Unit Corp. (NYSE: UNT), a diversified energy company, involved in exploration and production, contract drilling, and mid-stream, appears to trade at a discount to any of its peer groups owing in part to its complicated corporate structure.

The widening valuation disparity between mid-stream Master Limited Partnerships (MLPs) and E&Ps and contract drillers may further nudge management to consider separating these assets into a more tax-friendly structure. If not, activist investors that have successfully pushed for similar transactions by other corporations may consider a similar strategy. We are not the first to point out these valuation discrepancies. However, the mid-stream assets previously appeared to be relatively small to separate into a standalone business. Given ongoing investment in the segment, this no longer appears to be the case.

During UNT’s December 2013 investor day, management reiterated a comfort level with the current corporate structure, but indicated they were always open to new options, particularly if the company needed to raise new capital or other capital allocation issues came into play. Demand for its new AC rigs or increased mid-stream spending could be catalysts for change. Considering peer group multiples, assets, and future projected cash flows, we value the exploration and production assets at $43.50 per share, the drilling rigs at $20 per share, and mid-stream operations at $15.50 per share.

On a sum-of-the-parts basis, we reach a value for UNT of $62 per share when accounting for $13 per share in net debt and $4 per share in corporate or shared costs. Future potential catalysts include a spin-off of the mid-stream segment, sale of the drilling rigs, or rising hydrocarbon prices and associated active rig count expansion. Potential risks include the status quo continuing, thus leaving the valuation discount in place; declining commodity prices; or development issues at some of UNT’s core E&P plays.

Gannett Co. (NYSE: GCI), a local media company with broadcasting, publishing, and digital segments, is in the process of acquiring fellow local broadcaster Belo Corp. (NYSE: BCI), in a $2.2 billion deal expected to close by the end of 2013. GCI is among a handful of remaining diversified media companies following a series of breakups.

In coming years, local broadcasters may benefit from expanding retransmission fees from cable companies, the potential sale of spectrum through an FCC auction, and increased expenditures on political campaigns, as well as an ongoing shift to television as the most popular advertising medium. Local broadcasting stocks are likely to benefit from increasingly positive earnings projections, as well as rising multiples, as local broadcasting multiples still significantly trail their national cable brethren.

Taking into account $175 million in synergies within three years in the broadcasting segment as a result of the Belo merger, we value the business at $31 per share based on peer group and historical multiples and current growth prospects. Assuming publishing revenue and margins begin to stabilize, we reach a fair value of $12 per share for the newspapers based on a 10-12% cash flow yield and peer multiples. The stake in CareerBuilder is valued at $3 per share, while other investments total $2 per share based on book value and projected cash flow. Net debt, including $2.2 billion for the Belo acquisition, equals $3.4 billion, or $15 per share.

On a sum-of-the-parts basis, we reach a value for GCI of $33 per share. Future potential catalysts include a spin-off or sale of the publishing segment, additional asset sales such as the 53% stake in CareerBuilder, significant growth in retransmission fees, or potential upside from spectrum sales. This SOTP valuation excludes potential benefits from the $300 million share repurchase program, which can easily be funded from free cash flow.

Woori Finance Holdings is one of the leading South Korean diversified financial companies, with assets of KRW 332,803 billion as of September 30th, 2013. Known also as Woori Financial Group, the company was created in 2001 by the Korean Government as a vehicle to consolidate four commercial banks and one investment bank—Hanvit, Peace, Kwangju, Kyongnam and Hanaro Investment Banking—given the prolonged weakness in the country’s financial sector following the 1997 crisis. Currently, the firm has expanded its operations to credit cards, securities and investment banking, asset management, insurance and consumer finance.

