Somfy SA (SO FP) is a French company that specializes in the manufacturing and selling of motors and controls for awnings, blinds, shutters and garage doors through Somfy Activities. Additionally, through its subsidiary, Somfy Participations, it invests in companies that mainly operate outside the company’s core activities. On August 28, 2014, Somfy announced that its Supervisory Board approved in principal the demerger of its investment subsidiary, Somfy Participations. The standalone company will be floated on the Euro MRF market of the Luxembourg Stock Exchange and will be renamed Edify SA. There will be 5,060,620 shares issued, implying a distribution ratio of approximately 0.68 Edify shares for each Somfy share. Shareholders will have the discretion to elect a distribution either in cash—EUR 50 per Edify share—or in shares of the new company. Therefore it is likely that Somfy will end up holding a stake in the spin entity. The controlling Despature family, which owns 74% of the shares, has announced that it will receive its consideration in shares of the new company. The spin-off was approved by Somfy’s shareholders on November 27, 2014. The parent company is expected to trade without the right to Edify shares, or the cash consideration, from December 2, 2014. The period during which eligible shareholders can elect to receive their consideration in cash or shares will last until December 12. Edify shares are expected to start trading between December 19 and December 22.

The spin-off will lead to the creation of two pure-play companies that will also better cater to individual shareholders preferences. Given that the new entity will have shareholders’ equity of approximately EUR 250 million, its float-adjusted market capitalization is expected to be very small—given that the Despature family will own 74% of the shares outstanding and Somfy will own the shares of investors electing the cash payment. Consequently, one cannot rule out that the controlling family may not seek a full privatization of Edify. Such a transaction can be consummated with a minor cash outlay. The caveat is that, while strategically reasonable, a buyout shortly after the spin-off may conflict with French laws regarding preferential tax treatment for spin-offs.

Post spin-off, Somfy will be a pure operating entity in the home improvement industry. Besides the assets attributed to Somfy Activities, the parent company will retain the 34% interest in Faac SpA that is currently considered one of Somfy Participations’ holdings—due to the similarity in their operations. Its products include motors, remote controls, sensors and other automation solutions and technologies for shutters, awnings, windows, blinds, gates and garage doors. Following the spin-off, Somfy’s valuation range is estimated between EUR 174.6 and EUR 190.7 per share.

Edify SA will be a Luxembourg entity that will comprise Somfy’s Somfy Participations subsidiary. It will be an investment holding company that focuses on companies undergoing change or transaction. Its investment horizon is long term and its approach is similar to that of private equity companies. Its portfolio includes investment in eight companies. Pro forma shareholders’ equity stands at EUR 256 million. Based on peer NAV multiples of 0.6x to 1.4x, Edify could be valued at EUR 48.2 per share. Based on earnings power, Edify’s shares are valued at EUR 32.6 per share. Thus, holders of Somfy SA should consider opting for the cash consideration instead of shares.

The sum-of-the-parts valuation for Somfy, prior to the spin-off, ranges from EUR 196.8 to EUR 224.7 per share, with a target price of EUR 214.6 per share. The upper end of the range assumes that shareholders elect the cash consideration of EUR 50 per Edify share.

However, investors should take note of two additional scenarios that could potentially lead to short or long term gains. The first one takes into account that the current Somfy shareholders who believe that Edify is worth less than EUR 50 per share will elect the cash consideration. The same applies for investors not wishing to hold Edify—for various reasons that usually lead to the outperformance of recently spun off companies. Thus, forced selling after the demerger is unlikely to take place. Moreover, informed shareholders who assigned a sub-EUR 50 value to Edify shares will also have exited. Consequently, it is highly unlikely that in the first days of trading there will be many sellers below the EUR 50 mark—with the possibility of pushing the Edify stock price above that level.

The second scenario takes into account the owner operator nature of the company. The Despature family controls approximately 74% of the shares, valued at EUR 1.25 billion. Thus, the decision to allow shareholders to receive EUR 50 per Edify share implies that they place the intrinsic value higher than that. Such a high valuation is not justified by Somfy Participations recent earnings power. However, no one should underestimate the actions of successful shareholders with insider knowledge and control. It may very well be that after a short period of softness, Edify’s earnings increase substantially, to justify the EUR 50 book value per share. If not, the owner operator can take other actions to unlock shareholder value, such as selling some of the portfolio holdings. Regardless of the path, long term shareholders could profit by following the insiders.

On June 10, 2014, B/E Aerospace, Inc. (NASDAQ: BEAV) announced plans to spin off its Consumables Management Segment, consisting of the company’s aerospace division and energy services, business into a new company, to be named KLX, Inc., through a tax-free distribution of shares to BEAV shareholders. The parent company, which achieved revenue of approximately $3.5 billion in F2013 (13% year-over-year growth) and is expected to achieve revenue of approximately $4.3 billion in F2014 (23% year-over-year growth), has grown through over two dozen acquisitions to become one of the largest manufacturers of aircraft seating and cabin interiors—an estimated $12 billion market by 2016 growing at a 4.6% CAGR by 2020. BEAV is the established leader in each of its product categories, holding over 50% share of the aircraft seating market.

The aircraft manufacturing industry, which has contracted and expanded considerably over the past ten years, is currently experiencing a period of renewed growth. Demand for air travel, which was significantly reduced during the recession (as was purchasing from airlines), has rebounded since 2010, aided by a recovering global economy and continued GDP growth (3.6% average to 2019). Global air traffic increased 5.2% in 2013, following increases of 5.1% and 6.0% in 2012 and 2011, respectively. 2014 forecasts call for a global passenger traffic increase of approximately 5.5% and capacity growth of approximately 5.4%. Load factors (capacity utilization) of 79.5% are at near-record levels, and yields (revenue per mile) have increased 0.2% compared with 2012. Commercial air carrier domestic revenue passenger miles (RPMs) are expected to increase 0.9% in 2014 and grow at an average of 2.2% annually through 2034. Moreover, industry economics have vastly improved, with an expected $19.7 billion in 2014 global airline profits (52% year-over-year growth), marking the fifth consecutive year of profitability.

