• Pitney Bowes (NYSE: PBI) is a business services company providing hardware, software, and services in support of physical and digital communications. PBI has three main operating segments: (1) Small & Medium Business solutions (SMB), which was 54% of sales in 2014; (2) Enterprise Business solutions (24%); and (3) Digital Commerce solutions (22% of 2014 sales).

• The company’s three business segments have distinct client sets, strategic intents, and financial models. Thus, the more mature SMB and Enterprise segments, which are battling a secular decline in the use of physical mail, are managed for cash and financial returns, while Digital is managed for growth. Despite a dearth of perfect comparables, it is evident that the market assigns divergent valuations to growth-oriented companies such as Stamps.com, which trades at 15x 2016E EBITDA, versus more mature peers such as Xerox and Neopost, which trade at 7x-8x. PBI, for its part, currently trades at about 7x 2016E EBITDA.

• While PBI has been active on the acquisition/divestiture front in recent years, it could, at some point, face activist pressure, as did Gannett and Hewlett-Packard, to separate mature businesses perceived to be in secular decline from faster-growing assets. Indeed, the stock’s relative underperformance over the last 1-, 3-, and 5-year periods could provide ammunition for criticism. Notably, Iridian Asset Management, a value/cash-flow-focused investor, is PBI’s largest shareholder with an about 10% passive stake. Iridian invests in “corporate change,” where catalysts could include management or industry changes, acquisitions, spin-offs/divestitures as well as significant share repurchases.

• Based on peer multiples of earnings, one can ascribe value of about $29 per share and $6 per share to PBI’s SMB and Enterprise businesses and about $18 per share to the Digital business. Accounting for corporate costs and net debt of ~$20 per share yields a sum-of-the-parts fair value of about $33, suggesting potential about 45%.

BHP Billiton Group is the world’s largest diversified metals and mining company. Headquartered in Melbourne, Australia, BHP Billiton is a dual-listed company, with shareholders in its UK unit BHP Billion Plc (BLT LN) and its Australian unit BHP Billiton Ltd (BHP AU) having equal rights. On August 19, 2014, BHP Billiton announced its intention to separate its non-core assets into a new company through an in-specie distribution of shares to existing shareholders. The new corporation will be named South32 Limited and will be headquartered in Perth, Australia. Its primary listing will be on the Australian Securities Exchange, with additional listings on the London Stock Exchange and the Johannesburg Stock Exchange.

Shareholders as of May 15 will be entitled to receive one share of the new entity for every share owned. Concurrently with the spin-off, South32 will establish an ADS program. BHP Billion ADS owners will receive 0.4 South32 ADSs for every depository receipt owned. Since each BHP Billion’s ADS represents two BHP Billiton shares, the spinco ADSs will represent five shares. South32 shares will start trading on a deferred settlement basis in Australia and a when-issued basis in the UK and the US on March 18, while on the same date the new shares will commence trading on a normal settlement basis in South Africa.

Through this demerger, BHP Billiton will manage to simplify its portfolio by focusing on its four “pillars”, i.e., iron ore, copper, petroleum and coal—with potash representing a potential fifth product. The assets remaining with the parent company have longer reserve lives—in some cases over 100 years—as well as the highest profit margins. The streamlining of BHP Billiton’s business seems appropriate given that the non-core assets that are transferred to South32 represent a wider range of commodities—compared to BHP Billiton’s four pillars—while generating only 6% of the company’s fiscal 2014[1] underlying EBITDA. From that perspective, it is clear that dealing with these assets only serves as a distraction to management, whose time would be better spent on overseeing the limited number of resources generating the vast majority of the company’s profits. The demerger may also benefit the newly created company. For reasons detailed above, it is likely that South32 assets lacked appropriate oversight as part of BHP Billiton. The spin-off, consequently, will most likely lead to increased management attention and better decision making. Furthermore, South32 will gain independent access to capital—both debt and equity. That is another critical aspect that justifies the demerger: as part of BHP Billiton, South32’s assets competed internally for resources with other projects that typically offered superior returns and—based on fundamental corporate finance principles—were attracting the bulk of the company’s investments.

Following the spin-off, BHP Billiton will remain the world’s largest metals and mining company. Resource diversification, although limited, will still be an important part of its strategy. The company will focus on four core commodities: iron ore, copper, coal and petroleum. Its assets will comprise long-lasting, low-cost mines and oil/gas fields primarily located in Australia and the Americas. Among the company’s strategic priorities are the maintenance or even expansion of its dividend, currently at USD 1.24 per share and the retention of its A credit rating. However, balancing both targets may not be possible, as commodity prices, including those of iron ore, copper, crude oil and natural gas, have declined substantially since the summer of 2014. On the other hand, after the spin-off, BHP Billiton’s leverage will remain at reasonable levels, allowing the company to temporarily fund its dividend through debt—since free cash flow is unlikely to suffice.

That is particularly true for BHP Billiton and its peers. Consequently, numerous assumptions regarding both the company’s profitability as well as its trading multiples should be used to arrive at a broad valuation range that can demonstrate the risk and reward of the investment. Post spin-off, BHP Billiton could reach a value of AUD 40 per share if profitability increases or its dividend attracts yield-starved investors. As the company’s EBITDA and net income are expected to decline further, a valuation closer to AUD 28 per share—based upon its historical EV/EBITDA multiple—is more appropriate. However, from the perspective of a value investor, even such stock price would not justify an investment in post demerger BHP Billiton, as risks including a prolonged period of low iron ore and crude oil prices and increasing leverage—required to fund the dividend—remain. Rather, a price below AUD 20 per share would allow investors to acquire a high quality company at the low end of the cycle while paying a multiple that is well below the historical average[2].

