On February 7th, 2024, Berry Global Group, Inc. (Berry) unveiled its plan to spin off most of its Health, Hygiene & Specialties (HH&S) segment, including its global nonwovens and films business, and merge it with Glatfelter Corporation (GLT) to create a new company named Magnera. This strategic move is designed to establish Magnera as a global leader in specialty materials, focusing on the healthcare, hygiene, and specialty markets. Berry is expected to retain approximately 90% ownership of Magnera, which will have an enterprise value of $3.6 billion, while GLT shareholders will hold the remaining 10%. Magnera’s market capitalization is anticipated to be around $1.8 billion.

The rationale behind this transaction is clear for both companies. For Berry, the spin-off allows it to sharpen its focus on becoming a pure-play leader in sustainable global packaging solutions. Post-transaction, Berry will emerge with approximately $10.2 billion in revenues and EBITDA of around $1.8 billion, while maintaining net leverage below 3.5x. The streamlined company will have a strong presence, ranking #1 or #2 in over 75% of the markets it serves. With a portfolio concentrated on fast-moving consumer products and sustainable packaging solutions, Berry aims to achieve more predictable and stable growth, reducing earnings volatility. Additionally, it is rebranding its Engineered Materials segment as “Flexibles,” to better reflect its focus on high-value products. This reorientation is expected to elevate Berry’s margin profile, supported by ongoing lean initiatives, ultimately leading to improved returns on invested capital (ROIC) and more consistent free cash flow generation.

For Magnera, the merger with Glatfelter creates a global powerhouse in the specialty materials sector. The combined company is expected to generate revenues of $3.5 billion and EBITDA of $455 million, with a targeted pipeline of cost synergies of $120 million and the potential for further operational improvements. The merger enhances the operating leverage and cost absorption across the combined network, optimizing capital expenditures and network utilization. By bringing together leading resin and fiber technologies, Magnera will be able to offer broader solutions and innovation opportunities to its customers, deepening relationships with major brand owners. This strategic combination is set to create a differentiated industry leader, positioned to serve attractive segments as well as several highly profitable niches.

The transaction is fully financed, with Magnera expected to have a leverage ratio of 4.0x. This structure enables a $1 billion net cash distribution to Berry at closing. GLT’s existing 4.75% Senior Notes due in 2029 will remain in place, while other higher-cost debt will be retired. Prior to the merger, GLT will complete a reverse stock split, with the ratio to be determined by both Berry and GLT (although for the purposes of this discussion we are assuming a 5-for-1 split). Curt Begle, the current President of Berry’s HH&S division, will take the helm as CEO of Magnera, supported by a senior management team comprising leaders from both Berry and GLT. The Board of Directors will consist of nine members, six designated by Berry and three by GLT.

The transaction requires the approval of GLT shareholders, with a vote scheduled for October 23, 2024. Berry shareholders are not required to vote on the transaction. The financing was completed in mid-October, with the transaction closing pending customary regulatory approvals and conditions. Closing is expected in November 2024. This spin-off and merger offer a compelling opportunity to create value for both Berry and GLT shareholders by establishing two focused, market-leading entities, each better positioned to succeed in their respective markets.

The Berry-Glatfelter spin-off and reverse merger will create two stronger companies by reducing debt and streamlining operations after a challenging period and ahead of a likely upward cyclical inflection. Magnera, the smaller entity post-spin, may face initial selling pressure but enters the market with an attractive valuation. While both Berry (Pre-Spin), with a target price of $90, and Berry (Post-Spin), with a price target of $75, offer value, the biggest upside is with Magnera, which offers potential material upside to $21, assuming a 5-1 reverse split.

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In February 2022, Spectrum Brands Holdings, Inc. (NYSE: SPB) announced the acquisition of Tristar Products’ (private) Appliance & Cookware business, which would be combined with the company’s existing Home & Personal Care (HPC) segment; concurrently, the company anecdotally indicated the longer-term intention to separate the combined business from SPB’s core Global Pet Care (GPC) and Home & Garden (H&G) businesses. Subsequently, in February 2024, amid a ‘restoration of profitability’ at HPC, where integration, inflation and inventory challenges had pressured margins in F2022-F2023, management indicated that it was “accelerating” its efforts to separate the Home & Personal Care (HPC) business, via a sale, merger, spin-off or other strategic transaction.

