On January 27, 2014, forest resources company Rayonier Inc. (NYSE: RYN) announced plans to spin off its Performance Fibers business into a standalone publicly traded entity to be called Rayonier Advanced Materials Inc. The spin entity filed a Form 10 on January 29, 2014, and will apply for listing on the NYSE under the ticker “”RYAM””. The parent company will retain the remaining Forest Resources and Real Estate businesses. Prior to completion, Rayonier Advanced Materials (“”RYAM””) will make a cash distribution to Rayonier of $950 million. While the deal is expected to close by mid-2014, the separation still requires a favorable ruling from the IRS regarding the tax-free nature of the transaction, an effectiveness declaration of SEC filings, and final Board approval. RYN’s current CEO Paul Boynton will assume the CEO position at the spin entity.

The transaction separates two assets with different priorities for capital allocation and with dissimilar growth potential. Rayonier, which is structured as a Real Estate Investment Trust (REIT), is expected to grow modestly through timberland acquisitions and also increase its dividend longer term, as capital requirements will be reduced with the separation of the pulping business. For RYAM, which will not be structured as a REIT, the business will initially look to reduce its net debt position. Given the segment’s strong free cash flows, it will likely become a capital return vehicle longer term. However, growth is expected to be limited, as it appears unlikely that the company will finance the construction of additional pulping mills given the steep costs and the relatively small size of the global specialty pulping market. Moreover, the pricing environment does not appear to support capacity expansion at this time.

For RYAM a fair value of $8.01 per share can be derived based on peer group multiples. Upside to this estimate could be realized by sustained demand growth and higher pulp prices, which in turn could accelerate the company’s long-term plan of becoming a dedicated specialty pulp producer. All else being equal, pulp is generally accorded a higher price and therefore wider margin depending on its quality, or cellulose content.

For post-spin Rayonier, a fair value of $36 per share can be derived based on peer group multiples and historical land acquisition prices for its Forest Resources business and the average historical selling price per acre for its Real Estate segment. Following RYAM’s cash distribution, Rayonier is anticipated to have a net debt position of $300 million.

On a sum-of-the-parts basis, Rayonier has a pre-spin fair value of $44 per share. Given that the shares trade at a modest premium to this estimate, RYN shares are not recommended for purchase prior to the transaction. However, shares of RYAM may experience selling pressure in initial trading, providing an attractive entry point following the separation. RYAM will not be structured as a REIT, which will force real-estate–focused holders of RYN to sell their new RYAM positions.

Marathon Petroleum Corp. (NYSE: MPC) is a refiner with midstream operations through its 73.6% ownership (including 2% general partner interest) in MPLX LP (NYSE: MPLX), a Master Limited Partnership (MLP), as well as additional pipeline assets that have not been dropped down into the MLP. Marathon is also the operator of Speedway convenience stores (c-stores) and gas stations, primarily located in the Midwest US.

Following the 2013 spin-offs by Valero Energy Corp. (NYSE: VLO) and Murphy Oil Corp. (NYSE: MUR) of their convenience store operations and Hess Corp.’s (NYSE: HES) proposed 2014 separation of its c-store operations, MPC will be one of the few large energy companies that maintains retail assets. C-store multiples have expanded significantly over the last three years, and a spin-off could unlock value for MPC shareholders given the much lower multiples for the far more capital-intensive, cyclical refining operations.

Management has a history of shareholder-friendly efforts, including its own 2011 spin-off from Marathon Oil Corp. (NYSE: MRO), as well as the 2012 creation of MPLX to house its midstream assets. While management indicates that it remains comfortable with the current corporate structure, if planned investment in the c-store operations over the next two years does not result in multiple expansion, a spin-off would seem to be a reasonable alternative, particularly as less than 10% of the company’s refined products are sold through Speedway stores.

On a sum-of-the-parts basis, we reach a value for MPC of $100 per share, including $73 per share for the refineries, $16 for the pipeline assets (including the stake in MPLX), $15 for Speedway, $1 for investments and $5 in net debt. Based on this SOTP calculation, a separation would seem to offer about 13% upside to the current share price. Alternatively, investor recognition of the stable cash flow from the growing Speedway operations could generate capital appreciation without the need for additional corporate action over the next 12-24 months.

