On November 5, 2014, American Capital Ltd. (NASDAQ: ACAS) announced a plan to spin off its investment assets in the form of two publicly traded business development companies (BDCs), with the parent company, American Capital, retaining its asset management business (ACAM). Subsequently, on May 6, 2015, ACAS revised its transaction plan to spin off only one entity, American Capital Income (ACAP), which will control the majority of ACAS’s debt and equity investments. American Capital Income is expected to qualify as a BDC and elect registered investment company (RIC) status, and as such will be required to distribute at least 90% of investment company taxable income to shareholders. Following the separation, ACAS will consist primarily of ACAM and will operate as an alternative asset manager, overseeing permanent capital in the form of publicly traded REITs and BDCs and private structured products, both debt and equity funds. The separation effectively transforms ACAS into an externally managed BDC from an internally managed one.

The transaction is subject to final approval by the American Capital Board of Directors, the effectiveness declaration of registration statements by the SEC, receipt of a tax opinion, a refinancing of the company’s indebtedness, and the establishment of credit facilities for the new BDC, as well as refinancing by American Capital of the portfolio companies’ third-party debt and resolution of certain co-investment issues. In addition, shareholders must approve, among other things, the parent company’s plans to withdraw its election as a BDC, which cannot be done without consent of the holders of a majority of the outstanding voting shares.
ACAS is a Bethesda, MD-based private equity and asset management firm. The company elected to be regulated as a business development company under the Investment Company Act of 1940; however, following the company’s September 30, 2010, tax year, ACAS relinquished its regulated investment company status and elected to be classified as a corporation (subchapter M), and as such is subject to corporate income tax. The company has not paid a regular dividend since the reclassification.
The rationale for the planned spin-off is rooted in the fact that shares of ACAS have historically traded at a sharper discount to net asset value (NAV) than peers. The wider discount can be attributed to ACAS’s lack of a dividend payment and the lower NOI (or net operating income) margin achieved due to capital allocation into lower-returning assets. Shares of ACAS have traded at an average P/NAV of 0.71x versus comparable internally managed BDCs’ average of 1.15x since the beginning of 2011. The discount has persisted despite an increase in NAV per share. It should be noted that NAV per share has benefited from significant share repurchases, as the actual net asset value has not experienced the same degree of appreciation. Since 3Q 2011, NAV per share has increased 71.5%, while NAV has increased 32.1%.

Subsequent to the filing of ACAS’s Form 10 and proxy statement filing, Elliott Management released a letter to ACAS’s Board of Directors, a slide presentation, and an associated website that called for ACAS shareholders to vote “AGAINST” the proposed spin-off of American Capital Income. Among its objections to the separation, Elliott cited the persistent underperformance of ACAS shares relative to peers, ineffective capital allocation by management, an unqualified Board of Directors, and a bloated cost structure, including excessive compensation. As an alternative to the planned spin-off, Elliott proposed withdrawing the spin-off, strengthening the Board, reviewing capital allocation policies, and cutting overhead costs.

On November 25, 2015, ACAS released a statement that the company had hired financial advisors to conduct a strategic review of all alternatives for maximizing shareholder value. The company also announced that the board has increased the current stock buyback program to a range of $600 million to $1 billion from $300 million to $600 million. American Capital expects to announce the initial results of the strategic review no later than January 31, 2016.

The ultimate outcome of Elliott’s push to stop the spin-off and ACAS’s strategic review is still unknown; however, it can be noted that ACAS assets appear undervalued in the current corporate structure. It is possible that whether or not the spin-off is eventually completed, the shares are still an attractive value in the sense that if the spin-off does occur, and management is successful in transitioning its portfolio to higher-yielding investments, combined with the addition of a dividend payment at American Capital Income, the sum of the parts should increase versus current levels. Alternatively, if the spin-off is not completed, and Elliott gains sufficient influence, better capital allocation (including share repurchases at deep discounts to NAV) could drive a higher NAV per share and eventually reduce the current trading discount.