More recently, on July 2, 2024, after the market close, Spectrum Brands disclosed it had confidentially filed a Form 10 registration statement with the Securities & Exchange Commission (SEC) in connection with its previously disclosed separation plans for the HPC business. In terms of management’s most recent commentary regarding the potential transaction, SPB indicated on its 3Q F2024 conference call that given the on-going improvements at HPC, which is “exceeding last year by every key metric,” management remains confident that “the time is right to separate the business.” To that end, the company indicated it is still exploring multiple avenues for the separation of its HPC business, including a sale, merger or spin-off transaction. Anecdotally, management expects to “provide an update on our next earnings call,” which has historically occurred in mid-November, “or sooner if there is news to share.”. In that context, SPB’s chief executive, David Maura, further commented that, “Look, we’ve got multiple bids from financial players, strategic players on this asset. And we’ve got the spin path. And so we just got to work through all those options and see where we come out…there is a lot of interest in this asset.” For additional perspective on management’s internal thinking on a spin versus a sale, we note that in the initial commentary following the Tristar announcement, SPB’s chief financial officer, Jeremy Smeltser, commented, “Look, I think in an ideal world, we would find a different home, frankly, a strategic home for HPC, where the business can participate in industry consolidation.” (That said, while prior comments could suggest a bias in favor of a sale it may be relevant to consider that following the sale of its Hardware & Home Improvement segment in June 2023, company filings indicate management has concluded that “it is more likely than not that the majority of its federal & state deferred tax assets related to loss and credit carryforwards will not create tax benefits in the future”.)

Currently, Spectrum Brands, a diversified global branded consumer products and home essentials company, reports results in three segments: 1) Global Pet Care (GPC; 39% of consolidated F2023 sales and ~62% of adj. EBITDA), which is itself comprised of two business units, namely Companion Animal (~76% of segment sales) and Aquatics (~24% of segment sales), providing, among other things, dog & cat chews, treats & food, as well as grooming & sanitary/clean up products and consumer & commercial aquarium kits, including tanks, filtration systems, heaters, pumps and the associated accoutrements (e.g., food & cleaners); 2) Home and Garden (H&G; 18.5% of sales and ~24% of adj. EBITDA), which is focused on both household & outdoor pest control, including insect & weed killers/repellants as well as household cleaning products, such as bottled liquids, mops, wipes & markers; and 3) Home & Personal Care (HPC; 42.5% of consolidated sales and ~14% of adj. EBITDA in F2023), whose products include small kitchen appliances (e.g., toasters, slow cookers, & air fryers, etc.) along with personal care products (e.g., hair dryers, straighteners, electric shavers, nose & ear trimmers, amongst others). On a consolidated basis, SPB generated $2.9 billion in September-ending F2023 sales, representing a ~7% year-over-year decline (~8% organically), with adjusted EBITDA of $303 million, a $20 million (or 7% year-over-year) increase, as pricing and cost reductions offset volume declines. Through the first nine-months of F2024, consolidated sales were up less than 1% (~0.5% organically) to $2.19 billion, as a nearly 8% increase at H&G offset roughly flat sales at GPC and a 2.5% top-line decline at HPC, while adjusted EBITDA jumped ~27.5% to $297 million, reflecting nearly 300 basis points of margin expansion to 13.6%, which reflects significant improvements across the SPB portfolio, as higher sales, lower cost inventory and internal cost saving initiatives more than offset a material increase in the company’s investment into brand, marketing and product innovation.