On April 5th, 2014, Vivendi SA (Ticker: VIV FP, EUR 20.62, Market Capitalization: EUR 27.8 billion) announced an agreement with Netherlands-listed Altice SA (Ticker: ATC NA, EUR 33.6, Market Capitalization: EUR 6.8 billion) for the sale of its SFR telecom unit for EUR 17 billion. Consequently, the previously announced spin-off has been cancelled. SFR will merge will Altice’s subsidiary, Numericable Group SA (Ticker: NUM FP, EUR 30.35, Market Capitalization: 3.8 billion). Vivendi accepted a consideration of EUR 13.5 billion in cash and 20% in the form of equity in the newly created entity—valued at EUR 3.5 billion.

Subtracting the acquisition price from Vivendi’s EUR 27.8 billion market capitalization, the media part of the business is valued at EUR 10.8 billion. Incorporating net debt, the resulting enterprise value is EUR 16.6 billion. Given the EUR 2.2 billion EBITDA generated in 2013 by the conglomerate’s media assets, their implied enterprise value-to-EBITDA multiple is 7.7x.

Brookfield Property Partners LP (“BPY”) is a Bermuda based limited partnership that owns, operates and invests in high quality commercial real estate. As of December 31st, 2013, it owned $30 billion of investment properties, while its fully diluted funds from operations for 2013 stood at $561 million. The company was spun off from Brookfield Asset Management (“BAM”) in April 2013. On April 15th, 2013, Brookfield Asset Management shareholders received 0.0574 shares of BPY for each BAM share they owned, thus owning 7.5% of the company. The rationale behind the demerger was to consolidate BAM’s commercial real estate operations under one holding company that would be able to invest in all relevant real estate sectors (i.e., office, retail, industrial and multi-family) without restrictions—as opposed to a pure single-sector play company—and on a tax-efficient manner. BPY is structured as a partnership and consequently is externally managed by BAM, which will receive an annual management fee of $50 million and an additional equity incentive fee.

After the spin-off, BPY’s assets included a 49% stake in Brookfield Office Properties (“BPO”), a 22% interest in General Group Properties (“GGP”) and a 39% stake in Rouse Properties (“Rouse”), all of which have been or will be modified as a result of subsequent transactions as well as the upcoming BPO acquisition. Additionally, BPY owns a 22% stake in Canary Wharf Group, a private company controlled by publically-traded Songbird Estates. BPY also invests directly into real estate assets, with privately held properties located in North America, Brazil, Europe and Australia. Finally, BPY makes opportunistic investments through BAM’s real estate private equity funds, and is the cornerstone investor of the Brookfield Strategic Real Estate Partners fund—with a $1.3 billion contribution into the $4.4 billion investment vehicle.

On September 30th, 2013, BPY announced its intention to acquire the shares of BPO it did not already own. The offer gives the option to BPO shareholders to elect between a $20.34 cash payment and one BPY unit. However, no more than 67% of the purchase price will be paid for in BPY units and no more than 33% in cash. BPO shareholders have until March 19th, 2014, to tender the shares.

On its Q2 2013 conference call, BPY’s management indicated its willingness to move towards private asset acquisitions and gradually lower the importance of public holdings in the company’s asset mix. While the acquisition will bring BPO’s assets directly under BPY’s umbrella, it is, in fact, another investment in a public company. There are, however, a lot of compelling factors that led to this offer, the most important of which was that BPO traded at a steep discount to its book value—the acquisition price represents a 6.6% discount to BPO’s NAV. Additionally, BPY’s free float will increase by more than 200% (from 11% to 34%), a move that could close the discount between BPY’s book and market value. While not mentioned by management, there could be additional economic synergies. One potential source is BPO’s SG&A expense of $136 million, for 2013. Since BPY is externally managed by BAM, the corporate overhead could be reduced. Another potential benefit is BPY’s structure as a tax-free partnership. Thus, the transfer of investment properties from a C-corp to BPY could result in lower tax expense.