Based on a sum-of-the-parts analysis, including valuing ACAP’s assets at a discount to NAV, potential dividend payments, and earnings potential from post-spin ACAS, a fair value estimate of $16.90 per share is derived (consisting of $11.16 per share of ACAP and $5.73 per share of post-spin ACAS), representing almost 19% of potential upside from the current share price of $14.22.

It should be noted that this sum-of-the-parts valuation values ACAP’s investment assets at 0.85x net asset value, which represents a discount to other externally managed BDCs historical trading multiples. Upside to this estimate exists in expansion to a valuation closer to NAV ($20.44 per share as of this writing); however, given the need for ACAP to shift its portfolio out of lower-yielding assets to receive a more in-line multiple, which may take several years, near-term upside to this fair value may be limited. However, longer-term investors with a positive outlook on the BDC environment may wish to hold shares even at levels exceeding our fair value estimate. As an aside, a positive outcome for Elliott’s proxy contest (cancelation of the planned spin) could accelerate the timeline to achieving parity between NAV and share price, as ACAS would theoretically remain an internally managed BDC, a type of entity that trades at higher multiples than externally managed BDCs. As such, in combination with the current upside potential and favorable risk/reward characteristics of the current share price, shares of ACAS are recommended for purchase prior to the outcome of the company’s strategic review (scheduled to conclude by January 31, 2016).

On February 5, 2015, W.R. Grace & Co. (NYSE: GRA) announced a plan to spin off its Construction Products and Packaging business via a tax-free spin-off. The transaction is expected to be completed in the first quarter of 2016 and is subject to the customary closing conditions, including final approval by Grace’s Board of Directors. The parent company, Grace, will consist of Grace’s Catalysts Technologies and Materials Technologies business segments (excluding the Darex packaging business), and GCP Applied Technologies – the spin-off – will consist of Grace’s Construction Products business segment and the Darex packaging business. Fred Festa, Chairman and Chief Executive Officer, and Hudson La Force, Senior Vice President and Chief Financial Officer, will remain with New Grace. Greg Poling, currently President and Chief Operating Officer of Grace, will become President and Chief Executive Officer of New GCP.

W.R. Grace & Co. is a specialty chemicals and materials company, headquartered in Columbia, Maryland, that emerged from Chapter 11 bankruptcy protection in February 2014 after more than 12 years. (In 2000, the company was facing nearly 130,000 personal injury and property damage claims relating to its former ZONOLITE attic insulation product, which was discontinued in the 1980s.) Grace generated 2014 revenue of $3.2 billion, with more than two-thirds outside the United States. The company operates through three business segments: (1) Grace Catalyst Technologies; (2) Grace Materials Technologies; and (3) Grace Construction Products. Grace Catalyst Technologies is the largest segment, accounting for about 40% of revenue. In its spin-off announcement, the company noted that the move was aimed at enhancing its strategic focus, creating a simpler operational structure, and allocating capital efficiently for both independent entities.

New Grace, which is primarily focused on process catalysts and specialty silicas, includes the Material Technologies business, which consists of silica-based engineered products as well as sealants and coatings. The company has an estimated 10% share of the $16 billion global catalyst market and is the world’s largest provider of FCC (fluid catalytic cracking) catalysts, residue hydroprocessing catalysts, and independent polyethylene catalysts. Post separation, annual sales are expected to be approximately $1.8 billion. The company also operates a joint venture (JV) with Chevron Corp. (NYSE: CVX) called ART (Advanced Refining Technologies, LLC), which supplies a portfolio of hydroprocessing catalysts. Including this JV, annual revenues are expected to be $2.2 billion post separation.