In terms of the broader context/rationale for the separation of HPC, which has, in all fairness, been well telegraphed since the transaction announcement in February 2022, was that the $325 million purchase of Tristar’s Appliance & Cookware business, at least theoretically, provided the necessary scale (and financial synergies) for the combined business to exist as a standalone, pure-play personal care company and that its ultimate separation from SPB would reveal a more efficient/streamlined as well as higher-margin/higher-growth parent company focused on the global pet care and home & garden sectors, with each benefitting from more focused management teams and dedicated capital structures. (As well, a transaction would separate what is largely viewed by investors as a “consumer staples, consumables” company in GPC and H&G from what could be more broadly described as a “durable good type company” in HPC.) That said, we note that that, in practice, since the closing of the Tristar transaction in June 2023, the appliance business has been plagued by integration issues, supply chain & distribution challenges, elevated inventory levels, and product recalls, which, all told, have resulted in HPC’s segment adjusted EBITDA profile declining from high-single digits (i.e., north of 8%) in F2019-F2201 to the low-single digits in F2023 (which was a period when segment sales also fell ~9.5%). By contrast, while the remainder of SPB’s businesses (i.e., GPC and H&G) have also endured challenges, including cost inflation & global supply chain disruptions, segment-level profitability has fared better, with adj. EBITDA margins remaining in the mid- to -upper teens. [Notably, HPC segment results have markedly improved in the first-nine months of F2024, where despite segment sales declining ~2.5% to $897.5 million, adjusted EBITDA margins have expanded nearly 400 basis points to 6.3%. (For context, HPC adjusted EBITDA margins totaled 8.3%, 8.1%, 5.0%, and 3.5% in F2020-F2023, respectively.) Anecdotally, management attributes the year-over-year increase in profitability to improved gross margins along with lower inventory costs, the exit of lower-margin products (or SKUs), and benefits from its internal cost improvement initiatives.] Additionally, in terms of the overall rationale for the separation, the company expects to realize a degree of multiple expansion post-transaction; to that end, on the 3Q F2024 conference call, SPB’s chief executive, David Maura, opined, “Look, I think our bankers and investors believe, as I do, a sale, merger or separation of the appliance unit will cause a multiple uplift on our remaining company.”

At current levels, shares of SPB trade at approximately 8.0x F2025E EV/EBITDA estimates, roughly in line with HPC peers (ex-outliers, such as Shark Ninja and P&G), but a discount to public comparisons for the GPC and H&G segments, which trade at ~12x (albeit in wide ranges of ~7.0x-16.5x). On the earnings front, it appears reasonable to forecast that, on a consolidated basis, SPB generate sales just shy of ~$3 billion in F2025 with adjusted EBITDA approaching ~$370 million. In terms of valuation, based on a blended multiple of ~9.0x while accounting for corporate costs, capitalized at the weighted segment average, as well as projected net debt implies a pre-spin, sum-of-the parts fair value of ~$2.9 billion or ~$101.50 per share (with bull and bear cases of $113 per share and ~$90.50 per share, respectively).

Considering the relatively limited implied upside from current levels, which we note reflects a ~40% gain since its post-4Q 2023 low in November 2023 (versus a ~28% gain in the S&P 500 and 27% rise in the Russell 2000) and a ~12% rise since its latest 3Q F2024 results in August 2024 (in-line with the moves in the S&P 500 Russell 2000), to our fair value estimate a NEUTRAL initial stance seems appropriate. That said, the separation of Spectrum Brands (SPB) into two focused companies mirrors many characteristics of past successful spin-offs where a higher-growth, higher-margin business is expected to achieve a higher valuation as a standalone/independent entity while a lower-growth, lower-margin business, in this case focused on the consumer products sector, is expected to benefit from internal initiatives executed by a more focused management team (and investor base) with improved capital allocation priorities. Nevertheless, our current sum-of-the-parts (SOTP) valuation for Spectrum Brands (SPB) does not suggest significant immediate upside, in and of itself, ahead of the impending spin, sale or merger. However, we will continue monitor shares for any potential market, sector or company specific volatility for a more attractive pre-spin entry point, absent which we can envision that the typical post-spin shareholder turnover could present investment opportunities for both short-term and long-term investors.

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On May 9, 2023, Jacobs Solutions Inc. (NYSE: J) announced its intention to conduct a tax-free spin-off its Critical Mission Solutions (CMS) business into an independent, standalone, publicly traded company, subject to customary closing conditions including, among others, the receipt of a private letter ruling from the Internal Revenue Service (IRS), an effectiveness declaration of a Form 10 filing by the Securities & Exchange Commission (SEC) and final approval by J’s Board of Directors.  Subsequently, on November 20, 2023, Jacobs announced a definitive agreement to spin off CMS (along with the Cyber & Intelligence portion of its Divergent Solutions business) and merge it with privately held Amentum in a tax-free, Reverse Morris Trust (RMT). 