On December 2nd, Woori Finance filed an Information Statement with the SEC regarding the spin-off of two of its regional banks, Kwangju Bank and Kyongnam Bank. More specifically, current shareholders will receive 0.0636664 shares of KJB Financial Group (“KJB”), the 100% owner of Kwangju Bank, and 0.0972946 shares of KNB Financial Group (“KNB”), the 100% owner of Kyongnam Bank. Following the demerger and pursuant to Korean law, each share of Woori Finance Holdings will be exchanged for 0.8390390 shares of the same company. Holders of ADRs, traded at the NYSE and representing three common shares of Woori Finance Holdings, will not receive new shares of KJB and KNB, but instead will receive the cash proceeds from the sale of the shares—which will be arranged by Citigroup—after the spin-off. The demerger is expected to be complete by March 1st, 2014 and is subject to the necessary regulatory and shareholder approvals, while its tax status remains uncertain. The spun-off companies are expected to be listed at the KRX KOSPI Market and will be distributed to eligible shareholders on March 14th.

KJB Financial Group, will be the holding company of Kwangju Bank (“Kwangju”). As of September 30th, 2013, KJB had assets of KRW 18,945 billion and equity of KRW 1,361 billion. While the bank appears to be sufficiently capitalized, with a capital adequacy ratio of 13.7%, it has grown its asset base rapidly over the past few years, and it reported a 28% YoY increase in impairment losses. Moreover, it operates in two regions with subpar economic growth over the past decade and reliance on agriculture and tourism, two relatively volatile industries. KJB Financial Group could be valued at KRW 17,200 per share, based on its trailing twelve month net income, but shares would be recommended closer to the lower end of our valuation, at KRW 16,500, at a price that offers a 34% discount to book value and 27% discount to tangible equity.

KNB Financial Group will own 100% of the shares of Kyongnam Bank (“Kyongnam”). As of September 30th, 2013, KNB had assets of KRW 32,272 billion and equity of KRW 2,206 billion. KNB Financial Group shares are recommended for purchase at a price below the target level of KRW 22,700, based on the company’s strong profitability, high capital adequacy and geographical focus on one of South Korea’s industrial strongholds that offers additional opportunities for healthy expansion.

Woori Finance Holdings is in the process of selling some of its wholly owned subsidiaries, as well as its stakes in Woori Investment & Securities and Woori Financial, a process that is expected to be complete within 2014. Woori Finance Holdings has significantly lower asset quality, and it would not be surprising for the parent company to trade at a discount to its peers, at an estimated fair value of KRW 11,000 per share. However, increasing impairments for credit losses and subpar profitability could lead the stock price to as low as KRW 6,600. With the initial estimated fair value not providing a good risk/reward trade-off, shares are recommended only at the lower end of our valuation range.

The sum-of-the-parts valuation of Woori Finance Holdings before the spin-off is KRW 12,500 per share, which compares to the company’s current share price of KRW 12,350. The sum-of-the parts valuation, along with the potential taxable nature of the spin-off, the 33% potential downside and, most importantly, the uncertainty regarding Woori Finance Holdings’ asset monetization efforts, render the company an unattractive investment prior to the spin-off. Rather, investors are advised to wait for the completion of the spin-off and try to capitalize on: potential mispricing due to investor unawareness of the small, regional banks—particularly KNB Financial Group; the potential stock price overhang until KDIC’s stake is sold; and a potential acquisition premium if the new controlling shareholders decide to make a public offer.

On July 10, 2013, Tribune Co. (OTC: TRBAA, TRBAB) announced plans to separate its publishing operations from its broadcasting unit. The media conglomerate, which exited bankruptcy protection in late 2012, closed a deal in December 2013 to acquire Local TV LLC, an operator of 19 broadcasting stations, for $2.73 billion. As part of the agreement, broadcast licenses for three stations were sold to a third party. The separation follows the June 2013 spin-off by News Corp. (NASDAQ: NWSA) of its newspapers and publishing arm, which kept the News Corp. name and left behind its other media operations as Twenty-First Century Fox (NASDAQ: FOXA). Similarly, Time Warner Inc. (NYSE: TWX) is spinning off its magazine division, as media empires begin disbanding to isolate the more profitable, growth-oriented broadcast units from the publishing segments, which have diminishing profitability.

