• Griffon Corporation (NYSE: GFF) is a “diversified conglomerate” with three distinct businesses: (1) Home & Building Products (HBP), which manufactures garden tools and garage doors; (2) Telephonics, which builds radar and communications systems; and (3) Clopay Plastics Products (CPP), which produces high-performance plastic films.

• GFF’s three disparate businesses each have distinct manufacturing/distribution footprints, offering limited synergies, and the current corporate structure likely results in the dearth of sell-side research coverage, both of which seemingly contribute to the shares trading at a conglomerate discount. GFF trades at 8.8x F2016E EBITDA, which represents a discount to the multiples awarded the peers of each of its three businesses. On average, peers to HBP, GFF’s largest segment, trade at ~10.5x, while Telephonic and Plastics comparables trade at ~9.5x and ~9.0x, respectively. As such, a separation transaction could unlock value.

• In 2006-2007, GFF faced pressure from shareholders to pursue a wide range of actions, including a breakup, which yielded some corporate governance improvements (and a small divestiture) but failed to eliminate the conglomerate operating structure. Today, the company is not under any overt pressure to pursue strategic alternatives, but notably, its largest shareholder is Gabelli Asset Management (GAMCO), which holds a 17% stake. For its part, GFF management, which collectively owns ~12% of the outstanding shares, has anecdotally indicated that it “likes” each of its businesses as well as expressing a willingness to add to the portfolio.

• Based on peer multiples of earnings, one can ascribe value of $21 per share, $13 per share, and $12 per share to the H&B, Telephonics, and Plastics businesses, respectively. Accounting for corporate costs and net debt of ~$25 per share yields a sum-of-the-parts fair value of about $21.

On September 10, 2014, JDS Uniphase, Inc. (NASDAQ: JDSU) announced a plan to spin off its optical components and commercial laser (CCOP) business into a separately traded public company, to be named Lumentum Holdings, Inc., in the form of a pro rata distribution of 80.1% of the outstanding shares. One share of Lumentum common stock will be distributed for every five shares of JDSU held as of July 15, 2015, the record date for the transaction. The distribution date is July 26, 2015. Based on approximately 233.9 million shares of JDSU common stock outstanding as of March 28, 2015, a total of approximately 46.8 million Lumentum shares will be distributed, and approximately 11.6 million shares will be retained by JDSU. “”When issued”” trading is expected on or shortly before the record date. Because July 26, 2015 is a Sunday and not a business day, the shares are expected to be credited to “”street name”” stockholders through the Depository Trust Corporation (DTC) on the first trading day thereafter, Monday, July 27, 2015. Regular-way trading is expected to begin on July 28, 2015. Lumentum has applied for NASDAQ listing under the symbol “”LITE””. Alan Lowe, president of the Optical Components and Commercial Lasers segment, will serve as CEO of Lumentum, while JDSU’s current president and CEO, Tom Wachter, will continue to serve as CEO of the parent company, which is to be renamed Viavi Solutions, Inc. and will trade on the NASDAQ under the symbol “”VIAV””.

JDS Uniphase is a technology company with a focus on products that manipulate light waves for communications, commercial, and industrial applications. Since the heady days of the telecommunications bubble, the company has weathered the downtown and transformed itself through diversification, becoming a broad-based optical components and communications testing supplier. JDS currently operates three business divisions: Optical Components and Commercial Lasers (CCOP), Network and Service Enablement (NSE), and Optical Security and Performance Products (OSP). The spin entity, Lumentum, comprises JDSU’s CCOP division and addresses a $7.4 billion market for optical communications (85% of F2014 sales, estimated 11% four-year annualized growth rate, or CAGR) and a $2.5 billion market for commercial lasers (15% of F2014 sales, estimated 7% four-year CAGR). Lumentum’s products consist primarily of optical components and subsystems, including transceivers, amplifiers, splitters, ROADMs (reconfigurable add-drop multiplexers) for WDM (wave division multiplexing) applications, and passive components. Customers include major telecommunications, mobile, and cable network operators and network equipment manufacturers. The business generated F2014 (June) sales of $794.1 million and an operating margin of 12%.

Viavi, the parent company, will retain JDS’s NSE and OSP segments. The former addresses a $7 billion market for software and services used in the deployment and operation of next-generation Internet protocol (IP) networks, which is growing 6% to 8% annually. The company has one of the largest test instrument portfolios in the industry, spanning network and protocol and service assurance tools for use in laboratory, network, and enterprise environments. The OSP segment addresses a $1.1 billion market for anti-counterfeiting solutions for currency authentication and high-value optical components for security, safety, electronics, and other applications (also generating 6% to 8% growth). The combined NSE and OSP businesses reported F2014 sales of $949 million (1.6% year-over-year growth) and a blended operating margin of 11%.

With both businesses facing near-term challenges, including reduced spending by telecommunications service providers, intensifying competition and margin erosion, elevated research and development costs, and delayed revenue recognition on new products, JDS has suffered a series of disappointing quarterly results. As of this writing, JDSU shares trade at 1.4x EV/sales, a near-trough valuation reflecting bearish investor sentiment. For Viavi, the business remains constrained by an over 30% year-over-year decline in sales from its largest customer (widely reported to be AT&T [NYSE: T]), which has curtailed spending ahead of its merger with DirecTV (NASDAQ: DTV). With sales from this customer expected to decline another 20% next quarter (F4Q15), there is considerable nervousness concerning the near-term outlook.

Earnings leverage remains a second source of investor consternation. JDS has invested heavily in research and development and acquisitions in its service enablement business in anticipation of the shift toward software-defined networks (SDN), an emerging architecture driving more intelligent and programmable network control, which in turn requires more sophisticated analysis tools. Yet, demand has not materialized. Despite these near-term uncertainties, the long-term growth trajectory for Viavi appears very positive. As a pure-play network and service enablement story, post-spin Viavi appears well positioned to capitalize on the sustainable secular trend toward increased data center complexity and adoption of cloud technologies. In addition, Viavi may benefit from further industry consolidation, as traditional test and measurement companies seek to acquire NSE-related technology in order to capture a rapidly growing data center market. Current management has stressed on multiple occasions that there is an opportunity, following the spin-off, to consolidate the network test industry. JDSU’s nearly $9 billion in NOLs (net operating losses) is a source of value in funding potential transactions. Notably, life sciences diagnostics supplier Agilent Technologies (NYSE: A) spun off its test and measurement subsidiary Keysight Technologies in November 2014. Danaher (NYSE: DHR) is also in the process of spinning off its communications test business, which is to be acquired by Netscout Technologies (NASDAQ: NTCT).