Growing passenger volumes have accelerated demand for new commercial aircraft, with reported backlog at Airbus SAS and The Boeing Company currently at record levels of $11,396, or approximately 52% of the global fleet, through October (an approximately eight-year backlog). Aircraft production from these two suppliers alone is expected to require over 3.4 million seats from 2014 to 2020.[7] Yet, production is not the only growth lever for BEAV’s aircraft manufacturing and services business. Equally important is the delayed replacement of aging aircraft over the 2008-2011 period, which has created an extensive, multi-year retrofit cycle. With an active fleet of approximately 23,000 commercial jetliners competing for passengers (particularly high-margin business travelers), the aircraft interior has become a strategic battleground, resulting in continued replacement of interior components as well as retrofit and refurbishment to improve customization and brand positioning. Ultimately, the motivation for airline operators is to maximize profitability, energy-efficiency, and use of space. Aircraft interior design changes can greatly influence passenger appeal, create incremental seating, and remove excess weight (decreasing fuel consumption and carbon dioxide emissions)—significantly improving airline economics and creating value well in excess of design and development costs.

For BEAV, the industry’s intensifying competitive dynamics and strong secular trends, coupled with an ongoing recovery in the consumables market and sticky customer relationships, have generated exceptional (and consistent) financial performance and stable operating metrics. The company’s sales growth has averaged 20% over the past three years—more than double the growth rate of leading aerospace carriers Boeing (NYSE: BA) and Airbus (NYSE: AIR), which have averaged 9% over the comparable period. BEAV’s growth rate is also more than double rate of industry growth (approximately 8% CAGR from 2011 to 2016), underscoring the company’s adept product development and market share gains. Moreover, while the capital intensity of the airline industry may limit long-term earnings growth to the single digits, BEAV has the advantage of being the supplier for a product that we believe is typically sole-sourced, resulting in enduring customer relationships and more attractive operating margin (approximately 18%, versus 14% for its closest competitor, Zodiac Aerospace [ZC.FP]). The company is among the top earnings growers in the aerospace sector (24% and 20% EPS and EBITDA margin growth, respectively, in F2013), and is characterized by an extremely high level of production visibility, owing to $8.9 billion in total backlog (almost double estimated F2015 revenue). When coupled with the company’s over $9.0 billion installed base of products within the global aircraft fleet, BEAV has substantial potential revenue streams that should continue to generate above-average industry growth. Post-spin, BEAV should be able to sustain a low-teens organic growth rate—owing to a market-leading position, a mix shift toward wide-body aircraft (which require as much as $10 million of product versus under $1.5 million for a typical narrow body aircraft), a strong position in business and first-class interiors (which are growing as a portion of the overall seating market), and the discretionary portion of roughly 40% of the company’s business (a positive when airlines are highly profitable).

The spin-off entity, KLX, comprises BEAV’s Consumables Management Segment (CMS) and focuses on distribution, logistics, and technical services for the aerospace and energy services markets. The Aerospace Solutions Group (ATG), 80% of CMS sales, is the largest distributor of aircraft fasteners (nuts, bolts, screws, etc.), consumable products (e.g., spare aircraft seat parts) and supply chain services—a $4.7 billion addressable market in 2013. Energy Technical Services (ETS), 20% of sales, provides wireline and retrieval services, rental equipment, and other related components to oil and gas drillers—an estimated $15 billion addressable market. The total CMS business has grown at a 13% CAGR (including acquisitions) since 2009 and generated 2013 revenue of approximately $1.3 billion. Like the post-spin parent company, KLX should continue to generate low-teens annual revenue growth, with potential upside stemming from its energy services business, which addresses a market 2x to 3x larger than the aerospace consumables industry and is growing at a double-digit growth rate. Operating margins for the services business are slightly higher than for manufacturing, averaging 19% over the past four years, and are well above peers, at 11%. EBITDA margins are also well above peers, having averaged 21% over the same period, compared to a peer average of 12%. In addition, energy services acquisitions have been highly accretive, resulting in the company’s recent upward revision to earnings guidance.

The timing of the proposed spin-off appears opportune considering that aircraft manufacturers are consolidating their supply chains as they reduce costs and accelerate production. With components representing more than two-thirds of overall aircraft manufacturing costs, Boeing, for example, is seeking to compensate with its Partnering for Success (PFS) supply chain policy, which seeks pricing discounts (reportedly between 15% and 25%) from suppliers in exchange for purchase volume. Considerable M&A speculation has surrounded BEAV since a May 2014 announcement that the company was exploring strategic alternatives. Fueling this speculation is public commentary from German aircraft seating manufacturer RECARO Aircraft Seating GmbH & Co. (privately held), which noted its interest in purchasing BEAV assets. RECARO, the market leader for economy seats, is making a strategic push into the more profitable premium seating market. Ultimately BEAV’s potential takeout valuation—which would have to consider a robust backlog and ramping retrofit cycle—coupled with the potential lack of synergy associated with the energy services business makes a spinoff a more viable strategy versus an outright sale or divestiture of the distribution business. By separating the interiors business from distribution, both entities appear more attractive as acquisition targets for a large commercial aircraft manufacturer or broad-based industrial distributor, given their profitability, stability, and continued industry consolidation. Regardless, the separation should lead to incremental cost synergies and increased operational flexibility for both entities. In addition, management will be able to focus increasingly on efficient capital allocation, free cash flow distribution policy, and growth initiatives.

Also worth noting is that senior management, en masse, are going to KLX; executive leadership for post-spin BEAV is likely to be announced at the company’s upcoming investor day on December 1st. BEAV has a 50% share of its market; so in the intermediate- to longer-term time frame, the acquisition-based component of its historical growth rate will dissipate. With KLX, not only will management be able to stay with a longer-growth-trajectory vehicle, but they might well secure better stock options and stock award packages, since KLX has a greater likelihood of trading at low initial valuation multiples. This may be a reason for management, which has intensive experience with a roll-up strategy, to potentially jump to a smaller vehicle with the same future possibilities as the parent company enjoyed.

While both companies are strategically well-positioned, an important investor concern centers around the long-term health of the aero cycle and the potential for an aircraft production bubble—particularly given BEAV’s 40% revenue exposure to original equipment manufacturers (OEMs), which is in turn linked to a civil aircraft delivery cycle that is expected to decelerate beginning in 2016. That said, BEAV appears able to sustainably outgrow the market and maintain double-digit revenue and earnings growth, owing to two trends. First, a continued mix shift toward wide-body aircraft should increase BEAV’s average revenue per seat (given more business class and food service solutions) and in turn drive incremental revenue growth. Second, BEAV should be able to grow its penetration within the cabin interior with its successful next-gen lavatory retrofit product.

