On July 13, 2010, Northrop Grumman Corporation (NYSE: NOC) announced that it was exploring strategic alternatives for its Shipbuilding business, including a possible spin-off in a tax-free distribution to shareholders. The new entity would be named Huntington Ingalls Industries Inc. and would trade on the New York Stock Exchange (NYSE) under the symbol ‘HII.’ Northrop’s Board of Directors must still approve the separation. The final capital structure and share distribution have yet to be determined. As no potential buyer of the Shipbuilding business has publicly emerged, NOC is likely to distribute the segment in the first half of 2011. HII has already received preliminary debt ratings from credit rating agencies, and NOC has provided audited stand-alone 2010 financials for the Shipbuilding business, indicating ongoing progress.

Our fair value estimate for Huntington Ingalls (‘HII’) assumes a distribution of one share of HII stock for every share of NOC to shareholders. The net debt assumption for HII of about $1.06 billion is based on historic data presented in the most recent Form 10 filing. Net debt is subject to change prior to the spin. Fitch, in presenting its expected credit rating for HII in late January 2011, noted a likely capital structure that includes about $1.9 billion in debt and around $300 million in cash, resulting in net debt of $1.6 billion. HII will utilize additional debt to make a transfer to its parent and provide initial liquidity, according to the rating agency. Our fair value estimate will be adjusted prior to the spin-off date to reflect the finalized capital structure and share distribution.

NOC is seeking to exit the low-margin, capital-intensive, long-cycle Shipbuilding business to focus greater management energy on the faster-growing, higher-margin remaining business segments, including aerospace and electrical systems. As for HII, the spin-off will enable management to focus on efficiencies and on improving its own underperforming margins. One may arrive at modest upside to the current stock price based on a sum-of-the-parts analysis of the two businesses, but given the current soft environment for defense contractors, including slower to flat spending growth after a decade of rising budgets, closer scrutiny of costs, and the potential for quick termination of underperforming projects, NOC stock is not recommended for purchase ahead of the possible spin-off.

NOC has historically traded below the peer group of leading US defense contractors across most valuation metrics. Following the proposed spin-off of the low-margin Shipbuilding business, the difference between NOC’s operating margin and the higher operating margin for the peer group seems likely to narrow. Northrop management is also focused on reducing exposure to lower-margin work in its other business segments. Therefore, while defense spending growth is likely to slow over the next several years, profit growth may be driven by operating margin improvement. In this environment, one could expect the EV/EBITDA multiple for NOC to approach the higher multiple for the group.

Currently NOC trades at 5.7x forward EBITDA estimates, according to Thomson ONE, compared to a 6.5x multiple for the defense contractor peer group. If one assumes the multiple rises on expected operating margin improvement, post the Shipbuilding spin-off, a 6x multiple for NOC seems reasonable. Applying a 6x multiple to a 2011 EBITDA estimate of $3.58 billion (based on management operating margin and sales guidance and a reasonable split of depreciation and amortization across business lines), one arrives at a price target for NOC post-spin of $73. Given the current stock price, investors seem to apply almost no value to the Shipbuilding spin-off. Alternatively applying an 11.5x multiple to the three-year average (2008-2010) free cash flow for NOC ex-Shipbuilding of $1.83 billion or the mid-range of management’s 2011 free cash flow guidance, which is about $1.85 billion, one still derives about a $73 target. If one expects free cash flow to fall over the next decade as defense spending is reined in, it would be hard to argue paying more than $73 for NOC post-spin.

For the future HII, applying a 5.5x multiple to 2010 audited stand-alone adjusted EBITDA, and assuming a 1:1 share distribution to NOC holders and $1.06 billion in net debt for HII, one arrives at a target of $4 per share. This multiple is in line with Newport News’ trading range post-spin in the mid-1990s during a previous downturn in US Navy shipbuilding. Historical takeover multiples for US shipbuilders have averaged 8x or more, including an 8x multiple for NOC’s takeover of Newport News in 2001 and the recently announced acquisition of Seattle-based shipyard TODD Shipyards (NYSE: TOD). While a takeover seems less likely given previous segment consolidation, an 8x multiple would seem to be the bull case for the stock price. Applying an 8x multiple to trailing EBITDA and utilizing the same assumptions yields a bull case target of $8.