For Lumentum, the business outlook for optical communications and commercial lasers is similarly mixed. Within the optical communications business, the best-performing piece of the business is the Datacom sub-segment (14% of F2014 sales), which is experiencing robust demand for optical transceivers required to support higher-speed data center connections. However, this growth has been offset by sluggish sales in the Telecom sub-segment (60.6% of sales), which remains constrained by reduced capital expenditures by telecommunications service providers. Demand for industrial lasers (15% of F2014 sales) has also recently fallen short of expectations, due to a short-term inventory correction. With a combination of demand weakness and margin pressures likely to remain an overhang on the optical component market, industry observers have argued for further industry consolidation, which they contend could improve overall efficiency and pricing control. Accordingly, there has been considerable speculation as to whether JDS will ultimately pursue a spin-off versus an outright sale of the CCOP business (Lumentum), with Finisar (NASDAQ: FNSR) cited as the most logical suitor. While such a combination would likely be accretive and give Finisar and JDS approximately 25% of the total optical components market, it is not without operational and execution risk, as it would increase the combined company’s exposure to the more volatile, lower-margin telecom market (with likely negative gross margin impact) and would require Finisar to raise significant debt and/or issue shares. For the purposes of this report, we assume JDS completes the spin-off as announced.

Applying comparable multiples of sales, EBITDA, EPS and assets for both the parent and spin entity, one can derive a pre-spin sum-of-the-parts fair value estimate of $10 for JDSU, comprising $5.50 and $4.78 for Viavi and Lumentum, respectively. This valuation excludes JDSU’s over $9 billion in NOLs. Post-spin, assuming a one-to-five distribution, this analysis generates an estimated fair value of $19 and $6.45 for Lumentum and Viavi, respectively. With the pre-spin sum-of-the-parts fair value estimate suggesting modest downside to JDSU’s share price at the time of this writing ($11), the risk/reward does not appear favorable at this time.

Importantly, as technology companies in highly competitive and nascent industry segments, both Viavi and Lumentum must continue to spend heavily on research and development in order to stay ahead of cost/performance curve; the former on cloud-oriented performance management solutions, and the latter on driving increasing efficiencies in next-generation 100G equipment. As a benchmark, JDSU (and its closest peer, FNSR) currently spends approximately 16% of revenues on product development while depreciating its property, plant and equipment (PP&E) by approximately 25% annually. Accordingly, a key risk lies in the timing (and magnitude) of upcoming product cycles, and these companies’ ability to capitalize on it fully with differentiated products, while being able to maximize profitability in an intense pricing environment. For JDS, free cash flow as a percentage of sales averaged 4.2% for the 2012-2014 period, compared with negative 0.26% for FNSR for the same period. Incorporating cash paid for acquisitions exacerbates this lackluster cash flow dynamic.

The bull case argument, supported by improving backlog and underlying secular trends, is that end-market softness at both Lumentum and Viavi is temporary and that applied multiples for both companies will expand as they begin to meaningfully participate in their respective demand cycles. For Viavi, the CCOP spin-off should allow for some incremental multiple expansion, as it provides the company with the liquidity to accelerate its M&A strategy. We expect Lumentum to attract more growth-oriented investors, unlike the more value-focused base of JDSU. That said, the value creation associated with the spin-off could take time to materialize, as investors become more comfortable with business trends and long-term profitability. We note that should post-spin Lumentum shares come under pressure in the months following the spin-off, the likelihood of a purchase by Finisar should meaningfully improve.

On September 30, 2014, eBay Inc. (NASDAQ: EBAY) announced a plan to spin off its online payments business, PayPal, into a separately traded public company. Devin Wenig, currently the president of eBay Marketplaces, will assume the CEO role at New eBay, while Dan Schulman, most recently the president of American Express Co.’s (NYSE: AXP) Enterprise Growth Group, has joined PayPal and will serve as CEO upon separation. The company’s debt will remain with eBay following the transaction.

Shares of PayPal Inc. will be distributed on July 17, 2015, after the market close to shareholders of record as of July 8, 2015, on a one-for-one basis. Shares of PayPal will trade on the NASDAQ under the symbol “PYPL,” with regular-way trading expected to begin on July 20, 2015.

eBay operates in three reportable segments: Marketplaces, Payments, and Enterprise. Marketplaces includes the company’s core e-commerce business eBay.com, as well as other shopping websites such as StubHub, Fashion, Motors, and Half.com, and classified websites such as Marktplaats.nl and mobile.de. The Payments segment consists of PayPal, which enables individuals and businesses to send and receive payments online and through mobile devices; Bill Me Later, which enables US merchants and consumers to obtain credit at the point of e-commerce and mobile transactions; and Zong, which enables mobile phone users to purchase digital goods. The Enterprise business provides e-commerce and interactive marketing services for merchants. The company is reportedly in the process of selling the Enterprise segment.

While management was initially hesitant to separate the two businesses, the current diverging growth trajectories now appear to justify operating under separate corporate structures. The new eBay will offer more modest growth rates, with strong cash flow generation owing to wider margins that could eventually turn into a meaningful return-of-capital story for shareholders.

PayPal has reached an inflection point where growth off of eBay is 3x the rate of on eBay, affording the company ample cash flow to continue its growth strategy, which includes acquisitions of proven and growing payment technologies. The global online and mobile payments industry is expected to experience significant growth over the next several years to the benefit of PayPal. Further, separation from one of the largest online marketplaces lessens perceived conflicts of interest and will allow for a wider array of strategic partnerships for PayPal. The faster growing PayPal should warrant a higher valuation multiple than is awarded to the entirety of pre-spin-off eBay.

The two companies will enter into arms-length agreements to maintain a relationship following the spin-off in order to preserve the mutual benefits the two entities currently enjoy, including preserving PayPal’s position as the dominant provider for purchases made on eBay.

PayPal is an attractive story for a company with high teens organic revenue growth. The company has shown the willingness to acquire in rapid growth niches, and has the potential to expand margins in what is a high-growth (albeit increasingly competitive) industry. PayPal generated revenue of $8 billion in 2014, an increase of 19% on a year-over-year basis. In the face of increasing competition from the likes of Google, Apple, and startups, PayPal has been successful in expanding transaction volume outside of the eBay ecosystem, primarily via acquisitions such as Braintree (mobile payments platform) and the recently announced Xoom (international money transfers).

eBay has matured and is not showing the growth profile of other on-line marketplaces, most notably Amazon.com and Alibaba. However, the company is a juggernaut in the industry and continues to drive increases in gross merchandise volume and significant cash flows.

PayPal is fairly valued at $33 per share based on earnings and cash flow projections, while post-spin eBay is fairly valued at $31 per share. Upside exists for PayPal to $38 per share if the company is awarded a valuation multiple in-line with MasterCard and Visa.