The recent decline in fuel prices is also worth noting as a potential risk factor for both businesses should aircraft operators decide they can more profitably operate their existing fleets at the expense of new aircraft (fuel represents approximately 35% of airline operating costs). While oil, at approximately $75 per barrel, has indeed declined precipitously over the last six months, prices still appear too high to offset other fixed costs that would result in any meaningful production changes by aircraft operators. Also alleviating production concerns is the rate of global air traffic growth, which continues to outrun capacity, and robust utilization rates, with high load factors coupled with net delivery growth being measured at 2% to 3% per year. Moreover, the useful life of an aircraft has decreased from 28 to 21 years since 1999 given very poor economics on the fuel consumption of older aircraft, resulting in a spike in replacement demand.

While constructive on the long-term outlook for both companies, we believe the shares are likely to experience volatility leading into and following the spin-off. BEAV’s initial F2015 earnings guidance, pro forma for the spin (expected on December 1) may be moderately below consensus expectations—owing to higher interest expense associated with recent debt issuance, and incremental recurring expenses and a higher tax rate associated with KLX as an independent company. Another headwind is the potential for shareholder turnover given market capitalization and investment profile disparity between the companies. Post-spin KLX is likely to generate a market capitalization below $3 billion, which may cause large-cap, growth investors currently invested in BEAV to sell KLX on the spin-off. BEAV is currently present as a top-10 holding in three ETFs, which have an aggregate Assets Under Management (AUM) in excess of $5 billion. These ETFs track S&P mid-cap growth indexes, increasing the likelihood that KLX does not get pulled into another set of indexes or ETFs with significant amounts of AUM. Post-spin BEAV is a well-understood, more structural aerospace manufacturing story tied to OEM production and cabin retrofit. Expansion into lavatory retrofits, full galleys, and lighting systems also creates the potential for incremental earnings leverage. KLX, by contrast, faces negative headwinds associated with valuation multiple contraction in the energy sector, coupled with unfavorable comparable valuations. Ultimately, KLX’s energy services business will be valued against the Thomas Tools division of Schlumberger (NYSE: SLB), whose sale is expected to generate a valuation in the 6x to 7x EBITDA range. Longer term, however, the company appears competitively better positioned than peers and should benefit from a recovering aftermarket, coupled with the potential to accelerate both revenue and earnings growth from its expansion into a highly fragmented energy services market growing 20% annually.

Based on an analysis of projected EBITDA, sales, and assets, as well as potential acquisition multiples and dividend associated with the post-spin parent, one can arrive at post-spin fair value estimates of $55 for BEAV and $26 for KLX (based on a 1:1 exchange ratio). KLX will likely be accorded a lower multiple than BEAV, owing to a lower growth rate and visibility associated with the aftermarket and risk associated with the expansion into energy services. The spin-off should allow each entity to determine its own capital structure, cash allocation, and growth strategy, while making one or both more attractive as acquisition targets. Yet, with a sum-of-the-parts analysis suggesting a fair value of $81 per share, the transaction does not appear to offer enough potential price appreciation to warrant a purchase recommendation at this time. Coupled with a potential guidance reset and turnover in the shareholder base, we would recommend waiting for a better entry point on KLX below $22. While the current sum-of-the-parts analysis does not appear to unlock substantial incremental value, a look at BEAV’s historical performance may prove useful for longer-term investors, particularly given the strategic value of these assets and the potential for a renewed aerospace manufacturing growth cycle. Assuming KLX’s energy services business can demonstrate evidence of accelerating revenue and earnings growth, improving industry fundamentals and more favorable investor sentiment, it is reasonable to assume the business can expand into a 7x multiple (the high end of the comparable range). Similarly, should aerospace aftermarket demand continue its recovery, this segment of the business could expand into a 12.0x multiple (BEAV’s 10-year historical average), suggesting a valuation for post-spin KLX of $32 (23% upside to our fair value estimate). Similarly, it is feasible that BEAV’s manufacturing business may be able to expand from a 10.0x multiple today to 12.0x (its 10-year historical average) with incremental evidence of re-accelerating F2016 growth, suggesting a fair value of $64 (16% upside to our fair value estimate)

Visteon (“VC”) is a Tier 1 auto supplier with two distinct operating segments: (1) Climate Control, owned via a 70% stake in publicly traded Halla Visteon Climate Control (“HVCC”; ticker 018880 KS); and (2) Cockpit Electronics.

VC is in the latter stages of a multi-year transformation that has involved the divestiture of underperforming assets as well as acquisitions to bolster its more attractive businesses. Today, the company has a much more streamlined focus on its Electronics and Climate Control businesses, but with little operational overlap and industry trends seemingly pointing away from the conglomerate structure, VC could be evaluating a separation, via a spin-off or sale, of the two divisions. As standalone entities, VC’s businesses could become attractive acquisition targets with both strategic and financial suitors. (Based on the market value of HVCC, the implied multiple currently awarded the Electronics division is around 4.5x, a more than 40% discount to peers, suggesting adequate value is not being realized in the current corporate structure.)

Management’s public comments consistently affirm a commitment to the continual exploration of ways to unlock value for shareholders. Indeed, management’s actions since 2010 have demonstrated a willingness to pull multiple levers in that pursuit. As such, with the shares trading at an almost 25% discount to fair value, a separation transaction appears to be a logical avenue for management to explore on behalf of shareholders.

Considering peer group multiples and a mark-to-market valuation, one can ascribe an $81 per share value to the Climate segment and $56 per share to the Electronics division. Accounting for corporate/other costs of $11 per share as well as net debt and pension liabilities of $7 per share, a sum-of-the-parts valuation of $120 is derived.

NOTE: On the morning of publication, unconfirmed reports from South Korean media outlets reported that buyout firm Hahn & Co. was considering a purchase of Halla Visteon Climate Control Corp from Visteon Corp. In light of the unconfirmed nature of the reports we decided to publish the Hidden Opportunities report on Visteon Corp. given the fact that there remained significant upside to the current valuation on a sum-of-the-parts basis.