The spin-off, to be called Tribune Publishing Company, will include the Los Angeles Times, Chicago Tribune, Hartford Courant, Orlando Sentinel, The Baltimore Sun, The Morning Call, and Daily Press, while the parent, Tribune Company, will be home to 39 local television stations, as well as WGN America and equity interests in The TV Food Network, CareerBuilder, and assorted real estate assets. The transaction requires the customary regulatory approvals, positive opinion from counsel regarding its tax-free status and additional due diligence. Pending final Board approval, the distribution could be completed in mid-2014.

The spin-off is similar to the 2008 separation of broadcaster Belo Corp. (NYSE: BLC) and its newspaper publishing segment A.H. Belo (NYSE: AHC). The Tribune broadcasting business is likely to receive a higher multiple given wider margins and superior growth prospects due to rising retransmission fees from cable companies and increased ad spending. Synergies from the Local acquisition will likewise benefit the parent. Based on projected EBITDA for the merged business (even assuming 50% of synergy guidance is generated in the first two years) and the carrying value of the equity investments, a fair value of $79 per share can be reached. Since the standalone business has a fair value near the pre-spin trading price, the shares are recommended for purchase. Risks to the valuation include a lack of initial synergies from the Local merger and the potential inability of Tribune to obtain a listing on a national exchange. This valuation does not include the prospects for a valuation multiple expansion toward the level of higher-valued national cable network providers, which trade at premiums to local broadcasters despite similar margins. Tribune Publishing is likely to be under pressure following the spin-off, due to ongoing advertising revenue declines for newspapers. However, the $7.04 per share value should be supported by stabilizing circulation and rising subscription rates. This should provide a margin of safety provided that ad rates do not decline precipitously.

On November 7, 2013, The Ensign Group Inc. (NASDAQ: ENSG) filed a Form 10 to spin off its real estate into a separate publicly traded REIT, to be called CareTrust REIT Inc., through a tax-free distribution of shares to shareholders. The REIT has applied to be listed on the NASDAQ under the ticker “CTRE”. The transaction is expected to be completed in 1Q 2014. Following the separation, ENSG will manage approximately 116 skilled nursing centers and managed care facilities in California, Arizona, Texas, Washington, Utah, Idaho, Colorado, Nevada, Iowa, Nebraska, and Oregon. CTRE will hold the vast majority of the ENSG properties and will manage three independent living facilities. The remaining properties will be leased back to ENSG on a triple-net basis. Ensign’s management team will remain in place except for Executive Vice President Gregory Stapley, who will assume the duties of CEO and President of CTRE. The separation still requires a private letter ruling from the IRS regarding the tax-free nature of the spin-off, an effectiveness declaration of the filings by the SEC, and final Board approval.

Senior housing industry fundamentals support a bullish outlook for both entities post spin. An aging population, combined with a decline in housing supply in recent years, appears favorable for operators. Additionally, the market is highly fragmented, with approximately 70% of facilities being run by so-called mom-and-pop operators. ENSG has been acquisitive in the past, and there is no reason to expect that CareTrust will change strategies following the separation.

The transaction will include a distribution of up to $350 million from CTRE to ENSG, resulting in a net cash position at Ensign. Rationale behind the spin-off appears rooted in the idea that as a REIT, CTRE has the potential to achieve a higher valuation on a standalone basis if the market clearing price for its lease income, as expressed through the REIT dividend, is sufficiently high. The lower cost of capital at CTRE, in theory, should more than offset the lower earnings and cash flow potential, due to increased rental expense, and subsequent valuation awarded to ENSG.

A fair value of $19 per share of CTRE can be derived using a variety of metrics, including asset cost and peer group multiples. Given that REITs are attractive to income-oriented investors, the implementation of a dividend policy could provide modest upside to this fair value estimate. Even at this fair value, investors may still find the CTRE growth story attractive enough to warrant purchase, given CTRE’s ample opportunity to expand its asset base. Separation of the real estate should result in a lower cost of capital, thus fostering continued acquisitions. In addition, conversion into a REIT should attract incremental institutional interest, while the high likelihood of inclusion in real-estate–focused ETFs could provide valuation support through a larger number of buyers.

