (14% and 18%). As well, HSC has a 29% stake in a joint venture, Brand Energy & Infrastructure. The stock trades at 5.1x 2016E EBITDA.

· HSC recently indicated that it would explore strategic options for its Metals & Minerals (M&M) segment, which we think will ultimately result in a spin-off or sale of the business. Comparatively, M&M is lower margin as well as more cyclical and capital intensive than the Industrial and Rail businesses, where growth prospects are better and whose returns on invested capital are near 50%. We also expect HSC to monetize its stake in the Brand JV over next several years. Despite potential catalysts, cyclical weakness in HSC’s end-markets, particularly energy and mining, as well as overstated balance sheet concerns, have weighed heavily on the shares, which our analysis suggests now reflect a compelling discount to the sum value of HSC’s parts.

· Considering peer valuations and recent M&A multiples as well as management’s financial guidance/commentary, respective value of $12 per share, $6 per share, and $7 per share can be assigned to HSC’s Metals & Minerals, Industrial, and Rail businesses. Accounting for corporate costs of $3 per share and projected net debt of $13 per share yields a sum-of-the-parts value of roughly $10 per share. (Upside optionality of $2-$3 per share could be assigned to the potential monetization of HSC’s stake in Brand.)

· Potential catalysts include the separation of HSC’s M&M business, monetization of the Brand JV stake, improvement in end-market demand, and/or execution toward HSC’s profitability/leverage goals. Risks include a lack of execution on internal initiatives, further deterioration in fundamentals, customer bankruptcies, covenant breaches, and/or commodity/currency fluctuations.

On January 29, 2015, The Manitowoc Company, Inc. (NYSE: MTW) announced a plan to separate its Cranes and Foodservice businesses into two independent, publicly traded companies via a tax-free spin-off, expected to be completed in the first quarter of 2016. The proposed separation is subject to effectiveness of appropriate filings with the Securities and Exchange Commission and final approval by the company’s Board of Directors.

In addition to the proposed spin-off, Manitowoc announced that the Board has approved amendments to the company’s by-laws to eliminate its classified board structure on a phased-in basis, commencing with the elections which occurred at the company’s 2015 annual meeting of shareholders. In addition, upon completion of the separation, the spin-off company will have an annually elected Board of Directors. Currently, the Manitowoc Board is divided into three classes, with each director class serving a staggered term of three years. Under the terms of the declassification, all current directors will serve the remainder of their terms and thereafter become subject to election each year by shareholders. The change is scheduled to go into effect beginning with those directors whose terms expired at the 2015 annual meeting. As of the 2017 annual meeting, all Board members will be subject to annual election.

Founded in 1902, the Manitowoc Company is a multi-industry capital goods manufacturer operating under two main segments—Cranes and related products (59% of 2014 sales, FY ending December) and Foodservice equipment (41% of 2014 sales). The Cranes business, which reported annual revenue of $2.3 billion in the 12 months ended December 31, 2014, is one of the largest providers of lifting equipment for the global construction industry, including lattice-boom cranes, tower cranes, mobile telescopic cranes, and boom trucks. The business holds leading market positions and has highly recognized brands, including Manitowoc, Grove, National Crane, Potain, Shuttlelift, and Crane Care brand names. The business generates nearly 60% of its revenue from non-U.S. markets. The Foodservice business, which reported annual revenue of $1.6 billion in the 12 months ended December 31, 2014 ($1.2 billion for the first nine months of 2015), is a leading manufacturer of commercial foodservice equipment serving the ice, beverage, refrigeration, food prep, and cooking needs of restaurants, convenience stores, hotels, hospitals, and other institutions. The business has a worldwide network of 120 distributors and promotes more than 24 industry-leading brands, including Manitowoc, Garland, Convotherm, Cleveland, Lincoln, Merrychef, Frymaster, Delfield, Kolpak, Kysor Panel, Servend, Multiplex, KitchenCare, INDUCS, Koolaire, and Manitowoc Beverage System.

Following the transaction, the Cranes business will remain with the parent, retaining the Manitowoc Company name and ticker. The Foodservice business will take the name Manitowoc Foodservice, Inc., and is expected to trade on the NYSE under the ticker “MFS”. The transaction is the culmination of mounting pressure from activist investors, who have for some time suggested a separation of these two disparate (and underperforming) businesses. The Foodservice segment has suffered adverse product mix and poor execution, as MTW’s consolidation and restructuring actions resulted in weaker profitability in 2014 and into 2015, from originally targeted operating margins of 17.5% to 12.9% in the most recently reported quarter (3Q 2015). Similarly, a demand recovery in the Cranes sector has been elusive, owing primarily to weak demand for rough terrain and boom trucks in North America and weak recovery of non-residential construction markets (particularly utility power plants). Accordingly, in June 2014, Relational Investors disclosed an about 8.5% stake in MTW, stressing that a separation of the two businesses, which it contended had materially different operating metrics and cyclicality, would enhance capital allocation and strategic flexibility, as well as attract a more focused shareholder. Management was resistant to the proposal, filing an 8-K presentation in late August defending the combined businesses. Subsequently, in December 2014, activist investor Carl Icahn (MTW’s second largest institutional investor) disclosed, via a 13D filing, an almost 8% stake in MTW, which similarly called for a split of the two businesses as well as indicating a willingness to seek Board representation.