Occidental Petroleum Corp. (NYSE: OXY), based in Los Angeles, California, is an energy company operating in chemicals, midstream, and oil and gas. Primarily an oil producer (the fourth largest in the U.S.), the company also has interests in natural gas liquids (NGLs) and natural gas. U.S. operations are focused in the Permian Basin, where the company is the region’s largest oil producer, with a net share of approximately 16% of total production, and California, where OXY is the largest landholder. Internationally, production is located in the Middle East and South America. Occidental also has a chemicals segment, OxyChem. At year-end 2013, proved reserves totaled 3,487 MMboe (72% oil). OXY’s portfolio varies from that of most E&Ps in that it consists mostly of older, legacy assets already in production as opposed to new exploratory plays. The company is a leader in enhanced recovery, which includes advanced methods of increasing production from mature wells, such as carbon dioxide enhanced oil recovery (CO2 EOR), waterflooding and steamflooding, and hydraulic fracturing. OXY is one of the largest injectors of carbon dioxide for EOR in the U.S., with 60% of its current Permian production using this technique. At the same time, the company is accelerating investment in unconventional reservoirs, where stimulation techniques enable production from rocks with very little permeability, allowing the company to open up incremental plays in its existing Permian and California acreage.

OXY’s current restructuring can be viewed as one of the most significant transformations now occurring in the large-cap energy sector. Although OXY has more than doubled capital spending from 2010 to 2012, the company’s production, particularly in its unconventional U.S. acreage (California, Permian Basin, and Bakken Shale) has consistently lagged expectations. Despite delivering among the highest ROACE[1] and lowest net debt ratios among peers and the second highest dividend yield (double the peer average), OXY has underperformed the S&P 500 by approximately 60% and the energy group by approximately 25% since 2011. In particular, OXY’s California asset base has been a source of frustration, as a combination of complex geology, the state’s strict environmental scrutiny, and a slow permitting process has stymied growth. In response to shareholder activism in recent years, coupled with falling oil and gas prices, OXY has embarked on a “”shrink-to-grow”” strategy to find new accretive avenues for growth—building on a recent trend among large E&Ps such as ConocoPhillips (NYSE: COP), Hess Corporation (NYSE: HES), and Marathon Oil (NYSE: MRO), which have similarly divested non-core assets. Against this backdrop, in late 2013 management announced a plan to restructure and streamline its operations. On February 14, 2014, the company’s Board approved a plan to separate the California assets into an independent and separately traded company. In July 2014, a new management team was put in place for the California Resources Corporation (CRC) subsidiary, with plans to separate the business by the end of 2014. In recent months, OXY has been active in divesting non-core U.S. E&P assets, with a particular focus on selling a minority interest in its Middle East and North Africa (MENA) operations. Net-net, OXY’s goal is to become a smaller and more focused (and profitable) Permian Basin company with reduced political risk.

The spin-off company, California Resources (expected to list on the NYSE under the symbol “”CRC””), is considered the state’s largest oil and gas producer on a gross-operated barrels of oil equivalent (boe) basis as well as the largest land holder, at 2.3 million net acres. The company has a particular focus on the Monterey shale, a vast rock formation in central California spanning much of the state and estimated to hold two-thirds of the nation’s potential shale oil reserves. Over the past five years, the company has drilled over 570 unconventional development wells in the state (by far the most of any company). However, a combination of complex geology, regulatory scrutiny, and the limited success of unconventional drilling techniques has stymied production, dampening expectations for a resource once thought to rival other U.S. shale deposits and putting into question its long-term feasibility. While CRC targets production growth at a 7.5% compound annual rate through 2016 (190,000 boe per day, up from 154,000 boe per day in 2013), there is an understandable degree of skepticism among industry observers given the company’s recent history of disappointing results.

This planned spin-off transaction is unusual in that historically, most oil and gas transactions have involved separating different parts of the value chain (e.g., upstream and downstream), owing to divergent market dynamics, growth rates, and profitability. In this context, the benefits of creating a California-only oil and gas company are somewhat opaque. A more logical rationale for the spin-off may be based in OXY’s historical underinvestment (and that of the rest of the industry) in California exploration relative to other prolific U.S. basins—the result of the region’s unique regulatory and technical risks. From an operational perspective, CRC should benefit from a dedicated management team that can focus exclusively on the business given its specific challenges and requisite specialized expertise. Whereas historically OXY has reinvested California’s free cash flow elsewhere in its E&P portfolio toward higher returns, an independent CRC will invest most of its operating cash flow toward growing future production, while balancing growth versus returns longer term. CRC could also potentially benefit from further developing its unconventional assets.

Following the spin-off, OXY will maintain its exploration and production operations in the Permian Basin and other parts of Texas, in the Middle East, and in Colombia. The company will also retain its midstream and marketing segment and its chemical subsidiary, OxyChem. The company will distribute 80.1% of the equity of CRC to OXY shareholders (distribution date of November 30, 2014), and will retain the remaining 19.9% of the equity for up to 18 months, during which time it will conduct an exchange offer for OXY shares (any remaining equity at the end of this holding period will be distributed to shareholders). For OXY, the spin-off, coupled with the ongoing sale of non-core assets and reduced exposure in MENA, should bring into focus the company’s position as one of the largest Permian players, complemented by its midstream and chemicals assets.

Despite the obvious strategic benefits of OXY’s asset divestitures and ongoing restructuring, a combination of industry and company-specific concerns is likely to generate considerable volatility for the shares in the near term. From a macro perspective, the downward trajectory of crude prices has pressured shares of oil-focused producers in recent months. Moreover, execution risk for OXY remains high, as the company balances a restructuring of this magnitude while executing a major unconventional drilling program. In particular, there is considerable skepticism over whether OXY can deliver operationally in the Permian to achieve its targeted production of 270 Mboed (thousand barrels of oil equivalent per day) by 2016 (a 27% increase from 2013 levels), given a track record of disappointing growth over the past several years. Visibility into the timing of the company’s complicated MENA sell-down (and other asset disposals) also appears elusive.

