Cosan SA Indústria e Comércio (“Cosan” or “Cosan SA”) is one of Brazil’s largest corporations, with interests in businesses operating in the infrastructure and energy sectors. Cosan operates under a holding company structure. Its main wholly or partially owned subsidiaries and joint ventures include Raízen Combustíveis, Raízen Energia, Comgás (CGAS3 BZ), Rumo, Radar and Cosan Lubrificantes. The company was created when its Chairman, Rubens Ometto Silveira Mello, consolidated his family’s sugar mills. It has expanded rapidly, particularly since 2000, and has partnered with major oil corporations, such as Royal Dutch Shell Plc (RDSA LN).

On February 24, Cosan announced its intention to spin off its interest in its logistics subsidiary, Rumo, through a distribution in specie of Cosan Logística. The new entity will own a 75% stake in Rumo, with the remainder held by Cosan’s current partners, TPG and Gávea Investimentos. Existing shareholders will receive one share of Cosan Logística for each share of Cosan SA they own. The spin-off was approved by shareholders on October 1, 2014. The day after the decision, shares of Cosan SA Indústria e Comércio will trade ex-distribution, while at the same day Cosan Logística shares will start trading under the ticker “RLOG3”.

The demerger will essentially lead to the separation of Cosan’s energy and infrastructure businesses. Due to the fact that Rumo is a logistics company, and therefore a user rather than a provider of railroad infrastructure, its results tend to be more volatile compared to the parent corporation. Furthermore, Rumo has reached a critical size that now allows it to operate effectively as a standalone entity, and will be able to proceed with an all-stock merger with ALL-América Latina Logística SA (ALL3 BZ).

Rumo is 75% owned by Cosan SA. Thus, Cosan Logística, the entity existing shareholders will receive, will inherit that stake. The company specializes in the transportation of sugar, using road and rail transportation networks as well as its warehouses to move the commodity from sugar mills to the port of Santos where clients, such as commodity traders, take delivery for export. Given that Brazil is considered an emerging market, combined with Rumo’s relationship with Cosan’s sugar operations, it appears that the company is poised to expand rapidly. The offer for ALL, which currently grants rights to Rumo to operate in its rail network, appears to reinforce that perception.

On the other hand, the transportation of agricultural commodities is volatile, as shipments are affected by the quantity harvested. The transportation of sugars is additionally affected by the price and demand for ethanol, which can shift the sugarcane refining mix away from sugar. Combined with the uncertainty of the ALL merger, one should be cautious with the valuation of Cosan Logística, as it may initially be skewed upwards in anticipation of the transaction. A fair value appears to be BRL 4 per share, with a high case of BRL 4.3 per share and a low case of BRL 3.2 per share. Taking into account the aforementioned causes of concern, shares of Cosan Logística are recommended for purchase at a price below the low end of the valuation range.

Following the spin-off, Cosan SA will focus primarily on energy production and distribution as well as sugar refining. Its structure will remain complex; it will operate through five main subsidiaries, of which two are classified as joint ventures, one of which is publically traded, and various other businesses. Currently Cosan consolidates the results of Cosan Lubrificantes, Comgás and Radar. On the other hand, Raízen Energia and Raízen Combustíveis are deconsolidated entities, with neither their EBITDA nor debt included in Cosan’s income statement and balance sheet, respectively. It is clear though that most of Cosan’s value is derived from its two joint ventures.

Cosan SA will also continue to be responsible for the bulk of Mr. Ometto’s net worth. It has grown substantially, with many of its subsidiaries created in the last decade. Moreover, it appears to be a credible partner of large integrated oil and gas majors. Its Cosan Lubrificantes wholly-owned subsidiary produces and markets lubricants under the Mobil brand in Brazil, while Raízen Energia’s and Raízen Combustíveis’ joint venture partner is Shell. In fact, the British oil major is considering swapping its stake in these two business with shares of the parent company, Cosan. By valuing each business separately, one arrives at a valuation of BRL 43.8 per share. An appropriate valuation range is between BRL 38 and BRL 49.6 per share. Cosan’s owner-operated characteristics and its partnership with reputable foreign firms instills a greater degree of confidence that the company could trade at the higher end of the valuation range in the future.

On January 20, 2014, Kimball International Inc. (NYSE: KBALB, OTC: KBALA) announced plans to spin off its Electronic Manufacturing Services segment into a standalone company called Kimball Electronics. KBALB will retain its furniture manufacturing operations under the name Kimball International. Shareholders of record will receive three shares of KE for every four shares of KBALB owned. Upon completion of the transaction, current CEO James C. Thyen will retire. Kimball Electronics Group President Donald D. Charron will serve as CEO of Kimball Electronics, while Robert Schneider, KBALB’s current CFO, will assume the CEO role at Kimball International. The separation still requires legal opinion in relation to the tax-free status of the spin-off, an effectiveness declaration of SEC filings, and final approval from the Board of Directors. The transaction is expected to be completed sometime in the fourth quarter of the calendar year.

As part of the transaction, Kimball intends to combine its current dual class structure into a single class of shares. As of August 2014, there were 7.7 million Class A shares and 30.7 million Class B shares outstanding. Class A shares elect all but one director, while Class B shares have a small dividend preference. Class A shares are fully convertible to Class B shares on a 1:1 basis. Once Class A shares account for less than 15% of shares outstanding, the dual class structure is eliminated. The transaction is pending conversion of additional A shares.