South32 will be a diversified metals and mining company focused primarily on base metals. Its 11 assets are located in Australia, South Africa and South America, and produce aluminium, manganese, metallurgical and thermal coal, nickel, silver, lead and zinc. While the new company’s assets are not of the same quality as those of its former parent—both in terms of profitability and reserve life—most of them are situated at the bottom half of their respective industry peer group cost curves. In addition, South32 is more diversified than post spin-off BHP Billiton: No commodity is responsible for more than a third of its EBITDA, and no country is responsible from more than a tenth of its sales. On the other hand, almost half its revenue is generated from assets located in South Africa, an increasingly unfriendly place for miners.

The new company will have limited debt and additional liquidity in the form of an undrawn credit facility, while the majority of its contractual obligations originate from provisions for the closure of mines. EBITDA for each asset is well below its 10-year average. Despite the difficult environment, South32 has been free cash flow positive in each of the past three years—on a pro forma basis. Its first capital allocation priority is the payment of a dividend, equal to 40% of its net income. The remaining cash generation, along with additional debt, could be used for accretive acquisitions at the low point of the cycle.

Based on projected fiscal 2015 EBITDA and free cash flow, South32 can be valued between AUD 2.5 and AUD 2.9 per share. Notwithstanding a sharp increase in the prices of the commodities it produces, the company is unlikely to offer extraordinary shareholder returns as it focuses on dividends instead of opportunistic expansion. However, a low short-term price may offer value for investors—South32’s dividend should lead to a share price above AUD 1.7 per share. At valuation below AUD 2 per share, investors will not only benefit from a high dividend yield but also from a potential acquisition of the company. Whether South32 will trade at such attractive valuation or not will be seen—but it should be noted that the spin-off has received a lot of publicly and numerous asset managers have already declared they will examine the merits of holding onto the spin entity instead of sell indiscriminately.

The sum-of-the-parts valuation for pre spin-off BHP Billiton ranges from AUD 20 to AUD 43 per share. Thus, there is no incentive for investors to acquire shares prior to the spin-off. Quite the opposite, as a potential selloff of South32 shares could offer a far more attractive entry point.

On December 8, 2014, TriMas Corp. (NASDAQ: TRS) announced a plan to spin off its Cequent business via a tax-free distribution to shareholders. The transaction is expected to be completed in mid-2015, and is subject to final Board approval and the receipt of a favorable opinion regarding the tax-free status of the transaction. The spin entity, to be named Horizon Global Corporation, will control TRS’s current Cequent Asia Pacific Europe Africa (Cequent APEA) and Cequent Americas segments, while the parent company will retain the Packaging, Energy, Aerospace, and Engineered Components segments. Mark Zeffiro, TriMas’ current Chief Financial Officer, will assume the CEO role at Horizon Global, while Dave Wathen will remain the CEO of TriMas (“”New Trimas””) following the separation. On a pro forma basis, Horizon Global generated $611 million in 2014 revenue and $60 million in EBITDA. Both companies are expected to be well capitalized; however, the capital structures of the post-spin companies have yet to be disclosed. The company expects to incur $20 million in one-time costs associated with the planned spin-off.

The Cequent businesses, to become Horizon Global Corporation, are focused on custom-engineered towing and trailer products, including custom trailer hitches, trailer jacks, and winches, among others, as well as other aftermarket accessories. The company has a strong North American presence, which accounted for $447 million, or 73%, of F2014 revenue, while Asia Pacific, Europe, South America, and Africa represent growth opportunities. Cequent has seen a degree of revenue growth over the last several years, benefiting from acquisitions; however, operating margins have decreased, in large part due to increased costs associated with an acquisition strategy that has resulted in the purchase of lower-margin businesses, combined with pricing decisions made in newer markets in an attempt to gain market share. Margins have also been negatively affected by supplier issues, especially in the company’s Mexican facilities, as costs have increased owing to increased shipping expenses associated with the inability to locally source raw materials. Revenue increased 4% and 11% in 2014 and 2013, respectively. The business generated operating margins of 6% and 8% in 2014 and 2013, respectively. TriMas is currently undertaking a reorganization within the Cequent business to consolidate the geographical footprint of manufacturing capacity, while moving production to lower-cost countries. Management states that the majority of the “”heavy lifting”” is complete with respect to facilities optimization, which may be the reason that the company has decided to spin off Cequent at this time. Moving forward, margin opportunities should arise from improvements in the supply chain and from rationalization of manufacturing facilities. Horizon Global will have lower capital requirements than New TriMas, given the current manufacturing capacity of the segments. As such, it should be expected that Horizon Global will be a cash flow generator.

The businesses remaining with TriMas generated 2014 revenue of $887 million and EBITDA of $160.2 million. TriMas’ Packaging segment (the largest, at 22% of F2014 sales and 48% of operating income) manufactures closure and dispensing systems for end markets including steel and plastic industrial and consumer packaging applications. Key brands include Rieke Packaging Systems and Innovative Molding, among others. The business generated $336 million in trailing sales while operating with a 23.4% margin. The Energy segment manufactures industrial sealant products and fasteners used in refining, petrochemical, and industrial markets. Energy (14% of sales) generated revenue of $200 million and operated with a 0.7% margin over the past 12 months. Margins have declined significantly since the end markets peaked in mid-2013. The company has consolidated plants in Brazil, vertically integrated operations in India, and is in the process of moving production to lower-cost countries. TriMas’ Aerospace segment (8% of sales) manufactures a variety of temporary and permanent bolts and fasteners, including highly engineered fasteners for use in the aerospace industry. Engineered components, with sales totaling $221 million in F2014 and generating a 14.5% operating margin, sells cylinders used for the storage, transportation, and dispensing of compressed gases, as well as a variety of gas production equipment and pumps used at well sites for the oil and gas industry. As with Cequent, the parent entity’s revenue growth has been aided by a number of bolt-on acquisitions over the past several years, while margins have generally fared better than at Cequent, with the notable exception being the Energy segment, which has been negatively affected by operating inefficiencies and higher selling, general and administrative costs. The separation of the lower-margin Cequent business as Horizon Global will immediately improve New TriMas’ operating statistics. That said, the company’s Aerospace and Packaging segments are currently involved in increasing plant capacity in response to end-market growth, constraining free cash flow, at least in the near term.