The upside case, given OXY’s history of underperformance, is that the company could begin to deliver operationally in the Permian Basin (ramping up unconventional production), execute incremental asset sales, and return excess cash to shareholders—potentially rendering the shares a more defensive play in a lower oil price environment. A robust balance sheet (no debt, and cash bolstered by an incremental $6.2 billion from CRC), healthy dividend yield (at about 3.0%, the second highest yield of an E&P company, and above the S&P 500 average of 2.0%), and an aggressive share repurchase program (funded by the spin-off and monetization of assets) would support a more positive long-term view. In particular, share repurchase and dividend growth are incremental areas for value creation that could mitigate volatility in the stock price and partially offset operational and industry risks, particularly in the event of a continued oil price decline. A back-of-the-envelope calculation would suggest that OXY could have over $15 billion of surplus cash– including the CRC dividend ($6.2 billion), the MENA equity sell-down ($6.5 billion), and the sale of its 10% interest in Plains All-American Pipeline (NYSE: PGAP), which would net approximately $3.5 billion after tax. Repurchases could represent approximately 13% of the company’s current market capitalization (and potentially over 13% of the company’s post-spin market capitalization), assuming OXY repurchases approximately $7.9 billion (100 million shares) of its shares, as projected. Assuming this is spread evenly over a three-year period, the combined cash returns to shareholders will be 8% annually, potentially one of the highest cash returns to shareholders in the large-cap oil and gas sector.

CRC, as a pure-play California oil growth story, is likely to face similar valuation headwinds in the current market. Given the parent company’s history of disappointments, investors will likely want tangible proof that CRC can deliver on production targets. The company’s debt burden may also pressure the valuation. Moreover, OXY’s more defensive investment profile (more proven production relative to peers, and increasing dividends and share buybacks), contrasts sharply with that of CRC.

Based on an analysis of proved reserves, production, projected EBITDA and pre-interest cash flow, and discounted future net cash flows for both entities, one can arrive at post-spin fair value estimates of $79 for OXY and $19 for CRC (based on a 0.4994:1 distribution ratio). On a pre-spin basis, OXY stock can be valued at $86 per share, consisting of $77 per share of OXY (post-spin value less 19.9% ownership in CRC) and $9 per share of CRC. While the spin-off of a problematic asset, coupled with incremental restructuring and an improved balance sheet, should generate more confidence in OXY’s core Permian asset base, the shares do not yet offer enough potential price appreciation to warrant a purchase recommendation at this time—particularly in an uncertain environment for oil pricing and given specific operational risks. That said, the lack of immediate upside should not be surprising considering this is not a value-unlocking transaction but a key step in the parent company’s ongoing restructuring process.

Con-way is a diversified transportation provider operating three distinct business segments: (1) Less-than-Truckload (LTL); (2) Truckload (TL); and (3) Logistics (Menlo).

While industry fundamentals will likely be supportive of improving results over the next few years, and internal initiatives appear to be gaining traction, CNW could consider separating, via a spin-off or sale, its three businesses for several reasons. First, CNW is awarded a valuation multiple based on its largest segment, LTL, which has underperformed peers over the last several years and is historically awarded a valuation multiple that lags both TL and Logistics comparables. Second, the initial strategic rationale for the current conglomerate structure has largely been abandoned. Third, as standalone entities the TL and Logistics businesses could be attractive acquisition targets with willing buyers, given the ongoing consolidation of those markets.

Over the last 1-, 3- and 5-year periods, CNW’s stock has underperformed virtually all of its LTL, TL, and Logistics peers; consequently, the company could see increased shareholder pressure to create value. That said, public commentary suggests that while CNW annually evaluates its strategic options and is generally open to all value-creating measures, in the absence of any significant pressure from shareholders, its near-term focus will likely remain on improving underlying operations.

Considering peer group and acquisition multiples, we value the LTL segment at $40 per share, the TL segment at $13 per share, and the Logistics segment, Menlo, at $12 per share. Accounting for incremental corporate costs, other income, and net debt of $8 per share, a sum-of-the-parts valuation of $57 is derived.

Future potential catalysts include a separation or sale of one of CNW’s three businesses, improving industry fundamentals, better internal execution, and/or share repurchases. Potential risks include management inaction or lack of execution, pricing irrationality, and/or a recession.

DREAM Unlimited’s profitability has declined since it was spun off from Dundee, and the price of the stock followed suit. However, Dream is currently undergoing a transformation, devoting more resources towards its homebuilding division. Why is that important? Because an increasing number of lots is used internally, thereby deferring revenues until the construction of single and multi-family real estate is complete—a process that can last longer than a year. While the short-term profitability is reduced, net income is expected to rebound once significant projects come online, and the company’s management expects 2016 to be the year that the transformation is completed.

Yet investors currently have the opportunity to purchase shares of Dream at a reasonable P/E ratio, 16.3x, that does not appear to incorporate the probability of significantly higher earnings in the next two years.

Irrespective of short term profit volatility, most of Dream’s value lies within its balance sheet and, more specifically, its land bank. The company owns significant acreage that can be developed into more than 40 thousand lots—decades’ long of supply at the current sales pace. The implications of the significant land ownership are twofold: Firstly, the company can more easily control the pace of its sales—housing inventory has significant maintenance costs so it has to be sold fast, while land sales can be postponed. Secondly, Dream has enough land to construct its own real estate for decades. Thus, unlike other homebuilders, it does not have to constantly replenish its land bank to stay in business. That practice allows for minimal cash generation at other competitors, a problem that Dream does not face.

Moreover, Dream’s raw land holdings, recorded on its balance sheet at CAD 374 million, are worth multiples of that amount. Based on recent sales prices and gross margins, the 8.3 thousand acres of undeveloped land could generate approximately CAD 5,760 million in revenues and CAD 2,290 million in gross profit, a noteworthy fact given that Dream’s enterprise value is below CAD 1,470 million.

The asset management division, with almost CAD 15 billion in assets, is another source of value that is not depicted on Dream’s balance sheet. During the second quarter of 2014, the company generated CAD 7.5 million in fees, of which CAD 7 million comprised base fees that are of a recurring nature. Additionally, asset management is a very profitable business, generating gross margins between 60% and 70.

With land holdings worth a significant premium to book value and an extremely profitable and growing asset management division, DREAM Unlimited represents uncommon value, and its shares are consequently recommended for purchase. The company’s stock is valued between CAD 15.9 and CAD 23.9. The current stock price also allows for a significant margin of safety—permitting the purchase of the company’s assets at a discount while getting the asset management business for free and retaining the optionality of improved profitability when the transformation of the company is completed.