Excluding the new rental payments, The Ensign Group’s operating characteristics will experience minimal change following the spin-off of CareTrust. ENSG’s strategy of taking over underperforming senior living facilities has shown success in increasing occupancy and revenue per facility. Post spin, ENSG will likely follow a similar strategy, entering into lease agreements on distressed properties, then using Ensign’s expertise to improve operations. Based on peer group comparisons and ENSG’s ability to generate cash flow, a fair value estimate of $29 per share is derived.

On a sum-of-the-parts basis, pre-spin ENSG can be valued at $48 per share. Given less than 10% upside, shares of The Ensign Group are not recommended for purchase prior to the transaction. However, investors with particular interest in REITs should follow CareTrust in initial trading, as its shares may present investors with acceptable long-term growth prospects.

On October 31, 2013, Starwood Property Trust (NYSE: STWD) filed a Form 10 to spin off its single-family residential business, including single-family home rentals and related home loans, into a separate publicly traded REIT, to be called Starwood Waypoint Residential Trust. Shares will be distributed on January 31, 2014, with regular way trading commencing on February 3. The REIT is expected to be listed on the NYSE under the ticker “”SWAY””. Shares will be distributed on a 1:5 basis to STWD holders of record as of January 24. When-issued trading is likely to begin around January 22. Management anticipates that for tax purposes, the spin-off will be treated as a distribution equal to the value of the distributed SWAY shares. STWD Chairman and CEO Barry Sternlicht will also serve as Chairman of SWAY. The deal requires final Board approval as well as an effectiveness declaration by the SEC. STWD will retain its commercial mortgage loans and commercial debt investments in a mortgage REIT. The transaction could be viewed as similar in nature to the separation of the commercial and residential pieces of Newcastle Investment Corp. (NYSE: NCT) with the creation of New Residential (NYSE: NRZ) in May 2013.

As of September 30, 2013, net book value of SWAY’s residential real estate, which includes 5,817 single-family homes and non-performing loans (NPLs), totaled about $786 million. STWD expects SWAY to be capitalized with $100 million in cash and have an undrawn line of credit totaling $400 million. Based on the peer group multiples, and assuming a 1:5 share distribution, SWAY could be valued at $22 per share. Given the tight trading range based on book value and assets, the stock is likely to trade close to this valuation. However, an entry point at this price or at a modest discount could be attractive. The valuation could benefit from home price appreciation, continued US trends away from home ownership, or greater evidence of the sustainability of the single-family rental business model. Near-term trading could be volatile. The stock is likely to respond to changes in home prices and new construction. A lack of available home supply or inability of families to obtain mortgages would be seen as beneficial to the stock. SWAY may appeal to longer-term investors, in particular, given the potential for multi-year home price improvement.

As STWD generally trades on the basis of dividend yield, and as the possible assets in the spin entity do not contribute at all to the dividend, the value of the standalone parent should not change substantially following a separation. The dividend will remain unchanged. The peer group of commercial mortgage REITS has a 7.5% yield, while STWD has traded at about a 7.6% yield since inception of the payout about four years ago. Based on historical and peer group yields, as well as consensus earnings estimates, a fair value of $25 per share can be reached for STWD. A pre-spin sum-of-the-parts valuation of $29.40 per share leaves only limited upside to the current stock price.

Amcor Limited is one of the world’s leading packaging companies, offering fiber, glass, metal, flexible and rigid plastic products to clients in over 40 countries. On August 1st, it announced the spin-off of its Australasia & Packaging Distribution (AAPD) business into a newly created company named Orora, through distribution of one Orora share for every one Amcor share.