Currently, Brookfield Property Partners’ dividend yield exceeds 5%, compared to 3-4% for its closest peers and, most importantly, its public subsidiaries. The valuation discrepancy could stem from two factors: firstly, BPY distributes as dividends 80% of its FFO, while most US office and retail REITs have FFO payout ratios between 40% and 60%. In fact, were BPY to distribute a percentage equal to its peer average, and subsequently be valued at the peer group yield, the resulting valuation would be $19.65 per unit. A second concern is the sustainability of such a payout ratio, given that the cash BPY actually controls is much lower than the dividend and dependent on the dividend distributions of its subsidiaries.
The acquisition of BPO can address, or at least ease, both concerns, and therefore serve as a catalyst for BPY’s upward re-evaluation. Purchasing BPO shares at a price below book value is a more efficient way to increase BPY’s asset base that will generate future FFO compared to the acquisition of individual real estate properties1. Thus, BPY’s funds from operations are positioned to grow faster in the future due to the acquisition. Profitability could be further boosted by cost synergies—especially with regards to BPO’s corporate overhead—as well as a more tax efficient use of BPO’s assets. Moreover, by owning 100% of BPO, BPY will eventually gain full control over the former’s cash balance. At the current 49% ownership level, BPO’s results may be fully consolidated, yet the decisions regarding cash distribution still remained with BPO, not BPY. In a sense, BPO’s 50% FFO payout ratio created a gap, since BPY aimed for an 80% ratio. Consequently, the probability of BPY reducing its dividend will be greatly diminished.

The rise of indexation and passive investing through ETFs has lead to an increased importance of free float in the clearing price of securities. The higher the ownership of insiders or controlling shareholders, the lower the weight of a company in many passive investment products. While such approach contradicts a very important investment consideration—that is, alignment of incentives—it has lead to the exclusion of owner-operated companies from many indexes. BPY has a free float of only 11%. After the transaction, the number of shares available for trading will rise by 200%, a move that could increase the company’s investor base. In the same spirit, BPY is a stock followed by very few analysts. It is indicative that in the company’s Q3 2013 conference call, there was only one question submitted by the analyst community. One of the reasons for that is that BPY is essentially a small cap stock. Given the company’s structure, the public entity has a market capitalization of approximately $2 billion, and it’s only holding is a 19% stake in the operating company that has $12 billion valuation. BPO, on the other hand, with a gross market capitalization of $9.6 billion and a free market capitalization of $4.8 billion is followed by 15 analysts. It comes as no surprise that on BPY’s February 6th, 2014, conference call the Q&A session lasted 30 minutes.

The transaction initially will be dilutive, with BPY valued at $18.80 on a dividend yield basis (assuming peer payout ratios and dividend yields). However, the company will have an NAV of $24.5 per unit, representing an almost 30% premium to the stock price. Due to the use of International Financial Reporting Standards (“IFRS”) accounting, BPY’s properties are recorded at fair market value and have been readjusted upwards in the past years. While a conservative investor may want to have a margin of safety, a discount of 20% appears excessive. Even applying a 10% discount, BPY could be valued at $22 per unit, allowing for 15% appreciation.

Besides looking at Brookfield Property Partners as an event-driven opportunity, investors with a long-term time horizon can also find the company’s shares an attractive investment. The partnership has almost all of the qualitative characteristics that would make it desirable. It is operated by Brookfield Asset Management, a Canadian asset manager with a history of value creation for its investors (both those invested in its private equity, real estate and infrastructure funds and those invested in its stock). Its CEO, Bruce Flatt, is one of the most highly regarded investors in the country. While BPY is an externally managed partnership, it is still owner operated. 89% of the economic interest in the operating company is owned by BAM. As a result, both companies interests are aligned. In fact, while BAM is entitled to receive both a quarterly base management fee and an equity incentive fee, it has demonstrated in its presentations how such revenue would be dwarfed by the value creation stemming from BPY’s stock appreciation

Another important issue that makes Brookfield Property Partners a valuable long-term investment is its opportunistic nature when acquiring assets and companies Due to the fact that the company is a world-class real estate franchise and is managed by a Brookfield Asset Management (a firm with a long, successful, track record that has achieved a 20% annualized appreciation of its stock in the past 20 years), it has access to credit when needed, as well as access to distressed deals that are not available to every company or investor. It is no wonder that some of BPY’s largest acquisitions involved companies in distress or bankruptcy, such as Olympia & York (developer of the World Finance Center in downtown Manhattan, recently renamed Brookfield Place New York), MPG Office Trust and General Growth Properties. Consequently, investors would benefit by owning BPY’s units through a full real estate cycle, during which the company could make significant value-enhancing acquisitions. As BPY currently expands and invests in its existing asset base, it could command a valuation in excess of $34 per unit in a five to 10 year horizon.