With return on invested capital (ROIC) at 7.7%, versus an almost 9% weighted average cost of capital (WACC), TriMas must make its previous acquisitions ($383 million in 2014) pay off for shareholders. Revenue and earnings growth are important components that constitute the relative valuation for a diversified industrial company, but to create value for shareholders, TriMas must sustainably earn its cost of capital over the intermediate to long term. Since the company is not currently in a position to return capital to shareholders via share repurchases, the most effective means of expanding ROIC is to exceed its WACC through a significant improvement in profitability. Accordingly, the spin-off should allow TriMas to focus on its two core-growth businesses of Aerospace and Packaging and increase profitability and ROIC while accelerating its trajectory toward a mid- to high-single-digit organic sales growth target. With an activist shareholder, Glen Welling (Engaged Capital), expected to join the company’s Board in 2016, we expect management’s top priority to be operating margin expansion through manufacturing relocations, cost reduction, and other operational actions. In the near term, however, TriMas remains a turnaround story, as the company faces revenue growth challenges associated with energy sector exposure (approximately 14% of sales)[1] and currency headwinds as it works toward executing on its operating improvement strategy.

Based on an analysis of revenue, EBITDA, assets, and operating cash flow, a pre-spin fair value estimate of $33 per share can be assigned, comprising $23 of value from TriMas and $10 of value from Horizon Global. This analysis suggests 15% potential upside to the current share price. Our positive thesis is predicated on the view that TriMas should continue to execute on its operational turnaround and achieve 2015 earnings targets without an incremental rebound in end-market demand. Even while operating in a low-single-digit organic growth environment, the company should generate improved operating margin through continued cost reductions and productivity improvements (already well underway), offsetting greater headwinds from lower oil prices, destocking and further strengthening of the U.S. dollar. While the spin-off has the potential to unlock meaningful upside, it is important to underscore several near-term risks, including the potential for a more significant currency impact, continued volatility in oil- and gas-related sales (approximately 15%), and weaker pricing trends. While TriMas’ recent results have been encouraging, with operating margin above expectations, this is clearly a turnaround story—and any failure to achieve continued operating improvement throughout 2015 would likely result in a material correction in the shares, potentially re-testing what appears to be some conditional support in the low- to mid-$20s range. In short, New TriMas must deliver improved operating results to reverse its recent history of challenging quarters, particularly given current leverage ratios approaching their limit, as stated by the company’s debt covenant.

Given the reduced growth and earnings profile associated with Horizon Global Corporation, the post-spin shares are not recommended for purchase at this time. Similar to the parent company, continued execution on a cost-reduction strategy represents a key catalyst for the shares, but a mixed demand environment and channel pressures may limit near-term growth potential. We recommend investors wait for clearer indications of earnings growth acceleration and globalization of the business.

On October 24, 2013, DuPont Co. (NYSE: DD) announced that its Board of Directors had approved plans to spin off its performance chemicals unit into a separate publicly traded company through a tax-free distribution of shares to DD shareholders. DD will retain its segments focused on products for the agriculture, healthcare, food, and consumer electronics industries. The separation will allow DD to focus on its faster-growth and steadier-margin specialized product segments, which will likely generate a higher multiple following the transaction. The spin-off is expected to be completed within 18 months. The transaction still requires an effectiveness declaration of filings by the SEC, confirmation of the tax status of the separation, and final Board approval. Management expects the two companies to pay dividends in total that equal the parent’s dividend prior to separation.

Management initially disclosed in July 2013 that it was exploring strategic alternatives for the cyclical, commoditized Performance Chemicals segment, which consists primarily of titanium dioxide (TiO2) products and fluoroproducts (used in white pigment and refrigeration applications, respectively). The exodus of the more cyclical business follows the path pursued by specialty chemicals producer PPG Industries Inc. (NYSE: PPG). In late January 2013, PPG spun off its lower-margin, low-growth commodity chemicals business, which merged with Georgia Gulf to create Axiall (NYSE: AXLL). PPG trades at about 23x forward EPS (DD is at 16x) and 13x forward EBITDA (DD is at 10x). Commodity chemical producers such as AXLL trade at around 6.6x EBITDA and 11x EPS.

The Performance Chemicals business, to be named The Chemours Company, generated approximately $7 billion in FY2014 revenue (approximately 18.6% of DuPont’s consolidated revenue) and 15.7% of total operating income. However, the business faces challenging fundamentals, having experienced operating income declines since 2011 (7% in 2014). A combination of increased competition and excess inventory has lowered pricing for titanium dioxide and refrigerants and created excess inventory. While TiO2 inventory levels appear to be stabilizing, DuPont may not have experienced a bottom in pricing, as evidenced by recent sequential declines. In fluoroproducts, higher demand for automotive air conditioning has been offset by lower refrigerant pricing and competitive pressures.

DuPont, a component of the Dow Jones Industrial Average, carries a market capitalization of approximately $63 billion. Under CEO Ellen J. Kullman’s tenure since 2009, DuPont has divested assets and exited lower-margin commodity businesses such as Performance Coatings as part of a strategic plan to enhance the company’s portfolio around science and innovation and pursue higher-value growth opportunities. However, since 2011, earnings growth has faltered—largely due to the company’s unwieldy cost structure as a conglomerate. While management has proposed a $1.3 billion cost reduction by 2017, there is considerable skepticism over how much of this will flow through to the bottom line (particularly since approximately half of this amount is costs related to Performance Chemicals, which is being spun off). At the same time, management’s outlook appears to hinge heavily on economic growth, as opposed to innovation and added value. Other than hope that the economy improves, DuPont’s plan to generate earnings growth remains unclear.