Orora will consist of the Australasia & Packaging Distribution segment. The two businesses were merged for operational purposes in 2009. The Australasia segment manufactures metal, glass and fiber packaging such as beverage cans, folding cartons and wine bottles and closures, and is focused on Australia and New Zealand. Packaging Distribution, on the other hand, manufactures and distributes corrugated boxes and other packaging supplies through its various brands. It derives the vast majority of its sales from the USA. Packaging Distribution’s roots can be traced to the 2001 acquisition of California based Sunclipse by Amcor. During FY 2013, Orora generated AUD 2,895 million in sales and AUD 245 million in EBITDA. Its disappointing performance has led management to institute a wide reorganization that included discontinuing certain products, manufacturing plant closures as well as significant capital expenditures. The reorganization is expected to result in AUD 76 million in cost savings in the near future, leading to higher margins and increased profitability. Orora’s very narrow focus on specific packaging segments and regions, combined with the Container & Packaging industry’s minimal growth rate imply that its valuation is essentially based on the success of its restructuring initiative. Given the industry’s subpar performance, and our target price of AUD 1.1 per share, shares of Orora are recommended at a price of AUD 0.8 to AUD 0.9, in order to provide a sufficient margin of safety against a failure to increase profitability. Should Orora’s operations and margins improve, an estimated long-term fair value would be AUD 1.4 per share.

Amcor, post spin-off, will focus on Flexibles—including tobacco packaging—and Rigid Plastics. Currently, Amcor is a leading company in both businesses, with the number one position in food flexibles, healthcare flexibles, tobacco packaging and rigid plastic containers. The company will maintain its worldwide presence, with Rigid Plastics deriving almost all of its revenues from the Americas and Flexibles being present in all continents, including Oceania. Similar to Orora, Amcor will be restricted due to the low growth rate of the industry in which it operates. However, its leading position and its broad geographic presence could potentially provide selective opportunities for the company to grow, while it also enjoys double digit EBITDA margins and strong free cash flow. A reasonable price for Amcor’s shares after the demerger is AUD 9.2. However, given the rich multiples at which the company currently trades, it is expected to start trading closer to, or even above, the higher end of our valuation—i.e. at AUD 9.5 per share.

The sum-of-the-parts valuation of Amcor before the spin-off is AUD 9.3 per share. Such valuation represents an 18% discount to the company’s current share price of AUD 11.36. Therefore, no obvious investment opportunity appears prior to the spin-off. While Amcor, post spin-off, would probably be a better business compared to Orora, the latter’s size—as measured by both net income and assets—could trigger forced selling by companies avoiding small-cap stocks and indexes where it does not meet the minimum threshold, thus potentially offering an attractive entry point.

On May 23, 2013, industrial conglomerate Dover Corporation (NYSE: DOV) announced that its Board had approved plans to separate into two independent, publicly traded companies through a tax-free spin-off to shareholders of a substantial portion of its Communication Technologies segment into a company to be known as Knowles Corporation. The spin entity will be focused on the manufacture and sale of microphones, speakers, receivers, transducers, and assorted components used in communications infrastructure. Annual revenue for the business is estimated at around $1.3 billion. Dover will maintain its energy, refrigeration, fluids, and printing & identification businesses, which generate annual revenue of about $7.5 billion. Knowles is expected to have an investment-grade credit rating. Leading brands include Knowles, Sound Solutions, Dielectric, Novacap, Syfer, and Vectron. Current segment head Jeffrey Niew will serve as CEO. Current Dover CEO Robert A. Livingston will retain that position. Moving forward, Dover is expected to focus on core acquisitions and potential share buybacks. The transaction is scheduled to be completed in early 2014. The separation still requires a private letter ruling from the IRS pertaining to the tax-free status of the transaction, an effectiveness declaration from the SEC, and final Board approval. Despite significant international manufacturing operations, the new entity will be headquartered in the US.

Dover currently reports operations in four segments: Communication Technologies, Energy, Engineered Solutions, and Printing & Identification. The Communication Technologies segment accounted for 19% of total revenue in 2012, in line with its contribution over the previous three years, and 16% of segment earnings, down from 19% in 2010. The Communications segment has benefited from the July 2011 acquisition of Austria-based Sound Solutions from NXP Semiconductor NV for $855 million, or about 2.6x sales. Sound Solutions builds speakers and receivers for the fast-growing smartphone market and other consumer electronics. However, the business has recently had production issues and faces the possibility of slower growth after a massive uptick in smartphone demand.