Kimball’s Electronics Manufacturing Services group (EMS), which represents approximately $700 million in annualized revenue (58% of total sales), and which is growing approximately 5% annually, provides electronics manufacturing assemblies in the medical, industrial, automotive, and public safety markets. Revenue growth in this business has been extremely volatile – ranging from a ten-year high of 14% year-over-year growth in F2013 to a 15% decline in F2012 – largely the result of demand fluctuations and the effects of customer concentration. The company is uniquely positioned, both as a mid-sized EMS player in a heavily consolidated industry dominated by a handful of global competitors and by its strategic focus on emerging markets. More recently, this business can be viewed as a play on the rapidly growing demand for automobiles as well as the increasing requirement for automotive intelligence, with the company benefiting from growth in the U.S. and China.

Kimball’s furniture segment, which focuses exclusively on the office and hospitality markets, represents approximately $540 million in annualized revenue (42% of total sales). This business is similar to the durable goods industries from a demand perspective, with performance directly tied to the broader economy and employment trends. Revenue growth has been similarly volatile – ranging from a precipitous 10-year 27% decline in F2010 and subsequent high of 16% year-over-year in F2011. Revenue has remained essentially flat over the past four years as the market for U.S. office construction and occupancy remains in recovery, with industry growth still lagging historical norms in a post-bubble era.

Looking into F2015, the outlook appears generally stable for both businesses, with year-over-year revenue growth estimated at 6% for the combined entities. Estimated F2015 consolidated revenue growth of 6% (based on current Bloomberg consensus) is slightly below the 8% experienced in F2014. Profitability, however, varies widely; the 6% EBITDA margin for EMS trends in line with industry peers, while the furniture segment’s 4% EBITDA margin lags comparables, likely due to cost inefficiencies associated with a reduced footprint. Both businesses are capital intensive and subject to relatively high fixed costs, increasing commodity and materials pricing, and competitive pricing pressure, all of which may limit long-term profitability. These operational headwinds have necessitated expansion and optimization of manufacturing, sales, and distribution assets in lower-cost geographic areas (consistent with industry competitors) and are exacerbated by Kimball’s position as a relatively small player in each of its respective industries. As a result, the spin-off may give each entity the flexibility to leverage its balance sheet to achieve greater scale and potentially expand earnings leverage.

Clearly these are two very disparate businesses and, historically, Kimball has struggled with execution, as the relative underperformance and outperformance of either segment has resulted in a metaphorical two-legged stool situation, weighing on the company’s blended revenue and earnings growth. This unusual composition – coupled with a dual-class equity structure – has weighed on valuation, with both segments historically underperforming peers. Accordingly, a separation would afford investors a choice, and may eliminate the ‘conglomerate discount,’ while providing each company with the ability to invest appropriately for growth.

Kimball shares can be said to have exhibited many characteristics sought by value-oriented investors, including a strong balance sheet with negligible debt, an attractive dividend yield ($0.20/share, or 1.27%), and, historically, a reasonable relative valuation. At the end of F2013, KBALB shares traded at approximately a 7% discount to tangible book value (TBV) of $10.42. Despite trading at a meaningful discount to historical multiples, KBALB shares have appreciated approximately 18% since January 2013 and currently trade at a premium of approximately 30% to TBV of $11.31 (book value has remained essentially flat for the past ten years), implying that upside from the current price of the combined entities may be limited. On a price-to-earnings basis, KBALB shares trade at 16x estimated F2015 EPS (based on Bloomberg consensus estimates), a premium to both furniture and EMS peers (which trade at 15x and 13x, respectively), which may be unwarranted given the company’s reduced profitability relative to peers.

For post-spin Kimball International (“”KBAL””), it appears that investors may already be pricing in a recovery in the office furniture market, particularly as most industry forecasts suggest an improving 2015 outlook. That said, uncertainty surrounding the timing of the company’s return to historical growth will likely linger until the outlook for U.S. office construction, occupancy, and employment improves. Longer term, the combination of increased competition and elevated commodity costs may remain a drag on profitability, requiring KBAL to acquire local manufacturing internationally and expand distribution in order to achieve scale. Kimball Electronics (“”KE””), as an independent company, appears well-positioned to benefit from healthy trends in the automotive and industrial sectors (growing at a five-year CAGR of 20%), yet faces potential revenue risk associated with the loss of its largest customer, representing 13% of F2014 sales.
Ultimately, both KBAL and KE can be characterized as small businesses in intensely competitive markets where scale is a key determining factor for competitive success. That said, for potential investors willing to tolerate the near-term revenue risk and ensuing volatility at KE, the company may be able to leverage its scarcity value over time. Specifically, the EMS industry continues to streamline the supply chain, favoring broader, solutions-based EMS suppliers, thus supporting the argument for further consolidation. While a potential sale does not appear to be a motivating factor for the spin-off, it would not be unreasonable to view KE as a potential acquisition candidate over time, particularly given consolidation in the EMS industry.