Against this backdrop, the spin-off of the highly cyclical and capital-intensive Performance Chemicals business (and resulting enlarged share repurchase program) is clearly positive. However, considering its modest 16% contribution to 2014 EBITDA, the Chemours spin-off may further expose the magnitude of DuPont’s cost problem. Moreover, post-spin DuPont faces increasingly challenging industry and competitive pressures that are likely to weigh on performance throughout 2015 and beyond. In the near term, the principal challenge is the Agriculture segment (the company’s largest, at 32% of FY2014 sales and 39.5% of operating profit), which seems likely to experience a second successive year of operating profit contraction. Lower corn acreage and higher soy acreage in the U.S. create product mix pressure. In addition, DuPont faces currency pressure through the depreciation of the Brazilian real and weakening euro (management estimates an approximately $0.60 foreign exchange impact on 2015E EPS). Declining grain prices, high inventories, market share loss, and farmers’ cost-cutting actions have also resulted in significant revenue and margin declines, which are likely to persist into the 2016-2017 timeframe. DuPont’s agriculture success has been largely a function of new crop chemicals, whose demand will be challenged by poor weather and inventory correction. Beyond the Agriculture business, DuPont’s potential recovery hinges on improving GDP growth to achieve the company’s long-term target of 7% sales CAGR and 12% operating earnings CAGR.

Despite these challenges, DuPont shares outperformed the broader market in 2014, having appreciated 17% (versus the S&P 500 at 12% and -2% for Dow Chemical)—mostly due to ongoing pressure from activist shareholder Trian Fund Management LP. Trian, led by Nelson Peltz, owns 24.4 million shares (a 2.7% percent stake, worth just under $2 billion). Trian argues that DuPont’s current conglomerate structure blends together high- and low-return businesses, masking the strong performance of some of the company’s divisions and the poor returns of others, while overwhelming DD with bureaucracy and organizational complexity, with as much as $4 billion in excess corporate costs. Trian has argued for a further break-up at DuPont—in particular, for the divestiture of the volatile but cash-flow-strong Performance Materials business, which Trian argues should eliminate overhead, improve management accountability, and generate increasing efficiency. DuPont has rejected Trian’s proposal, which includes adding two nominees each to the Boards of DuPont and Chemours. In its defense, management has highlighted the stock’s strong recent performance and its view that keeping its businesses together allows the company to benefit from its science platform, global scale, market access, and brand. Management notes that under its current leadership, DuPont has significantly outperformed both the S&P 500 and its peers as a result of strategic changes. DuPont appears particularly hostile to the idea of granting Peltz a Board seat.

To date, Trian’s involvement has been very good for DuPont’s share price, which has appreciated over 20% since the firm announced its break-up proposal in September 2014, peaking in March of this year at approximately $80. Recent events, however, may have tempered investors’ hopes for broader strategic changes. DuPont formally rejected Trian’s nomination of four Board members, and Fidelity Investments, DuPont’s sixth largest shareholder, has publicly pressured DuPont and Trian to reach a settlement (shares have pulled back approximately 9% from the $80 peak as of this writing). Still, at 17x 2016E EPS (a PEG ratio of over 2x) and 10x EBITDA, DuPont trades well above its diversified chemicals peers and historical peak multiples. The Dow Chemical Company (NYSE: DOW) and Monsanto Company (NYSE: MON), for example, currently trade at 8x and 13x EBITDA, respectively, allowing investors to capture the same agricultural exposure at a more reasonable valuation (and in the case of Monsanto, a considerably higher EBITDA margin of 30% versus 16% for DuPont).

Given DuPont’s high economic sensitivity and a valuation that ran up on the expectation of change, the risk/reward in the shares appears mixed. Based on a comparable analysis of estimated revenue, EBITDA, free cash flow, dividend yield, share repurchase, and assets, one can arrive at an implied enterprise value estimate of $63,078 million for DuPont (ex Performance Chemicals) and $7,470 million for Chemours. This implied fair value suggests a pre-spin share price of $70 per share, in line with DuPont’s current share price. The post-spin fair value for DuPont of $66 implies an EV/EBITDA multiple of 11x, in-line with titanium dioxide peer Tronox Ltd. (NASDAQ: TROX) but a premium to other large capitalization specialty chemical suppliers (approximately 8x) and the shares’ 5-year historical average (10x). On this basis, the implied fair value probably represents the higher end of the shares’ valuation range. Most importantly, while DuPont has historically responded to weak quarters with stock buybacks, these do not address the company’s fundamental strategic challenges (although they do help mitigate volatility in the stock). While changes to the company’s capital structure in 2015-2016 could lift the valuation multiple, these appear less likely at the moment. With the risk/reward fairly balanced at current levels, and the shares subject to and influenced by special situation speculation, shares of DuPont are not recommended for purchase at this time. The annual shareholder meeting on May 13 represents a potential upcoming catalyst for the shares.

Long term, Chemours can be expected to grow relatively in line with global GDP. Despite relatively predictable revenue growth, however, earnings will likely continue to be affected by pricing declines associated with titanium dioxide, refrigerants, and industrial resins (which do not appear to have found a bottom), coupled with the impact of currency against a strong U.S. dollar. Based on the potential for meaningful near-term earnings erosion, shares of Chemours are not recommended for purchase following the spin-off.

On November 13, 2014, after the market close, Graham Holdings Co. (NYSE: GHC) announced plans to spin off the company’s Cable ONE subsidiary into a standalone public company via a tax-free distribution of shares to GHC shareholders. Cable ONE, to be the new standalone company, is the 13th largest cable service provider in the U.S. as measured by coverage area, serving small-city subscribers in 19 Midwestern, Western, and Southern states. The parent entity, which has approximately 14,000 employees, is a diversified education and media company whose principal operations include education services as well as online, print, and local TV news. Notably, Graham Holdings owns Kaplan, a leading provider of educational services, and Graham Media Group, which controls several local television broadcasting stations. The separation is expected to be completed in 2015, and is subject to SEC review of required filings, other applicable regulatory approvals, and final approval by the company’s Board of Directors.