Opting for the more conservative approach and applying the $4 target for the proposed HII and $73 target for NOC post-spin, the sum-of-the-parts analysis results in a $77 target pre-spin for NOC. Given only limited upside and the challenging business environment, the stock is not recommended for purchase. Investors should base their post-spin investment decisions regarding HII and NOC on their fair value estimates of $4 per share and $73 per share, respectively. Those estimates will be reevaluated as more information is made available by the company in amended Form 10 filings.

On January 28, 2014, global packaging and paper manufacturer International Paper Co. (NYSE: IP), announced it would spin off its paper and office supplies Distribution unit, xpedx, through a tax-free dividend to shareholders. Following the spin-off, the new standalone company will immediately merge with privately held Unisource Worldwide Inc. in a Reverse Morris Trust (RMT) transaction. Once consolidated, the new business will be called Veritiv, which is derived from the words: “verity,” “active,” and “connective.” The company is expected to have 16 million shares outstanding and will trade on the NYSE under the symbol “VRTV”. Prior to the spin, xpedx will make a $400 million cash payment to IP, subject to certain adjustments, and will target a debt-to-EBITDA ratio of 4x-5x. The merger is anticipated to generate $150-$225 million in annual synergies to be realized through 2018. IP shareholders will own 51% of the new business, while the remaining 49% will be held by Georgia-Pacific and Bain Capital. Mary Laschinger, the current President of xpedx, will assume the CEO and Chairwoman roles at Veritiv. Shares of standalone xpedx will be distributed at a 0.0188:1 ratio on July 1, 2014, for shareholders of record on June 20, 2014. This implies pre-existing IP shareholders will be allocated roughly 8.16 million shares. “When-issued” trading will commence on June 18, 2014, with “regular-way” beginning on July 2.

IP’s rationale for pursuing the transaction is to improve returns on invested capital (ROIC) by separating a lower-margin business. Over the last four years, the company has been able to exceed its 8% cost of capital, albeit modestly, thanks to the integration of previous acquisitions and a comprehensive Transformation Plan initiated in 2005. Now, with the anticipated spin-off, IP is targeting a near-term ROIC of 12% through higher margins and increased debt reduction. Consequently, the company will likely accelerate capital returns to shareholders via share buybacks and dividends. In the near term, the company anticipates an annual dividend per share of approximately $1.60-$2.00 (vs. $1.40 per share annualized as of the most recent quarter), primarily supported by its improving Industrial Packaging business. As of April 2014, the company also had a $500 million repurchase authorization ($1.5 billion repurchase program initiated in September 2013).

The merger of xpedx and Unisource will position VRTV as one of the largest paper and office supplies distribution businesses in North America. The new company is expected to benefit from substantially increased scale, which could lead to more attractive supply arrangements with vendors and the realization of cost synergies that are expected to more than double margins over time. Based on historical acquisition multiples and a free cash flow yield analysis, a fair value of $36.60 per share can be reached for VRTV. This estimate could prove low if synergies in excess of $150 million (embedded in valuation) are realized.

Post-spin International Paper could be valued at $52 per share, which is based on the sum-of-the-parts of its Industrial Packaging, Printing Paper, and Consumer Packaging segments, in addition to the fair value of its 50%-owned joint venture partner, Ilim Holding S.A. The valuation of each of these businesses includes peer group multiples and historical transaction prices. If the company can stabilize the decreasing revenues and EBITDA trends at its Printing Papers business, the segment could be accorded a higher valuation, thereby increasing post-spin IP’s fair value.