On September 24, 2013, National Oilwell Varco Inc. (NYSE: NOV) announced that its Board of Directors had approved plans to spin off its distribution business into a separate publicly traded company through a tax-free distribution of shares to NOV shareholders to be completed in the first half of 2014. The spin entity, NOW Inc., has applied for listing on the NYSE under the symbol “DNOW”. NOV will retain its drilling rig, field equipment, and component manufacturing operations. The separation still requires a positive opinion from legal counsel regarding the tax free status of the transaction, an effectiveness declaration from the SEC on the company’s Form 10 filing, and final Board approval. Robert Workman, the current Distribution segment President, will become the Chief Executive Officer of the spin entity. In February 2014, NOV announced that Chairman and CEO Merrill “Pete” Miller would be replaced by Clay Williams. Miller will serve as Executive Chair of NOW following the separation.

NOW will be a pure-play provider of maintenance, repair, and operating (MRO) supplies to global energy and industrial markets, which represent 85% of the current Distribution segment’s revenue. The separation follows a series of acquisitions within the segment. The Distribution business is less cyclical than the much larger rig construction operations, although both can be affected by variations in drilling activity and active rig count. The Distribution segment peer group trades at a higher multiple because of its greater revenue stability and cash flow. Capital expenditure requirements tend to be limited, although infrastructure investment may be necessary in order to open new distribution sites. Barriers to entry are relatively low, which may pressure margins. Distribution is a relationship-driven business based on timeliness and cost-effectiveness of delivery. Distribution locations near active drilling areas may be of paramount importance to grow the business. A valuation of $4.80 per share is reached for the spin entity when considering peer group and historical multiples applied to future profits or assets. If NOW can generate greater synergies from acquisitions made in 2012, and if margins return to pre-acquisition levels, a fair value higher than $7 per share could be reached, offering upside to investors with patience. In addition, forced selling by index-based funds or ETFs (as NOW seems unlikely to join the S&P 500 based on The Spin-Off Report’s fair value estimate) and sector funds (as NOW might not be classified as an energy stock) may provide an entry point immediately following the spin. A gap in research coverage, as analysts covering NOV would appear unlikely to continue following the spin entity following the transaction, could also create an opportunity for mispricing.

Following the separation, NOV is expected to focus on manufacturing oilfield equipment, including drilling rigs, top drives, and coiled tubing. The business is far more capital intensive than the Distribution business and will exhibit much more cyclicality. A valuation of $75 per share is derived for post-spin NOV. Backlog has grown considerably through increased international offshore rig demand, as well as through acquisitions. However, global offshore rig utilization has softened over the last six months, which could be of concern, even though management has noted that new rig orders have yet to slow.

On December 6, 2013, Sears Holdings Corp. (NASDAQ: SHLD) announced its intention to spin off its Lands’ End clothing business through a tax-free distribution of shares to SHLD holders. Shares of Lands’ End will be distributed on April 4, 2014, to SHLD shareholders of record as of March 24, 2014. Lands’ End will trade on the NASDAQ under the symbol “”LE”” following the distribution. Each SHLD share outstanding as of the record date will receive 0.300795 shares of LE. Sears CEO Edward Lampert’s ESL Investments Inc. expects to own 48.4% of Lands’ End common stock following the separation. ESL owns 48.4% of SHLD stock.

Sears Holdings has been a highly visible and controversial name. The SHLD retail story has been one of declining sales levels and store counts. The negative view on the retail business appears to suggest that the company is bankruptcy bound. However, bullish investors see significant value in the company’s assets, primarily the real estate holdings, which could be monetized over time. The spin-off of Lands’ End is an attempt to monetize one asset. SHLD has opportunities to monetize other assets, including well-known brands and an auto center business. Of note, SHLD expects to generate $1 billion in 2014 from the LE spin, the potential sale or separation of Sears Auto Center, and monetizing the company holdings in Sears Canada (SCC).

SHLD bought Lands’ End in 2002 for $1.9 billion. The clothing brand is distributed through landsend.com, direct mail, about 275 “”store within a store”” departments at SHLD stores, and 16 separate retail stores. Sales have weakened in recent years, with increased promotional activity offset by workforce and third-party cost reductions. LE will pay a $500 million separation dividend to SHLD and expects its costs as a standalone publicly traded entity to increase by about $8-$10 million. Based on a comparable company valuation, and the proposed distribution ratio, a post-spin fair value of $22 per share can be derived.