Graham is in the midst of a major transformation. The flagship Washington Post business was sold in 2013 (with the company subsequently changing its name from The Washington Post Co.), and GHC management is in the early stages of deploying capital into new business lines, such as healthcare and manufacturing, among other businesses, including marketing focused on social networks. The decision to separate the Cable ONE business makes sense given that the relatively small company (as measured by subscribers) has struggled to contain costs and has had to make programming decisions that have resulted in loss of customers. The cable industry is going through a period of consolidation in an attempt to gain size and scale to more effectively negotiate content contracts. Through a spin-off, GHC could monetize its cable holdings in a tax-free manner while setting up Cable ONE to potentially be acquired.

Following the separation, Graham Holdings’ television broadcast business will become the company’s primary source of profits while management attempts to right the Education business. Through the ownership of five television stations (all in top-50 designated market areas, or DMAs), GHC is poised to benefit from strong industry trends resulting in increased high-margin revenue. Broadcast stations in general are receiving increasing amounts of retransmission fees and should benefit from the cyclical nature of advertising spending. Four of GHC’s five stations are affiliated with major networks that will see increased advertising spending tied to the next election cycle, while two are NBC affiliates that will experience increased Olympics-related advertising spending.

For-profit education institutions, such as Kaplan, have come under increased government scrutiny that has resulted in sharply reduced enrollment and profits. The once cash-flow-rich business is not likely to return to its former glory anytime in the near future. However, over the last two years GHC’s education business appears to have stabilized its revenue while aggressively reducing its cost structure to allow the Kaplan business to operate profitably in the new environment of reduced enrollment.

On a pre-spin basis, Graham Holdings can be assigned a fair value of $1,053 per share, consisting of $343 per share of Cable ONE and $710 per share of GHC. Given that shares currently trade at only a modest discount to the fair value estimate, the spin transaction itself does not appear likely to unlock significant value. The absence of material upside can be attributed to the recent share price performance, increasing 22% year to date (versus 2% for the S&P 500 index) and up 32% since the spin announcement (versus 3% for the S&P 500 index).

Upside to the fair value lies in the potential premium valuation for Cable ONE in a takeout scenario and GHC management’s ability to effectively allocate capital into higher-return investments. The Graham family, who control the company, have historically been effective allocators of capital, as evidenced by the increase in book value per share. It should be noted that a takeout of Cable ONE is likely a longer-term scenario as a purchase of the company within two years of the spin-off could jeopardize the tax-free status of the spin off.

· Omnova Solutions (NYSE: OMN) is a diversified specialty chemical manufacturer with two main operating segments: (1) Performance Chemicals (PC), which was 76% of sales in 2014; and (2) Engineered Surfaces (ES), which comprised the remaining 24% of 2014 revenue.

· OMN has been urged by an activist shareholder with an about 2% stake and two recently won Board seats to increase strategic focus by separating its two businesses as well as by cutting costs, improving governance, and more effectively deploying excess liquidity. In terms of a potential separation, it appears that given the relative size of OMN’s Engineering Surfaces business, a Reverse Morris Trust transaction or outright sale seems most appropriate. In the event of a sale, OMN could utilize its roughly $115 million of net operating losses to minimize any potential tax leakage. For its part, OMN management has expressed support for the current corporate structure (as well as its operating plans), while stressing its commitment to shareholder value.

· OMN currently trades at 6.3x 2016E EBITDA, which is a discount to both PC and ES peers, which trade at about 7x and 8x, respectively. The disparity is likely due, in part, to the company’s inconsistent operating history and relatively high level of indebtedness. As such, to the extent that a rationalization of OMN’s conglomerate portfolio improves execution, in terms of growth, margins, and/or capital allocation, it could create incremental value above any potential initial re-rating.

· Based on peer multiples of earnings, one can ascribe value of about $15 per share to OMN’s PC business and about $6 per share to its ES segment. Including corporate costs and net debt of ~$11 per share yields a sum-of-the-parts fair value in excess of $10. Optionality on the order of ~$2 per share could be derived from the tax-efficient monetization of the ES segment and the deployment of the proceeds toward share repurchases and net debt reduction, suggesting more than 50% of potential upside.

On March 27, 2014, Baxter International Inc. (NYSE: BAX) announced plans to spin off the company’s biopharmaceuticals business through a tax-free distribution of shares to BAX shareholders. The transaction is expected to be completed by mid-year 2015. The biopharmaceuticals business will be composed of the current BioScience segment, excluding BioSurgery-related revenues. The spin company, to be named Baxalta Inc., will control a variety of pharmaceutical products used in the treatment of bleeding disorders, burns, shock, and of other acute blood-related conditions. Baxalta, which plans to trade on the NYSE under the ticker “”BXLT””, generated revenue of almost $6 billion in 2014. BAX will maintain a 20% ownership stake in BXLT.

The parent company, which will retain the Baxter corporate moniker and focus on medical devices, offers products for drug delivery and inhalation anesthetics, among others. On a pro forma basis, the parent entity had sales of $10.7 billion in 2014 (including BioSurgery revenue). The spin-off still requires final Board approval, a favorable ruling with respect to the tax-free nature of the spin-off, regulatory approvals, and an effectiveness declaration from the SEC. Robert L. Parkinson Jr. will continue to serve as the CEO of Baxter, the parent company. Ludwig N. Hantson, the current president of the BioScience division, will assume the CEO role at the spin entity.

