Kenvue Inc. (NYSE: KVUE) operates three segments: 1) Self Care (42% of consolidated sales & 55% of adj. EBIT in 2024), which is produces over-the-counter (OTC) pain, cough, cold & allergy medicines; 2) Skin Health  & Beauty (27.5% of sales & ~15.5% of adj. EBIT), which delivers face, body & hair care as well as sun protection products; and 3) Essential Health (~30.5% of sales & 29.5% of adj. EBIT), which makes oral, baby, women’s health and wound care products.  In what is intended to be an on-going/periodic series of thematic pieces, in which we highlight/briefly analyze so-called SpinCo’s that are approaching the 2-year anniversary of their divestment and ideally also possess some other attractive/catalytic attributes, including, among others, activist investor involvement, evident undervaluation, or industry-specific consolidation/M&A trends. [For context, Section 355(e) of the IRS Code broadly states that if a significant change in ownership occurs within 2 years of a tax-free transaction it is presumed to be part of a “plan” that could jeopardize the tax-status for the distributing company.] As it relates specifically to Kenvue, which completed its separation from Johnson & Johnson (NYSE: JNJ) on August 23, 2023, the company under pressure from several activist-investors, including Starboard Value, a ~1.1% owner that secured three Board seats earlier this year, Third Point (~0.5%) and TOMS Capital Management (~0.8%), which, for its part, is reportedly pushing for either an outright sale the further separation/monetization of assets. To that end, we view the company more in two parts (as opposed to three), namely consumer health (i.e., Self Care & Essential Health), which we view as the faster-growing, higher-margin core business, and Beauty (i.e., Skin Health & Beauty), which has underperformed in recent years and we think could be a target for divestiture (or benefit from a turnaround). Based on management guidance and commentary as well as peer and M&A valuations, KVUE’s Self Care and Essential Health businesses could be valued at ~$28 per share while the Skin Health & Beauty business could be valued at ~$9 per share.  Accounting for corporate costs and projected net debt of $6.50 per share yields a base case sum-of-the-parts fair value of ~$26 per share (with bull/bear cases of ~$27 and ~$24 per share, respectively). Potential catalysts include the monetization or separation of assets, an outright sale as well as better than expected growth & margins. Risks include management execution, competition, changes in consumer preferences, and/or a decline in consumer spending due to a recession or other geopolitical disturbances.

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On September 4, 2024, Fortive Corporation (NYSE: FTV) announced its Board of Directors authorized the pursuit of a tax-free spin-off of its Precision Technologies (PT) business from its Intelligent Operating Solutions (IOS) and Advanced Healthcare Solutions (AHS) businesses.  The standalone Precision Technoligies business will adopt the corporate name of Ralliant Corporation and ultimately trade on the New York Stock Exchange Ticker (NYSE) under the ticker RAL.  The parent company will retain the Fortive Corp. moniker (and both entities expect to maintain a “modest” quarterly dividend).  At least initially, the company targeted the transaction’s completion in 4Q 2025 but has accelerated its timeline with an expected completion after the market close on June 28, 2025 (with the commencement of trading on June 30^th).  To that end, we attended the joint capital markets day held in NYC on June 10^th and management has embarked on an equity roadshow in advance of the transaction’s completion.