Sears remains an interesting opportunity due to the aggressive repositioning efforts by CEO Edward Lampert. Notably, as mentioned above, management is also considering a spin-off or separation of the Sears Auto Center business. Property and equipment are currently held on the balance sheet at around $5.7 billion. In addition, SHLD and SCC appear to have multiple opportunities to monetize the significant real estate portfolio and leverage the brand name appliance and hand tools business. The Auto Center business, combined with just the Craftsman and Kenmore brands could be valued in excess of SHLD’s current enterprise value.

The transaction appears to unlock modest value, at least in the near term, as the far smaller and profitable operations of LE gain the advantages of more transparency. For investors focused on the near-term spin-off event, a pre-spin fair value of $52.20 per share can be derived, consisting of $6.60 per share in Lands’ End and $45.61 for the current Sears operations. Future catalysts, including a spin-off of Sears Auto Center, would likely provide upside. Longer-term investors who believe that Lampert could ultimately unlock the value of SHLD’s sizeable real estate portfolio could see upside to $85.27 per share on a pre-spin basis.

On November 4, 2013, Weyerhaeuser Co. (NYSE: WY) announced plans to separate its homebuilding and real estate development business, WRECO, in a spin-off or split-off and immediately merge it with homebuilder TRI Pointe Homes Inc. (NYSE: TPH). The separation still requires final Board and TPH shareholder approval, a declaration of effectiveness by the SEC, and additional regulatory approvals. The merger will be structured as a Reverse Morris Trust transaction, which would maintain the tax-free status of the separation. Following the transaction, WY shareholders are expected to control approximately 80% of the newly merged company, which will retain the TRI Pointe Homes corporate moniker. WRECO will also pay a cash distribution to WY of approximately $739 million. TPH’s current management will remain in place, including CEO Doug Bauer and Chairman Barry Sternlicht, who is also CEO and Chairman of Starwood Capital. The merger is expected to be completed in 3Q 2014.

TPH is a regional homebuilder with operating divisions in Northern California, Southern California, and Colorado. The addition of WRECO gives significant scale and an entrance into new markets for TPH’s business. WY’s real estate segment generated EBITDA of $165 million during 2013, up from $142 million in the previous year. Housing market strength has resulted in increased home sales at higher prices over the last 18 months.

Following the separation, WY will focus on its forest products business, which includes 6.9 million acres of timberland, primarily located in North America, with about 323,000 acres in Uruguay. In June 2013, WY purchased Longview Timber LLC for $2.65 billion, which included approximately 645,000 acres in Washington and Oregon. Separating the homebuilding businesses should result in reduced earnings volatility with a focus on returning capital to shareholders through dividends and share repurchases. WY management has indicated that the transaction is likely to be structured as a split-off. In a split-off (to be discussed later in this report), shareholders are offered to exchange their shares of the parent company for shares in the spin entity at a set ratio. Based on recent share prices of WY and TPH, an exchange could reduce WY’s share count by about 78 million, essentially acting as a nearly 14% share buyback. Rising timberlands valuations and increased home construction could be benefits for WY. A fair value for post-spin WY of $32 per share is reached based on a sum-of-the-parts (SOTP) calculation that includes the timberlands, wood products and cellulose fibers segments. A pullback prior to transaction completion could provide an entry point for investors, particularly if the merger is conducted as a split-off.

A valuation of $18 per share for New TPH is reached when considering peer group multiples and potential synergies from the merger. While a housing recovery could be a strong catalyst for the stock, other home builders appear to trade at lower multiples and may offer better opportunities for investors. Developers carrying larger lot inventories (as will be discussed later in this report) may be better positioned to capitalize on rising home prices.

On December 13, 2013, Simon Property Group (NYSE: SPG) announced that its Board of Directors had approved a plan to spin off its strip centers and small malls as a REIT through a tax-free distribution to shareholders. The separation of Washington Prime Group requires an effectiveness declaration of registration statements by the SEC, acceptance of the new entity’s listing by an exchange, and final Board approval. SPG will maintain its current annual dividend of $5 per share, while Washington Prime Group’s initial annual dividend is estimated to be at least $0.50 per share, assuming a 1:1 share distribution. Richard Sokolov, Simon’s President and COO, will serve as Chairman of Washington Prime Group’s Board, while David Simon, CEO of the parent, will also serve on the Board. Mark Ordan, most recently the CEO of Sunrise Senior Living (private), has been named CEO of Washington Prime Group. The transaction is scheduled to be completed in 2Q 2014. The entity will pursue an investment-grade credit rating.