The combined CMS, C&I and Amentum (CombineCo) business generated ~$13.7 billion of annual sales (& ~$1.1 billion of adj. EBITDA, including $50-$70 million of synergies) for the last twelve months, and “create a leading provider of system integration & technology solutions” and “deliver expertise in the government’s highest priority areas of energy, space exploration, intelligence & analytics, and digital modernization”, at scale.  On the flip side, management indicated that the post-separation parent (RemainCo) will be a “higher value” company focused on “technology-enabled solutions” for the “world’s most complex critical infrastructure & sustainability challenges” with “leading positions in the attractive water and environment, energy transition, transportation and advanced manufacturing sectors” with ~$11.4 billion in trailing annual sales. 

Post-spin parent, Jacobs, and its shareholders were expected to own 58.5%-63% of the combined spin entity, Amentum, consisting of 51%-55% for J shareholders and the parent’s retainment of 7.5%-8.0%. (Funds managed by American Securities and Lindsay Goldberg, the current owners of Amentum, will own 37%-41% of the combined post-spin company). The final ownership stakes will be determined based on reaching certain operating targets at CMS and C&I. Further, RemainCo will receive a ~$1 billion cash dividend, which is expected to primarily be directed toward debt repayment (in an effort to maintain an investment grade credit rating).  All told, CombineCo is targeting a leverage ratio of ~4x at closing (with the goal of reducing that metric to below 3.0x, including synergies, within 24 months).

The company filed its initial Form 10 in late-July (16^th), held a capital market day for Amentum on August 13, 2024 and expects to complete the transaction toward the second-half of its September-ending F2024.  More recent commentary indicates the separation will be completed in the latter half of September 2024 (as the company has cleared all regulatory approvals for the transaction, save the private letter ruling from the IRS).

John Heller, the current chief executive of Amentum will serve as the combined company’s CEO (as well have a seat on the Board), while Dr. Steve Arnette, the current president of CMS, will serve as CombineCo’s chief operating officer (COO).  Steve Demetriou, J’s current Executive Chairman, and former CEO from 2015 until 2023, will assume the same role at Amentum.  Mr. Robert (Bob) Pragada, J’s chief executive from early-2023, will remain the CEO of the parent (and will assume the role of Board Chairman).

Our valuation analysis indicates that J’s current pre-spin stock price roughly aligns with our estimate of its fair value, suggesting limited immediate upside. However, depending on post-spin-off trading activity, there may be compelling opportunities for both the parent company and the spin-off entity. We have detailed price targets and further analysis in the report.

Luxfer Holdings (NYSE: LXFR) reports three business segments: (1) Gas Cylinders (~46% of consolidated sales & ~38.5% of adj. EBITDA in 2023), which is a leading provider of specialized carbon composite (as well as aluminum) cylinders for gas storage & transportation; (2) Elektron (46% of sales & ~61.5% of adj. EBITDA), which primarily focuses on magnesium & zirconium-based advanced materials for, among others, the aerospace, healthcare & defense sectors; and (3) Graphics Arts (8% of 2023 consolidated sales), which offers magnesium, copper, zinc & brass photoengraving plates for the graphic arts and luxury packaging arenas. In October 2023, LXFR announced a wide-ranging strategic review, which precipitated the decision, in February 2024, to pursue a sale of its non-core (and poorly performing) Graphic Arts business, which is expected to be completed by year-end, as well as the acknowledgement that the remaining Gas Cylinders & Elektron businesses had no “material strategic synergies” and could ultimately be separated in management’s pursuit of unlocking value for shareholders. In that context, we think LXFR shares are undervalued relative to the sum value of its parts; to that end, in our estimation, based on management guidance and commentary as well as peer and M&A valuations, LXFR’s Gas Cylinders, Elektron, and Graphic Arts businesses could be valued at ~$8 per share, ~$10 per share, and ~$0.50 per share, respectively. Accounting for projected net debt of ~$2 per share yields a base case sum-of-the-parts fair value of $16.50 per share (with bull and bear cases of ~$19 per share and ~$14 per share, respectively). Potential catalysts include the separation/monetization of LXFR’s various businesses, accretive M&A, share repurchases, leverage reductions and/or better than expected growth and margins, particularly at the Gas Cylinders and Electron segments. Risks include management execution, including on acquisition integration, accident liability, currency fluctuations, competition/pricing pressure, leverage, regulation, labor issues, raw material availability, cyberattacks, geopolitical disruptions, including a pandemic, and/or a deterioration in industry fundamentals due to, among other things, a recession.