On a pre-spin sum-of-the-parts basis, EBAY is fairly valued at $64 per share. Given the lack of material upside from the current share price of $61.76, shares of EBAY are not recommended ahead of the transaction. Instead, we would recommend growth investors look for an entry point at a 10% discount to the PayPal fair value, while long-term investors interested in the potential for a significant return of capital story could purchase post-spin EBAY closer to the fair value estimate.

On August 5, 2014, Gannett Co. Inc. (NYSE: GCI) announced plans to spin off its publishing business into a separately traded public company via a tax-free spin-off to GCI shareholders. The publishing company will retain the name Gannett Co.; the parent entity, controlling broadcast and digital assets, will be named TEGNA Inc. (a partial anagram of Gannett) and is expected to trade on the NYSE under the symbol “TGNA”. Gannett shareholders will receive one share of new Gannett for every two shares of Gannett stock owned on the record date of June 22, 2015. New Gannett shares will begin “regular way” trading on June 29, 2015, under the symbol “GCI”. Robert J. Dickey, Gannett’s US Community Publishing president, will serve as CEO of the spin entity. Garcia Martore, Gannett’s current CEO, will remain CEO at the broadcast and digital company. The transaction is subject to final approval by GCI’s Board of Directors, the receipt of a positive opinion from tax counsel regarding the tax-free nature of the spin-off, and an effectiveness declaration of a Form 10 filing by the SEC.

The potential for Gannett to spin off its publishing assets had been highlighted in The Spin-Off Report Radar Screen since August 2013. In January 2015, Carl Icahn and affiliates filed a Form 13D announcing the nomination of two candidates for election to GCI’s Board of Directors. In addition, Icahn also recommended several corporate governance proposals that could facilitate the sale of either the parent or the spin entity post separation. Management issued a letter stating it was “surprised by Mr. Icahn’s aggressive actions,” and promised to evaluate the suggestions.

GCI is the latest major media conglomerate to separate its publishing from its broadcasting assets. The transaction is similar to recent spin-offs completed by News Corp (NASDAQ: NWSA), Time Warner Inc. (NYSE: TWX), and Tribune Media Co. (NYSE: TRCO). The announcement also follows on the heels of the recently completed spin-off of Journal Media Group (NYSE: JMG) from The E.W. Scripps Co. (NYSE: SSP), the latter of which comprises a merger and spin-off of the broadcasting and publishing businesses of Scripps and Journal Communications. The rationale for all of these transactions appears rooted in the fact that the publishing industry is undergoing significant structural changes. Advertisers are increasingly allocating budgets to online and television media versus print, pressuring traditional revenue streams. Compounding the publishing industry’s struggles has been a declining subscriber base, which is being only partially offset by increased pricing, and consumers’ aversion to paying for online content. In contrast, broadcasters have benefited from increased retransmission and political advertising cycle revenue streams. Consequently, broadcasting-focused companies trade at premium multiples relative to publishing entities (11x versus 8x EV to 2016E EBITDA).

In October 2014, GCI completed the acquisition of the 73% interest it did not own in Classified Ventures LLC for $1.8 billion. Classified Ventures owns Cars.com. The acquisition was priced at approximately 11.7x pro forma 2014 estimated incremental EBITDA contribution of $155 million. The transaction multiple would have been 9.2x assuming anticipated synergies that are expected to be realized in 2015. The Classified Ventures acquisition was financed through cash on hand and via proceeds from a $675 million debt offering completed in September 2014. The acquisition approximately doubled GCI’s digital portfolio.

TEGNA owns 53% of jobs website careerbuilder.com, and following the June 2013 acquisition of Belo Corp., the company has essentially doubled its broadcast portfolio to 46 television stations in 32 markets. Post spin, the company is well positioned to grow revenue and EBITDA, supported by robust retransmission and digital growth. The roll-out of the company’s new G/O Digital local and national digital marketing products, coupled with a strong political advertising opportunity in 2016 (the presidential election and several key Senate races), represents a positive lever for revenue growth. Moreover, there is likely to be continued upside, as over one-third of the company’s subscribers are up for renewal by the end of the year. With the business having ample room to grow before reaching the 39% FCC cap, the spin-off frees up acquisition opportunities that would have been prohibited by market ownership restrictions. TEGNA is expected to pay a dividend of $0.56 per share and have a repurchase authorization of $750 million.

For post-spin Gannett, while the continued separation of print and broadcast assets has created a potentially investable newspaper industry, potential investors may question the long-term viability of the publishing industry. The most important structural challenge threatening the industry’s viability is the ubiquity of the internet, which has caused a two-fold revenue erosion in the print publishing industry: first, from significant declines in readership (as subscribers turn toward digital media), and, second, from loss of advertising (as advertisers seek to attract more eyeballs from social and mobile formats).

Exacerbating these trends is an uncertain economy. Traditionally, advertising and marketing spending is viewed as discretionary, and these budgets are often cut to align expenses during economic slowdowns. With unemployment little changed since October 2014 at 5.5%, limited credit availability and a cautious consumer spending environment are likely to keep prospects for a robust economic recovery relatively low for now. While publishers have attempted to stem the impact of subscriber loss with such tactics as increased subscription prices and bundled digital subscriptions, the resulting incremental revenue growth appears to have been short-lived, leaving the industry to struggle with a long-term strategy for sustainably monetizing digital versions of traditional print publications. Accordingly, in the near term, post-spin GCI shares appear to be more of a structural and operational improvement story. Despite a nearly debt-free balance sheet and a focused management team, the overall secular challenges facing the newspaper publishing industry (advertising and circulation) will likely remain an overhang on the story, and if the historical precedent for recent broadcast/publishing spin-offs serves as an indication of post-spin performance, the shares are likely to remain under pressure, as existing holders most likely will gravitate toward the improving operational performance and healthier demand drivers of the broadcast/digital parent entity, while positioning GCI as a value/contrarian investment story. Without acquisitions or new growth from new digital products, Gannett is likely to continue ceding share to digital media alternatives, resulting in estimated year-over-year revenue declines in the high single digits beginning in 2015, with EBITDA margins essentially flat in the 10% range.

The bull case for Gannett rests in the opportunity, similar to that also available to its national publishing peers, to find a commercial formula that monetizes a global potential addressable market for its brands. Moreover, with competition escalating and print advertising spending expected to continue their decline, the newspaper industry is likely to consolidate further, potentially making post-spin GCI an attractive asset—particularly if the company can stabilize the business by improving margins and cash flow. Importantly, GCI has an opportunity to employ a strategy made successful by New Media Investment Group (NYSE: NEWM), which is actively acquiring publishing opportunities in smaller markets. NEWM shares have traded up 27% over the past 12 months (versus 8% for the S&P 500) as management has successfully executed its strategy of becoming a small-market publishing roll-up. The potential for GCI’s publication USA Today to interact with its smaller market publications also has yet to be more fully exploited.