Post-spin Grace will operate in a healthy, oligopolistic industry with strong barriers to entry and few competitors—which should result in consistent earnings and free cash flow growth. The company is expected to make strategic acquisitions in its core segments to expand its high-margin specialty chemicals and performance materials portfolio. The spin-off essentially separates a higher-multiple operation, effectively creating a new “acquisition currency” to grow the company’s catalyst franchise. Post spin, debt will be 2.0x-2.5x EBITDA at New Grace and 3.0x-3.5x at GCP, with GCP raising its own debt and paying Grace with the proceeds. Importantly, the Catalyst business is driven by end-user demand for transportation fuel and plastics, and weaker oil prices have no significant impact on this business. New Grace should be able to capitalize on strong secular trends—most notably, trends in heavy crude oil processing (oils are heavier and dirtier, requiring new treating solutions), as well as more stringent clean air mandates, which require increased use of hydrotreating. The underlying businesses have the ability to grow at 1.5-2.0x global GDP and can generate annual free cash flow of $400-$500 million. Besides selected potential bolt-on acquisitions, management is focused on returning excess cash to shareholders through dividends and buybacks.

GCP Applied Technologies is a leader in cement and concrete chemicals, specialty building materials, and can sealants and coatings. The company’s Construction Products include cement additives, concrete admixtures, and waterproofing products. The Darex packaging business supplies can sealants, closure sealants, and can and closure coatings to the packaged food and beverage industry. Post separation, sales are expected to be approximately $1.5 billion, with net leverage between 3.0x and 3.5x adjusted EBITDA. Despite being in the early stages of the construction recovery in North America and emerging markets, Grace has improved its operating margin from trough levels of approximately 10% to over 14%, with the potential to approach the company’s mid-cycle range of 16% to 18%.

Diversified chemicals suppliers tend to trade at higher multiples than more volatile sub-segments such as commodity and agricultural chemicals. We would expect Grace to trade at a higher multiple and trade at around 12x-14x EV/EBITDA based on its stronger ROIC metrics, while GCP should trade at an 8x-10x EV/EBITDA multiple based on its lower margin profile. Based on an analysis of revenue growth, EBITDA, and assets, we arrive at a pre-spin sum-of-the-parts valuation of $101 for GRA, comprised of $79 for New Grace and $22 for GCP Applied Technologies. The pre-spin fair value estimate implies approximately 2% upside to the shares’ current price ($99 as of this writing), and a blended multiple of 11.5x consolidated estimated 2016 EBITDA of $791 million (versus a current consolidated company multiple of 11x), implying that the valuation appears to adequately reflect the incremental value associated with the split. Over the longer term, there may be potential upside as GCP becomes either a construction cycle recovery pure-play or a consolidation target, potentially expanding into a valuation that might have not been achieved as part of a broader GRA portfolio. Shares could see upside closer to $110 should the company return to higher normalized earnings in its Venezuelan operations and generate improved operating leverage from increasing catalyst capacity utilization. Note that despite reporting 3Q15 results that surpassed expectations, GRA did not raise its EBITDA guidance and now expects Venezuelan earnings to be negligible going forward. GCP’s capitalization structure (including any incremental debt and the amount of the company’s cash payment to the parent entity) has not been finalized, and as such, any new material information would affect our fair value estimate assumptions going forward.

BM&FBovespa (BVMF3 BZ), based in São Paulo, Brazil, is the country’s securities and derivatives exchange. It is the leading exchange in Latin America, offering trading in cash equities, fixed-income securities, FX spot and a full suite of derivatives, as well as clearing operations, market data, securities lending and a range of other services. After years of consolidation, BM&FBovespa operates, effectively, as a monopoly within the country and is a key asset in the future development of the country’s economy and financial sector. Its current market valuation, however, appears to minimize the stature of the exchange, the magnitude and stability of its current earnings, and the likelihood of future earnings expansion given the exchange’s role in Brazil’s growing economy. The market also appears to be discounting the value of its 4% equity interest in CME Group (NYSE: CME), which is worth nearly 25% of BM&FBovespa’s current enterprise value. If one were to adjust the enterprise value for this investment and make the appropriate adjustments to earnings, BM&FBovespa is currently trading at below 10x 2015 earnings estimates, whereas comparable companies can easily trade for 20x earnings or more. This discount, combined with the quality of this asset, outweighs any country risk one might attach to Brazil. Because of this, shares of BM&FBovespa are recommended for purchase.