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On October 5, 2023, Howard Hughes Holdings Inc. (NYSE: HHH) issued a press release detailing the creation of a newly formed division, Seaport Entertainment, which now controls the company’s entertainment-related assets in New York and Las Vegas. Assets in the new division include the Seaport in Lower Manhattan and the Las Vegas Aviators Triple-A Minor League Baseball team (as well as the team’s stadium). Additionally, the 25% ownership stake in Jean-Georges Restaurants and the 80% air rights ownership above the Las Vegas Fashion Show Mall, which are contemplated to be used to create a new Las Vegas Strip casino, are included in Seaport Entertainment. HHH intends to complete the spin-off of Seaport Entertainment into a publicly traded company by year-end 2024. Following the planned separation, HHH will transform into “a pure-play real estate company focused solely on its portfolio of acclaimed master planned communities.”

In 2019, HHH announced a “Transformation Plan” that would be focused on three pillars: a reduction in annual overhead expenses, the sale of non-core assets, and accelerated growth in the core MPC assets. As of today, HHH describes itself as owners of “one of the nation’s largest portfolios of master planned communities (MPCs), as well as operating properties, strategic developments, and other unique assets across six states from New York to Hawai’i.”

The company now operates under four segments: Operating Assets, MPCs, Strategic Developments, and Seaport. Outside of the Seaport segment, the company operates a value creation cycle through the remaining business segments, whereby MPC plans, develops, and manages “small cities and large-scale, mixed-use communities”, with acreage being sold to home developers. Strategic Developments builds commercial properties using cash flow from MPC land sales, which are then transferred into the Operating Assets segment, ultimately generating Net Operating Income (NOI), which is then used to fund new Strategic Developments.

In approaching valuation, we acknowledge that the majority of value in both the parent company and post spin Seaport Entertainment is largely derived from the future value of land and earnings potential from operating assets versus HHH’s current earnings profile. As noted in management’s estimated NAV, the largest ascribed value is placed on future MPC land sales, some of which are forecasted to last into 2086, which requires a high degree of assumptions to be made, all of which are subject to challenge and the ultimate reliability of such is highly uncertain aside from the fact that these assets have some value.

In deriving our fair value estimate, we attempt to approach our assumptions in a conservative manner while acknowledging there is upside potential and noting that the ultimate value realization to shareholders may not be realized for several years, if not decades. Within that mindset, the volatility surrounding asset valuations due to economic and social forces may diminish the ultimate long-term returns. Further, given the asset-heavy valuation approach, it is not clear if the separation of the Seaport assets in of itself will prove to be a value-creating transaction. Instead, we suggest that ex-Seaport Entertainment, the parent company appears to better positioned to capitalize on its value creation cycle and should at least appear more attractive to investors. As for Seaport, low occupancy, negative cash flow, and the need to fund the 250 Water Street project will likely remain a concern for those outside of deep value real estate-focused investors.

On a pre-spin, sum-of-the-parts basis we assign an $80 fair value estimate to shares of HHH, consisting of $70 in value from the parent company and $8 per share in value from Seaport Entertainment. With over 20% upside to our base case fair value estimate we recommend shares of Howard Huges prior to the separation. Upside to our fair value estimate exists from improvements in the general economy, which would result in increasing leased percentages and occupancy, increased land values at the MPCs, and progress made on profitability at Seaport. We again note that it is not our belief that in and of itself, the spin transaction will unlock value. However, the parent company is better positioned to capitalize on its value creation cycle, and ultimate shareholder returns may take several years.