On a sum-of-the-parts basis, pre-spin IP can be valued at $53 per share. While a plethora of evidence suggests a continued decline in the paper industry, which should weigh on International Paper’s business, IP is arguably becoming a dedicated corrugated case and consumer packaging manufacturer. From 2009-2013, these segments have grown substantially, with operating margins up 300 basis points to over 11%. Post separation, these core businesses will come to represent approximately 77% of 2014E revenue and 81% of EBITDA (vs. estimates for Paper of 23% and 19%, respectively). Given expectations for further margin improvement in Industrial Packaging – IP’s largest business – shares of the company are recommended for purchase ahead of the spin. Given the current discount to standalone IP, shares of VRTV could be viewed as a free dividend.

On March 17, 2014, the second largest US natural gas producer, Chesapeake Energy Corp. (NYSE: CHK), filed a Form 10 to spin off its oilfield services division, to be called Seventy Seven Energy Inc., through a tax-free distribution to shareholders. Shares will be distributed on a 1:14 basis on June 30, 2014, to CHK shareholders of record as of June 19. Seventy Seven Energy has filed to list its shares on the NYSE under the ticker “”SSE””. When-issued trading is expected to commence on or around June 17. The CHK Board has already given final approval for the separation.

SSE is a provider of drilling, hydraulic fracturing services, and rental tools to exploration and production (E&P) companies. Chesapeake and its working interest partners accounted for 90% of revenue in 2013 and 85% in 1Q 2014. SSE operates 83 rigs. Many of these rigs were obtained through the $312 million acquisition ($14 million per rig) of Bronco Drilling in 2011. CHK is one of the only remaining E&Ps that operates its own drilling rig fleet. SSE will assume about $1.115 billion in debt and make a cash distribution of $391 million to CHK at the time of the transaction. Jerry Winchester, who has been the CEO of Chesapeake Oilfield Services (COS) since 2011, will be the CEO of the spin-off entity.

If SSE is valued using comparables in the drilling and completion services sectors based on EBITDA and assets, as well as on replacement value of the fleet, a fair value of $21 per share can be reached. SSE has 16 rigs under construction for delivery over the next 18 months, which could lead to increased EBITDA. In addition, expansion of its rental tools and trucking segments to third-party operators could also result in greater profitability.

A valuation of $29 per share is derived for post-spin CHK based on proved reserves[1], projected EBITDA, and a discounted cash flow analysis. Management is focused on lowering debt, reducing the complexity of the corporate structure, and raising liquids production. The spin-off of the oilfield services segment and the sale of other non-core assets should help the company to achieve some of these goals. However, the sum-of-the-parts fair value of $30.50 per share does not offer enough price appreciation to warrant a purchase recommendation at this time.

On September 5, 2013, The Timken Company (NYSE: TKR) announced that its Board of Directors had approved plans to spin off its engineered steel operations into a separate publicly traded company through a tax-free distribution of shares to TKR shareholders, while retaining its bearings and power transmission business. The spin entity will be named TimkenSteel and is expected to trade on the NYSE under the symbol “TMST”. Shares will be distributed on a 1:2 basis on June 30, 2014, to TKR shareholders of record as of June 19, 2014.The transaction still requires an effectiveness declaration of the company’s Form 10 filing by the SEC. Richard Kyle, former COO of the Bearings and Power Transmission business, has replaced James Griffith as CEO of TKR. Chairman Ward Timken will become Chair and CEO of the spin-off entity. John Timken will become non-executive Chairman of TKR.

The decision to spin off the steel business follows a May 2013 non-binding shareholder vote brought by large shareholder Relational Investors LLC, with support from the California State Teachers Retirement System (CalSTRS), to separate the company’s ball bearings unit from the steel production business. The Board retained Goldman Sachs to review the proposal, at which time a special committee that excluded all Timken family members was designated to reach a final decision on the separation. Relational argued that the stock was mispriced because the combination of disparate pieces created a conglomerate discount. The potential for a separation was first highlighted in the December 2012 edition of The Spin-Off Report Radar Screen.

The Bearings and Transmission business operates in three segments: Mobile Industries, Process Industries, and Aerospace & Defense. The Mobile Industries segment provides bearings, assemblies, power transmissions, and related products for mobile equipment and vehicles, such as light trucks, tractors, and locomotives. The Process Industries segment offers industrial bearings and transmission equipment to support oil drilling equipment, food processing systems, and heavy movables structures, among others. The Aerospace & Defense segment manufactures power transmission systems and aftermarket supplies for civil and military aircraft, as well as robotics, machine tools, and medical equipment. The Steel business (with approximately 2 million tons of annual melt capacity) provides custom alloy steels in the form of bars, tubing, and billets used in drill pipe, crankshafts, and axles for a variety of global industries.