Bilfinger SE (GBF GR) is a German industrial company that provides maintenance, repair, construction and other services to the real estate, industrial and power sectors. In 2014 it started experiencing reduced profitability, primarily due to pricing pressure and fewer orders from power and utility clients, and secondarily due to lower capital expenditures by industrial clients. As a result, its stock price has lost approximately half of its value since July 2014.

Cevian Capital, the renowned European activist investment firm, has been Bilfinger’s largest shareholder since 2011. Cevian emerged as the top Bilfinger investor in the end of that year, when it was announced that it owned 12% of the shares. Based on the German company’s prevailing stock price at the time, Cevian probably acquired its stake at a price of approximately EUR 60 per share. Furthermore, following the material decline in Bilfinger’s share price, the activist investor doubled down, raising its ownership to 26% by September 2014. As Bilfinger engineers a turnaround, the role of Cevian Capital appears critical; having just one Board seat prior to 2014, in the aftermath of Bilfinger’s profit decline it managed to appoint one of its partners, Dr. Eckhard Cordes, as Chairman, replace the CEO and CFO, as well as execute additional management changes.

In June 2015, Bilfinger began to sell or announce the divestment of certain business units, and in October it made a formal announcement of the steps of its turnaround process, which include: the sale of the Power division; establishing a holding company structure that will result in the two remaining subsidiaries, Industrial and Building & Facility, operating as independent entities; focusing on “core” activities within the remaining units; and the partial withdrawal from businesses generating approximately EUR 1 billion in revenues. At the same time, the company is lowering its headcount and SG&A costs and striving to improve cash conversion. These strategic and financial initiatives should make Bilfinger a more efficient organization. Increased focus in and greater independence of the Industrial and Building & Facility segments should allow for a gradual pickup in new orders and, eventually, revenues, as well as higher margins. Additionally, Bilfinger’s bloated cost structure should improve-with SG&A expenses as a percentage of revenue, in particular, being more than 400 basis points above similar companies. Even though the success of the proposed measures cannot be guaranteed, the involvement of a very successful and patient activist investor increases the odds of a successful turnaround.

One may note that Bilfinger’s current valuation already incorporates expectations for cost savings-while the company’s shares would be worth a lot less in the case where Bilfinger fails to deliver on its promises. This is true. Nonetheless, based on peer analysis, it appears that achieving a moderate level of cost reduction should be quite easy to achieve, especially when implemented by the company’s newly appointed Chairman and CEO. Bilfinger’s valuation leverage to SG&A savings is substantial. A gradual 200 basis point reduction in SG&A costs, as a percentage of sales, coupled with a reduction of capital expenditures to maintenance levels, has the potential to greatly lift free cash flow generation. In fact, due to Bilfinger’s numerous acquisitions since 2001, approximately a quarter of depreciation and amortization expense comprises goodwill amortization. Consequently, in the years to come, the German firm should generate free cash flow that exceeds reported net income by more than 20%.

To that end, and assuming Bilfinger’s transformation is complete by 2018, the company currently trades at 7.7x to 9.9x our estimated 2018 free cash flow. Were Bilfinger to trade at a normalized multiple, say, 15x, it would offer investors annualized returns exceeding 15% over a three year period. Therefore, given the involvement of Cevian Capital-which increases the chances of a successful turnaround-and a favorable risk-reward ratio offered by Bilfinger’s current valuation, the company’s shares are recommended for purchase.

· Nuance Communications, a leading provider of voice and language software solutions, reports four distinct operating segments: (1) Healthcare (47% of sales and 53% of segment profit in F2015); (2) Mobile & Consumer (23% and 18%); (3) Enterprise (18% and 15%); and (4) Imaging (12% and 14%).

· NUAN is a technology “roll-up” whose focus on a broad array of competencies, in terms of customers, industry verticals, and products, has led to inconsistent operating performance over the last few years. So, while results over the last several quarters have been encouraging, and we discern macro tailwinds in several aspects of the business, including healthcare and automotive, a rationalization of its portfolio could improve long-term execution, in terms of growth, innovation, margins, and/or capital allocation, creating incremental value beyond any potential re-rating. In terms of the latter, NUAN currently trades at ~14.5x and ~13.5x F2016E and F2017E EPS consensus, which we think reflects a conglomerate discount to the sum of its parts.