For context, Fortive was itself spun off from Danaher Corp. (NYSE: DHR) in 2016 and subsequently completed the spin-off of Vontier Corp. (NYSE: VNT) in October 2020.  Currently, the company operates three business segments: 1) Intelligent Operating Solutions (43.5% of consolidated sales in 2024 and ~49% of adjusted EBITDA); 2) Precision Technologies (36% of 2024 sales and 32% of adj. EBITDA); and 3) Advanced Healthcare Solutions (20.5% of consolidated sales in 2024 and ~19% of adj. EBITDA).  In terms of guidance, for full-year 2025 FTV initially guided to consolidated sales of $6.23-$6.35 billion, with adjusted diluted EPS of $4.00-$4.12 but in conjunction with 1Q 2025 results management adjusted its EPS forecast to $3.80-$4.00. (Management outlined some more segment-specific post-spin financial targets at the combined investor day and intends to provide more specific near-term post-spin guidance when each company holds their next quarterly conference calls in July 2025.)  Anecdotally, the company had previously signaled the expectation that the remaining Fortive business would be a “consistent mid-single digit grower” (with upside from opportunistic tuck-in acquisitions and a focus on shareholder returns) with post-spin Ralliant also posting “mid-single digit through cycle growth” (again, with potential upside from opportunistic tuck-in acquisitions and a focus on shareholder returns). More recently, at this week’s investor day management projected compound annual top-line growth at post-spin Fortive of 3%-4% (on a recurring revenue base exceeding 50%), with 50-100 basis points of average annual adj. EBITDA margin expansion and EPS advancing at a “high-single digit” CAGR while Ralliant was projected to post “through cycle” compound annual top-line growth of 3%-5% (comprised of ~3% organic growth along with a ~1% tailwind from potential tuck-in M&A) with a consolidated EBITDA margin profile in the “low-to-mid 20%s”.

In terms of capital allocation, FTV has focused on share repurchases since the spin-off announcement and both companies are expected to be set up with investment-grade balance sheets (with leverage ratios of below 2.0x), including the planned ~$1.15 billion distribution from Ralliant to its former parent. Looking ahead, both companies have indicated the intent to take disciplined approaches to capital allocation, focused primarily on share repurchases followed by dividends and lastly the potential for opportunistic tuck-in acquisitions (that have strategic coherence and offer at least double-digit ROICs).  On the dividend front, while not specifically declared, as of yet, both companies have indicated the expectation they will continue to maintain a “modest” dividend (i.e., likely around ~0.4%-0.5%).

In terms of post-spin leadership, upon completion of the transaction, James Lico will retire as president & chief executive (CEO) and the current head of the IOS business, Olumide Soroye, will take the helm at Fortive, while Tami Newcomb, the current head of the PT segment, will assume the president & chief executive roles at Ralliant with Neill Reynolds (formerly of Wolfspeed) assuming the chief financial officer (CFO) position.  Effective March 2025, Mark Okerstrom succeeded Chuck McLaughlin as FTV’s chief financial officer where he will remain post-spin.  At Ralliant, Ganesh Moorthy will assume the Chairman role while current Fortive Board members Alan Spoon and Kate Mitchell will also be joining the Ralliant Board (although Ms. Mitchell will also remain on the FTV’s Board).  The incoming chief executive, Ms. Newcomb, will also join RAL’s 9-member Board, which we note will have a staggered three-class election structure.

Aside from the standard rationale of increased strategic focus, reduced complexity, improved capital allocation and allowing investors to better focus their investment dollars, management contends that the transaction will highlight Fortive’s (i.e., RemainCo’s) ~50% recurring revenue base (and ability to continue to pursue growth through disciplined/opportunistic bolt-on M&A), as well as Ralliant’s (i.e., SpinCo’s) leverage to key end-markets with long-term secular/organic growth prospects (i.e., mission critical technologies in test & measurement, specialty sensors and aerospace & defense subsystems).  From our perspective, the rationale for this transaction could be distilled into the separation of a recurring revenue business (i.e., the reaming FTV parent) from a more cyclical (at least from a top-line perspective) one (i.e., Ralliant). That said, while our current calculations, which are based on management guidance/commentary and peer/M&A valuations, suggest the transaction could unlock modest value the potential projected upside does not strike us as overtly compelling at this time; thus, we are maintaining a NEUTRAL stance ahead of the impending transaction.  [Simply as an aside, considering it tends to be a common client query, we would anecdotally describe, at least from our relatively narrow perspective, investor sentiment on this transaction as being in varying degrees of apathy; to that end, we have neither fielded many in-bound calls nor discerned much follow-up interest toward further digging into the story resulting from our more pro-active discussions.]