Based on an analysis of estimated 2016 EBITDA, EPS, free cash flow, and potential dividend yield, a pre-spin sum of the parts estimate of $35 for GCI can be derived (including minimal value attributable to the 1.5% ownership stake in post-spin GCI), which consists of $28 for TEGNA and $7 for Gannett. Post-spin TEGNA will retain a 1.5% interest in Gannett, which is necessary because the CareerBuilder LLC agreement requires a minimum 1% economic and voting stake to be retained in order for the parent to negotiate a modified affiliation agreement (the agreement can be for up to five years). With the pre-spin fair value estimate representing a 5% discount to GCI’s current price (approximately $37 as of this writing), this analysis suggests the shares are fully valued. For TEGNA, the $27 fair value estimate represents a multiple of 8.6x estimated 2016 EBITDA (accounting for 53% of CareerBuilder earnings). Post-spin, Gannett can be fairly valued at $14, based on a 1:2 distribution ratio (113.4 million shares outstanding). While there are some modest incremental drivers in both businesses (most notably, the potential for accretive M&A), we believe near-term caution is warranted given the post-spin performance of other recent publishing/broadcast separations (e.g. Tribune, Scripps). In addition, for TEGNA, the company has not begun paying reverse compensation to CBS and NBC on over a third of its pay-TV households, which are up for retransmission contract renewal at the end of 2015. TEGNA must negotiate reverse compensation, which may meaningfully offset profitability.

On September 28, 2014, NiSource, Inc. (NYSE: NI) announced that its Board of Directors had approved a plan to separate its gas and electric utility and its natural gas midstream transmission and storage operations into two distinct, publicly traded companies via a tax-free spin-off. The spin entity, Columbia Pipeline Group, Inc., is expected to be listed on the NYSE under the ticker CPGX and will be a C-corp entity serving as the pipeline corporate parent. The spin-off is expected to take place on July 1, 2015, with CPGX to begin trading on July 2, 2015. Separately, NiSource announced plans to file an S-1 for an initial public offering (IPO) of a midstream master limited partnership (MLP). This offering of Columbia Pipeline Partners, LP (NYSE: CPPL), the largest MLP IPO on record, raised $1.2 billion and, comprising a 53.5% limited partner interest, was completed on February 5, 2015.

All of NiSource’s pipeline assets (midstream and storage) will be housed in an operating company, Columbia Pipeline Operating Company (OpCo), with various ownership interests, initially split an estimated 85%/15% between CPGX and Columbia Pipeline Partners (CPPL); CPGX plans to sell additional ownership to CPPL over time (via multiple transactions) to drive additional growth at the MLP and transition itself into a pure-play general partner.

The distribution of CPGX common stock is expected to be made after the close of trading on the NYSE on July 1, 2015, to NiSource shareholders as of the record date of June 19, 2015. NiSource shareholders will receive one share of CPG common stock for every one share of NiSource common stock held as of the record date. A “when issued” public trading market for CPGX common stock under the symbol “CPGX WI” is expected to begin on or about June 17 on the NYSE and continue through the distribution date. On July 2, 2015, the expected first day after the distribution date, CPGX will begin “regular way” trading on the NYSE under the symbol “CPGX.”

With a prime midstream footprint in one of the nation’s most strategic and productive basins (Marcellus/Utica going east and south), and an expected 20% EBITDA growth rate and a 15% dividend growth rate through 2020E (supported by sizable long-term, fixed-fee investments), CPGX has one of the highest and most visible growth stories in the midstream space. Upon separation, taking into account its unique structure with CPPL, CPGX will be characterized by premium EBITDA and dividend growth and by stable and predictable cash flow, given that its revenues are 95% fee based.

In addition to creating three distinct investment vehicles (MLP, utility, and midstream), which can better capture dedicated investment profiles, the spin-off appears to demonstrate good stewardship of shareholder capital, as the market currently values MLPs considerably more highly than utility assets. The spin-off also follows a much broader trend of disaggregation of integrated energy businesses—particularly as the rising demand for natural gas in the U.S. has increased demand for efficient midstream services. Most notably, ONEOK, Inc. (NYSE: OKE) spun off its natural gas distribution business, ONE Gas, Inc. (NYSE: OGS), in February 2014. The transaction has also been well telegraphed, with management having been very public about the need for an equity raise in mid-2015 to fund the level of capital spending expected in the company’s utility business, where over $30 billion of infrastructure investment opportunities have been identified. The IPO of CPPL supplants the need for an equity raise at the utility parent, while the separation of businesses allows the spin entity, CPGX, to retain control over its pipeline assets by retaining the general partner (GP) interest. Through its wholly owned subsidiary Columbia Energy Group (CEG), CPGX will own CPPL’s GP and all of its incentive distribution rights (IDRs) and subordinated units, which represent the remaining 46.5% limited partner (LP) interest in CPPL. For CPGX, the MLP provides an extremely attractive primary source of financing to help fund the company’s over $10 billion backlog of growth projects over the next 10 years. The company is expected to generate best-in-class EBITDA growth of 20% through 2020. As its pipeline assets grow, MLP distributions will increase through the GP IDR structure, providing CPGX incrementally more cash flow. This structure gives CPGX a vehicle for incremental cash flow without its having to finance growth entirely on its own.

For post-spin NiSource, the separation of the midstream business leaves the company a pure-play, fully regulated gas and electric distribution entity with a premier footprint, serving more than 3.4 million natural gas customers in seven states. NiSource is outgrowing utility peers owing to its attractive, balanced regulatory environments and bolstered by well-documented multi-billion-dollar infrastructure replacement and modernization programs. The size and universality of these modernization programs represent attractive features for low-risk-tolerant investors targeting a higher yield combined with modest single-digit growth. Importantly, NiSource is unique in its balanced regulatory jurisdictions, which allow a meaningful amount of capital expenditures to be governed under automatic rate-adjustment mechanisms, or trackers, which guarantee a pre-specified rate of return, thereby reducing much of the regulatory uncertainty associated with return on investment. Most of NiSource’s jurisdictions are earning their allowed ROE (return on equity). These attributes should allow the company to sustain above-industry earnings growth and yield potential. With an approximately $3 billion pre-spin debt recapitalization planned (CPGX will issue long-term debt to repay $1,025 million of intercompany debt and make a $1,450 million one-time payment to NiSource), NiSource will significantly reduce its debt load while generating above-average annual earnings and dividend growth of 4% to 6%—supported by rate base growth associated with an identified $30 billion of infrastructure investment opportunities. Importantly, post-spin NiSource can refocus on distributing cash flow to shareholders, as opposed to directing cash flow into a more capital-intensive pipeline business. Accordingly, the spin-off should also result in more predictable margins—bolstering the argument for further dividend increases over time. A multi-decade pathway for organic growth given the magnitude of infrastructure investment potential, coupled with a recent uptick in utility-related merger and acquisition activity, also introduces the potential for further sector consolidation and renders NiSource a potential acquisition candidate in the longer term.