Based on an analysis of comparable revenue growth, EBITDA, and EPS, we arrive at a pre-spin sum-of-the-parts valuation of $15.28 for MTW, comprising $2.72 for post-spin MTW and $12.55 for MFS. The pre-spin fair value estimate implies approximately 17% upside to the shares’ current price ($13.02 as of this writing). Despite the upside potential, however, we would recommend remaining on the sidelines pre-spin. Given the potential for continued volatility in the Cranes business, shares of post-spin MTW will likely experience near-term selling pressure, owing to concerns over the long-term viability of this business as a separate entity given weak order growth (down 39% year-over-year in the most recently reported quarter), deteriorating margins, and weakening global end markets. Rising leverage associated with weakening profitability metrics is also likely to be a key concern, a view supported by the historical underperformance of highly leveraged U.S. machinery companies. Note that the pre-spin company has $1.6 billion in long-term debt and a debt to equity ratio of 2.07x. That said, investors with a longer term investment horizon may rotate into shares of MFS, given attractive restaurant industry fundamentals and margins. Additionally, it is important to note that our fair value estimates are subject to revision as incremental capital structure details become available.

On August 3, 2015, Community Health Systems Inc. (NYSE: CYH) announced its intention to separate 38 hospitals and Quorum Health Resources, LLC, a hospital management and consulting business, via a tax-free spin-off. The transaction was originally expected to be completed in 1Q 2016. On January 7, 2016, CYH announced a revised timeline to complete the spin in 1H 2016. The company stated that the longer timeline was due to market conditions. The delay was likely due to the market volatility at the time of the announcement, which may have affected the company’s ability to refinance debt.

The spin company, to be named Quorum Health Corporation, will include a diversified portfolio of 38 hospitals with an aggregate of 3,587 licensed beds across 16 states. The hospitals that will comprise Quorum Health Corporation have strong market positions and are primarily located in cities or counties having populations of 50,000 or less. In 84% of these markets, the QHC hospital is the sole provider of acute care hospital services. Quorum Health Corporation will also include Quorum Health Resources, which provides hospital management and consulting services to 150 non-affiliated hospitals across the U.S., most of which are located in markets similar to Quorum Health Corporation’s sole-provider hospitals.

Quorum Health Corporation, which is expected to have the ticker QHC, will effectively take shape as a throwback to CYH’s roots as a small group of rural-based, sole-provider hospitals. CYH, the parent, will focus on expanding services offered at its larger networked hospitals, which were mostly acquired since 2007. The two systems have bifurcated operating and capital needs, which has resulted in QHC’s portfolio being largely underinvested under the current corporate structure. Given this rationale, it should not be expected that an immediate value unlocking will occur. Instead, both systems’ potential upside arises from their ability to conduct accretive acquisitions and widen margins through centralized systems and cost controls, which is not much different from CYH’s overall goals in recent years.

The delaying of the spin-off follows the October 2015 pre-announcement of CYH’s 3Q 2015 results, which included a 15% year-over-year decline in adjusted EBITDA, as quarterly admissions declined 1.9% (2.1% decline on a same-hospital basis). Shares of CYH fell 35% on the day of the pre-announcement.

Based on forecast earnings, pre-spin shares of CYH can be fairly valued at $25 per share ($3.66 per share of QHC and $21.09 per share of post-spin CYH). Post-spin QHC is fairly valued at $16.49 per share based on an expected distribution ratio of 1:4.5. The fair value estimate represents 23.5% potential upside from the price as of this writing. Despite the implied upside to the fair value, the shares are not recommended for purchase at this time. The uncertainty surrounding current admissions trends and their impact on near-term earnings, along with the lack of definitive timing for the spin-off transaction, creates risks related to the forecast earnings and ultimate structure of the post-spin entities. In order for us to become more positive on the shares prior to the spin, admissions trends need to show stability, and management needs to more clearly define the transaction timeline. Positive catalysts for QHC or post-spin CYH would include faster than anticipated margin expansion or an aggressive acquisition strategy, particularly if focused on states that are expanding Medicaid.