Looking post-spin, while historical precedent would suggest that the aforementioned dichotomy (i.e., recurring parent vs. cyclical spin) typically favors the post-spin parent (and it remains to be seen where each individual company begins trading in the so-called “when-issued” and “regular-way” markets) we would postulate that the timing of this transaction could end up being fortuitously well-timed from Ralliant’s perspective with the business at a cyclical trough (and a potential upturn in late-2025-2026) as well as a solid underlying M&A market (i.e., EMR/NATI, KEYS/Spirent), which could support valuation and potentially portend a consolidation opportunity, albeit down the road (i.e., 2-years). Also, we see the potential for some index-related liquidation (with FTV being in the S&P 500 and Ralliant not being immediately included) that could potentially present a more attractive post-spin investment opportunity.  On the other hand, while post-spin parent, Fortive, despite its strong recurring revenue base (i.e., ~50%), of which ~25% stems from software, strong brands, such as Fluke and ASP, with exposure to industrial and healthcare industry trends along with a disciplined capital allocation strategy (with the near-term focus on share repurchases and dividends albeit with the potential for opportunistic tuck-in acquisitions) will likely be attractive to a relatively wide cohort of investors it could also be possible that the post-spin standalone still suffers from a so-called “conglomerate discount” with two assets that some may reasonably describe as “disparate” (i.e., IOS & AHS).  [As well, on the latter front, we anecdotally discern that while incremental divestitures at post-spin FTV are plausible any significant incremental de-conglomeration measures (i.e., the separation of IOS & AHS) are not seemingly likely on the near- or medium-term horizon (i.e., likely looking out until 2028E).]

The Scotts Miracle-Gro Company (NYSE: SMG) operates three segments: 1) U.S. Consumer (85% of consolidated sales & 97.5% of adj. EBITDA in 2024), which is SMG’s core domestic lawn & garden business; 2) Hawthorne Gardening (8% of sales & 0.5% of adj. EBITDA), a provider of indoor & hydroponic gardening supplies; and 3) Other (7% of sales & 2% of adj. EBITDA), which is essentially the company’s lawn & garden business in Canada.  During the pandemic era SMG’s stock had a dramatic ascent amid an unprecedented surge in demand; that said, as consumer trends normalized in the post-pandemic era the company was left with a bloated cost structure and an elevated leverage profile (with some capital allocation decisions now seeming regrettable in hindsight), which weighed heavily on SMG’s stock price (i.e., trading below pre-pandemic levels). Subsequently, management has diligently worked to reduce costs & leverage, improve profits as well as refocus on its core North American lawn & garden business, which, we note, is both historically recession-resilient and not particularly affected by tariffs. (As well, we would note that while covenants were renegotiated management, to its credit, avoided cutting its dividend or issuing shares). In terms of the core refocus, management is seemingly winding down its foray into the cannabis sector, which we discern will result in the divestiture of its remaining cannabis-related supplies business (e.g., lights, nutrients, & other materials) over the next year. (Relatedly, SMG recently transferred its interest in its cannabis-related investment arm, The Hawthrone Collective, to an “independent strategic partner” albeit with the option to reacquire an interest if/when federal regulations become more favorable.) All told, at ~9.0 F2026E EV/EBITDA, a discount to its historical trading multiple of 11x-12x, we think shares offer investors an attractive potential return, particularly relative to the risks abounding in the broader market.  Based on management guidance and commentary as well as peer and M&A valuations, SMG could, all told, be valued at ~$72 per share, assigning de minimis value to its remaining cannabis-related asset, Hawthorne.  Accounting for corporate costs and projected net debt of $61.50 per share yields a base case sum-of-the-parts fair value of ~$72 per share (with bull/bear cases of ~$81.00 and ~$63.00 per share). Potential catalysts include the monetization of assets, leverage reductions, and/or better than expected growth & margins. Risks include management execution, competition, changes in consumer preferences, leverage, weather/seasonality, and/or a decline in discretionary spending due to a recession or other geopolitical disturbances.

PCS Research Group welcomes and encourages your feedback.  Please feel free to call us if we can be of service.

