BWA Completes the Spin-Off of PHINIA Inc.; Rate BWA at NEUTRAL with a $44 FVE; Rate PHINIA at NEUTRAL with a $33 FVE

On July 3, 2023, after the market close, BorgWarner Inc. (NYSE: BWA) completed the spin-off of its fuel systems and aftermarket business into a standalone, publicly traded company called PHINIA Inc. (NYSE: PHIN).

BWA shareholders of record received one share of PHIN for every five shares of BWA owned as of June 23, 2023.

As previously disclosed, PHINIA Inc will be added to the S&P SmallCap 600 effective prior to the opening of trading on July 6, 2023. BWA will remain a member of the S&P 500 following the spin-off.

We maintain our post-spin fair value estimates of $44 per share for post-spin BWA, and $33 for PHIN.

Given limited upside to our fair value estimate, we rate shares of post-spin BWA and PHIN at NEUTRAL. On a post-spin basis, we would favor the BWA remain co. businesses as the path to electrification provides for a greater growth story versus PHINIA, granted they achieve their profitability goal on the eProducts portfolio and successfully manage their M&A integrations.

For PHINIA, we would be incrementally positive if shares traded at a significant discount to our fair value estimate, as we do see significant cash flow generation from its product portfolio over the coming years. However, would remain cautious as the company likely does not receive a valuation multiple above low single digits given its end market exposure.

For more details, please refer to The Spin Off Report dated June 20, 2023, and UPDATE dated June 29, 2023.

Lab Corp. Completes Spin-Off of Fortrea Holdings; Rate LH at NEUTRAL with a $219 FVE, Rate FTRE at NEUTRAL with a $35 FVE

On June 30, 2023, after the market close, Laboratory Corporation of America Holdings (“Lab Corp”) (NUSE: LH) completed the spin-off of its clinical development business into a standalone, publicly traded company called Fortrea Holdings Inc. (NASDAQ: FTRE).

LH shareholders of record received one share of FTRE for every share of LH owned as of June 20, 2023.

As previously disclosed, Fortrea will be added to the S&P SmallCap 600 effective prior to the opening of trading on July 6, 2023. LH will remain a member of the S&P 500 following the spin-off.

On Friday, shares of LH and FTRE closed trading in the when-issued market at $207.94 and $34.01, respectively. We maintain our post-spin fair value estimates of $219 and $35 for Lab Corp and Fortrea, respectively. Given limited upside to our post-spin fair value estimates, we rate both shares at NEUTRAL.

Notably, since our initial LH report, shares have increased by 7.5% versus a 2.6% price increase for the S&P 500.

If post-spin shares were to pull back from current levels, we would favor owning the parent company (LH) as we view the apparent near ending of COVID-related revenue declines and margin reversion as being priced in, with multiple expansion to that of peers providing more upside potential versus spin company’s business.

For more details, please refer to The Spin Off Report dated June 13, 2023, and UPDATE dated June 29, 2023.

Liberty Media expects to complete the split-off of Atlanta Braves Holdings on July 18^th, after the market close; fair value remains $50 per share

This morning, before the market open, Liberty Media announced that it expects to complete the previously announced split-off of Atlanta Braves Holdings, Inc., including ownership of The Atlanta Braves MLB team, its stadium, and The Battery mixed-use development into a separate, publicly traded, asset-backed equity (as opposed to its current multi-class tracking stock structure), on July 18, 2023, after the market close.

As previously announced, the transaction, which is still subject to shareholder approval at the July 17^th special meeting, is expected to be completed via the redemption of each currently outstanding Series A, B, & C shares for one share in the corresponding common stock of the new Atlanta Braves Group (with all intergroup interests being settled & extinguished).

There is no record date for the transaction; as such, all holders of Liberty Braves common stock at the effective time of the split-off on July 18^th.

Liberty expects Atlanta Braves Holdings Series A and C common stock will begin trading on the NASDAQ tickers BATRA and BATRK on July 19^th while the Series B common stock will trade OTC under the ticker BATRB.

In remains our view, this transaction will reduce complexity and help alleviate the current so-called tracking stock discount as well as facilitate the eventual, tax-efficient monetization of the Braves Group’s assets.

Our base case fair value estimate remains $50 per share, reflecting a ~$47 per share valuation for the Atlanta Braves MLB team, based on a 5.5x multiple of 2023E regular season ballpark sales, a $9 per share valuation for the company’s real estate/development assets (i.e., The Atlanta Battery), reflecting a 6.5% capitalization rate on our stabilized net operating income estimate, and net debt of ~$ 5 per share

For context, our ~$2.895 billion valuation for the Atlanta Braves baseball team implies an ~11.5% premium to the most recent 2023 Forbes valuation of $2.6 billion, which we note represented a ~24% year over year increase from its 2022 valuation of ~$2.1 billion.