· While NUAN is up ~35% over the last year (versus a 7.5% rise in the NASDAQ), the stock is roughly flat over the last three years (versus a 72% gain in the NASDAQ) and well off its 2012 high of ~$30 per share. In April 2013, Carl Icahn filed a 13G disclosing a ~9% “passive” stake in NUAN. Subsequently, Mr. Icahn reclassified his stake under an “active” 13D, secured two Board seats, and increased his stake to 19.6%. While Mr. Icahn has not publicly voiced his aims for NUAN, it can be assumed that all options, both operational and transactional, would be considered in order to unlock value. Anecdotally, management, which collectively owns ~2.75% of NUAN, seems convinced that executing its operating plan is the correct long-term strategy.

· Considering peer multiples of earnings, respective per share values of ~$14, ~$5, ~$3, and ~$5 can be ascribed to NUAN’s Healthcare, Mobile, Enterprise, and Imaging segments, yielding a sum-of-the parts (SOTP) value of roughly $27 per share, implying roughly 30% of potential upside.

On November 12, 2015, Liberty Interactive Corporation (NASDAQ: QVCA, QVCB, LVNTA, LVNTB) announced that the company’s Board of Directors has approved the tax-free spin-off of two companies, CommerceHub Inc. and Liberty Expedia Holdings Inc. CommerceHub Inc. is to be comprised of the CommerceHub business, a software-as-a-service platform for online retailers and their suppliers. In the spin-off of CommerceHub, shareholders of Series A and Series B Liberty Ventures (LVNTA, LVNTB) common stock will receive shares of the corresponding series of CommerceHub, Inc. common stock for each share of Liberty Ventures common stock held. Expedia Holdings will be comprised of Liberty Interactive’s entire ownership interest in Expedia, Inc., as well as Liberty Interactive’s subsidiary Bodybuilding.com, LLC. In the spin-off of Expedia Holdings, record holders of Series A and Series B Liberty Ventures common stock will receive shares of the corresponding series of Expedia Holdings common stock for each share of the Liberty Ventures Group common stock held.

Expedia Holdings Series A and Series B common stock are expected to trade under the symbols LEXEA/B, respectively, and CommerceHub, Inc. Series A and Series B common stock are expected to trade under the symbols CHUBA/B, respectively, in each case, on the Nasdaq Stock Market. The transaction is subject to various conditions, including the receipt of an opinion of tax counsel, and is expected to be completed in the first half of 2016.

Following the spin-off, the Liberty Ventures Group will be comprised of all of Liberty Interactive’s businesses and assets other than those attributed to the QVC Group (QVCA,QVCB), including its subsidiaries Evite, Inc. and LMC Right Start, Inc., its interests in FTD Companies, Inc., Lending Tree, Inc., Interval Leisure Group, Inc., Time Warner Inc. and Time Warner Cable Inc., various green energy investments, the exchangeable senior debentures currently attributed to the Liberty Ventures Group and Liberty Interactive’s commitment to purchase $2.4 billion of Liberty Broadband Corporation’s Series C common stock in connection with the closing of the proposed merger of Charter Communications, Inc. and Time Warner Cable (subject to the exercise by Liberty Broadband of its right to reduce such commitment by up to 25%).

The Digital Ventures Group, which includes CommerceHub as well as the company’s other on-line commerce businesses (Backcountry.com, Inc., Bodybuilding.com, LLC Evite, Inc. (“”Evite””) and LMC Right Start, Inc.), generated $471 million in revenues in 2014. Accordingly, given limited disclosures to actual revenue and earnings of the CommerceHub, a post-spin valuation for the business is currently expected to result in a minimal market capitalization and will not be covered at this point in time, however maybe revisited at a future point.

A starting point for a post-spin valuation for Liberty Expedia Holdings can be based on the company’s current ownership position (23.6 million shares including Class A and B shares) at the current market price of $127.97 totals $3.0 billion, or $21.29 per share. The active trade business (ATB) being included in Liberty Expedia Holdings (Bodybuilding.com) provides minimal optionality.