The rationale for the separation is centered on the idea that bearings and transmission sales are typically more stable than the cyclical steel manufacturing business. Additionally, the bearings and transmission business provides greater opportunities to sell into the aftermarket. As such, a standalone bearings business would be likely to generate more stable revenue and margin streams than TMST, thus warranting a higher valuation multiple. The spin company would exhibit more cyclical trends; however, with a modestly levered balance sheet, management would be able to invest further in existing operations or pursue acquisitions that would likely be less feasible within a combined entity.

Based on peer multiples and asset, equity, and takeover values, a pre-spin sum-of-the-parts fair value of $70 per share is derived. The SOTP is arrived at using post-spin fair value estimates of $49 for the bearings business and $42 for TimkenSteel (based on a 1:2 distribution). Given the current upside from the pre-spin fair value estimate, and positive business trends that may present further enhancement of the fair value over a longer period of time, shares of TKR are recommended for purchase prior to the transaction.

Liberty Interactive has two tracking stocks, Liberty Interactive Group (NASDAQ: LINTA, LINTB) and Liberty Ventures Group (NASDAQ: LVNTA, LVNTB). On October 10, 2013, Liberty Interactive announced plans to separate its ownership interest in TripAdvisor Inc. (NASDAQ: TRIP), which is among the assets held within LVNTA. In addition, the BuySeasons business, which primarily operates through the BuyCostumes.com website, would be combined with the TRIP holdings to form Liberty TripAdvisor Holdings, which is expected to trade under the tickers “”LTRPA”” and “”LTRPB””. Liberty will receive a $350 million cash distribution from Liberty TripAdvisor as part of the transaction. Holders of Liberty Ventures ‘A’ or ‘B’ shares are expected to receive one corresponding share of the new entity. Liberty TripAdvisor Holdings will hold a 22% economic and 57% voting interest in TRIP, which Liberty Interactive acquired through its stake in Expedia Inc. (NASDAQ: EXPE). TRIP was a spin-off of EXPE in December 2011. The separation is still subject to final Board approval. The transaction is expected in mid-2014.

Following the separation, LVNTA will retain Liberty’s stakes in EXPE, Tree.com (NASDAQ: TREE), and Interval Leisure Group (NASDAQ: IILG), among others. The transaction appears to be an effort to eliminate the discount accorded LVNTA when compared to the market value of its stakes in publicly held companies. While management has indicated that there are no immediate plans to merge LTRPA back into TRIP, the separation of those holdings would make the combination easier. The potential for that merger could help eliminate LVNTA’s discount to net asset value (NAV).

This discount has been highlighted in The Spin-Off Report Bits & Pieces since September 2013. Since its initial inclusion, LVNTA is up 38% (through May 15) compared to an 11% rise for the S&P 500. As a result, the discount has narrowed considerably; nevertheless, the forthcoming transaction offers additional upside. Based on a NAV per share of $34 for Liberty Ventures and $34 for Liberty TripAdvisor, offering about an 8% discount to the current market capitalization of LVNTA, the stock appears interesting. Additional optionality could be generated if the BuySeasons business experiences a recovery following a difficult two years of declining sales, or if the LTRPA stake is eventually combined with TRIP to eliminate the discount potentially accorded TRIP due to the dual corporate structure. Given that LVNTA’s primary holdings are in stakes for online travel websites, the risks to the recommendation are declining travel and leisure spending or increased competition in these markets.