Washington Prime Group will own or have interest in 54 strip centers and 44 mall in 23 states, each generating $10 million or less in net operating income (NOI), for initial annual NOI of approximately $400 million and funds from operations of about $300 million ($0.80 per share). The entity’s assets total about 53 million square feet with occupancy of 94.2% at strip centers and 90.4% at malls. Washington Prime Group will have a significant presence in Illinois, Indiana, Ohio, Florida and Texas. The transaction is reminiscent of the 2011 spin-off by General Growth Properties Inc. (NYSE: GGP) of its Class B malls into Rouse Properties Inc. (NYSE: RSE).

The separation will accomplish two main objectives. First, the spin-off will allow Washington Prime Group the opportunity to reinvest in the portfolio and pursue strategic acquisitions. Within the larger corporate structure of Simon Property Group, smaller transactions and redevelopment opportunities at Washington’s properties were likely passed over as a higher return on capital could be accomplished through investment in larger properties. Washington currently has a $300 million pipeline of development and re-development projects.

Second, post spin SPG’s operating statistics will improve via the removal of the less profitable assets. The improved portfolio combined with the maintenance of the current dividend, should provide support for SPG shares following the separation. The average size and sales per square foot for SPG’s remaining malls will expand. As a result, it is reasonable to assume SPG will receive a higher FFO multiple from investors, lowering the cost of capital.

Based on peer group multiples, post spin fair value estimates of $13 per share of Washington Prime Group and $163 per share of post spin SPG are reached. On a sum of the parts basis, a pre-spin fair value of $176 is derived. SPG shares currently trade at a modest discount to the peer group. Given that SPG is widely considered a premier REIT operator, the discount creates a margin safety. If one were to consider the current peer group trading multiples reasonable, the fair value estimate implies that the current share price assigns close to no value to the Washington properties. Investors in this position could consider purchasing shares ahead of the transaction as the spin-off is likely a value creating catalyst. Those concerned about current REIT multiple levels versus historic averages may wish to look for an increased margin of safety before initiating a position. Certainly, there are REITs, including those in the spin-off realm, with clearing prices that are not governed by being large components of major REIT indexes. Examples can be found in the Canadian real estate sector, which trades at substantially higher dividend yields and much lower price/book value multiples.

On July 30, 2013, oilfield services provider Oil States International Inc. (NYSE: OIS) announced that its Board of Directors had approved plans to spin off its Accommodations segment into a separate publicly traded company through a tax-free distribution of shares to OIS shareholders, to be completed by summer 2014. The entity will initially be spun off as a C-corporation. However, management is also considering converting the spin-off into a real estate investment trust (REIT), which could occur in 2015. A feasibility study must be conducted first. Bradley Dodson, who currently holds the position of Senior Vice President, Chief Financial Officer, and Treasurer of Oil States, will be promoted to serve as President and Chief Executive Officer of the Accommodations business. The spin-off entity is expected to make a cash distribution of $650-$850 million to the parent at the time of the separation.

Following the separation, Oil States will operate in two segments: Offshore Products and Well Site Services. The spin-off appears to be an effort to generate a lower cost of capital for the more stable, higher-margin Accommodations business. The spin-off could further benefit from REIT conversion. The Well Site Services business is focused on US land drilling and well completion. It is affected by shifts in US rig count and as a result can be very cyclical. The Offshore Products segment manufactures connectors and other equipment for offshore rigs, platforms, and pipeline. Products are sold worldwide, including the North Sea, West Africa, and Southeast Asia. Cycles for this segment will be driven by offshore drilling and production activity.

The proposed spin-off entity generates more stable revenue than the parent, given the location of its accommodation structures in long-term development areas, including the Canadian oil sands and Australian mining communities. The structures tend to be portable, modular configurations designed and constructed by OIS. The operations generate stable ongoing revenue streams from long-term contracts for housing, catering, and onsite services. These contracts would seem likely to lend themselves well to a REIT structure, in which investors demand relatively secure dividends. However, they are not fully protected from commodity price risk. In 2013, weak metallurgical coal (met coal) prices led to declining room utilization for the Australian segment, while reduced drilling activity lowered profits for the US segment.