On October 30, 2023, Western Digital Corp. (NASDAQ: WDC) announced that the company’s Board of Directors had approved a plan to separate its HDD (Hard Disk Drive) and Flash (NAND) businesses into two independent, standalone, publicly traded companies via a tax-free spin-off to shareholders. At least initially, the goal was to complete the transaction in the second half of calendar 2024, but the most recent commentary suggests a completion date in late-February 2025.  To that end, management indicates the company completed a “soft-spin” or internal separation of the two businesses at the start of its September-ending fiscal 1Q 2025 (as WDC reports on a June-ending fiscal year), publicly filed its most recent Form 10 in January 2025.  Additionally, the company intends to hold a capital markets event for SpinCo, which will re-assume its original corporate moniker of SanDisk Corp. and ultimately trade under the NASDAQ ticker SNDK, on February 11, 2025, The post-spin HDD business, which will retain the Western Digital corporate identity and continue to trade under on NASDAQ under the WDC ticker, will conduct a similar investor event the following day on February 12, 2025.  Upon distribution, shareholders will receive one-third of one share of SNDK for every WDC share owned as of the record date and WDC will retain a 19.9% stake in SpinCo (with definitive plans for disposal over the subsequent twelve-months following completion).

For context, in May 2016, Western Digital, which previously focused on hard disk drive memory storage, completed the acquisition of SanDisk Corporation, which focused on non-volatile Flash memory storage, for ~$19 billion in cash and stock.  Subsequently, in September 2020, WDC, under the leadership of new chief executive David Goeckeler, who took the helm in March 2020, announced that it would reorganize into two distinct operating segments: (1) HDD, which generated 51.4% of consolidated sales in the June-ending F2024; and (2) Flash, which generated 48.6% of F2024 consolidated sales. Concurrently, WDC announced the hiring of Robert Soderbery, formerly of Symantec/Veritas (private) and Cisco (NASDAQ: CSCO), to be the general manager of the Flash business and shortly after, announced it had hired Ashley Gorakhpurwalla, formerly of EMC Dell (NYSE: DELL), to run the HDD segment.  (At the time, management indicated the realignment of its portfolio, which, at times, is a move that has foreshadowed an eventual separation transaction that would improve the profitability, growth, and agility of each business.) 

Later, in October 2021, it was reported in the Wall St. Journal that WDC may have been pursuing a merger with Kioxia Holdings, a privately held maker of flash memory chips based in Japan (with whom WDC has a long-running joint venture). In May 2022, activist-investor Elliott Management disclosed a ~1.2 million share stake in WDC (currently 2.25 million or 0.65%) and called for a full separation of the HDD and Flash businesses, which, among other things, it contended could yield a stock price of ~$100 per share by the end of 2023. In addition to its public equity investment in WDC, the investor indicated that it would also offer ~$1 billion of incremental capital into the Flash business, at a valuation of $17-$20 billion, to facilitate the separation. In June 2022, WDC announced that it was reviewing strategic alternatives, which could include the separation of its Flash and HDD businesses. More recently, in early-February 2023, activist investors Elliott Management and Apollo Global purchased $900 million of WDC’s preferred stock, in an effort to provide financial flexibility and “facilitate the next stages of Western Digital’s strategic review.” Notably, on November 26, 2023, two trading days prior to the spin announcement, it was reported in the business press that merger talks between Kioxia and WDC had fallen apart due to an objection from Korean chip maker SK Hynix, which is part of the Bain Capital investment group that purchased Kioxia, previously named Toshiba Memory, in a $9 billion transaction announced in October 2020.  [Notably, Kioxia Holdings Corp. recently conducted an initial public offering on the Tokyo Stock Exchange in the latter half of December 2024.]

In terms of rationale, management indicated that the separation would “better position each business to execute innovative technology and product development, capitalize on unique growth opportunities, extend respective leadership positions and operate more efficiently with distinct capital structures.”  Anecdotally, while both companies are broadly in the data storage industry, they, in fact, operate in differing businesses, both in terms of end-markets, each having their own size, cyclicality and growth prospects/cadences (i.e., enterprise cloud vs. more consumer-oriented PC, mobile and gaming), as well as capital intensity.