While it may be possible for KE to generate increased equity value as a scarce resource, the reverse may hold true for KBAL. Specifically, the company’s historical advantage as an office pure-play may diminish over time as the traditional office market converges with the home/consumer markets, resulting in saturation or erosion of KBAL’s addressable market and future profitability. Already, Kimball’s competitors have begun to increase their consumer presence via acquisition, product line expansion, and distribution – potentially requiring Kimball to similarly acquire assets and diversify its product line. Underscoring this possibility is management’s recent commentary surrounding increased product development efforts, which could result in increased operating expenses for post-spin KBAL going forward.

Based on an analysis of projected sales, EBITDA, assets, free cash flow, and dividend yield, post-spin fair value estimates of $11.60 per share of KE (based on a 3:4 distribution ratio) and $6.92 per share of KBAL can be derived, for a pre-spin sum-of-the-parts value of $16 per share. This exercise suggests that the shares are approaching full valuation heading into the transaction, likely already pricing in a continued recovery and potentially improving fundamentals. Given the limited upside, the shares are not recommended for purchase at this time. One could look to a more attractive pre-spin entry point below $13.

On April 10, 2014, Automatic Data Processing Inc. (NASDAQ: ADP) announced plans to spin off the company’s Dealer Services business through a tax-free distribution of shares to ADP shareholders. The new standalone company, which will adopt CDK Global Inc. as its corporate name, is expected to have annual revenue approaching $2 billion. The current Dealer Services segment provides retail and digital marketing services to automotive retailers and manufacturers. The parent company will maintain the Employer Services segment, which offers payroll, benefits administration, and other outsourced solutions to businesses, and the Professional Employer Organization (PEO) Services segment, which provides employment administration outsourcing solutions through co-employment agreements.

In conjunction with the separation, the spin company will distribute $825 million to ADP, which will be used to fund share repurchases. ADP plans to maintain its current $0.48 per share quarterly dividend following the separation. The spin-off still requires an effectiveness declaration from the SEC. CDK intends to list on the NASDAQ under the ticker “CDK”. Shares of CDK will be distributed after the market close on September 30, 2014, to ADP shareholders of record as of September 24, 2014. ADP shareholders of record will receive one share of CDK for every three shares of ADP owned. Shares of CDK are expected to begin when-issued trading on the NASDAQ under the symbol “CDKVV” on September 22, 2014, with regular-way trading commencing on October 1, 2014. Steve Anenen, the current president of Dealer Services, will assume the CEO role at CDK, while the current Dealer Services CFO Al Nietzel will assume the CFO role.

CDK operates in what can be considered a saturated market where margins can be variable due to the cyclicality of the auto industry. Growth potential, outside of acquisitions, may be limited because the current rate of auto purchases is approaching the historical average, and the number of primary customers (auto dealerships) has declined due to industry consolidation. Further, CDK’s margins are below that of ADP’s core payroll business. Post-spin ADP can be viewed as a company that provides stable earnings growth and an increasing return of capital to shareholders through share repurchases and an annual dividend that has increased for 39 consecutive years.

The separation accomplishes three main objectives. First, removal of the more cyclical business should increase ADP’s earnings stability. Second, ADP’s core margins should increase as the lower-margin CDK business is spun off. Lastly, once ADP has essentially divested the dealer services business, by definition the ADP stock itself will trade at a lower price. Therefore, the purchasing power of the remaining cash flow is likely to be enhanced and become more meaningful. The company’s stock repurchase program could therefore become more robust. Given these potential positives, the parent entity appears more interesting following the separation.

However, shares of ADP have risen 10% since the spin announcement and currently trade above respective segment peer and historical ADP multiples, implying that upside from the current price of the combined entities may be limited. Based on relative valuation and cash flow, including near-term potential share repurchases, post-spin fair value estimates of $28 per share of CDK and $69 per share of ADP can be derived, representing a pre-spin fair value estimate of $79 per share. Upside potential to the ADP post-spin fair value would come from more rapid earnings growth, which could be bolstered by an environment of rising interest rates, or by an aggressive pace of share repurchases following the separation.

Aker Solutions is an oil services company based in Norway. It specialized in the offshore oil and gas industry, offering products such as subsea and drilling equipment and engineering and maintenance services. Its main clients are major oil and gas exploration and production companies as well as offshore rig construction yards.On April 30, 2014, the company announced its plan to separate its subsea and field design segments from its oilfield services and non-core assets. The former segments will be spun off into New Aker Solutions, which after the demerger will be renamed Aker Solutions[1] and under the existing ticker “AKSO”. The parent company will subsequently change its name to Akastor and will trade under the ticker “AKA”. The transaction was approved by shareholders on August 12. The last day of trading cum-distribution is expected to be September 26, with both Aker Solutions as Akastor and New Aker Solutions starting trading on September 29.

The rationale for the demerger is that it will speed up the corporate structure streamlining process that Aker Solutions commenced a few years ago, lower costs and increase focus on specific markets and customers. Of particular interest appears to be the spin entity’s subsea division, which has seen a significant increase in its backlog but in the recent history has achieved profitability margins well below its competitors. Additionally, Akastor’s structure will resemble that of a holding company, with each division renamed and managed as a separate company. That endeavor may actually hinder operating efficiencies, but may be a precursor of potential asset disposals.