Following the spin-off, the parent entity will maintain the ownership interest in Interval Leisure Group Inc. (NASDAQ: IILG) (16.6 million shares), Lending Tree Inc. (NASDAQ: TREE) (2.8 million shares), and FTD Companies Inc. (NASDAQ: FTD) (10.2 million shares), which in aggregate have a current market value of $841 million. The company’s ownership position in Time Warner Inc. (NYSE: TWX) and Time Warner Cable Inc. (NYSE: TWC) are valued at $1.3 billion. Accounting for $3.8 billion in cash and $2.2 billion in debt, a net asset value (NAV) of $3.8 billion, or $27 per share, is derived.

According to this preliminary valuation exercise, Liberty Ventures trades at a 10% discount to NAV. The discount is likely due to the fact that Liberty Ventures is actually a tracking stock, which generally trade with a discount. The decision to spin-off the EXPE ownership stake is likely driven by two key factors, one of which is an attempt to narrow the tracking discount. The other main reason to create Liberty Expedia Holdings is a that it creates a tax efficient way to monetize the long held EXPE stock, which is carried on the balance sheet at just $626 million (September 30, 2015). Given John Malone’s history of completing numerous successful spin transactions (with an aversion to paying taxes on holdings) in recent years (including Liberty Media / Starz) we would expect that the finalization of the Liberty Expedia Holdings transaction would narrow the current discount, with a high likelihood that Liberty Expedia Holdings eventually is merged back into EXPE down the road.

Fiat Chrysler Automobiles (FCAU US, “FCA”) is a global automotive manufacturer and 90% owner of the Ferrari brand-with the remaining 10% held by Piero Ferrari, son of the brand’s founder. On October 29, 2014, FCA announced its intention to demerge its interest in Ferrari into a new company. It opted to proceed with an initial public offering of Ferrari, selling 10% of the company-11.1% of its shareholding-followed by a distribution in-specie of the remaining shares to its existing stockholders. FCA filed the Form F-1 with the SEC on July 23, 2015. The IPO was priced on October 20, 2015, at USD 52 per share, with shares of Ferrari NV (RACE US) commencing trading the following day. FCA has also scheduled an Extraordinary Shareholders’ Meeting on December 3, 2015, to approve the distribution of the company’s remaining interest to its shareholders, at a ratio of one Ferrari share for every 10 FCA shares owned. The final part of the carve-out is expected to be completed by 2016.

The separation of Ferrari into a distinct entity has a dual purpose for FCA. Firstly, it is expected to lead to increased shareholder value; Ferrari’s business is characterized by stable sales and very high profit margins, thus deserving a premium valuation multiple. Consequently, the market price of the luxury automaker is higher than its implied valuation as part of the Fiat Chrysler group. Secondly, the spin entity’s disparate business model will allow it to be better managed as a standalone entity rather than as part of a traditional auto manufacturer. Prior to the distribution of Ferrari shares, FCA chose to sell 11% of its interest in the company. The initial public offering will bring USD 982 million to the parent company’s coffers. In 2014, FCA laid out an ambitious expansion plan that required EUR 48 billion in capital expenditures over five years. The Italian company’s combination of a Ferrari share distribution with the disposal of 11% of its holdings can be explained by its need to raise additional funds that will allow it to execute its business plan while at the same time deleveraging its balance sheet.

As a separate company, Ferrari will be a pure-play luxury performance car manufacturer. Besides the sale of cars and related products, the company also derives revenue from other activities such as the sale of engines to Maserati, licensing and royalty fees from theme parks and Ferrari-branded retail stores and from Formula 1 sponsorships and TV rights. As an ultra-luxury brand, Ferrari’s business model differs from that of most traditional auto manufacturers such as its former parent. Profit margins are very high-with gross margin above 45%-while car sales are artificially constrained by the company, thus eliminating any cyclicality resulting from demand dipping below supply. That being said, the company has two disadvantages. The first is a “by-product” of its business model. In order maintain its perception as a luxury label, Ferrari has to ration the sale of its vehicles. Consequently, car sales growth will be limited in the future, as any rapid increase in supply risks damaging the brand and its premium pricing strategy. Additionally, as a result of the carve-out, the company will pay a demerger consideration of EUR 2.8 billion to FCA, resulting in negative shareholders’ equity and pro forma net debt-to-EBITDA of 2.9x. Evidently, Ferrari deserves to be valued at a premium to most automakers. Based on enterprise value-to-EBITDA and price-to-free cash flow multiples, shares of the company are worth between USD 31.4 and USD 46.7, while a discounted cash flow valuation with a weighted average cost of capital of 8.4% results in a USD 28.9 price per share.