In terms of post-spin leadership, Mr. Goeckeler will lead the standalone Flash business, SanDisk, which precipitated the departure of Mr. Soderbery in early January 2025.  Mr. Irving Tan, currently the executive vice president (EVP) of global operations, is to assume the chief executive role at the remaining HDD business, which prompted Mr. Gorakhpurwalla to assume an EVP role at Lenovo (992 HK) to lead their infrastructure solutions group in November 2024.  (More recently, in mid-January 2025, WDC announced, somewhat surprisingly by all accounts, that its chief financial officer, Wissam Jabre, who was supposed to carry on that role at the standalone HDD business, would leave the company following the spin’s completion “to pursue other opportunities.”  The company is conducting a “comprehensive search” for a replacement.)

On a pre-spin basis, it will be relevant, in our view, for investors to consider the mixed/disparate near-term outlook for the HDD and Flash businesses (as well as recent management changes) against the backdrop of solid longer-term demand trends. The need for data storage capacity continues to accelerate, in part driven by the needs of hyperscalers and artificial intelligence (AI) computing models, along with what appears to be an un-demanding valuation that suggests the impending transaction is poised to unlock value.

On the first point, as a standalone, WDC’s hard disk drive (HDD) business is the more stable of the two, in terms of near-term revenue, margins and cash flow trends. It also has a robust outlook, driven by increased data-center and cloud storage demand. Additionally, there is the relatively oligopolistic nature of the underlying competitive market, where WDC and Seagate Technology (NASDAQ: STX) essentially control ~80% of the  share, while the Flash (or NAND, as it is commonly referred) business is grappling with pricing pressure driven by excess inventory and “choppy” demand (or what management terms as a “mid-cycle pause”) within its core personal computer (PC) and smartphone end-markets, as well as increased foreign competition (e.g., China-based Yangtze Memory Technologies).  [That said, for its part, management expects the supply/demand dynamic within its Flash business will begin to improve during the back-half of calendar 2025, as excess industry inventory is drained and a potential refresh cycle in the personal computer (PC) space driven by the Windows 11 roll-out and the addition of AI capabilities ramps as well as improved capital/capacity discipline within the industry writ large (as postulated in company’s recent webcast on the subject dubbed “The New Era of NAND”).]

Also, in the longer-term, it seems apparent that the demand outlook driven by the ever increasing/secular need for storage capacity given the data needs that are emerging on many fronts, including artificial intelligence models, along with the sheer sizes of the total addressable markets support an attractive underlying industry backdrop for both businesses. (In fact, despite the current weakness in the broader industry, the enterprise Flash market is ironically perhaps better positioned than HDD looking into the next decade.)

Lastly, it appears that, at current levels, the shares trade at a valuation, which, at least to some degree, reflects the near-term uncertainty at Flash and suggests the impending transaction could unlock value, warranting a BUY recommendation.  To that end, on a pre-spin basis, we fairly value shares of WDC at ~$75 per share, consisting of $16 per share for SanDisk and $59 for the remaining HDD business.  On a post-spin basis, shares of SanDisk are valued at ~$37.50 per share (accounting for the one-for-three share distribution ratio and the 19.9% stake retained by its former parent), and post-spin WDC at $62 per share (including the estimated value of its retained ownership in SNDK).  Upon distribution, we see heightened potential risk for initial volatility at post-spin SanDisk. This is due to the seemingly dour near-term investor sentiment, which could be exacerbated by the uncertainty regarding index inclusion, as the parent is a member of the S&P 500 Index. That said, this dynamic could ultimately present a compelling entry point for long-term investors (particularly in front of the potential for a re-rating ahead of a cyclical recovery in 2H 2025, a more disciplined pricing environment and a seemingly solid longer-term secular demand backdrop, particularly in enterprise SSD).

As mentioned earlier, the company intends to hold a capital markets event for SanDisk and the post-spin HDD business on February 11^th & February 12^th, respectively. At that time, the company plans to “detail more of the long-term models for each of the businesses as well as the capital allocation framework and other types of information that the investment community would be interested in leading to the actual spin,” as well as provide more granular information regarding its unconsolidated joint venture with Kioxia (which we estimate could provide a modicum of incremental upside to post-spin SanDisk’s valuation). We look forward to the event and will undoubtedly refine our current forecasts accordingly.