After the spin-off, New Aker Solutions will be comprised of the Subsea, Umbilical, Engineering and Maintenance, Modifications and Operations (“MMO”) businesses. The new company will focus on the deepwater and subsea markets of Norway, Western Africa and Brazil by offering differentiated products and following a business model that requires limited investments and can achieve a high double-digit return on equity. The new company is also expected to be less cyclical. A significant portion of the services it offers, such as maintenance and modification, are required during the entire lifecycle of an offshore project, from initial exploration to decommissioning. Of outmost importance for the future of the company is the performance of its Subsea segment, which is its largest both by revenue generation and by EBITDA contribution. Its operating model appears to be grossly inefficient, as evidenced by its EBITDA margin that is well below its peers. In a smaller company, such as the New Aker Solutions, the Subsea segment can command more attention from the company’s management—who, in turn, will have more time to allocate to this division. An initial trading range for New Aker Solutions will likely be between NOK 50 and NOK 59 per share. Were the company to achieve its targeted EBITDA margin expansion in the Subsea division, New Aker Solutions could be valued at NOK 90 per share.

The remaining Aker Solutions will be renamed Akastor, and is considered by management an “oil service investment company”. It will comprise a very diverse set of businesses; Drilling Technologies, Oilfield Services and Marine Assets (“OMA”), Surface Products, Process Systems, Business Solutions and Real Estate. Each segment will be subsequently renamed and will be able to operate on a stand-alone basis, essentially leading to a holding company structure. The two main contributors to Akastor’s profitability are the Drilling Technologies and Business Solutions segments. However, the company is facing a variety of headwinds. Its holding company structure, while aimed at reducing costs in the corporate level, may lead to higher SG&A expenses. The Drilling Technologies business mainly caters to offshore rig shipyards, and is thus correlated to the production of newbuilding rigs. However, after an order spree that is expected to lead to an oversupply of offshore drilling rigs next year, new orders are poised to slow down. Moreover, the segment’s order book has contracted substantially during 2014—i.e., during a period of strong rig construction. Last but not least, the Business Solutions division mainly services New Aker Solutions and has limited external or non-related party clients. Akastor’s fair value is estimated between NOK 21 and NOK 28 per share, with a target price of NOK 24. However, due to the numerous challenges the company may face, it is recommended for purchase at a price below the low end of the valuation range.

The sum-of-the-parts target price for Aker Solutions prior to the spin-off is NOK 83 per share, with a low case scenario valuing the company at NOK 72 per share. Our high case valuation is contingent upon New Aker Solutions achieving its targeted margin expansion in its Subsea division, in which case Aker Solutions could be valued at NOK 118 per share. While the upside to downside ratio appears reasonable, shares of Aker Solutions are not recommended for purchase before the spin-off, as the upside comes exclusively from the performance of New Aker Solutions—which makes the spin entity the sole attractive investment proposition—and the future performance of Akastor remains highly uncertain.

On September 19, 2013, Agilent Technologies Inc. (NYSE: A) announced that its Board of Directors had approved plans to spin off its electronic measurement (EM) business into a separate publicly traded company, Keysight Technologies, through a tax-free distribution of shares to A shareholders to be completed by the end of 2014, while retaining its life sciences and diagnostics business. Keysight has applied to list on the NASDAQ with the ticker “KEYS”. Agilent was originally a division of Hewlett-Packard Company (NYSE: HPQ), which became a public company in 1999. Both entities will seek to maintain leverage ratios below 2x. The parent, which will retain the Agilent name, intends to pay an annual dividend of approximately $130 million per year, implying a yield at least equivalent to the current 0.9%. Bill Sullivan will remain CEO of the parent, based in Santa Clara, CA (approximately 11,500 employees), while the current president, Ron Nersesian, will assume duties of CEO for Keysight, based in Santa Rosa, CA (9,500 employees).

Agilent and Keysight have similar business models as test and diagnostics companies, but serve vastly different end markets. Post-spin Agilent generates about $3.9 billion in annual revenue (about 41% recurring), and Keysight about $2.9 billion. The companies generate similar operating margins (19%-20%) although, importantly, Keysight is growing at a slower rate (3% annually versus 6% for Agilent). Keysight is exclusively focused on electronic measurement, and provides products used to test communications networks, mobile handsets, and other electronic devices – primarily serving the communications, aerospace and defense, and semiconductor industries. Agilent will be exclusively focused on test, diagnostics, and chemical analysis tools for the life sciences industries – serving the pharmaceutical, biotech, chemicals, food, and energy markets.

The transaction makes sense given the disparate nature of the businesses. For years, Agilent has struggled with Keysight’s volatility and cyclicality, owing to its significant exposure to the technology and semiconductor markets (together accounting for approximately 40% of sales). The post-bubble tech recession and challenging macro-environment, coupled more recently with budget sequestration, have been overhangs for Agilent’s overall top-line growth and frustrating for life-sciences-oriented investors, who have grappled with the shares’ historically discounted valuation relative to pure-play peers. As a result, Agilent has been steadily realigning corporate resources toward important growth catalysts in the life sciences and diagnostics markets, while under-investing in and de-emphasizing its electronic measurement business.