Fortrea to Join S&P SmallCap 600; Spin-Off to be Completed on June 30, 2023, Maintain BUY Rating on Pre-Spin LH

• On June 28, 2023, after the market close, S&P Dow Jones Indices announced that Fortrea Holdings Inc., the clinical development business of Laboratory Corp. of America Holdings Inc. (NYSE: LH), will be added to the S&P SmallCap 600 effective prior to the opening of trading on July 6, 2023. LH will remain a member of the S&P 500 following the spin-off.
• LH is scheduled to complete the spin-off of Fortrea Holdings Inc. on June 30, 2023, after the market close. Fortrea is expected to trade on the NASDAQ under the symbol “FTRE” beginning on July 3, 2023.
• When-issued trading in Fortrea and LH (ex-distribution) closed last night at $34.26 and $204.25, as compared to our post-spin fair value estimates of $35 per share and $219 per share. We fairly value pre-spin shares of LH at $255 per share.
• Given the strength in both post-spin company’s base businesses, the lessening impact of COVID-related revenue on the parent company, and margin improvement opportunities at Fortrea, combined with the implied upside from the current share price to our pre-spin fair value estimate, we continue to rate pre-spin shares of LH at BUY ahead of the spin-off.
• If regular-way shares were to trade at prices approximating the current when-issued pricing, we would favor owning the parent company (LH) as we view the apparent near ending of COVID-related revenue declines and margin reversion as being priced in, with multiple expansion to that of peers providing upside potential versus the implied post-spin LH share price.
• For more details, please refer to The Spin Off Report dated June 13, 2023.

PHINA to Join S&P SmallCap 600; Spin-Off to be Completed on July 3, 2023, Maintain NEUTRAL Rating on Pre-Spin BWA

• On June 28, 2023, after the market close, S&P Dow Jones Indices announced that PHINIA Inc., the fuel systems and aftermarket business of BorgWarner Inc. (NYSE: BWA), will be added to the S&P SmallCap 600 effective prior to the opening of trading on July 6, 2023. BWA will remain a member of the S&P 500 following the spin-off.
• BWA is scheduled to complete the spin-off of PHINIA Inc. on July 3, 2023, after the market close. PHINIA is expected to trade on the NYSE under the symbol “PHIN” beginning on July 5, 2023.
• When-issued trading in PHINIA and BWA (ex-distribution) closed last night at $37.00 and $40.00 (albeit in anemic first day trading volumes), as compared to our post-spin fair value estimates of $33 per share and $44 per share. We fairly value pre-spin shares of BWA at $51 per share.
• Given limited upside to our fair value estimate, we rate shares of pre-spin BWA at NEUTRAL. On a post-spin basis, we would favor the BWA remain co. businesses as the path to electrification provides for a greater growth story versus PHINIA, granted they achieve their profitability goal on the eProducts portfolio and successfully manage their M&A integrations.
• For PHINIA, we would be incrementally positive if shares traded at a significant discount to our fair value estimate, as we do see significant cash flow generation from its product portfolio over the coming years. However, would remain cautious as the company likely does not receive a valuation multiple above low single digits given its end market exposure.
• For more details, please refer to The Spin Off Report dated June 20, 2023.

YELL down more than 20% today (dipping below $1 per share) as the company files a breach of contract lawsuit against the Teamsters union and suggests the company could be out of cash by mid-July, which would “likely force the Company into liquidation”; XPO is up ~5%     