On November 23, 2023, MDU Resources Group Inc. (NYSE: MDU) announced that its Board of Directors approved a plan to separate the construction services business into a standalone, publicly traded company, via a spin-off. Following the separation, MDU Resources will become a pure-play regulated energy delivery company. The transaction, which is targeted to be completed in late-2024, is subject to customary closing conditions, including an effectiveness declaration of a Form 10 filing with the SEC, final Board approval, and receipt of opinions or rulings as to the tax-free nature of the transaction, amongst others. In March 2024, MDU announced that it had confidentially filed an initial Form 10 with the SEC, and reiterated its intention to complete the separation in late-2024. In the prior Knife River separation, MDU retained an approximate 10% stake in the new company, which was disposed of in a tax-free exchange in November 2023. The standalone Construction services company will adopt the corporate moniker Everus Construction Group. MDU management has not ruled out retaining an ownership stake in Everus similar to what was done with the Knife River transaction.

The final deconstruction of MDU returns the company to its roots as a pure play energy delivery and distribution company with significant scale. It plans to invest $2.7 billion into regulated infrastructure over the next five years that will deliver earnings growth. As a utility, the company should be able to generate stable cash flow, and earnings growth from system replacement and expansion, particularly in relation to the electric transmission system. Tailwinds from government infrastructure spending and new high-volume electric customers, such as data centers, combined with approximately 80% of utility revenue being fixed augers well for stable earnings and cash flow growth at the post-spin MDU. Management has stated that MDU will maintain its long-term dividend payout policy of 60% to 70% of regulated earnings, and has indicated that there are no foreseeable equity issuance needs prior to 2027.

For its part, the Construction Services business is positioned to capitalize on government infrastructure spending and deliver earnings growth at or above that of the utility business. For reference, the current segment has grown EBITDA at a 17% CAGR since 2018, while requiring minimal capital expenses (<2% of revenue) allowing for business reinvestment and potential acquisitions. Notably, the segment has a current backlog (as of the March 2024) of $2.2 billion, of which $1.85 billion is related to electrical and mechanical work.

Given the current trading multiple of MDU, it implies that following the spin-off, shares of Everus should be re-rated higher to approximate that of E&C peers, while a corresponding reduction in trading multiples at the utility company does not seem likely. Under this scenario, the transaction appears to be poised to unlock value when considering the growth prospects for both post-spin companies.

We fairly value MDU at $31 per share, consisting of approximately $16 per share in value from Everus and $15 per share from the remaining regulated businesses. Given the implied upside to our fair value from the current share price, we rate pre-spin shares of MDU at BUY. We note that both post-spin companies’ ability to grow earnings are supported by macro trends, including large government spending from the Infrastructure Investment and Jobs Act, and the Inflation Reduction Act, customer and rate base growth from regulatory friendly jurisdictions, which provide an attractive investment opportunity at the current pre-spin share price.

TFI International Inc. (NYSE: TFII) reports four business segments: (1) Package & Courier (~7.5% of consolidated sales and ~11% of adjusted EBITDA in 2023); (2) Less-than-Truckload (44.5% of sales and ~38% of adj. EBITDA); (3) Truckload (25.5% of 2023 sales and 34.5% of adj. EBITDA); and (4) Logistics (22.5% of sales and 16.5% of adj. EBITDA in 2023). In our view, following the April 2024 acquisition of specialized/flat-bed carrier Daseke, Inc., TFI International, which has an active history of both acquisitions & divestitures (and was previously covered by The Hidden Opportunities Report in 2017-2021), is incrementally likely, based on recent management commentary, to consider potential value-unlocking options for its Truckload division, including a spin-off as a standalone or a strategic merger (looking into 2025-2026).

Additionally, the company’s asset-light Package & Courier (P&C) business (as well as the non-asset-based Logistics division) are seemingly undervalued in the current corporate structure and could be ancillary sources of longer-term optionality. On the valuation front, TFII trades at less than 8.0x 2025E EV/EBITDA, ~14.5x 2025E EPS, and, at the mid-point of management’s recently articulated guidance, with a free cash flow yield of ~8%. (Additionally, we would highlight that at the current quote TFII is within the $125-$135 per share range that management has recently indicated it was willing to accelerate its stock repurchase activity.)