For Agilent, the separation will allow the company to further hone its strategy and concentrate on growing organic revenue in its core businesses, which are experiencing renewed demand, based on new products, and should benefit from several industry tailwinds. For Keysight, being a standalone entity affords the same benefits. The challenge, however, will be how effectively Keysight can maintain its leadership position in a more dynamic and competitive and, importantly, maturing market. Agilent’s lack of focus on the electronic measurement business has afforded competitors incremental market share and has allowed them to more effectively invest research and development resources and leverage their balance sheets to make strategic acquisitions to position themselves for the next wave of industry growth. Somewhat paradoxically, Keysight appears to be a market leader forced to play catch-up, as the industry has shifted dramatically from the company’s legacy heritage in traditional communications testing to niche growth areas such as IP, applications performance, and security. Accordingly, Keysight must protect its intellectual property portfolio while innovating in order to maintain market share, and must quickly and meaningfully invest in emerging technologies to achieve growth targets. Whereas margins and growth opportunities seem likely to expand at post-spin Agilent, Keysight’s margins and addressable market may face more pressure owing to increased competition and customers’ budgetary constraints. Moreover, while recent results suggest that the technology markets may be stabilizing, overall visibility remains limited, and investors may continue to see volatility ahead given the book-and-ship nature of the business. While Keysight should benefit from several positive industry trends, the impact is more dependent on increased capital spending, which is likely to remain constrained until technology companies approach accelerating top-line growth. Net-net, we see a higher probability that post-spin Agilent will outgrow the industry and exceed its 6% revenue growth target than for Keysight to surpass its 3% growth target – owing to more favorable near-term sector catalysts, recent product refresh (at higher margins), improved competitive position, increased cost efficiencies, and an expanding addressable market.

For long-term investors with a tolerance for market fluctuations, Agilent shares appear to offer a compelling opportunity to gain exposure to the growing Chemical Analysis, Life Sciences and Diagnostics markets at a reasonable relative valuation. An increasingly aging global population and the requirement for standardization, more stringent testing, and tighter regulatory approvals across the biopharma, food and beverage, and agriculture industries are secular trends which suggest this is more than a product cycle story. A defensible market leadership position provides leverage for Agilent’s strategic push into high-growth emerging markets such as China and, coupled with an expanding new product pipeline, supports an argument for above-average industry growth. The potential for steadily improving margins and cash flow, geographic and end-market diversity, recurring revenues, healthy cash flow and dividend payment also offer insulation against market volatility.

Following the spin-off, Agilent shares should receive a higher multiple than those of Keysight given the company’s industry leadership position, reduced cyclicality, and better long-term growth prospects. There also appears to be potential for further appreciation, considering that improved execution should be able to drive above-market core revenue growth and earnings leverage and, in turn, narrow the valuation disparity relative to peers. Agilent’s peer group trades at 3.2x F2014 revenue projections, 22x earnings, and 14x F2014 estimated EBITDA. On a relative basis, Agilent shares appear undervalued at 19x forward earnings, a 14% discount to peers – essentially in line with their five-year historical average. The primary risk to this relative analysis, as opposed to an intrinsic assessment of valuation, is that it is essentially subjective and vulnerable to over or under-valuation stemming from sentiment shifts and other macro or sector-related volatility. Setting this risk aside, the potential for a more focused life sciences company, coupled with positive industry dynamics and improving execution, should close the relative valuation gap between post-spin Agilent and its peers. With management having reset growth targets (6% year-over-year growth, essentially in line with growth over the last three years), and offering in-line guidance and incrementally more positive commentary on end markets and new product pipeline, the stage appears set for improving performance. The potential for post-spin Agilent shares to be included in industry-specific ETFs also may expand as the life-sciences and communications-focused segments are separated.

While it is essentially impossible to reasonably forecast Agilent’s five-year earnings performance, an assumption of 10% earnings growth appears reasonable considering the company’s three-year average, at 6%. Applying this growth assumption to our F2014 EPS projection of $1.86, once can derive a five-year EPS projection of approximately $3.00/share. Assuming the current average peer P/E multiple remains intact at 22x implies a five-year share price of $66 for Agilent, versus an implied $33 today (current pre-spin price of $57.92, netting out a $25 fair value estimate for KEYS), for an annualized rate of return of 14.9%, exclusive of dividends. As a base case, one could apply a 17x earnings multiple (representing the low end of the historical comparable valuation range), and arrive at a 9.1% annualized rate of return. While Agilent has historically traded as low as 11x earnings in 2011, this was during a period of broader macroeconomic uncertainty, government and academic market weakness and underperformance in the Keysight business. It is important to note that our growth assumptions do not account for incremental earnings leverage associated with new product introductions and market share gains, a higher percentage of recurring revenues, and an increasing shift toward under-penetrated markets. Moreover, given the secular drivers for more pervasive use of Life Sciences and Diagnostics test products, and company-specific operational improvements, one could argue that management’s growth assumptions, which are in-line with historical growth, appear conservative.