Knowles (“KN”) will be primarily focused on the manufacture of microphones, speakers, and receivers for the smartphone market, and should benefit from considerable demand over the next couple of years due to increased usage of MEMS microphones within smartphone handsets. Micro-ElectroMechanical Systems (MEMS) microphones are used in consumer electronics, primarily smartphones. MEMS technology allows for the manufacture of small mechanical components on the surface of silicon wafers. Knowles is the current market leader in the MEMS microphone industry; however, the company has lost market share in recent years to both established and new competitors. In addition, because of acquisition integration issues, the former Communications segment of Dover has seen significant margin declines. Knowles will have to spend significant resources on R&D to remain current with or ahead of the technology curve in order to slow or reverse the current business trends, or it will risk its product portfolio becoming obsolete. Within the larger Dover corporate structure, the increased R&D spending might not have been made; therefore, as a separate entity KN will have the opportunity to increase R&D or pursue a more aggressive acquisition strategy. A fair value of $33 per share can be derived for Knowles Corp.

Post-separation Dover will continue to be a diversified industrial conglomerate with an increased percentage of revenue and earnings being derived from the-fast growing Energy segment, which manufactures products for use in oil and gas drilling and extraction applications and which exhibits margins approaching 30%. Weaker margins in the Communications segment may be masking faster growth in the other segments. Increased hydrocarbon development, particularly horizontal drilling and more technologically complex exploration and production, will likely benefit the upstream operations. The Engineered Systems segment has shown decent growth, but the sustainability of that growth may be brought into question following the completion of a major retailer’s store remodeling campaign and continued sluggish economic growth in Europe. Applying a diversified industrial peer group multiple could result in a fair value of $77 per share of post-spin DOV.

On a sum-of-the-parts basis, a pre-spin fair value estimate of $94 per share is derived. Given limited upside from the current price levels, shares of DOV are not recommended for purchase prior to the spin-off transaction.

Brambles Limited is an Australian company that provides pallet and container pooling solutions through its CHEP an IFCO brands, and information management services through its Recall subsidiary. Headquartered in Sydney, Australia, it is a truly global company, with operations in over 50 countries and FY 2013 revenues of USD 5,890 million. On July 2nd, it announced the spin-off of its information management business through the demerger of Recall Holdings Limited, through distribution of one Recall share for every five Brambles shares.

Recall Holdings is currently Brambles’s information management subsidiary. It was established in 1999 and will be headquartered in Atlanta, GA, USA—with an additional corporate office in Sydney, Australia. It offers Document Management Solutions (DMS), such as storage of physical documents, Secure Destruction Services (SDS), such as destruction of physical documents and media items, and Data Protection Services (DPS), such as computer back-up data offsite storage. Given that Recall’s shareholders’ equity represents only 17% of the combined company, a sell-off could take place and provide investors with an attractive entry point. In that case, shares of Recall are recommended at a price of AUD 5.8. A target price of AUD 8 is achievable, given Recall’s strong cash flows, its leading position in the information management market, strong demand for document storage and digitalization services—stemming from stricter regulations and compliance procedures, and cost reduction initiatives, respectively—and the probability of a high payout ratio that could result in a dividend yield between 3.5%-4.8%. Additionally, the company’s top-line geographic and client diversification, combined with a very high percentage of recurring revenues—68% for FY 2013—and robust free cash flow (FCF) provide a sufficient margin of safety, while the possibility of a leveraged buyout can offer additional optionality.