A valuation of $58 per share is reached for post-spin OIS when considering peer groups in the drilling, completion services, and offshore products segments, as well as the replacement value of assets. The spin-off, OIS Accommodations, can be valued at $62 per share as a C-corp when considering the closest comparable in oilfield housing services or using a modest discount to hotel C-corps (which likely generate more stable profitability since they lack the same commodity price risk). Using a similar discount to a wide variety of REITS, a fair value of $75 per share can be derived if conversion to this structure is completed. It would appear from this analysis that the higher valuation for the standalone Accommodations entity is not being fully considered by the market. As a result, the stock is recommended for purchase.

Near term, pre-spin OIS may still trade at a slight discount to its individual peer groups due to its varying products and services. However, with OIS’s completion of its sale of its low-margin tubular services unit in 2013 and following the forthcoming Accommodations spin-off, this discount could evaporate over time. Investors seeking to benefit purely from the higher valuation created by the impending transaction may want to consider hedging commodity price risk if that is an option. As will be discussed in the valuation section and the conclusion of this report, a group of drillers or offshore product manufacturers may provide the best hedge.

On May 29, 2013, SLM Corporation (NASDAQ: SLM), aka Sallie Mae, announced that its Board had approved a plan to spin off its education loan management business through a 100% tax-free distribution to shareholders. The company also announced that COO John Remondi will replace Albert Lord as CEO, effective immediately. Remondi is expected to lead the loan management business following the completion of the spin-off. The transaction requires final Board approval, a private letter ruling from the IRS, and an effectiveness declaration by the SEC. Management is targeting a 1H 2014 separation date. Following the transaction, Sallie Mae will retain its consumer banking operation, which originates and services private education loans as well as offering student insurance and college savings programs. Ray Quinlan, formerly of CIT Group Inc. (NYSE: CIT), has been hired to assume the CEO role at the parent banking company

The education loan management portfolio, currently referred to as New Corporation, will include about $106 billion in Federal Family Education Loan Program (FFELP) loans, $32 billion in private education loans, and $8 billion of other interest-earning assets, as well as the federal loan servicing platform. FFELP was eliminated in 2010 through the passage of the Health Care and Education Reconciliation Act, as a result of which the government replaced private lenders in extending federally backed loans to students. Therefore, most of this portfolio is in run-off mode and presents opportunities to return capital to shareholders. The diminishing asset base may be hiding the greater growth prospects in the consumer banking business.

The parent company will retain the SLM moniker and will transform into a traditional consumer finance bank, with a focus on funding private education loans. Sallie Mae Bank is a branchless entity that accepts deposits to fund student loans and will remain with the parent company. In addition, SLM will offer some student-focused insurance products. The branchless nature of the business likely provides a structural cost advantage versus traditional consumer finance banks. Given a relatively small current asset base, and the ability to expand that base approximately 20% annually in the near term, separating the banking operations should allow greater visibility into SLM’s growth opportunities.

The spin-off likely accomplishes two main goals. First, given the end of FFELP, a large portion of the current SLM balance sheet is in run-off mode. With an average loan life expectancy of just over seven years, significant declines in the asset base likely would overshadow increases in assets at the banking operations. Second, there appears to be concern over regulatory oversight of the two companies. Given the dissimilar operations, regulatory oversight for the two companies would likely fall under differing agencies. Completion of the spin-off will remove the overhang of the declining FFELP loan portfolio from the growing bank operations and result in single-agency oversight for each of the standalone entities. Removal of these two concerns likely results in a reduced cost of capital at SLM Corp., and opportunities to return capital to shareholders of New Corp. Combined, this presents an opportunity for a greater aggregate value of both entities than the current market value of SLM, thus unlocking of shareholder value.

Post-spin New Corp. can be compared to similar peers in the education loan management business, as well as specialty finance companies that provide third party servicing of loan portfolios. Based on a peer multiple, a fair value estimate of $13.86 can be derived. Shareholders’ focus will likely be on a return of capital through share repurchases and dividends. The parent entity will compare favorably to other banking operators with similar asset sizes given the high initial growth opportunities. The market leading position in private education loan originations is an attractive attribute that likely attracts growth investors post spin. Based on the current book value and management’s projected ROE of 16%-20%, and applying a peer group multiple from regional banking operators generating similar ROE, a fair value estimate of $11.44 can be derived.

On a pre-spin, sum-of-the-parts basis, shares of SLM can be valued at $25.30 based on the above pre-spin fair value estimates. Given growth opportunities at the post spin parent, and the approximate 10% upside from the current share price in addition to a 2.6% dividend yield, an investment in SLM is recommended ahead of the transaction.