Keysight comparables include broad-based and more focused electronics measurement suppliers. The group trades at approximately 12.8x F2014 EBITDA and 2.1x F2014 estimated revenue. In the near term following the spin-off, KEYS shares could experience some volatility, as a portion of the investor base might gravitate toward the stability and more focused end-market composition of the new Agilent. Moreover, while recently reported financial results appear encouraging, with a return to year-over-year growth, Keysight could again exhibit negative growth comparables, particularly as visibility remains generally very limited across the technology supply chain. Considering historical and comparable multiples on earnings, sales, and EV/EBITDA, and cash flow, Keysight can be fairly valued at $25 per share and New Agilent at about $40 per share, for a sum-of-the-parts value of $65 per share.

CSC is an information technology (IT) services company that provides consulting and outsourcing services through two business segments focused on distinctly different end-markets. The larger segment provides services to commercial sector clients, while the other focuses on public sector entities, such as federal, state, local and foreign governments.

The IT services industry has increasingly looked to separate commercial and government-focused IT assets over the last few years, as the former trade at almost 15% premiums to the latter, given higher margin and growth profiles. As well, commercially focused businesses are less susceptible to variability in government spending/decision-making. Separations have also aimed to sharpen management focus as well as eliminate any perceived conflicts of interest in bidding on government contracts. In 2012-2013, L-3 Communications, SAIC Inc., and Exelis all announced tax-free spin-offs of IT services assets.

CSC’s is in the midst of an operational turnaround, which seems to be gaining traction and is likely management’s main near-term focus. As well, its public comments have downplayed potential conflicts of interest and highlighted possible cross-selling opportunities between segments, indicating comfort with the current operating structure. That said, management does not rule out any measure that would create value for shareholders and potential catalysts for a split could emerge in FY2015-2016.

Considering peer group multiples, we value the commercial business segment at $79 per share and the public sector segment at $22 per share. Accounting for corporate costs of about $16 per share as well as net debt and other liabilities of $9.50 per share, a sum-of-the-parts valuation of $75 is derived.

Future potential catalysts include a spin-off or sale of the government business, an uptick in IT spending, acquisitions, and share repurchases. Potential risks include inaction on a split or sale, a lack of execution on turnaround plans, and a recession.

On November 14, 2013, Kimberly-Clark Corporation (NYSE: KMB) announced that its Board of Directors had granted management the opportunity to consider a tax-free spin-off of its health care business. On May 6, 2014, KMB filed a Form 10 for the health care business under the corporate moniker Halyard Health Inc., officially confirming the company’s plans to separate the Health Care segment into a standalone entity. Halyard is expected to trade on the NYSE under the symbol “HYH”. The transaction is expected to be completed in late October 2014. The Health Care segment generates approximately $1.6 billion in annual sales, about 70% of which is in North America. Manufacturing facilities are primarily located in Latin America and Asia, and headquarters are in Roswell, GA. Products include surgical gowns, sterilization wraps, sampling catheters, feeding tubes, medical exam gloves, and pain management systems. About 70% of revenue is derived from surgical and infection prevention products and 30% from medical devices. KMB is one of the world’s largest consumer product businesses, with well-known brands that include Huggies diapers, Kleenex facial tissues, and Cottonelle toilet paper.

Thomas Falk will remain CEO of the parent, while Halyard Health Inc. will be led by Robert Abernathy, currently a KMB group president. The transaction still requires an effectiveness declaration of a filing of a Form 10 by the SEC, a private letter ruling by the IRS regarding the tax-free status of the transaction, and final Board approval. Given the low tax basis of the health care assets, the spin-off of assets can make more fiscal sense than separation via an asset sale.

The rationale for the transaction is twofold. First, the healthcare and consumer products businesses serve increasingly different end markets in that of hospitals and healthcare professionals versus traditional consumers. The lack of overlapping sales channels results in minimal realizable synergistic benefits from shared services such as sales and marketing. Secondly, and more importantly, the businesses are currently tracking different growth trajectories, with healthcare serving the mature North American market while the consumer products business is experiencing a degree of growth in international markets such as China and Russia. The healthcare related business, to a large extent, sells commodity products, including but not limited to rubber gloves and surgical drapes. The commoditization of products, combined with external factors including efforts to control hospital costs, will likely result in continued pricing pressure moving forward, which KMB’s healthcare unit has already encountered. Alternatively, the consumer products business’ portfolio of products includes well known brands such as Huggies, Kleenex, and Scott. Further, the consumer products business is actually experiencing a fair degree of growth due to international market expansion and increased penetration. Notably products such as disposable infant diapers are gaining traction in countries such as China where historically they had not been used. The net result is increased growth and margin opportunities for the consumer products company versus Halyard.

The separation will remove the more commoditized healthcare business from what has traditionally been the more stable consumer products business. By removing the healthcare business the spin-off will reveal the international growth story that has likely been obfuscated in recent years. Post-spin the parent company’s growth profile will improve, which may attract investors. Alternatively given the lower growth of Halyard due in part to pricing pressures and commoditized nature of products, investors may initially shy away from owning Halyard shares in favor of post-spin KMB.

Consumer products stocks receive higher multiples than similar health care companies, perhaps due to better international growth prospects, and thus KMB could receive a higher multiple following a spin-off. Currently KMB trades at an EV/EBITDA multiple between the multiples of the peer groups for the respective businesses. An increase in valuation multiple at the larger consumer products company could be partially offset by a reduction in multiple for the health care business.