Based on management guidance and commentary as well as peer and M&A valuations, TFII’s Package & Courier (P&C), Less-than-Truckload (LTL), Truckload (TL) and Logistics businesses could be valued at $10 per share, ~$83 per share, $53 per share, and ~$49 per share, respectively. Accounting for corporate costs and projected net debt of ~$27.50 per share yields a base case sum-of-the-parts fair value of $167.50 per share (with bull and bear cases of ~$186.50 per share and ~$148.50 per share, respectively). Potential catalysts include the separation/monetization of TFII’s businesses, accretive M&A, share repurchases, leverage reductions and/or better than expected growth and margins, particularly at the LTL & TL segments. Risks include management execution, particularly on acquisition integration, accident liability, currency fluctuations, competition/pricing pressure, regulation, labor issues, geopolitical disruptions, including pandemics, and/or a deterioration in industry fundamentals due to a recession.

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In January 2023, Baxter International Inc. (NYSE: BAX) announced that it would spin-off its Kidney Care business into a standalone publicly traded company, implement a new operational model to improve manufacturing and supply chain integration and better represent business activities, and would pursue strategic alternatives for the BioPharma Solutions (BPS) business. The BPS business was sold in September 2023, for which the company received cash proceeds of $3.96 billion. In 4Q 2023, the company used approximately $2.8 billion of said proceeds to retire debt and expects to use the remainder to retire near-term bonds that are coming due. The company has a targeted net leverage ratio of 2.75x in 2025.

In March 2024, BAX filed a Form 8-K with the SEC in which the company disclosed that “it has been in recent discussions with select private equity investors to explore a potential sale of the Kidney Care asset in lieu of the proposed spin-off of the business.” While no final decision has been made on the ultimate form of the Kidney Care separation, management stated it is committed to “separating“ the business in 2H 2024. The standalone business, if spun off, is expected to adopt the corporate moniker Vantive.

As the company stands today, it describes itself as providing “a broad portfolio of essential healthcare products, including: acute and chronic dialysis therapies; sterile intravenous (IV) solutions; infusion systems and devices; parenteral nutrition therapies; inhaled anesthetics; generic injectable pharmaceuticals; surgical hemostat and sealant products, advanced surgical equipment; smart bed systems; patient monitoring and diagnostic technologies; and respiratory health devices.” In 2023, the company generated $14.8 billion in revenue and operated with a 14.7% operating margin.

From a separation perspective, the rationale appears to make sense in the fact that the removal of the lower-margin Kidney Care business will significantly improve overall profitability measures for the parent company, Baxter. It should be noted that while management is targeting 4% – 5% topline growth, it has emphasized that the company is focused on improving overall profitability and is willing to see slower growth in the near term. Absent Kidney Care segment contributions, consolidated margins would have widened by 310 basis points each year, on average.

As a point of reference, BAX currently trades at 8.7x and 11.3x its consensus 2024 EBITDA and EPS estimates, respectively. In relation to its discounted multiple to the medical device and supplies peer set, it should be noted that BAX as a whole operates with an EBITDA margin that is roughly 800 basis points below that of the low-end performing peers and roughly in line with that of the Kidney Co. peer. Absent Kidney Co., BAX’s margins should expand, so as to narrow the margin discrepancy, although still remaining below its peers.

Valuing the post-spin companies at 9.0x for Vantive, roughly in line with the current BAX multiple, and 12.0x for post-spin Baxter equates to respective fair enterprise values of $5.2 billion and $28.0 billion. Based on current net debt and shares outstanding, we assign a pre-spin sum-of-the-parts fair value estimate of $43 per share. Given the implied upside from the current share price nearing 20% we rate pre-spin shares of Baxter International at BUY.