Topgolf Callaway Brands Corporation (NYSE: MODG) currently operates two business segments: (1) Topgolf (41% of sales & 51% of adj. EBITDA), which owns and/or operates more than 100 off-golf course entertainment venues (which could be described as gamified driving ranges with a social/sports-bar style environment, including a full-range of food & beverage options); and (2) Callaway (59% of sales & 49% of adj. EBITDA in 2023), which is a leading provider of golf equipment, including clubs (#1), balls (#2) and apparel. In March 2021, Callaway acquired Topgolf for ~$2.55 billion, in a transaction that was initially embraced by investors, particularly amid an acceleration in underlying demand trends during the immediate so-called “post-Covid era”.  That said, amid a reversion to a more normalized cadence in consumer activity as the pandemic period has receded the stock has declined ~78.5% since its all-time high of ~$37 per share in June 2021 (relative to a 45.5% gain for the S&P and a ~1% rise in the Russell) and 69% since its most recent high of nearly ~$26 per share in February 2023 (versus increases of 46.5% and ~16 in the S&P and Russell).  In that context, on September 4, 2024, MODG revealed an intent to pursue a separation of its two businesses, via spin-off or sale (with the former seemingly being the preferred avenue).  Even since just that time, shares have declined ~25% (compared with increases of ~11% for the S&P and 8% for the Russell) and currently trade near their lowest level since the turn of the century. To that end, at ~7.0.x 2026E EV/EBITDA and a discount to tangible book value we think shares trade below the sum value of its parts and present an attractive entry point/margin of safety, particularly amid solid longer-term backdrops for both businesses and the potential for a value unlocking transaction (as well as a return to same venue sales or SVS growth) looking into 2H 2025.  Based on management guidance and commentary as well as peer and M&A valuations, MODG’s Topgolf business could be valued at ~$10 per share, while its Callaway business could be appraised at ~$19 per share.  Accounting for corporate costs and projected net debt of $18 per share yields a base case sum-of-the-parts fair value of ~$11.50 per share (with bull/bear cases of ~$16.00 and ~$7.00 per share).  Potential catalysts include the separation/monetization of assets, share repurchases, leverage reductions and/or better than expected growth & margins. Risks include management execution, competition, changes in consumer preferences/the overall popularity of golf, technological disruptions, tariffs, currency fluctuations, leverage, weather/seasonality, and/or a decline in discretionary spending due to a recession or other geopolitical disturbances.” – The Hidden Opportunities Report

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XPO, Inc. (NYSE: XPO) currently operates two business segments: (1) North American Less-than-Truckload (60.5% of sales & 84% of adj. EBITDA in 2023), which is a top-3 provider of asset-based less-than-truckload (LTL) transportation services in North America; and (2) European Transportation (39.5% of sales & 16% of adj. EBITDA), which provides dedicated truckload (TL), less-than-truckload, brokerage, last mile, freight forwarding & warehousing services in the U.K., France, Spain & Portugal. XPO, in its pursuit of emerging as a pure-play North American less-than-truckload (LTL) carrier, has undergone a multi-year simplification process (following a long-period of acquisitive conglomeration), most notably punctuated by the tax-free spin-offs of its contract logistics business, GXO Logistics, Inc. (NYSE: GXO), in August 2021 and its truck brokerage operation, RXO, Inc. (NYSE: RXO), in November 2022.  To that end, XPO’s last remaining step toward having a singular focus on the high-ROIC (i.e. 30%-plus) North American LTL business is the ultimate divestment of its European Transportation business (which, per anecdotal indications, is an effort that is seeing renewed effort/momentum from management). This transaction, along with the company’s own internal operational initiatives, dubbed LTL 2.0, under the direction of a proven executive brought in from the industry’s best-in-class operator, ODFL, as well as the potential for a cyclical upturn in freight volumes (following a prolonged period of weakness) could, in our estimation, unlock incremental value beyond what the company has already realized/achieved. Based on management guidance and commentary as well as peer and M&A valuations, XPO’s Less-than-Truckload (LTL) business could be valued at ~$192.50 per share, while its European Transportation business could be appraised at ~$13.50 per share.  Accounting for corporate costs and projected net debt of $25 per share yields a base case sum-of-the-parts fair value of ~$181 per share (with bull/bear cases of ~$194 and ~$167 per share). Potential catalysts include the separation/monetization of assets, share repurchases, leverage reductions and/or better than expected growth and margins at LTL. Risks include management execution, competition/technological changes, insurance liability, government regulation, labor issues, geopolitical disruptions and/or pricing pressure due to deteriorating industry fundamentals.”The Hidden Opportunities Report