Based on peer group multiples, cash flow generation, and assets values, a fair value of $5.64 per share for Halyard Health Inc. is derived. Post separation, KMB should receive a slightly higher multiple, implying a fair value estimate of $104 per share, resulting in a pre-spin sum-of-the-parts fair value estimate of $110 per share. The fair value estimate implies an approximate 2% price appreciation potential from the price at separation. Given the limited upside, the shares are not recommended for purchase at this time. However, investors may consider purchasing shares closer to the spin-off’s actual distribution date if a similar price discount still exists. In this scenario, Halyard shares could be treated as a dividend and sold immediately.

On April 7th, 2014, Mando Corp announced its decision to separate the company into a holding entity, Halla Holdings, and an auto parts manufacturer, Mando Corporation. Current shareholders will receive 0.4782394 shares of Halla Holdings and 0.5217606 shares of Mando Corporation. The demerger was approved at the company’s shareholder meeting on July 28th, 2014. The last day of trading for Mando Corp will be August 27th, 2014, after which, trading will be suspended. While the ex-date for the spin-off is considered to be September 1st, 2014, both stocks are expected to be re-listed on October 6th.

The rationale for the spin-off is that it will simplify the company’s shareholder structure, as the parent company currently operates through various subsidiaries. Additionally, it is expected to ease concerns about related party transactions that have plagued the company. In fact, the cross-shareholding issue is of utmost importance.

In April 2013, Mando Corp bailed out a troubled subsidiary of Halla Group, Halla Corporation—then named Halla Engineering & Construction—by injecting KRW 378.5 billion in equity to Halla Meister, a wholly-owned subsidiary that engages in the distribution of auto parts and construction materials, among other activities. Subsequently, Halla Meister used the proceeds to acquire a 15.9% stake in Halla Corporation. Recall, Halla Corporation, was already Mando’s parent company.

After the demerger, Halla Holdings will acquire Mando Corp’s stakes in Halla Stackpole and Mando Hella (joint ventures with Canadian Stackpole and German Hella, respectively) as well as Halla Meister. All three subsidiaries are engaged in auto parts related businesses, such as advanced electronics components and auto part distribution. Therefore, the holding company’s structure will still constitute a so-called “circular shareholding”. Soon after the transaction, Halla Holdings will take the necessary steps to convert into a holding company. Such a move is very important as it has several implications: firstly, holding companies receive beneficial tax treatment in South Korea: secondly, no cross-shareholding is allowed, so it is likely that Halla Corporation will divest its 17.3% in Halla Holdings, and remain part of the group as a subsidiary; thirdly, one of the requirements that need to be satisfied by a corporation in order to be classified as a holding company is a minimum 20% stake in subsidiaries that are publically traded. Consequently, Halla Holdings will probably purchase Halla Corporation’s 17.3% stake in Mando Corporation, as well as Chairman Chung Mong-won’s 7.7%.

After the spin-off, Halla Holdings will have assets and shareholders’ equity of KRW 1,572 billion and KRW 754 billion, respectively. For the first three months of 2014, the company recorded revenues of KRW 219 billion and net income of KRW 6 billion on a pro forma basis. Due to the sweeping restructuring that will likely follow the spin-off, one can only roughly approximately the holding company’s estimated share price. Halla Holding’s stock could trade at a price between KRW 64,900 and KRW 81,400, with the potential to reach KRW 127,500 if the market is convinced there is no longer risk associated to related party transactions and the transition to a holding company structure is completed timely and smoothly.

Mando Corporation, on the other hand, will comprise Mando Corp’s operating entities, such as Mando China and various operating subsidiaries—including manufacturing facilities in the US. It will be a pure auto parts manufacturer, and is expected to attract the majority of investor interest. As of December 31st, 2013, it had assets of KRW 3,742 billion and equity of KRW 1,004 billion. The company’s performance, and the associated stock pricing, would reasonably be aided by the strength and momentum of the global automobile market. However, Mando Corporation derives more than half of its revenues from companies belonging to the Hyundai Motor Group—and, consequently, its two automobile companies, Hyundai and Kia. The spin entity’s fair value is estimated at KRW 197,200, with KRW 161,900 representing the low end of the valuation range. Were Mando Corporation to continue its sales and earnings growth and further diversify its client base away from Hyundai Motor Group, it could benefit from a trading multiple expansion and reach a price of KRW 252,000.

The sum-of-the-parts valuation for Mando Corp prior to the spin-off ranges between KRW 115,500 to KRW 192,500, with a target of KRW 141,800. The mid and high case valuations provide 9% and 48% upside, respectively, while the low case is 11% below the company’s current stock price. However, the transaction still involves high risk—with the transformation of Halla Holdings continuing after the demerger—and the high case scenario is contingent upon assumptions that are unlikely to materialize all together. Ergo, a greater upside potential is warranted, and shares of Mando Corp are not recommended for purchase prior to the spin-off.

LXU is an industrial conglomerate that operates within two distinct businesses: the company manufactures chemicals mostly used in nitrogen-based fertilizers, and it designs and builds specialty heating, ventilation and air conditioning (HVAC) products and parts.