On July 31, 2014, Cash America International Inc. (NYSE: CSH) filed a Form 10 with the SEC formalizing the company’s plans to spin off its online consumer lending business, Enova International Inc. The filing followed the April 2014 disclosure that CSH was reviewing a potential spin-off of the online-focused business, and a failed attempt to take Enova public in July 2012. Cash America will distribute 80% of Enova International’s common stock via a tax-free distribution on November 13, 2014, to CSH shareholders of record as of November 3, 2014. Shares of Enova will begin regular-way trading on the NYSE on November 13, 2014, under the symbol “”ENVA””. CSH shareholders of record will receive 0.915 shares of ENVA for every share of CSH owned. David A. Fisher, currently the CEO of the online business, will carry on his role at Enova following the spin-off. CSH plans to sell the 20% ENVA stake as soon as reasonably feasible.

Cash America is the largest pawnshop operator and pawn loan provider in the world, with approximately 950 locations in the U.S., U.K., and Australia. In addition to the pawn operations, the company entered into the online unsecured lending business in 2006 via acquisition, a strategy that Cash America has used throughout its history to facilitate growth in what is typically a fairly stable pawn industry. The primary services offered by CSH are pawn lending, consumer lending, and ancillary financial services, including check cashing and consumer loans. Pawn lending and disposition of pawned items account for a large percentage of the company’s revenue; however, the lending business, both at retail locations and online, has grown to become roughly 50% of Cash America’s business.

Consumer loans take the form of unsecured short term borrowings, often referred to as payday loans, and unsecured medium term installment loans. CSH customers lack access to traditional sources of credit, allowing for extraordinarily high annualized interest rates and fees to be charged. For example a payday loan’s annualized rate of return could easily exceed 300%, when fees are included. Similarly, pawn loans can also achieve over 100% rate of return depending on length of pawn and the ultimate repayment or disposition price of pawned merchandise. There is a counterbalance to the high rates, which is a much higher rate of loan loss; the CSH rate is recently below 20%. Unlike a traditional bank, though, these companies do not employ much leverage; the CSH debt to equity ratio is 62% in its current corporate structure. This different mix of interest rate, charge-off experience and leverage ratios produces, among CSH and comparable companies, a return-on-assets level of profitability in the 5% to 12% range, whereas a traditional bank like Wells Fargo will have an ROA in the 1-2% range, with a leverage-inflated ROE in the 12% range.

The separation of the E-Commerce segment into Enova appears to make sense in terms of the goal of splitting the faster-growth and higher-margin online business from the steady, cash-flow-focused pawnshop business. However, the largest benefit to CSH is a clearer separation of risk profiles between the retail operations, centered in North America, and the much newer online lending business, which has exposure to various international markets. The online lending business is currently exposed to significant legislative/regulatory risks that could restrict business practices in the near future. In the UK Enova has already begun to operate under rule changes that are expected to reduce loan volumes, as that country has implemented affordability reviews and limits on lending and fee collection. The ultimate impact on Enova’s business is still unclear with respect to the magnitude of loan and revenue declines, as evidenced by the wide range of management’s guidance for the company’s performance in 2015. The uncertainty surrounding Enova’s ability to operate and charge high fees to subprime borrowers will likely result in a depressed valuation until clarity is resolved on the regulation front in the US and regarding the impact on UK operations.

The post-spin parent company will retain its retail pawn store business, where ancillary services are offered at some locales, and will continue a growth-by-acquisition strategy. The pawnshop industry is highly fragmented, with significant number of operators operating a small number of shops, presenting opportunities for CSH’s management to acquire competing pawn shops in attractive markets. Earnings at store-level retail operations have declined in recent years due to the economic weakness following the 2008/2009 financial crisis and as the fall in the price of gold has affected the company’s ability to dispose of jewelry at higher prices. As gold price declines appear to have at least halted following the experience through most of 2014 year to date, and with the company coming up on the anniversary of its switch of practice from selling gold for scrap to selling refined pieces at retail outlets, store-level earnings should see a higher degree of stabilization.

Based on relative comparable-company valuations and forecast 2015 earnings, post-spin fair value estimates of $15 per share of CSH and $32 per share for ENVA can be derived. On a pre-spin basis, CSH stock can be valued at $43 per share, consisting of $14 per share of CSH (post-spin value less 20% ownership in ENVA) and $29 per share of ENVA (accounting for the share distribution ratio). Given the regulatory risks associated with both companies following the separation, the shares are not recommended for purchase at this time. If ENVA’s business can weather the UK regulation changes and potential implementation of US regulations, it may be able to operate a highly profitable online lending business. However, the regulatory risks would have to be clarified before the shares are reevaluated for recommendation. The pawn-based business is exposed to less risk, and will grow at a slower pace than the online business. Investors interested in the retail-based business could consider initiating positions at around $12 per share.

On April 29, 2014, Alliant Techsystems, Inc. (NYSE: ATK) announced plans to separate its aerospace and defense businesses from its outdoor sports business, Vista Outdoor, via a tax-free spin-off of Vista to ATK shareholders. Immediately following the transaction, ATK will merge its standalone aerospace and defense segments with Orbital Sciences Corporation (NYSE: ORB) in a tax-free Morris Trust transaction. The new entity will adopt the moniker Orbital ATK and is to be listed on the NYSE under the ticker “”OA””. Current ATK shareholders will own approximately 53.8% of the newly merged company, with Orbital shareholders owning the remaining 46.2%. ATK shares will be distributed to Orbital shareholders on a fixed exchange ratio of 0.449:1. Orbital ATK expects to retain roughly $1.7 billion of existing debt following about a $350 million cash distribution from the spin entity, Vista. Mark DeYoung, the current CEO of ATK, will become the CEO of Vista Outdoor, while David Thompson, the current CEO of Orbital, will lead the combined Orbital ATK. ATK’s current Chairman, General Ronald Fogleman, will serve as Chairman of Orbital ATK. The transaction was initially expected to close before the end of 2014, but management comments on Orbital’s most recent earnings call suggested that the need to await receipt of regulatory approval may push the timing out to January 2015.