Following the complete separation from Ferrari, Fiat Chrysler Automobiles will remain one of the ten largest automotive groups in the world, based on sales, with a diverse portfolio of brands including Fiat, Chrysler, Jeep and Maserati, among others. The company’s turnaround efforts since 2009 and its ambitious five year business plan have strained its balance sheet. The proceeds from the IPO, along with the full separation from Ferrari, are expected to reduce net debt by approximately EUR 3.3 billion and increase shareholders’ equity by EUR 1.1 billion. With its balance sheet significantly strengthened, the company should focus on another weak point, that of low profitability. FCA’s profit margins are among the lowest in the industry, and its interest coverage ratio stands at a mere 1.9x. Perhaps, however, its biggest challenge is its ambitious five-year business plan. It requires significant investment and relies on lofty sales growth assumptions. With global vehicle sales at a record and well past the 2007 peak level, a downturn in this very cyclical industry would find FCA wrong-footed and its shareholders at risk of permanent capital impairment. Based on peer enterprise value-to-EBITDA multiples, post carve-out FCA could be valued between USD 27.2 and USD 28.1 per share. As an absolute downside valuation, one may consider the corporation’s pro forma book value that is estimated to be USD 11.5 per share.

The value of FCA shares is currently estimated between USD 14.4 and USD 32.8, with a target price of USD 30.3. While FCA is not a remarkable or high quality automaker, based on the company’s current share price of USD 14.9, Fiat Chrysler Automobiles stock is recommended for purchase prior to the distribution of the Ferrari shares. The significant margin of safety, quantified as a potential downside of approximately 3%, combined with exceptional upside, more than compensates for the acquisition of what can be described as a mediocre corporation. Furthermore, based on our fair value estimates, shares of Ferrari, currently trading at USD 53.1, appear grossly overvalued. Revisiting our sum-of-the-parts analysis, and replacing our Ferrari valuation with the company’s market capitalization, our pre carve-out FCA valuation range is revised to USD 16.8 to USD 33.4, and the target price to USD 32.5. In that scenario, even if FCA is valued at book value following the distribution in-specie, shareholders could make a 13% profit by locking in the valuation of Ferrari. Consequently, as an optimal strategy it is recommended that investors acquire FCA shares while hedging their exposure to Ferrari by selling short one of the latter company’s shares for every 10 FCA shares purchased.

On June 23, 2015, Darden Restaurants, Inc. (NYSE: DRI) announced that its Board of Directors had formally approved a strategic plan to separate a portion of the company’s real estate assets. The separation is to be achieved by a combination of selected sale-leaseback transactions and the spin-off of a portion of its remaining real estate assets to a new real estate investment trust (“”REIT””), to be named Four Corners Property Trust, Inc. (“”FCPT””).

Darden will transfer approximately 430 of its owned restaurant properties to the REIT entity, with substantially all of the REIT’s initial assets being leased back to Darden. The leased properties are expected to have attractive rent coverage ratios, fixed rent escalations, and multiple renewal options at Darden’s discretion. In addition, the company has been marketing selected properties for individual sale-leasebacks. To date, 75 properties have been listed, and over 30 of these have been sold or are under contract. Management expects an average cash capitalization rate of approximately 5.5% for all 75 properties. In addition, Darden is seeking to sell and lease back its Orlando Restaurant Support Center property and buildings under a long-term contract, with multiple renewal options at the company’s discretion. After receiving proceeds from the completion of the strategic real estate plan, the company expects to retire approximately $1 billion of its debt over time. The transaction is subject to several conditions, including satisfaction of various tax conditions, negotiation and execution of leases between the REIT and Darden, debt financing transactions, and completion of SEC filings related to the REIT transaction.