Based on recent performance of MLP and yieldco offerings, parent companies tend to perform well ahead of an official announcement, but tend to stagnate around the timing of the formal announcement and for a period after the transaction. Notably, NI shares have outperformed the S&P 500 as well as diversified peers over the last 12 months (+21% versus +7% for the S&P 500; YTD +9% versus +2%) as investors seeking steady, growing, and low-risk returns have anticipated the value unlocking associated with the MLP formation and the broader impact of the company’s large utility modernization programs and pipeline growth projects. Our $50 price target, which comprises $18 in value from NiSource (ex Midstream) and $32 for Columbia Pipeline Group, is derived via a combination of (1) a sum-of-the-parts analysis, which aggregates standalone valuations for NiSource’s collection of businesses by ascribing multiples to 2016E EBITDA and EPS for each of the company’s segments, and (2) a target yield analysis. This price target suggests 9% upside to NI’s current price (approximately $46 at the time of this writing). At $18, NiSource remainco (ex Midstream) would implicitly trade at an EV/EBITDA multiple of 12x, a 47% premium to diversified utility peers, at 8.3x. These premiums appear to sufficiently reflect NiSource’s higher earnings and dividend growth rate and significantly reduced regulatory risk. At $32, post-spin CPGX would trade at a 2016E EV/EBITDA multiple of 16x, a 10% premium to peers, reflecting premium EBITDA and dividend growth metrics. Going forward, execution on the company’s many growth projects (many of which go into service by late 2018) represents a key catalyst for the shares. Management’s primary focus will be to finish on time and within budget. Moreover, while the long-term track record of MLPs has been solid, the sector has not experienced a broad Federal Reserve tightening cycle; rising interest rates could put pressure on MLP yields. Deviations in assumptions regarding regulatory outcomes, interest rates, capital costs, MLP drop-downs, and project execution could also alter fair value estimates going forward.

• Nationstar Mortgage Holdings (NYSE: NSM) is a mortgage and real estate services company with three main business segments: Mortgage Servicing; (2) Mortgage Originations; and (3) Solutionstar, which provides real estate services including titles, appraisals, closings and auctions. Solutionstar will be renamed Xome and launch a web and mobile platform that could be compared to Zillow or Realtor.com but with transaction capabilities.

• Solutionstar, formed in 2012, is a rapidly growing and highly profitable asset that is undervalued within NSM’s core mortgage business, which has experienced earnings volatility as well as regulatory scrutiny in recent years. Real estate services companies trade at 15x 2016E EPS, which is about a 50% premium to the ~10x multiples awarded mortgage finance servicing comparables. NSM, for its part, trades at about 7.5x 2016E EPS and about 1.05x current book value.

• NSM began breaking out results for the Solutionstar segment in 3Q14, and with the impending launch of Xome, as well as the possibility of a third-party capital injection later this year, we believe it is becoming increasingly likely that NSM will move to monetize the business at some point, via a spin, sale, or IPO. Notably, in 2009, Ocwen Financial (NYSE: OCN), a mortgage servicer, spun off Altisource Portfolio Solutions (NASDAQ: ASPS), a real estate services operation, to considerable initial success, which has been somewhat offset by regulatory/operational troubles at the former parent. Still, at $27.10, shares of ASPS trade almost 70% above their $16 debut (albeit well off the 2013 high of $169).

• Based on peer multiples of earnings, one can ascribe value of $18 per share and $6 per share, respectively, to NSM’s Servicing and Originations businesses and about $17 per share to Solutionstar. Accounting for corporate costs of ~$14 per share yields a sum-of-the-parts fair value of about $27, suggesting ~40% of upside.

On April 30, 2014, Energizer Holdings Inc. (NYSE: ENR) announced plans to separate into two standalone publicly traded companies: one a personal care company and one a household products business. Shares of the household products company (“New Energizer”), which will retain the Energizer Holdings Inc. name, will be distributed via a tax-free distribution of shares to ENR shareholders. The parent company will be rebranded Edgewell Personal Care (“Edgewell”) and will trade on the NYSE under the symbol “EPC”.

Shares of New Energizer will be distributed to ENR shareholders of record as of June 16, 2015, on July 1, 2015 before the market opens. Shares of New Energizer and Edgewell Personal Care will trade on a “when issued” basis beginning on June 12, 2015, under the tickers “ENR WI” and “EPC WI”, respectively. Shareholders of record will receive one share of New Energizer for every share of ENR held as of the record date.

The two segment heads will become CEOs of the respective companies. David Hatfield will serve as CEO of Edgewell, and Alan Hoskins will be CEO of spun-off New Energizer. Current ENR CEO Ward Klein will become Executive Chairman of Edgewell, whose leading brands include Schick shavers, Edge shaving cream, and Playtex feminine products, as well as Banana Boat and Hawaiian Tropic sunscreens. Household products included in New Energizer include Energizer and Eveready branded products as well as portable lighting products.

The separation makes sense from the point of view that the growth trajectory of the personal care business is opposite to that of the household products business. Personal care has opportunities for growth through increased penetration in international markets and via acquisition. The household products business, dominated by the sale of batteries, operates under the overhang of demand that is shrinking, albeit modestly, and it could be managed to maximize cash flow while maintaining market share and returning capital to shareholders. In this view, ENR’s separation can be compared to the recent wave of spin-offs conducted by media companies jettisoning their newspaper businesses, which were in the midst of a more pronounced secular decline, in favor of the growing television and broadcast businesses. The stagnant household products business has been a drag on the company’s valuation multiple as ENR shares have traded roughly in line with household product peers, which have traded at a discount between 20% and 30% versus personal care peers over the past five years. With personal care competitors trading at a premium to the slower-growth household competitors, the separation should allow each company’s valuation multiple to be rerated. The obvious benefit of the rerating is that the personal care business, which has been the beneficiary of almost all of ENR’s acquisitions since it became a public company in 2000, should be able to lower its cost of capital for funding future transactions.