Beyond the standard stated rationale for such transactions, including improved strategic clarity, management focus, and capital allocation, the proposed deal broadly aims to separate ATK’s fast-growing sporting unit (i.e., deserving of a higher valuation multiple than the parent company) from its slower-growing aerospace business and contracting defense unit, which has been hurt in part by declining ammunition sales to the military and budget sequestration, while simultaneously merging it with a higher-growth but smaller peer that has attractive exposure to the commercial satellite, launch vehicle, and missile defense markets.

Vista Outdoor, on a standalone basis, will be a leading producer of ammunition and outdoor sporting accessories, such as binoculars, holsters, and other accessories for hunters and members of law enforcement. With its preferred brands, such as Federal Premium and Speer, and given the growing popularity of sport shooting and hunting amid increased fears of regulation, the company’s core ammunition business has posted mid-teens revenue growth as well as an expanding margin profile over the last few years. Moreover, the company has bolstered its firearms and outdoor sports accessories businesses via the acquisitions of Bushnell in November 2013 and Caliber Company, the maker of Savage Arms, in 2011. Pro forma for the 12 months ended December 2013, Vista generated $2.2 billion in revenue and $361 million of EBITDA. While management continues to expect mid- to-high-single-digit revenue growth, excluding acquisitions, for F2015, there is concern that operating margins, which on a pro forma basis stood at 13.2% in the most recent June quarter, are approaching a cyclical peak and could see modest downward pressure. Based on expected trends, peer multiples of earnings, and a leveraged buyout (LBO) analysis, a post-spin fair value estimate of $70 can be derived.

The merger of ATK and Orbital appears strategically sound, as both are well positioned in their respective markets, and the product overlap of the companies, which have partnered on dozens of projects over the last 25 years, is de minimis. Indeed, the combination will offer vertical integration opportunities between ATK’s propulsion and satellite component offerings and Orbital’s launch vehicle and satellite systems. Broadly, the new Orbital ATK will have an industry leading position in the space and aeronautics markets (60% of revenue) as well as the non-space defense sector (40% of revenue). Per company filings, the combined company generated $4.5 billion of sales, $435 million of EBIT (~10% margin), EBITDA of $585 million, and EPS of about $4.00 in the calendar year 2013. As well, management has articulated three-year targets for compound annual revenue and EPS growth of 4%-5% and 12%-15%, respectively, as well as cumulative free cash flow of at least $1 billion. (Note: included in guidance is $150-$200 million of annual revenue synergies as well as $70-$100 million of annual cost synergies to be realized by the end of 2016.) Based on peer multiples of earnings, and cash flow as well as asset value, a post-merger fair value of $74 can be derived.

Based on the projected market capitalization of Vista Outdoor and the expected 53.8% interest ATK shareholders will have in post-merger Orbital ATK, the implied pre-spin fair value for current ATK shares is about $146 per share (versus the current price of $127.62). Based on the expected 46.2% interest that ORB shareholders will have in Orbital ATK, the implied pre-merger fair value of current ORB shares is about $34 (versus the current share price of $29.51). As such, it appears investors could consider pre-transaction investments in either stock, but given the slightly greater aggregate potential implied upside in shares of Orbital Sciences Corp., it may be the more appealing option.

Post-spin, the standalone Vista entity, which, based on ORB’s current share price of $29.51 and the fixed 0.449 exchange ratio, is implicitly trading at around $62 per share, could experience a degree of initial selling pressure as the shareholder base turns over and investors grapple with concerns that ammunition earnings are peaking. That said, a sell-off would likely present an attractive longer-term buying opportunity, assuming the company can come even close to achieving the double-digit top- and bottom-line growth, including both internal and acquisitive expansion, anecdotally targeted by management. In that context, the outlook for M&A at Vista looks particularly attractive given the underlying fragmentation of its markets and the company’s expected financial flexibility.

On May 8, 2014, Liberty Media Corp. (NASDAQ: LMCA, LMCK; OTC: LMCB) (“LMCA”) announced that the company would spin off shares of Liberty Broadband, which will include Liberty Media’s holdings in Charter Communications Inc. (NASDAQ: CHTR), along with wholly owned subsidiary TruePosition, a minority ownership position in Time Warner Cable Inc. (NYSE: TWC), and liabilities related to deferred taxes and revenue. Post-separation, Liberty Media will primarily consist of the company’s holdings in Sirius XM Holdings Inc. (NASDAQ: SIRI), along with smaller public holdings.

Shares of Liberty Broadband Corp. will be distributed on November 4, 2014, to shareholders of record on October 29, 2014. Liberty Media shareholders will receive one share of Broadband for every four shares owned of the respective Liberty Media class. Class A and C shares of Liberty Broadband (“Broadband”) will trade on the NASDAQ under the symbols “LBRDA” and “LBRDK”, respectively; Class B shares will trade OTC under the symbol “LBRDB” beginning November 5, 2014.

Following the common stock distribution, Broadband shareholders will receive one subscription right to acquire one share of Series C common for every five shares of each class of Broadband stock owned. The subscription right will be priced at a 20% discount to the initial 20-trading-day volume-weighted average. The distribution date for the rights offering is December 10, 2014, with a record date of November 19, 2014.

Based on the current discount of 11% at which LMCA shares trade compared to the estimated net asset value (NAV) of LMCA’s public and private holdings, the shares are recommended for purchase prior to the spin-off of Liberty Broadband. The spin-off transaction should prove to be a value-creating catalyst, as creating two separate companies, each of which is essentially a pure play on one holding (SIRI for LMCA and CHTR for LBRDA), will reduce the current conglomerate discount. A pre-spin fair value estimate for shares of LMCA of $52 is derived via the calculated NAV.

Liberty Broadband becomes a pure play on the consolidation of the cable industry. The mega merger between Comcast Corp. (NASDAQ: CMCSA) and Time Warner Cable Inc. shows industry willingness to consolidate in an effort to leverage power over rising content costs and competition from over-the-top (i.e., internet-based) services that could be considered a disruptive technology to the cable providers. CHTR appears to be an attractive industry consolidator given that the current subscriber count is well below the maximum allowed by law. Liberty Broadband looks to have ample liquidity, care of availability on its revolving line of credit, cash to be raised in the rights offering, and modest debt levels, to acquire a larger stake in CHTR and exert a greater influence on the strategic direction of the company. Shares of LBRDA can be valued at $51 per share based on the current market prices of CHTR and TWC following the rights offering.