There are several reasons for the spin-off of Baxalta. First, biopharmaceutical companies can trade at premium multiples compared to medical device companies due to their higher margins and less commoditized product offerings. Second, the capital requirements and cash flow profiles between the two businesses vary widely. Separating the higher-cash-flow-generating medical devices business from the more capital-intensive bioscience business could allow for a greater return of capital to shareholders or a more acquisitive growth strategy. Lastly, the spin-off separates two businesses that have differing margin, risk, and growth profiles. The higher margins that BioScience (Baxalta) currently generates may come under pressure as the hemophilia treatment market becomes increasingly crowded with competitors, whereas previously the company enjoyed a market share leadership position in a stable, high-margin business for many years. Growth at Baxalta is dependent on the company successfully launching new products, including long-lasting versions of existing products, as well as broadening the development pipeline into areas such as oncology, and increasing international penetration for the company’s existing products. Alternatively, the medical products business (“”New Baxter””) has opportunities to improve margins through better fixed-cost leverage and can pursue an acquisitive strategy.

Ultimately, management’s decision to separate the two businesses seems mostly an attempt to increase the company’s share price. Shares of Baxter have significantly underperformed the S&P 500 and the S&P 500 Health Care Index over the past five years. Creating two focused business with separate managements and capital allocation strategies appears to be a reasonable undertaking. However, increased competition for BAX’s largest hemophilia franchise and a mounting drag from currency (BAX and BXLT each have significant international sales) appear likely to keep earnings growth muted for the foreseeable future. While bioscience and medical device peers currently trade in close proximity based on earnings multiples, BAX trades at a discount to both peer groups. As separate entities, BAX and BXLT could see that discount lessen.

Post-spin fair values for Baxalta of $31 per share and for New Baxter of $40 per share can be derived looking at the earnings growth and cash flow profiles of the post-spin entities. New Baxter’s fair value includes approximately $8 per share owing to the 20% ownership stake in Baxalta. On a pre-spin basis, a fair value of $72 per share can be assigned, comprising $39 of value from Baxalta and $33 in value from New Baxter. Given the lack of material upside from the current share price and the less than robust growth opportunities, shares of Baxter are not recommended for purchase at this time.

On October 13, 2014, Danaher Corp. (NYSE: DHR) announced a plan to spin off or split off a portion of the company’s Communications business into a separate company, which is to be merged with NetScout Systems (NASDAQ: NTCT) in a Reverse Morris Trust transaction. Danaher will create a wholly owned subsidiary for the Communications business and will subsequently distribute ownership of that subsidiary to Danaher shareholders, a transaction that will be followed by a merger of the Communications subsidiary with NetScout. NetScout will acquire the majority of Danaher’s Communications business, which includes the brands of Tektronix Communications, Fluke Networks, and Arbor Networks (the data cabling tools business and carrier service provider tools business of Fluke Networks will be excluded from this transaction).

Following the merger, Danaher shareholders will own approximately 60% of the merged NetScout entity. The transaction is expected to be completed in 2015 and is subject to obtaining regulatory approvals, as well as final approval by NetScout shareholders. Based on NetScout’s current share price of $43, the transaction values Danaher’s Communications business (DHRCB) at approximately $2.7 billion, up from $2.6 billion at the time of the announcement in October 2014 (based on 62.5 million NTCT shares). Danaher shareholders will receive about 62.5 million of newly issued shares of NetScout in consideration for the deal. The transaction is expected to be completed in the first half of NetScout’s FY2016, suggesting a June/September timeframe. Inherent in this timeline is a concurrent analysis by the Department of Justice (DoJ) as to whether the combination raises any antitrust concerns. A merger vote is expected to occur between 30 and 60 days after an effectiveness declaration by the SEC. A $55 million break-up fee to Danaher would be triggered if the NetScout Board of Directors advises shareholders to vote against the transaction.

As of the time of this writing, Danaher has yet to determine whether the business will be distributed via a spin-off or a split-off. A split-off would offer DHR shareholders the option of exchanging DHR shares for post-deal NTCT shares, with a premium to induce shareholders to make such an exchange. The advantage of this offering is that it would reduce the number of DHR shares, and theoretically put NTCT shares into the hands of investors who want to own them. If the offering is undersubscribed, Danaher would allocate the remaining NTCT shares on a pro rata basis to all DHR shareholders. Given the vastly different complexion of the current DHR and NTCT shareholder bases and the differences in market capitalization between the two companies ($60 billion versus $2 billion), the latter method appears more likely to be elected. If a spin-off is elected, the dilution impact on Danaher’s net earnings per diluted share would be approximately 2%-3% on an annual basis, or between $0.07 and $0.11 in CY15.

Unlike most Reverse Morris Trust transactions, which are typically employed by a larger entity to acquire a smaller entity as part of a spin-off, in this case NetScout, the smaller entity, will be the controlling company post transaction, with NetScout’s current executives at the helm. For NetScout, which provides end-to-end network and application assurance solutions, the acquisition of Danaher’s Communications business gives the company considerable scale and customer penetration, while fueling the company’s ambitions to become a leading player in the high-growth cyber-security market. NetScout will become a $1.2 billion revenue company (nearly tripling revenue), growing at approximately 10% to 12% year-over-year, with estimated annual EBITDA of $319.2 million (23.5% EBITDA margin) and earnings growth in the mid-teens. The acquisition considerably broadens the company’s revenue mix from predominantly enterprises (which have traditionally represented 50% of sales) toward service providers, and from network management toward applications performance management.

From an investor perspective, there appears to be some skepticism regarding the transaction, given the valuation, the perception of weak growth prospects for the acquired Danaher products (which experienced a 9% revenue decline for the first nine months of 2014), and the potential execution risk associated with a lower-margin acquisition. At 3.2x trailing-12-month sales of $836 million (Danaher FY ending December), the valuation represents a considerably higher multiple than the 1.5x EV-to-revenue multiple of the company’s last acquisition, that of network management supplier Network General in 2007. From a financial perspective, we believe there are more than sufficient operating levers available to NetScout to allow the combined entity to be accretive to EPS expectations for standalone NetScout in the first year of integration. From a strategic perspective, although a fairly large bet by NetScout, the Danaher acquisition has considerable value. Most importantly, it accelerates NetScout’s “manifest destiny” to become the dominant supplier not only to IT organizations, but also to security and business analytics organizations—to essentially redefine the company as a world-class data intelligence provider, akin to mega-suppliers Cisco Systems (NASDAQ: CSCO) and CA, Inc. (NASDAQ: CA). Over time, as security structures are increasingly challenged to handle the volume of traffic and complexity of environments, we believe NetScout has the potential to become the go-to supplier to insure optimal performance and cost-effective deployment of security and data analytics technologies—significantly expanding the company’s Total Addressable Market (TAM) and value proposition.