• Today, shares of Yellow Corp. (NASDAQ: YELL) are down more than 20%, even dipping below $1 per share, on news that the company had filed a $137 million breach of contract lawsuit against its unionized labor force, which is represented by the International Brotherhood of Teamsters.  (Please see our note published last week on June 20^th for more information but as a reminder the two parties are in the midst of a contentious contract negotiation ahead of their current labor agreement’s expiration on March 31, 2024.)
• Per the company’s legal assertions, the union has blocked management’s restructuring efforts, dubbed One Yellow, which are “essential to the Company’s survival” and that “without these crucial reforms, which are standard practice in the industry today, Yellow likely will not survive, 30,000 jobs will be lost, including 22,000 union jobs, and its shareholders, including the federal government, which owns ~30.1% of Yellow stock, will be severely damaged”.  (On the latter point, YELL indicates that it had attempted to reach out directly to the Biden Administration as well as other politicians, such as Sen. Bernie Sanders in hopes of brokering a deal but to “no avail”.)
• Further, management asserted that the completion of its restructuring initiative during 2023 is “critical to Yellow’s ability to survive, particularly given that Yellow faces, among other things, the imminent need to refinance $1.3 billion of debt – a $567.4 million term loan maturing on June 20, 2024 and a $729.4 million U.S. Treasury loan maturing on September 30, 2024.”
• Anecdotally, the company indicated that it could run out of cash as soon as mid-July (a pull-forward of its previous commentary, which suggested a  cash crunch in August, at which time its creditors “will likely force the Company into liquidation”
• For the Teamsters part, union leaders have called the lawsuit “unfounded and without merit” while criticizing the struggling carrier, which “loves to cry poor”, for “paying a team of high-priced lawyers to wage a public-relations battle – all in a failed attempt to mask their incompetence”.
• As described in our note last week, assuming YELL, which generated ~$4.7 billion of U.S. LTL revenue in 2022 (but is chronically unprofitable), were forced into liquidation or even if it manages to survive (but continues to bleed market share) it would result in material market share and pricing gains for the remaining players, including XPO, Inc. (NYSE: XPO), Old Dominion (NASDAQ: ODFL), Saia (NASDAQ: SAIA) and ArcBest (NASDAQ: ARCB) as well as Fed Ex (NYSE: FDX) and TFI International (NASDAQ: TFII).
• To that end, we estimate that XPO, who in mid-2022 implemented plans to expand its overall door capacity by ~6% in key constrained markets (as well as increase its driver recruitment/training efforts) by 1Q 2024, likely has at least 5%-15% in excess truck/terminal capacity (that we assume would quickly be erased in the event of a consolidation event).
• In the case of an actual liquidation, where more than $4.5 billion of revenue is dumped into the market at once, we think the incremental margin on new freight could easily be 30%-40% (although it would likely be higher considering the pricing strength that we would expect in the wake of a bankruptcy filing).
• Even if YELL manages to survive/reorganize, we think a substantial amount of market share will likely come on to the market via customer attrition as the situation (with both labor and lenders) evolves; in this case, we assume the incremental margins on new business would be at least 20%.
• Under these assumptions, even excluding fuel surcharges, we calculate that applying a 9.0x multiple (compared with the peers SAIA and ODFL, which currently trade at ~12x and ~16x, respectively) there could ~$4-$20 per share of potential incremental upside for XPO in the event YELL’s negotiations with both labor and lenders actually devolves into bankruptcy or it manages to limp along as it has in the past (see Exhibit #1 on page 2 as well as our initial publication dated June 20^th).
• Our base case fair value, which assumes the status quo persists in terms of LTL market dynamics, for post-spin XPO is $60 per share, reflecting a 9.0x multiple on 2024E adj. EBITDA of $1.025 billion and projected net debt of $2.175 billion (see Exhibit #2 on page 3).

A quick look at the potential impact of significant industry consolidation on XPO(the now stand-alone LTL concern following the spin-offs of GXO and RXO)  

• As a purely theoretical exercise, we thought it may be interesting to examine why, besides the recent broader market rally (and the hiring of David Bates as COO), shares of XPO have demonstrated such strength in recent weeks/months even against the backdrop of relatively unfavorable underlying market fundamentals. (On the latter point, while pricing discipline has largely been maintained we would note that we have seen tonnage declines ranging from the low-single digits to the mid-teens across the industry in recent months.)
• In that context, we think it reasonable to suggest that some investors could have begun considering the potential impact of significant industry consolidation on the less-than-truckload (LTL) industry broadly and XPO, specifically, in the wake of recent reports regarding the negotiations between long-troubled LTL carrier Yellow Corp. (NASDAQ: YELL) and its unionized labor force, which is represented by the International Brotherhood of Teamsters.
• In addition to its labor issues, it seems to us that without a material improvement in the underlying demand environment the company, which sported a ~4.6x adj. leverage ratio at the end of 1Q 2023, could very likely be skirting its minimum trailing 12-month (TTM) EBITDA covenant of $200 million in 2H 2023.  To that end, while, as of 1Q 2023, YELL’s TTM EBITDA was ~$325 million it should be noted that March-quarter results were down ~35% to $34 million and over the last six-months the EBITDA generated by the company totaled only $89 million. This, along with quarter to date tonnage being down more than 16% at YELL so far in 2Q 2023 does not, in our view, suggest a robust near-term rebound in results is likely.
• Further, the company’s credit rating was downgraded from B3 to Caa1 in May 2023 and it has ~$1.3 billion of debt maturing in 2024.
• Under a broad range of assumptions, which are discussed in more detail within the report, we estimate there could ~$4-$20 per share of potential upside for XPO in the event YELL’s negotiations with both labor and lenders actually devolves into bankruptcy or it manages to limp along as it has in the past (see Exhibit #1 on page 2).