It should be noted that the Broadband valuation ascribes minimal value to the wholly owned subsidiary of TruePosition. TruePosition’s location-based services and proprietary technology may benefit from recent legislative changes. However, the ultimate potential scale of the benefit to TruePosition is unknown at this point. It does not appear that much, if any, value is currently being ascribed to the business within LMCA. Upon separation, with CHTR held by LBRDA, it is unlikely to garner much value either, and could be considered optionality. However, TruePosition could prove to be a valuable asset to shareholders in the future.

Liberty Media’s valuation will primarily consist of Sirius XM’s value. SIRI has a large and growing customer base and a significant installed base of receivers that present a major hurdle for new market entrants that might attempt to take share. The company is now profitable and has turned into a major free cash flow generator that has the ability to repurchase large amounts of equity. At this point, LMCA is not selling into the repurchases. If repurchases continue, LMCA’s proportional ownership will increase as the shares not owned by Liberty are retired (i.e., no additional capital is needed to increase ownership). Further, business fundamentals appear strong despite competition from internet-based music services, since 70% of new cars come equipped to receive the service, and the total cars number of cars that will be SIRI enabled is expected to total 120 million in the next few years. Not to be overlooked, LMCA’s ownership of Live Nation Entertainment Inc. (NYSE: LYV), which also generates sizeable cash flow and presents optionality to investors based on the future monetization of video content. Initial post-spin trading for LMCA should approximate $38 per share based on the current market value of LMCA’s holdings. Growth from the underlying businesses provides ample upside of approximately 16% from the initial trading values based on the valuation of SIRI. As such, shares would be recommended at the $36 level based on the thesis that the SIRI share price will appreciate in the future.

On April 11, 2014, Vornado Realty Trust (NYSE: VNO), a commercial property real estate investment trust (REIT), announced plans to spin off its shopping center operations through a tax-free distribution of shares to VNO shareholders. The spin entity, which will be structured as a REIT, will consist of 81 strip centers and 4 malls. Following the separation, VNO’s portfolio will largely consist of office properties and street level retail space in New York and Washington, D.C.

Jeffrey Olson, currently CEO of shopping center REIT Equity ONE Inc. (NYSE: EQY), will become Chairman and CEO of the yet-to-be-named spin entity. Steven Roth, Chairman and CEO of VNO, will also serve on the spin entity’s board. The transaction is expected to be completed in 4Q 2014, pending an effectiveness declaration of the company’s Form 10 filing, approval for listing of the spin entity by a major exchange, and final Board approval. VNO expects that its current $2.92 per share annual dividend will be maintained through a combination of the post-spin dividends of the two post-spin entities. The spin entity’s portfolio of 85 retail properties totals approximately 16.1 million square feet, with an average occupancy of 95.5% as of year-end 2013.

The spin-off of the regional strip centers is a large step in management’s two-year-old plan to reduce the complexity of Vornado’s operations. The transaction is structured to separate relatively lower-return assets (strip centers) from the premier assets (Manhattan/Washington, DC) held by the parent company. In turn, three goals can be accomplished. First, the parent company’s operating and growth statistics will likely immediately improve, which should result in a higher valuation multiple, all else equal. Second, the spin entity appears to be unduely discounted within the current corporate structure. As a standalone company, SpinCo will almost certainly be rerated at a higher valuation than is implied within the current share price, which could converge towards peer-group pricing. Third, , the spin entity has the opportunity to make investments in assets that likely would not have been made within the context of the larger corporate structure. The spin assets are not necessarily poor assets; however, they exhibit lower operating metrics such as sales per square foot. This means that Vornado’s investment decisions favor the premier properties, which typically generate a higher rate of return over time. As a result, Vornado’s funds are more routinely invested in larger properties, thus creating a self-fulfilling prophecy whereby the lower-return assets are underinvested in over time and become perpetual portfolio laggards. With a separate capital structure, investments and/or acquisitions can be made that will benefit the standalone spin entity.

SpinCo should be able to capitalize on a strengthening American consumer to maintain occupancy, while $100 million of reinvestment opportunities have been identified that could help increase average rents charged. Over the past two years management has been effective in increasing base rates upon lease renewals. Further, low debt costs and attractive strip center asset pricing should allow selective accretive acquisitions to be made in growing the portfolio.

Post-spin Vornado appears well positioned in the Manhattan market to capitalize on current low vacancy rates and a constraint on new supply due to various factors, including zoning regulations and a lack of available buildable real estate. The constrained supply will likely allow continued increases in rent, approximating the rate of recent years. The street level retail properties in New York should benefit from the same market characteristics. Of particular interest may be VNO’s ownership of the Hotel Pennsylvania, located in the western portion of Manhattan’s Midtown directly across the street from Penn Station. The property contains a hotel, commercial office space and street level retail. The hotel charges rates that are reasonable for the location and has improved occupancy in recent years: however the office space and retail portions lag the broader New York portfolio. Western midtown is one of the last remaining portions of Manhattan that has yet to be fully redeveloped. Upon completion of a redeveloped trade area, the Hotel Pennsylvania could prove to be a highly valuable asset, one whose value appreciation could be very significant and that today understates the potential cash flow of the New York segment.

The Washington, DC market will likely prove more challenging; however, it has the potential to rebound from steep declines in office space occupancy resulting from US government-related base closures and realignment.

Pre-spin VNO shares trade at a slight discount to other premier office property REITs, likely due to the complexity of the business model, which includes investments in other companies such as Toys “R” Us and the incorporation of the strip center business. Strip centers trade at a sizable discount to peers. Applying price to funds from operations (FFO) comparable multiples, estimated cap rates, and estimated dividend yield analysis to SpinCo and post-spin VNO, a pre-spin sum-of-the-parts valuation of $114 per share can be derived. The pre-spin valuation comprises $101 per share of post-spin VNO and $13 per share of SpinCo ($26 on a post-spin basis, accounting for the planned 1-for-2 share distribution).

Given that Vornado shares currently trade at just under $105 per share, the market is ascribing only $4 per share to the strip center business. Upon separation it could be expected that SpinCo will be revalued, resulting in the unlocking of approximately 10% in value, in our view.