On December 11, 2013, Exelis Inc. (NYSE: XLS) announced that its Board of Directors had approved a plan to spin off its Mission Systems business (part of its Information & Technical Services segment) through a tax-free distribution to shareholders to be completed by mid-2014. The segment, to be called Vectrus Inc., provides facility management, logistics, and network communication services for government and military customers in the United States and globally. The spin entity is expected to trade under the ticker “VEC” on the NYSE upon completion of the transaction. The separation of the spin company still requires an effectiveness declaration of registration statements by the SEC and final Board approval. XLS will maintain its quarterly dividend, currently about $0.1033 per share. The parent will also retain and continue to service pension obligations. Vectrus will be led by Kenneth Hunzeker, who has been the president of the unit since April 2011.

The spin company has a larger percentage of revenue tied to overseas troop deployments, and as a result is likely to see greater declines in earnings in the next two to three years. Consequently, XLS is expected to be awarded a higher valuation following the transaction, thereby lowering the company’s cost of capital. New XLS should also face meaningfully less exposure to the US Department of Defense (DoD), which is likely a positive for new contracts given the agency’s recent penchant for cutting costs due to years of escalating government budgets. According to management, less than 50% of pro forma revenue is generated by the US Army, Navy, and Air Force, while more than 15% of revenue is derived from international clients and 6% from commercial markets. VEC is expected to have a leverage ratio of 2x – 3x EBITDA, which implies about a $186 million cash distribution to the parent upon separation. XLS could use the distribution to buy back shares or seek out smaller acquisitions.

Management has guided for a mid-teens revenue decline for Vectrus and about a 6% operating margin. Utilizing a peer group that includes Engility Holdings Inc. (NYSE: EGL), SAIC (NYSE: SAIC), and ManTech International Corp. (NASDAQ: MANT), a fair value of $2.50 per share can be derived when assuming a 1:1 distribution ratio. One may note that other recent defense-related spin-offs with high degrees of revenue uncertainty, including EGL and XLS (when it was separated from ITT Corp. in 2011), came under significant selling pressure in their initial months of trading, which proved to be attractive entry points. VEC may follow this course. Standalone XLS is likely to generate flat revenue in 2014. Assuming a peer group that includes L-3 Communications Holdings (NYSE: LLL), which spun off EGL last year, and other aviation electronics specialists such as Teledyne Technologies Inc. (NYSE: TDY) and Rockwell Collins Inc. (NYSE: COL), a fair value for standalone XLS of $18.50 per share can be reached. Notably, multiples for defense contractors such as Northrop Grumman (NYSE: NOC) and LLL, which have completed spin-offs of weaker assets in recent years, have expanded following completion of the transactions. Based on these valuations, XLS could be valued similarly as a standalone with higher margins and greater future revenue certainty. As a result, a purchase of XLS either immediately prior to or following the separation is recommended.

SWK is a diversified global provider of power tools, industrial products and services, mechanical access solutions, and electronic security and monitoring systems. The company operates under three reportable segments: Construction & Do It Yourself (CDIY), Industrial Tools, and Security Solutions.

Security-focused companies have increasingly been valued at a premium to more diversified industrial conglomerates. In 2013, Ingersoll-Rand completed the spin-off of its security business, Allegion, which thus far has proved to be a value-creating catalyst. Other large conglomerates, including Dover Corp. and ITT Corp., have pursued similar strategies.

SWK management comments in 2013 indicated comfort with the current corporate structure and hinted that the Security business was too small to operate as a standalone company. However, management acknowledged that if security businesses were valued at a premium to SWK, they would reconsider the company’s stance. The success of the Allegion transaction may lead management to reevaluate SWK’s corporate structure. Given the highly fragmented and consolidating security market, a lower cost of capital for a standalone security business might facilitate a more aggressive acquisition strategy. Alternatively, the segment could be sold to a competitor.

Considering peer group multiples, we value the CDIY segment at $64 per share, the Industrial segment at $43 per share, and Security operations at $33 per share.

On a sum-of-the-parts basis, we reach a value for SWK of $99 per share when accounting for $24 per share in net debt and $17 per share in corporate or shared costs. The $99 SOTP valuation represents a 16% premium to the current SWK share price. Future potential catalysts include a spin-off or sale of the Security segment, increased share repurchase activity, or sizable acquisitions in the CDIY or Industrial segment. Potential risks include management maintaining the current conglomerate strategy, causing the high-valuation segments to receive a conglomerate discount, or the inability of the Security segment to widen margins.