Brambles, post spin-off, will offer its pooling services through the provision of reusable pallets, crates and containers. While not a pure logistics company, demand for its services will be dependent on the global trade of consumer goods, groceries, fresh foods and retail products, along with certain more specialized materials, such as chemicals. Based, in Australia, Brambles will derive approximately half of its revenues from North America. The company’s services are offered through two main brands, CHEP and IFCO, and can be broken down to three segments; Pallets—plastic and wood, Reusable Plastic Crates (RPCs) and Containers. While post spin-off Brambles also will generate strong operating cash flow (CFFO), it incurs significantly higher capital expenditures, thus greatly restricting its free cash flow generation. However, Brambles is the undisputable world leader and the most recognizable brand in logistics pooling solutions, facing competition only from much smaller companies, has a very diverse and reputable clientele and significant opportunities to grow. Consequently, shares of Brambles are recommended for purchase at a price below AUD 7.5, a level that will result in a 3.6% dividend yield.

The sum-of-the-parts valuation of Brambles before the spin-off is AUD 8.8 per share. The fact that the aforementioned valuation represents an 7% discount to the company’s current share price, along with the taxable nature of the spin-off for non-Australian residents, imply that there is no obvious investment opportunity before the spin-off materializes. Thus, shares of Brambles are not recommended for purchase before December 9th, 2013. While both companies could trade at attractive prices after the spin-off, one would expect Recall to offer the best investment opportunity due to its small size compared to Brambles.

On September 12, 2011, The McGraw-Hill Companies (NYSE: MHP) announced that its Board of Directors had approved a plan to spin off its Education segment via a tax-free distribution to shareholders, which is expected to be completed in 4Q 2012. McGraw-Hill Education Inc. has applied for the ticker symbol ‘MHED’ on the NYSE. One share of MHED is to be distributed to McGraw-Hill shareholders for every three shares of MHP. A $500 million dividend is expected to be paid by the Education segment to the parent at the time of the transaction. The spin-off will require SEC approval. MHP has received a private letter ruling from the IRS concerning the tax-free status of the separation. However, management still has not ruled out a potential sale of the segment.

MHP CEO Terry McGraw will lead the renamed McGraw-Hill Financial going forward, while Lloyd Waterhouse, formerly the CEO of Harcourt Education, will serve as CEO of McGraw-Hill Education. McGraw-Hill Financial will retain Standard & Poor’s, Platts, Capital IQ, S&P Indices, and J.D. Power and Associates. MHED is a leading educational publisher in the K-12, college and professional markets.

As part of its efforts to enhance shareholder value, MHP is also undertaking an extensive cost-reduction plan and an accelerated share repurchase program. MHP repurchased $1.5 billion in shares in 2011. In November 2011, MHP announced it will combine its index business with CME Group (NYSE: CME) in a joint venture with S&P/Dow Jones Indices. MHP will own 73% of the business. The combined entity began operations in late June 2012.

The Education segment is likely to face challenges as a standalone business, as evidenced by the May 2012 bankruptcy filing of book publisher Houghton Mifflin Harcourt. Growth has been stagnant, due in part to the evolution of Internet-based educational materials. The shift to online transmission of teaching sources has increased competition and limited textbook publishers’ ability to raise prices. Given local and state budget constraints, these problems could be exacerbated in coming years. However, the cyclical business could be buffered by the transformation of the education marketplace into one that emphasizes e-books. If Education can maintain its leadership position in the market, it could benefit from the shift owing to increased content demand if e-textbooks gain widespread support. As for the Financial segment, margins for the index and database businesses could be under pressure as clients push for fee reductions. However, despite some signs of slowing in the growth of ETFs, the S&P Indices business would seem to demand a high multiple, which currently may be obscured by the larger business. While the credit ratings business is currently under increased scrutiny following the recent financial crisis, one could see eventual multiple expansion when new debt offerings begin to enter the market.

On a sum-of-the-parts basis, one may reach a fair value of $61.50 per share for MHP ahead of the spin-off. The stock is recommended for purchase prior to the transaction, as the possible sale of the Education segment could be a catalyst for movement in the shares. If the spin-off does go forward, investors should be mindful of potential forced selling of the entity by index and sector funds. A better entry point for the spin-off could come a week or more following the transaction.