New Energizer, with its heavy exposure to consumer battery sales, has no pure-play public competitor, and has lost share in recent years due to competitive pricing from competitor Duracell. The Procter & Gamble Company (NYSE: PG) has entered into an agreement to sell its Duracell business to Warren Buffett’s Berkshire Hathaway Inc. (NSE: BRK-A, BRK-B). Under new stewardship, a normalization of industry pricing is likely to occur, given BRK’s history of managing businesses for cash flow versus market share. A reset of the competitive environment should slow sales losses for Energizer and improve cash flow generation. Based on peer comparables and cash flow generation, post-spin New Energizer can be fairly valued at $42 per share. The stable cash flow generation potential of the battery business could be an attractive asset to financial suitors down the road. Based on a leveraged buyout scenario with arguably conservative assumptions, upside for New Energizer exists to $57 per share, although it must be noted that a potential takeout is not likely to occur in the near term, in order to preserve the tax-free nature of the spin transaction. While the near term probability of a takeout of New Energizer is not high, the 2- to 3-year time horizon can be viewed as a positive in that it assists in the creation of an equity yield curve. Based on the derived fair values and upside scenario, the potential annual returns are 10% – 15%, which does not account for potential share repurchases, debt retirement, or exceeding operational targets that could result in increased returns.

Edgewell Personal Care’s go-forward strategy includes accelerating top-line growth, systemic cost reduction, and generating substantial free cash flow, in addition to conducting selected acquisitions. Domestic revenue has disappointed recently, as declining sales of legacy products have been only partially offset by new product sales and international growth. To compound the company’s domestic sales decline, the current impact of a weaker U.S. dollar is offsetting some of the international growth currently being experienced. Assuming a return to modest top-line growth (2%) and margin expansion from continued cost cuts and plant rationalization, Edgewell Personal Care can be fairly valued at $101 per share based on peer multiples and cash flow generation.

It has been widely noted in the financial press and investor circles that Edgewell could be an attractive takeout candidate for a strategic buyer due to its market-leading brands and cash flow generation, added to a growing international presence. The structure of the spin-off of New Energizer, with Edgewell being the legal parent entity, places much fewer restrictions on a potential acquisition of Edgewell in the near term. Indeed, ENR was spun off from Ralston Purina in 2000, with the parent (Ralston) being acquired within approximately a year and a half after the transaction. Framed in that manner, Edgewell probably is awarded a premium multiple, which may explain ENR’s share price performance since the spin announcement. The shares have appreciated approximately 40% since the announcement, versus 16% for the S&P 500, implying that shares of Edgewell may already price in a takeout.

On a pre-spin basis, ENR can be valued at $144 per share, with upside to $158 based on a future potential takeout of New Energizer. Given the viewpoint that the current share price incorporates a takeout premium for Edgewell, shares of ENR are not recommended prior to the spin. Instead, we believe investors should look for attractive entry points in New Energizer following the spin-off. As a point of reference, after the 2000 Ralston/Energizer spin-off, shares of ENR underperformed the S&P 500 over the first three months of regular-way trading, before significantly outperforming in the first two years of regular-way trading.

FirstService Corporation, a Canadian real estate services company, announced on February 10, 2015, its intention to separate into two publicly traded corporations. The parent company will be renamed Colliers International Group Inc (with CIG CN as the new ticker) and will focus on commercial real estate, while the new entity will take the FirstService Corporation moniker (ticker NFS CN) and offer residential property management and services.

The transaction has been approved by shareholders and has received a favorable tax ruling from the Canada Revenue Agency. Shareholders as of May 29, 2015, are entitled to receive one new FirstService share for each share owned. Shares of the two independent companies will start trading on June 2, 2015. Upon the consummation of the spin-off, FirstService’s CEO, founder and largest shareholder, Jay Hennick will take over the role of Executive Chairman at Colliers International and of Chairman at New FirstService.

The spin-off will separate two companies that, despite operating in the same industry, have different operating models. Colliers International is pursuing aggressive growth and is dependent on real estate transactions for a good portion of its revenue. New FirstService has struggled to grow—on the other hand it has a high degree of recurring revenue. Furthermore, the two separate entities will be in a position to optimize their divergent capital structure and capital allocation strategies, including shareholder return and acquisition policies.

Colliers International is a global leader in commercial real estate services and one of the fastest growing companies in the sector. Its service offerings include brokerage, valuation, project management and leasing. It has a global presence and a diverse revenue base. Its revenues, however, are subject to volatility caused by the dependence on real estate brokerage—both leasing and sales—i.e., on dealmaking activity.

The company has managed to increase its revenue and EBITDA rapidly over the past decade. Aggressive expansion is indeed Collier’s focus. However, 2015 appears to offer a pause, as various challenges, including a strong US dollar, are expected to moderate the pace of revenue growth. Consistent with the low degree of earnings visibility, the company targets a net debt-to-EBITDA ratio of 1x to 1.5x. It also expects to distribute USD 8 cents per share as an annual dividend.

Based on comparable enterprise value-to-EBITDA multiples, Colliers International can be valued between CAD 50.4 and CAD 54.3 per share. However, a closer look at the profit attributable to its common shareholders and its free cash flow generation reveals a less positive outlook. Thus, even at a rather high 5% free cash flow yield or at price-to-earnings multiple of 18x, Colliers International’s shares should be valued between CAD 33.2 and CAD 35.

The new FirstService Corporation will offer residential real estate property management—through FirstService Residential—and property services—through FirstService Brands. FirstService Residential is one of North America’s largest managers of residential communities. Its sales are contractual, with a high degree of recurring revenue and a 95% retention rate. FirstService Brands provides essential property services such as painting, window cleaning and maintenance though a network of affiliated companies. While demands for such services is less volatile compared to FirstService Residential, the group operates primarily as a franchisor, thus smoothing top-line fluctuations.

Unlike Colliers International, the new FirstService will operate exclusively in North America. Despite recent lackluster EBITDA growth, expectations for 2015 are positive, aided perhaps by the absence of currency exchange rate issues. Given long-term mediocre growth expectations as well as earnings and revenue stability, new FirstService’s capital structure and capital allocation policies will focus on higher leverage—with a target net debt-to-EBITDA between 2x and 2.5x—and an increased dividend payout ratio. New FirstService is aiming for an annual dividend of USD 40 cents per share, an amount equal to the pre-spin entity’s cash distribution.

Valuing the new FirstService Corporation can be problematic in the absence of publicly-traded peers. As the company’s growth rate is expected to be lower than that of Colliers, one can simply apply a lower enterprise value-to-EBITDA multiple or free cash flow yield—resulting in a valuation between CAD 13.9 and CAD 22.2 per share. Additionally, due to its focus on shareholder returns, new FirstService could be valued on a dividend yield basis; for the company to yield slightly above Canada’s benchmark index, its stock would be valued, at a 3% yield, at CAD 16.5.

Cheung Kong Holdings Ltd, the Hong Kong-based conglomerate controlled by Asia’s richest man, Li Ka-shing, announced on January 9, 2015, its plan to merge with its publicly-traded subsidiary Hutchison Whampoa Ltd (13 HK) and rename itself CK Hutchison Holdings Ltd (1 HK). Subsequent to the merger, CK Hutchison will spin off its property operations through the distribution of shares of Cheung Kong Property Holdings Ltd (1113 HK).