The disparate businesses, which have minimal synergies, results in LXU shares trading with a conglomerate discount. This discount is exacerbated by the persistent operational issues at LXU’s Chemical business over the past several years. HVAC companies trade at roughly a 40% premium to nitrogen-based chemical producers, while LXU trades at a discount to both peer groups. As such, a separation of LXU’s businesses would appear to unlock value as the HVAC business would be revalued.

LXU has previously been urged by an activist investor to, among other things, separate the two businesses as well as convert the Chemical segment into a Master Limited Partnership (MLP) structure. Thus far, management has been resistant to the suggestions, but it recently altered its corporate governance structure and appointed a Strategic Committee to provide recommendations on value maximization initiatives. Moreover, the company has a history of buying and selling non-core assets.

Considering peer group multiples, we value the Chemical segment at $50 per share and the Climate Control segment at $17 per share. Accounting for corporate costs and other income of about $4 per share as well as net debt of $13 per share, a sum-of-the-parts valuation of $50 is derived. Optionality of $20 per share exists via the adoption of an MLP structure at Chemical.

Future potential catalysts include a spin-off or sale of the Climate Control business and/or a conversion of the Chemical assets into an MLP structure. Improved operational performance at the Chemical segment could also provide upside. Potential risks include management inaction, perpetuating the current discount, a lack of improvement at Chemical, and/or a recession.

On April 30, 2014, Noble Corp. (NYSE: NE) announced that the company would no longer pursue the public offering of a 20% stake in its standardized rig fleet and instead will opt for a full tax-free spin-off of shares in the entity, Paragon Offshore plc, to NE shareholders. The decision may indicate limited market interest in the entity. Paragon will be listed on the NYSE under the ticker “PGN”. Shares of PGN will be distributed on August 1, 2014, to NE shareholders of record as of July 23, 2014. NE shareholders of record will receive one share of PGN for every three shares owned of NE. Shares of PGN are expected to begin trading on a “when-issued” basis on or about July 23, 2014.

The proposed transaction may remind readers of the 2009 spin-off of jackup rig operator Seahawk Drilling from Pride International (NYSE: PDE). Within two years, Seahawk filed for bankruptcy protection. Former Seahawk CEO Randall Stilley will be CEO of Paragon. However, Noble has greater international diversification in its fleet, and the jackup market has started showing signs of improvement following the April 2010 Gulf oil spill. Jackup rigs drill in shallower water, typically for natural gas, and are usually under short-term contracts. As a result, these rigs generate lower dayrates and exhibit less stable utilization than floaters and bigger rigs drilling in deep water.

The contract drilling services industry is one that exhibits a high degree of cyclicality that may only be rivaled by the shipping industry. The recent period of high energy prices and rising dayrates has resulted in an increasing number of newbuild rigs scheduled to enter the market over the next 18 months. Increased rig count will pressure dayrates and utilization across the offshore drilling industry. Standard specification rigs, in particular jackups, have already seen utilization rates decline. For this reason, among others, jackup focused operators receive discounted valuation multiples versus higher specification focused operators.

Additionally, the degree of financial leverage employed also appears to have an impact on premium or discounted company valuations. PGN will have initial net debt of approximately $1.7 billion, resulting in the company being levered at approximately 60% of property, plant, and equipment, net. Post-spin NE will carry net debt representing 45% of property, plant, and equipment, net. Post-spin NE’s leverage will approximate that of offshore drillers trading at premium multiples while PGN will closely resemble jackup focused peers that trade at a discount.

Paragon assets include five drillships, three semisubmersibles, 34 jackups, and one floating, production, storage and offloading (FPSO) unit. Following the separation, it could be expected that shares of PGN would see selling pressure as investors will likely favor owning the higher-quality, more versatile rig assets that remain with the parent. Similar selling pressure was seen in the 2009 spin-off of Seahawk Drilling from Pride International. Concerns about industry-wide utilization and dayrates over the next 18 months as new rigs are delivered may exacerbate the selling pressure. A fair value estimate for PGN of $26 is derived by applying a blended EV/rig multiple to Paragon’s jackups and floaters and based on forward EBITDA.

The spin-off of the standard-spec rigs would likely generate a higher multiple for the remaining company, reducing its costs of capital. This could benefit Noble if it continues its global new-build program, taking advantage of long-term contracts for specialized rigs drilling in deepwater for oil. Larger offshore drilling fleet operators tend to trade at higher multiples than smaller jackup fleets. A fair value estimate of $27 is derived for post-spin NE based on EBITDA generation, and EV/rig multiples.

On a pre-spin sum-of-the-parts basis Noble Corp. is valued at $36 per share, representing approximately 9% price appreciation potential from the current share price. The current NE share price likely does not provide an adequate margin of safety to initiate a new ownership position prior to the spin-off given the volatility that drilling stocks exhibit. Current NE shareholders should monitor closely initial trading in PGN shares. Given investor preference for higher quality assets, such as those remaining with NE, PGN is likely to experience significant shareholder rotation following the spin. Current NE shareholders may consider selling PGN shares in the when-issued market.

More cautious investors not currently involved in NE should be mindful of initial selling pressure as a possible steep discount to the fair value may emerge. Investors could use an asset based valuation for PGN of $11 per share in determining an initial entry price. It should be noted that PGN’s assets have been significantly depreciated given the seasoned age of the company’s rig fleet and shares may not actually reach the $11 per share level.