IMMOFINANZ AG (“”IMMOFINANZ” or “IIA”) is an Austrian real estate company that owns commercial and residential properties in Central and Eastern Europe. Its real estate is mainly located in Austria, Germany, Russia, the Czech Republic, Poland, Hungary, Romania and Slovakia. The company’s strategic focus is on income generating assets, complemented by a recycling program of rental properties and the sale of new developments. On February 12th, IMMOFINANZ announced BUWOG’s distribution to shareholders through a partial spin-off. Existing shareholders will receive one BUWOG share for every 20 IMMOFINANZ shares they own. Their stake will comprise 51% of the company, with IIA maintaining the remaining 49% and ceding operational control[1]. The transaction was approved in the extraordinary shareholders meeting held on March 14th, 2014, with the ex-date for the spin-off being April 28th. The rationale behind the demerger is that the stock of the discrete entities—BUWOG and IMMOFINANZ—will be more appealing to investors as they will represent pure-play companies, with BUWOG focusing on residential real estate and IMMOFINANZ on commercial properties. Additionally, residential real estate is considered a relatively safer investment, with such companies being valued closer to their book value, as opposed to commercial real estate companies that have been trading at a discount to their NAV since 2007.

After the spin-off, IMMOFINANZ will own retail, office and industrial real estate, along with a few residential properties in Eastern Europe, and 49% of BUWOG. The company’s portfolio will be weighted much more towards developing nations such that the importance of Austria and Germany will be significantly reduced. A quarter of the commercial investment properties—measured by asset value—will be in Russia. Given the recent tension with Ukraine, where the company has minimal presence, such concentration poses a significant risk. At an extreme case, Russia could seize assets of foreign companies, IMMOFINANZ included, or restrict the repatriation of profits. A more likely scenario though, if the situation does not ease, is the depreciation of the Russian Ruble[2] which will reduce IIA’s profitability. Post demerger, IMMOFINANZ could be valued between EUR 2.1 and EUR 3 per share. This wide range highlights the company’s weak profitability compared to its asset base. More specifically, the EUR 2 valuation is based on the company’s FFO, while the EUR 2.7 target is based on a 30% discount to IIA’s book value. Given the risks that arise from IIA’s geographical footprint—stemming from the presence in Russia as well as in other developing nations with high risk profiles—an investor should require an above average return for holding the stock. As such, shares of IMMOFINANZ, after the spin-off, are recommended at a price below EUR 2.1.

The new entity, BUWOG, has been operating as a wholly owned subsidiary of IMMOFINANZ since its acquisition, in 2004. Consequently, the demerger will not be detrimental to its operational platform. Its real estate consists of residential properties in Austria and Germany. After the DGAG acquisition, BUWOG controls approximately 54,000 residential units with an asset value of EUR 3.6 billion. Given its exposure to two of Europe’s stronger and more stable economies, as well as to real estate’s most conservative sector, the spin entity is expected to be characterized by slow, stable growth and a safe dividend. BUWOG’s management expects to distribute 60% to 65% of its FFO as dividends every year, starting with the fiscal year of 2014[3]. However, the high debt incurred for the acquisition of the DGAG portfolio, along with plans to continue the company’s expansion through new developments and purchases of existing properties, could result in limited dividend growth rate in the short term. In the short to medium term, BUWOG’s FFO and, consequently, dividend will be restricted by significant financing costs—the pro forma net debt-to-book value is 120%. Based on its FFO, the company could be valued as low as EUR 9.6 per share. On a book value basis, on the other hand, BUWOG commands a valuation of EUR 14.8. Given the low risk of BUWOG’s strategy and real estate portfolio, the latter valuation appears quite plausible.

For IMMOFINANZ prior to the spin-off, the sum-of-the-parts target price range is EUR 2.5 to EUR 3.7. Most methods point to substantially higher downside risk than potential upside and, consequently, shares of IMMOFINANZ are not recommended for purchase prior to the spin-off.

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.