The reorganization of the Li Ka-shing empire involves four steps, with the actual demerger being the last one. Firstly, Cheung Kong Holdings became a wholly-owned subsidiary of CK Hutchison Holdings—with shareholders exchanging their shares in Cheung Kong for new shares of the new entity on a 1:1 ratio. As of the date of this report, the reorganization has been completed and trading in Cheung Kong shares has ceased, while CK Hutchison Holding has begun trading using its predecessor’s ticker 1 HK. The second step is the Husky Exchange: a Trust controlled by Li Ka-shing will exchange a 6.24% interest in Husky Energy Inc (HSE CN), a Canadian oil and gas producer, for approximately 84 million CK Hutchison shares. Consequently, Li’s Husky holdings will decline to 29%, while CK Hutchison will own—inclusive of Hutchison Whampoa’s existing holdings—40%.

Following the series of transactions, CK Hutchison will separate its real estate business into a newly created entity, CK Property. The last day of trading in the parent company shares on a cum-distribution basis is May 26. Shareholders as of that date will receive one new CK Property share of every CK Hutchison share owned. Trading in the new company’s securities is expected to commence on June 3, 2015.

The spin-off will remove CK Hutchison’s layered structure, since the company is invested in a wide array of companies both directly and through, or sometimes alongside, 50%-owned Hutchison Whampoa. The ownership structure of both corporations will also be simplified. Li Ka-shing’s holdings will be merged, and he, his family and his trusts will control 30 percent of each new entity. Moreover, the spin-off will create two more focused companies; CK Hutchison, a traditional investment conglomerate and CK Property, a real estate company. Thus, investors will be able to elect whether they would like be invested in Li Ka-shing’s property empire, an option that is not available under the current structure, as both Cheung Kong Holdings and Hutchison Whampoa have significant real estate assets. Besides the additional investor flexibility, the creation of a pure-play real estate company will assist analysts in better understanding the real value of the company. While this does not strand true for CK Hutchison, which will continue to operate in a wide variety of sectors, CK Property’s value will be more easily assessed. It is noteworthy that after the spin-off announcement, the gap between Cheung Kong’s market and book value was eliminated, the shares appreciating by over 20%.

The real estate spin-off is also likely part of Li Ka-shing’s plan to reshuffle his holdings. In years past, the billionaire has seen a lack of opportunities in his native Hong Kong. For example, the city-nation’s property prices have appreciated to levels that do not appear sustainable. The billionaire’s recent transactions seem to verify that thesis; in 2014, publically-traded subsidiary Power Assets Holdings Ltd (6 HK), a global power generation company owned through Hutchison Whampoa’s Cheung Kong Infrastructure Holdings, spun off through an IPO its Hong Kong utility arm HK Electric Investments Ltd (2638 HK). The result of such transactions is the reduced, diluted stake of Li Ka-shing and his conglomerates in Hong Kong subsidiaries. On the other hand, his companies have been expanding in other areas, such as European telecommunications and aircraft leasing.

Following the merger with Hutchison Whampoa and the subsequent spin-off of the real estate business, CK Hutchison will be a diversified conglomerate with interests spanning retail, infrastructure, port services, energy and telecommunications, among others. Its operations will be conducted through a network of private and public subsidiaries. Despite their diverse nature, most of CK Hutchison’s operations share some common traits: stable revenue, strong cash generation. Given that the majority of the pre spin entities’ exposure to China and Hong Kong was through their property businesses, CK Hutchison will derive only 16% of its EBITDA from these two regions. Europe will be the company’s top contributor, with a 49% share of EBITDA, mainly due to the retail, infrastructure and telecommunication subsidiaries that operate in the continent. As Li Ka-shing reduces his exposure to his native country—by divesting Hong Kong assets such as HK Electric Investments—and increases his investment in other regions, the geographical revenue and EBITDA mix is expected to shift even further away from the Asian city-state.
Using a sum-of-the-parts valuation based on trading multiples, precedent transactions and existing market valuations, one arrives at a fair value of HKD 144 per CK Hutchison share. A more conservative estimate of the company’s infrastructure, telecommunications and port services divisions leads to a valuation of HKD 115 per share, while a more aggressive approach results in a price of HKD 159 per share.

Cheung Kong Property Holdings will engage in property development, property rentals, hotels and serviced suites and property and project management. Additionally, it will own stakes in a number of publicly-traded REITs. Property development—primarily of residential buildings—will comprise the company’s main source of income, followed by rents generated by its investment properties. The vast majority of CK Property’s real estate, land and developments is located in China and Hong Kong. While both Cheung Kong’s and Hutchison Whampoa’s real estate divisions have performed exceptionally well in the past and own some of the most iconic buildings in Hong Kong, investors could be concerned by the state of China’s and Hong Kong’s real estate markets. The former can be affected by the numerous risks threatening the Chinese economy, including, but not limited to, a high level of real estate debt and a sizable shadow banking system. In Hong Kong, prices have been trending upwards for over 10 years, pushing valuations to record levels. As the economy struggles to grow, such low real estate yields appear unsustainable.

The greatest short term risk to CK Property’s investors would be Li Ka-shing’s gradual exit from his 30% stake. In fact, through the reorganization of his holdings, the billionaire has effectively reduced his exposure to real estate: His main holding is Cheung Kong, a company that derives a significantly greater proportion of its income from real estate compared to Hutchison Whampoa. After the combination of the two entities, investors in Cheung Kong effectively increase their exposure in industries such as telecommunications and retail—at the expense of real estate—while the opposite happens to Hutchison Whampoa shareholders. Li’s stake in Cheung Kong stands at 43%, compared to a 2.5% stake in Hutchison Whampoa.

That being said, CK Property will have a very solid balance sheet, with a net debt-to-capital ratio of only 13.5%. Furthermore, the company’s real estate assets are valued on its balance sheet at a HKD 145 billion discount to their recently appraised value. As a pure-play real estate company, CK Property is expected to trade at par with its book value of HKD 66 per share. Most of the company’s peers, however, trade at a 15% to 20% discount to their book value. A comparables valuation approach results in a price of HKD 54 per share. Is should be noted that CK Property deserves a premium valuation care of its shrewd owner-operator and low leverage. Lastly, the company’s estimated net asset value—including the valuation surplus estimated by real estate appraisers—is HKD 376 billion, or HKD 98 per share.