Healthy underlying demand drivers should set the stage for NetScout’s next wave of growth. The communications test and measurement industry has experienced renewed activity over the past 12 months—the result of increasing demand for a more sophisticated, real-time view of the applications running over the network. Ultimately, spending on network visibility solutions seems likely to remain a key area of discretionary spending, as it allows organizations to maximize their investment on networking technologies. Notably, Agilent Technologies (NYSE: A) recently spun off its communications business, Keysight Technologies, in October 2014; JDS Uniphase (NASDAQ: JDSU) has announced plans to spin off its service enablement and optical security and performance products businesses as Viavi Solutions, Inc. later this year.

Danaher, a medical and industrial conglomerate, is characterized by a well-defined business strategy and efficient operating philosophy rooted in the a proprietary, standardized continuous-improvement culture started by its founders, Steven and Mitchell Rales. Danaher has a long history of highly successful, diversified acquisitions, but more recently has been looking to consolidate its Life Sciences business, which represented approximately 36% of 2014 revenue. This emphasis was further confirmed by the company’s appointment of a more life-sciences-focused CEO, Tom Joyce, in September of last year. Danaher completed or announced 18 acquisitions in 2014 for a total consideration of about $4 billion. This trend is likely to continue (and possibly accelerate) in 2015 and beyond, as some market observers see a possibility that Danaher is pursuing both larger and more numerous M&A transactions, with an emphasis on less cyclical end markets with more consistent earnings growth, and on business models characterized by high-margin, recurring revenue streams. In this context, a spin-off of a more volatile and highly cyclical test & measurement business makes sense.

Based on a comparable valuation analysis of estimated revenues, earnings, free cash flow, EBITDA, and assets, one can arrive at an implied enterprise value estimate of $4,768 million for the new NetScout (following the acquisition of Danaher’s Communications business), versus $1,800 million for the current company (approximately 2.6x). This implied fair value suggests a share price of $47 per share, or 9% potential upside from NetScout’s current share price (approximately $43 as of the time of this writing). Post-spin, NTCT shares will likely trade in a relatively tight range, as there will probably be a digestion period of several quarters until investors become more comfortable with the growth rate and profitability profile of the new company, which should in turn drive support for the combination. Moreover, from a customer and demand perspective, it will take some time for NetScout to begin integrating these operations into a cohesive, end-to-end story. In the near term, there may be some short-term sales disruption as customers have concerns about product line rationalization and about which overlapping platforms may potentially be combined. Over time, the new company should benefit from the incremental top-line growth associated with expansion into adjacent markets—particularly the high-growth cyber-security market—coupled with a greatly expanded geographic reach and distribution.

When accounting for an estimated enterprise value of $2,981 million for the new NetScout, a pre-spin enterprise value for DHR totals $65,933 million, or $93 per share, and represents 10% potential upside to the shares’ current price at the time of this writing. Post-spin DHR shares can be fairly valued at $88. The post-spin implied valuation for DHR represents a multiple of 12x 2015E EBITDA, which is essentially in line with the diversified industrial peer group. Historically, Danaher has traded at a 1.0x to 2.0x multiple-point premium to the peer group, owing to its best-in-class operating history (superior sales growth, operating margin, cash flow generation, and return on equity), diverse end markets, and relatively less volatile business portfolio. However, with potential earnings growth in the 15% range annually, based on expectations for low- to mid-single digit revenue growth, the shares are likely to trade in line with growth, limiting material expansion from current levels, at least in the near term.

While Danaher is spinning off of a non-strategic business which has had limited impact on the company’s overall revenue and earnings growth profile, the company’s ownership interest in the new NetScout suggests that management may potentially see long-term strategic value and growth prospects in the business as it nurtured under more focused management. Long-term investors can also look for potentially accretive acquisitions that could have a material impact on operating margins and earnings. Notably, Danaher has an ample war chest, with the capacity to spend more than $10 billion on acquisitions, which could offer material upside to current consensus estimates.

·Lear Corporation (NYSE: LEA) is a Tier 1 auto supplier with two operating segments: (1) Seating and (2) Electrical. The company is the #2 and #4 player in its respective markets but the businesses have only modest synergies as well as dissimilar growth, margin and capital intensity profiles.  Seating is the more mature, lower margin business compared with Electrical, which has higher margins and better secular growth prospects albeit with modestly greater capital intensity.

·LEA’s current operating structure results in the shares trading with an apparent conglomerate discount. To that end, despite solid operating performance and above market growth since 2010, LEA currently trades at about 5.7x 2016E EBITDA, which is a discount to the peer groups of both its business lines. Peers to LEA’s Electrical business currently trade at ~8.0x 2016E EBITDA, or a more than 30% premium to Seating comparisons, which trade at ~6.0x. As such, a separation could unlock value, as the Electrical business would likely be revalued.

·LEA has been urged by an activist shareholder with about a 5% stake to separate its two businesses as well as more aggressively repurchase shares. Management has not commented specifically on the current split proposal other than to reiterate its commitment to increasing shareholder value. Notably, in 2013, under previous pressure from the same shareholder, LEA increased its capital return to shareholders as well as granting Board representation. As well, an industry trend toward specialization, as evidenced by the impending transactions at Federal Mogul and Visteon, could favor an ultimate separation.