Our base case fair value for post-spin XPO is $60 per share, reflecting a 9.0x multiple on 2024E adj. EBITDA of $1.025 billion and projected net debt of $2.175 billion (see Exhibit #2 on page 4).

GTX completes the conversion of its Series A Preferred stock, simplifying the capital structure into just debt and equity (as well as providing $100 million of incremental annual net cash flow)

• Last night, after the market close, GTX completed the conversion of all Series A Preferred shares into Common shares on a one-for one basis. Holders of the former Series A Preferred shares will receive accrued & unpaid dividends through June 30^th as well as the dividends that would have accrued through September 30, 2023.  The per share payment, which is expected on or before June 20^th, is comprised of $0.144375 in cash and ~$0.104379 shares of common stock (representing $0.853509 in accrued and unpaid dividends, valued at $8.177 per share). 
• The completion of this conversion transaction (along with the early redemption of the Series B Preferred stock in June 2022) finalizes the simplification of GTX’s capital structure into just debt and equity (as well as provides ~$100 million of incremental annual net cash flow via the elimination of the 11% Series A Preferred dividend).
• Post-transaction, investors Centerbridge Partners and Oaktree Capital Management will each own ~15% of GTX’s common stock as well as each have the right to appoint 1 director (compared with ~45% combined ownership and 3 director appointments apiece pre-transaction).  Notably, the two significant investors have agreed to 50% lock-up restrictions over the next six and twelve months (and will forgo their existing Board representation rights if their respective ownership falls below 10%).
• On the fundamental front, recall GTX increased its full-year 2023 financial guidance in mid-April 2023; net sales are projected to be $3.79-$3.98 billion (versus the prior guidance of $3.55-$3.85 billion), implying constant currency growth of ~5%-10% (previously 1%-6%) with adjusted EBITDA and FCF of $585-$635 million and $315-$415 million, respectively (versus prior guides of $555-$615 million and $300-$400 million).  GAAP net income is projected to be $231-$268 million (compared with the previous range of $255-$300 million; see Exhibit 1 on page 2).  The company also increased its share repurchase authorization to $250 million (representing ~12% of the total at current levels).
• Management’s current projections assume light vehicle production of ~83 million units (up 1% year over year versus its prior commentary suggesting a flat comparison) along with a Euro/Dollar exchange rate of 1.07 (previously 1.05).  Research & Development (R&D) costs and capital expenditures are expected to be ~4.4% and 2.3% of net sales, respectively, of which 50% and 20%, respectively, will be devoted to electrical technology innovation.
• At the end of 1Q 2023, GTX had net debt of $902 million, including $291 million of cash and $1.19 billion of debt. Pro forma for a recent debt offering, the company expects a net leverage ratio of ~2.7x (compared with 1.65x at the end of 2022 and 2.3x at the end of 2021).  The company’s longer-term leverage target remains ~2.0x.
• Our base case fair value estimate for GTX remains ~$11 per share, reflecting an 8.0x multiple on our 2024E adjusted net income forecast of ~$349 million and a fully diluted share count of ~266 million (see Exhibit #2 on page 2).

MDU Completes Spin-Off of Knife River; Rate MDU and KNF at NEUTRAL with $24 and $32 Fair Value Estimates, Respectively

• MDU Resources Group Inc. (NYSE: MDU) has completed the spin-off of its aggregates-based, vertically integrated construction materials and contracting provider, Knife River Corp., into a standalone, publicly traded company. Knife River now trades on the NYSE under the ticker “KNF”.
• Shareholders of record as of May 22, 2023, received one share of KNF for every four shares of MDU owned. MDU retained a 10% ownership stake in KNF.
• We previously updated our post-spin fair value estimates to incorporate the most recent company filings, reflecting a slight update to the capital structures and shares outstanding, and MDU retaining 10% of Knife River (KNF) post-spin.
• We fairly value Knife River at $32 per share and rate shares at NEUTRAL.
• Post-spin MDU shares are fairly valued at $24 per share and also rated NEUTRAL.
• For more details, please refer to The Spin Off Report dated May 5, 2023, and UPDATE dated May 22, 2023.