On November 5, 2014, after the market close, The Babcock & Wilcox Company (NYSE: BWC) announced plans to spin off the company’s Power Generation business into a standalone public company via a tax-free distribution of shares to BWC shareholders. The new standalone company, which will retain the Babcock & Wilcox corporate name and will be listed on the New York Stock Exchange under the symbol “BW”, is an industry leader in the power generation market, having installed roughly 40% of all coal-fired boilers in the U.S., and provides fossil and renewable power generation equipment for power and industrial uses. The parent entity, to be renamed BWX Technologies, has been a specialty manufacturer of nuclear components, and is the sole provider of core reactors and fuel processing for the U.S. Navy. The company is one of a few operators that can enrich uranium and provide services relative to either the commissioning or decommissioning of nuclear weapons. The separation is expected to be completed by early 3Q F2015, and is subject to an effectiveness declaration of the company’s Form 10 filing with the SEC, regulatory review by the Nuclear Regulatory Commission (NRC), and final Board approval. E. James Ferland, the current CEO of BWC, will assume the CEO role at the spin company (“New BWC”); John A. Fees, BWC’s current Chairman, will become Chairman of BWX Technologies (“BWX”); and Peyton Baker, President of the current Government & Nuclear Operations group, will assume the CEO role at BWX Technologies.

The spin-off has been contemplated by B&W for some time, given the vastly different revenue and earnings profile of these businesses. The company indicated in October 2014 that it was evaluating a separation of its Power Generation and Government & Nuclear operations. This move followed the May 1 filing of a 13D by activist investor Blue Harbour, indicating it held about a 6% stake at the time; among other proposals, the investor called for a separation of the underperforming Power Generation business from the core nuclear assets as well as improvements in capital allocation policies. Notably, Blue Harbour has suggested that the company increase its debt levels and use the proceeds to reduce the number of shares outstanding, estimating that for each turn of debt-to-EBITDA leverage, the company could reduce outstanding shares by 20%. Other large, but passive, investors in B&W include T. Rowe Price, Starboard Value, Glenview Capital, and Greenlight Capital.

Historically, BWC shares have been somewhat overlooked by investors owing to the company’s unusual composition, misrepresentation as an E&C (engineering and construction) company (which overlooks the significant value of the Nuclear business), and exposure to challenging government, coal, and nuclear end-markets. That said, the nuclear-related business, which will become BWX post separation (and is likely to garner a higher multiple) is the dominant player in the market, with long-standing relationships with the U.S. government. Indeed, there does not appear to be a significant competitor to the company’s nuclear and government operations, owing to the highly specialized nature of this work and the requisite security clearances—making relative comparisons difficult and resulting in a discounted valuation under the current corporate structure. The power generation business, or “New BWC” post-spin, consists largely of coal-fired boilers, which have been in decline over the past several years, consistent with the lack of new investment in coal power generation in the United States, sustained low natural gas prices (causing utilities to switch from coal to gas), and overall customer conservation efforts and improvements in efficiency. That said, a growing international opportunity is expected to become the dominant growth vehicle going forward. Unlike the near-monopoly status enjoyed by the parent company in the Nuclear business, the Power Generation business competes with a variety of E&C companies.

We recommend BWC shares for purchase ahead of the spin-off, which should create meaningful incremental value. Based on an analysis of estimated 2015 revenue, EBITDA, assets, and historical acquisition multiples for both the parent and spin entities, a pre-spin sum-of-the-parts valuation of $40 per share can be derived, consisting of $11 for New BWC (Power Generation) and $29 for BWX Technologies (Government & Nuclear). This pre-spin fair value estimate represents 20% price appreciation from current levels, suggesting that the market is underestimating the implied value of these businesses. Moreover, our analysis excludes several potential upside levers. First, we assign no incremental value to the company’s mPower small-scale nuclear module program, which is likely overly conservative given that the company has invested in excess of $300 million in this initiative and could sell it or find another financial partner. Additionally, there is a potential for incremental profitability owing to restructuring and other spending reductions, coupled with share repurchases (which will likely remain a core part of the company’s capital allocation strategy).

Since the announcement of the planned separation, BWC’s earnings results have consistently exceeded expectations, suggesting that the decision to separate was partially rooted in increasing optimism surrounding each of the businesses. Neither entity is a traditional E&C company, and each carries significantly less project and execution risk than oil- and gas-centric E&C companies. Following the spin-off, we expect New BWC to continue to build on recent momentum, with revenue and margin expansion increasing throughout the year. There is some fundamental risk to the story, given the uncertain growth profile of the international business, coupled with continued deterioration in the domestic coal power market and headwinds associated with lower oil prices and currency. However, revenue guidance of 15% appears conservative in light of strong backlog (which at $2.5 billion stands at the highest levels since early 2012) resulting from an expanding international coal and waste-to-energy (WTE) project pipeline. Moreover, with margins likely to improve progressively throughout the year, EBITDA margin guidance of 9%-10% appears low, considering the potential for incremental restructuring benefits from the company’s Global Competitiveness Initiative (GCI) to streamline operations, revenue leverage from a growing pipeline, and $7.5 million of non-recurring costs in the 2014 base. Longer term, post-spin BWC should benefit from an expanding pipeline of international coal and WTE opportunities. Similarly, post-spin BMX Technologies remains an attractive holding given the long-term nature of its government contracts, strong margin, and expanding cash flow profile. The company should continue to benefit from continued strength in Nuclear Operations, which has been executing above plan—a highly consistent business with significant barriers to entry. Although management has guided to gross margin slippage in its Nuclear Operations business from 20% to the high-teens again in 2015, this could be conservative given strengthening backlog and top-line leverage, absence of non-recurring costs, and incremental productivity savings. Notably, management has guided for Nuclear Operations gross margins in the high teens for the past several years, and has consistently delivered in the low 20s.

With the government and power businesses operating as independent companies, we think it is possible over time that both entities will become attractive acquisition candidates. While the tax-free spin structure could be a complication, it is worth highlighting the scarcity value of the BWX Technology assets in particular. As the sole supplier to the U.S. Navy for nuclear propulsion system components (which refuel the U.S. Navy’s nuclear-powered vessels), post-spin BWX Technologies could draw interest from a number of defense companies or larger diversified E&C peers. In particular, the two most likely acquirers appear to be Huntington Ingalls Industries, Inc. (NYSE: HII) and Lockheed Martin Corporation (NYSE: LMT), given their involvement in other U.S. Navy programs. Notably, Huntington Ingalls’ Newport News Shipbuilding division constructs Virginia-class submarines and Ford aircraft carriers—two key platforms for Babcock’s propulsion system technology. Similarly, New BWC, as a leading provider of aftermarket services and environmental equipment to the coal-fired market (historically a 25%-30% market share), could draw interest from a number of potential suitors, including manufacturers of coal-fired power plant equipment looking for further penetration in growing international markets (e.g., Asia, Eastern Europe) or seeking greater exposure to environmental equipment and WTE technology. While the above comparable valuation analysis is largely based on in-line multiples, it is worth noting that longer term, both companies may garner a premium valuation owing to their scarcity value.