Darden expects to distribute all of the FCPT shares on November 9, 2015, pro rata to its shareholders of record as of 5 p.m. EST on November 2, 2015. Upon the close of the transaction, DRI shareholders will receive one FCPT share for every three Darden shares held. Following the spin-off, Darden will continue to be listed on the NYSE under the symbol “”DRI””, while FCPT has applied to list its common stock on the NYSE under the symbol “”FCPT””. Darden intends to use proceeds from the sale-leaseback of selected real estate properties, debt financing from FCPT, and Darden’s balance sheet cash to retire approximately $1 billion in debt.

With Darden in the midst of a significant operational turnaround, the potential unlocking of value from the monetization of the company’s real estate portfolio has been contemplated for some time. Activist investor Starboard Value LP, which owns 11.6 million shares (9% of DRI shares outstanding), called for an entire turnover of the 12-person board in September 2014, and had earlier proposed breaking up the company by spinning off Olive Garden, LongHorn Steakhouse and Red Lobster into a separate company from the company’s remaining brands and putting Darden’s real-estate holdings into a third publicly traded company. Instead, in May 2014 Darden sold Red Lobster to Golden Gate Capital for $2.1 billion. In October 2014, following intense public criticism of Darden’s leadership and overall strategy, Starboard won shareholder support in a highly contested proxy contest to replace the company’s entire 12-person Board of Directors and appoint Starboard CEO Jeff Smith as Chairman.

More recently, Darden has made some progress on its restructuring, having largely focused on improving operations at its Olive Garden restaurants, reducing its overall expense structure, and increasing asset efficiency. The spin-off of a portion of Darden’s real estate assets to a REIT entity will allow the latter to distribute the majority of its annual taxable income as dividends while pursuing additional real estate transactions to diversify its income base. These REIT attributes, coupled with the fact that REITs do not pay corporate taxes, have historically resulted in premium valuations for REITs relative to restaurant stocks—approximately 15x-16x EV/EBITDA versus 10x-11x for casual dining restaurant peers.

Based on an analysis of projected revenue, rental income, EBITDA, capitalization rates, and comparable valuations, a pre-spin sum-of-the-parts estimate of $74 for DRI can be derived, comprising $67 for DRI and $7 for FCPT. Post spin, Four Corners Property Trust can be fairly valued at $21 per share, based on a 1:3 distribution ratio. With the pre-spin sum-of-the-parts estimate of $74 suggesting approximately 19% potential upside to DRI’s current stock price at the time of this writing ($62), the above analysis suggests that the transaction could unlock incremental upside. However, with much of the company’s turnaround and cost savings/margin improvement story ($100-110 million targeted from F2015-F2017) already reflected in the current valuation, post-spin DRI must demonstrate continued momentum in same-store sales metrics and earnings expansion in order for the shares to see further valuation expansion. A return to a mid-2000s level of operating performance would result in a mid-single-digit same-store sales expansion rate (versus current Bloomberg consensus of 2.2% through F2018). Note that the implied enterprise value for post-spin DRI represents an EV/EBITDA multiple of 10.8x, well above the pre-spin company’s three-year average of 7.4x and its peak multiple of 9.8x and the 9x-10x range for the fast casual dining group. While it appears likely that post-spin DRI will regain same store sales momentum at Olive Garden, the reward appears more balanced, particularly as the current valuation already places a premium multiple on Olive Garden’s operations. With valuations in the restaurant segment reflecting broader macro-consumer sentiment, the recent improvement in casual dining fundamentals (i.e. comparable) has resulted in a comparable group that is trading at relative peaks. Accordingly, for DRI, any missteps along the company’s recovery could pose meaningful downside to the shares. For FCPT, there is potential risk given its smaller size relative to other REIT investment alternatives and the potential for rising interest rates.