·Based on peer multiples of earnings, one can ascribe value of about $97 per share to LEA’s Seating business and about $77 per share to its Electrical segment. Including corporate costs of about $25 per share as well as net debt and other liabilities of $14 per share yields a sum-of-the-parts fair value of about $135, which implies potential upside of more than 20%.

C.P. Pokphand Co. Ltd. (43 HK) is a Hong-Kong based investment holding company whose principal activity is the production and sale of animal feed, farm and food products in China and Vietnam. The corporation is part of the Charoen Pokphand Group, the holding company of Dhanin Chearavanont and one of Thailand’s largest private companies. Dhanin Chearavanont, who, along with his family, has a net worth of over USD 11 billion, controls C.P. Pokphand through another publicly-traded company, Charoen Pokphand Foods PCL (CPF TB), with the latter holding a 48% stake in the former. The Chearavanont family controls approximately 44% of Charoen Pokphand Foods.

On October 17, 2014, C.P. Pokphand announced that it submitted an application with regard to the separate listing of its non-core businesses—biochemical and industrial—on the Hong Kong Stock Exchange. A feasibility study of the demerger had commenced as early as the second quarter of 2014. The new entity will be named Chia Tai Enterprises International Limited (“CTEI”). C.P. Pokphand shareholders—with the exception of overseas investors (i.e., those with registered addresses outside of Hong Kong), including most likely US-based companies—are expected to receive one CTEI share for every C.P. Pokphand shares owned. The transaction is subject to shareholder approval. A Special General Meeting was initially set up for December 1, 2014. However, the company’s second largest shareholder, ITOCHU Corporation (8001 JP), requested on November 27, 2014 the adjournment of the meeting as it was still assessing the impact of the demerger on its investment. C.P. Pokphand shareholders are expected to meet in the upcoming months^[1]—although no exact date has been provided yet—to vote on the spin-off. According to the previously announced timetable, the demerger record date and the CTEI distribution should take place one or two weeks after the spin-off approval.

Following the spin-off, CTEI will be a small holding company with a very diverse set of businesses and limited float. Consequently, the demerger appears rational only from the parent company perspective. The post spin C.P. Pokphand will be a pure-play agri-business company that can be attractive a wider investor base—care of its more focused industry position—and better align its management interests with those of shareholders. At the same time, C.P. Pokphand’s position as a solely agri-business company could be a precursor of an upcoming merger with its parent company, Charoen Pokphand Foods. Chia Tai Enterprises International Limited is an investment holding company focusing on biochemical and industrial activities. The first business specializes in the production of chlortetracycline (“CTC”), an antibiotic that is used in the veterinary industry and as an animal feed additive. CTEI’s industrial business owns a 50% stake in ECI Metro, a Caterpillar dealer in Western China, and a 28% interest in Zhanjiang Deni, a Chinese manufacture of carburetors for motorcycles as well as other automotive parts. The biochemical business is the only one consolidated on CTEI’s financial statements, while ECI Metro is a joint venture company and Zhanjiang Deni is an associated entity.

The new company will be well capitalized, with a net debt-to-EBITDA ratio of 0.4x. Due to the diverse nature of its holdings, there is the possibility that the current divestment is the precursor of additional break-ups, with the sale of CTEI’s interests in the non-consolidated corporations or another spin-off. However, the small size of each separate company may represent an obstacle to that outcome. As a standalone company, CTEI is expected to trade at a moderate to deep discount to its sum-of-the-parts valuation, care of its holding company-like structure and its limited float—both as a percentage of the total shares outstanding and on an absolute value basis. Following the spin-off, CTEI could be valued at HKD 16.4 per share, with a valuation range between HKD 11.8 and HKD 19 per share.  

Post spin-off C.P. Pokphand will be a pure-play agri-business company, with operations in China and Vietnam. Its activities comprise the manufacturing and distribution of feed, farm and food products. The nature of the business involves short-term volatility, as the prices and the amount of livestock and food products fluctuate. However, the long-term trend for such activities is positive as the world’s population grows and as the living standard of more people is elevated to middle-class status—thus leading to increased meat consumption. That shift, to higher quality protein, is one of the earliest and most dramatic shifts in consumption as a population moves beyond the subsistence level of poverty. The parent company will still represent a considerable amount of the wealth of the Chearavanont family. Typically, the alignment of interests between the owner-operator and shareholders is a very important predictive attribute of exceptional stock performance. However, that is not the case with C.P. Pokphand; investors prior to 2003 have experience a de minimus increase in the book value of their holdings, and despite the significant increase in the company’s market capitalization, there has been a more than tenfold increase in the shares outstanding. Part of the company’s failure to generate shareholder value can be attributed to certain related-party transactions that took place in 2007 and 2010—when C.P. Pokphand sold and later repurchased its core operations, its agri-business assets.

Due to past underperformance, the number of questionable related-party transactions, and above-industry leverage—with a pro forma net debt-to-equity ratio of 60%— C.P. Pokphand should trade at a discount to its peers as well as its parent company, Charoen Pokphand Foods. On the other hand, as a pure-play agri-business company, C.P. Pokphand could be acquired by its largest shareholder—a transaction that would not make as much strategic sense prior to the separation of the non-core assets. The company’s stock could be valued at HKD 1.1, with a potential to reach HKD 1.4 if the trading multiple discount to peers is eliminated.

The sum-of-the-parts target price for C.P. Pokphand prior to the spin-off is HKD 1.3 per share, with a low case scenario valuing the company at HKD 1.2 per share. The high case valuation—a less likely scenario in the foreseeable future as it is contingent mainly upon the parent company proving it can create shareholder value—is HKD 1.6 per share. Despite the significant upside indicated by the sum-of-the-parts valuation, shares of C.P. Pokphand are not recommended for purchase prior to the spin-off due to the lack of clarity regarding the distribution of CTEI. Rather, investors may wish to wait until the transaction is completed and more information regarding the operations and the future of each standalone entity is provided.