The recent pullback in shares may present a buying opportunity for a business in the midst of a turnaround, with the planned separation providing a near-term catalyst. Further, if the company were able to attract a private equity buyer for the Kidney Care business, it may provide further upside to our valuation. Our analysis of recent medical device and supply companies suggests that while M&A has been completed within a wide valuations range, the low end appears to be near 12x forward EBITDA estimates. If Vantive were to be valued at 12x our 2025 EBITDA figure, our fair value estimate would increase by $4 per share.

On February 8, 2024, A.P. Moller-Maersk (MAERSKA DC, MAERSKB DC) announced the intention to spin off its Towage business, Svitzer, into a standalone, publicly traded company. A.P. Moller-Maersk (“Maersk”) shareholders of record as of May 1, 2024, will receive two shares of Svitzer for each share of Maersk. Shares of Maersk will trade without the right to the spin-off starting April 30, 2024, which is also the first day of trading for Svitzer under the ticker SVITZR DC. Maersk will hold a special meeting on April 26, 2024, to formally approve the separation.

The spin-off of Svitzer could present a compelling investment opportunity for those able to invest in small cap equities. It is reasonable to believe that few of Maersk’s institutional investors will be allowed to own the significantly smaller Svitzer, especially if they have a large capitalization mandate or reference any of the 130 indices that currently include the parent company. Any such selling pressure would allow investors to purchase a well-managed, market-leading, stable business at a discount.

Svitzer is expecting to reduce capital expenditures in 2024 after two years of steadily increasing investment in growth projects. Lower capex, combined with modest growth expectations, point to estimated 2024 free cash flow of DKK700 million, which is 3x higher than what this business generated last year. This potential cash generation may not be fully appreciated by the market at the time Svitzer begins trading.

Going forward, secular industry trends point to steady revenue growth in the low-single digits, while Svitzer stands to leverage its leading market position to expand organically into new markets. In addition, the company has an easy means of creating equity value by simply using its free cash flow to pay down borrowings.

The parent company’s valuation is not expected to be impacted materially by the demerger of Svitzer. This is not a commentary on Maersk’s investment merits, simply that the reasons to own or not to own Maersk have little to do with the spin-off of the towage business.

TriMas Corporation (NASDAQ: TRS) reports three business segments: (1) Packaging (52% of consolidated sales and ~57% of adjusted EBITDA in 2023); (2) Aerospace (27% of sales and ~21% of adjusted EBITDA); and (3) Specialty Products (21% of 2023 sales and 22% of adjusted EBITDA). TRS, which has an active history of both acquisitions and divestitures, including, most recently, the spin-off of its automotive business, Cequent (renamed Horizon Global) in June 2015 as well as the sale of Lamons, a gasket & bolt provider to the energy complex, in December 2019, is considering the sale of its energy-focused Arrow Engine business (currently housed within the Specialty Products segment along with the Norris Cylinder business), in part, under recent pressure from activist investor, Barington Capital (an ~1.1% holder). That said, we think the company could consider additional portfolio changes to increase its focus on the core Packaging sector, which we think would help alleviate any conglomerate discount as well as improve longer-term operational performance with respect to growth, margins and capital allocation (while also allowing investors to better target their investment dollars). To that end, while we view the company’s Aerospace business as well-positioned, we think it could likely benefit from increased scale as part of a larger enterprise (within a growing as well as consolidating industry). Moreover, we think TRS’s share price performance, which has materially lagged both the S&P 500 and Russell 2000 indexes over the last one-, three- and five-year periods, weakens management’s potential rationale for the maintenance of the current operating structure.

Based on management guidance and commentary as well as peer and M&A valuations, TRS’s Packaging, Aerospace, and Specialty Products businesses could be valued at $26 per share, $14 per share, and ~$8.50 per share, respectively. Accounting for corporate costs and projected net debt of ~$14.50 per share yields a base case sum-of-the-parts fair value of $34 per share (with bull and bear cases of ~$38 and ~$29 per share, respectively).Potential catalysts include the separation/monetization of any of TRS’s diverse businesses, accretive M&A, share repurchases, leverage reductions and/or better than expected growth and margins, particularly at the Packaging segment. Risks include management execution, shifts in technology or consumer preferences, competition, commodity and currency fluctuations, regulation, geopolitical disruptions, including pandemics, and/or a recession.

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