In November 2020, Liberty Global (LBTY) acquired Sunrise through its Swiss subsidiary, UPC. Post acquisition the merged entity Sunrise-UPC became a wholly owned subsidiary of LBTY.  In February 2024, LBTY announced the spin-off of Sunrise into a standalone public company listed on the SIX Swiss Exchange under the ticker SUNN. Post spin, the new entity (Sunrise Communications AG) will be the 2nd largest full-service telecommunications provider (or “telco”), with operations solely in Switzerland. Key timelines for the spin-off: 1) the record date is set to be 4th November 2024, 2) the Nasdaq ADS’s expected regular trade date is 13th November 2024, 3) Class A shares will start trading on the SIX Swiss Exchange on November, 15 2024.

Post the spin-off of Sunrise, LBTY will continue to operate all other businesses independently, including the fully integrated Belgium (Telenet) and Ireland operations, the Venture business, and the joint venture (JV) operations in the UK (VMO2-50%) and Netherlands (VodafoneZiggo- 50%). The corporate name of Liberty Global will remain the same and it will continue to trade on Nasdaq under the tickers LBTYA, LBTYB and LBTYK for its Class A, B and C shares, respectively. As part of this transaction, Sunrise will issue American Depositary Shares (ADSs) to all share categories of Liberty Global (LBTY) shareholders, which will be convertible into the corresponding common Class A shares on the Swiss Exchange. LBTY shareholders will receive one Class A ADS for every five Class A or C shares owned, and two Class B ADSs for each Class B share. The Class A ADSs will trade on Nasdaq under the ticker ‘SNRE’ for ~9 months and can be converted into Class A shares on the SIX Swiss Exchange (ticker – SUNN). Class B shares of Sunrise will not be traded on any market. Class B shareholders in SUNN, primarily constituting management representatives, will have a 3.6% ownership and control ~27% voting rights.

Management’s rationale for the spin-off is to enable the standalone entity to grow independently with focused strategic priorities, faster decision-making, agility and need-based capital allocation which in turn unlock value for LBTY shareholders. Management believes the spin-off will provide more transparency in evaluating the independent operational capability of Sunrise and potentially attract capital from local Swiss investors preferring dividends. Further, at least per management’s internal assessment, the consolidated business of LBTY is undervalued (i.e., management’s implied internal share price estimate is $48 vs. CMP at ~$20) due to conglomerate discount at Holdco Level. The standalone entity, as a pure play Swiss telco player, has potential for upward rerating. As well, the transaction could also help in derisking/decoupling its business from other operating entities from any potential headwinds across Belgium, Netherlands, the UK, and Ireland.

SUNN’s revenue, EBITDAaL and adj. FCF guidance are broadly stable in 2024, 2025 and the mid-term. We do not foresee significant challenges in meeting these targets unless there are major developments in the competitive dynamic within the Swiss telecom market. Key tailwinds for supporting the revenue outlook include volume growth/market share gains in B2C from privately held Yallo and ongoing traction in the B2B ICT offerings. However, we surmise that the FCF outlook will be the key consideration for investors. To that end, given no major capex plans such as FTTH/Docsis 4.0 upgrades or spectrum investments over the next 3-4 years and a relatively comfortable leverage ratio of 4.2x net Debt/EBITDA post the spin-off, we expect the company to deliver on its FCF outlook. Notably, management announced CHF 240 million in dividends for FY 2024 (which will be paid in 2025) with a targeted payout ratio of up to 70% of adjusted FCF going forward, subject to net leverage ratio between 3.5-4.5x.

On a pre-spin, sum-of-the-parts basis, we value LBTY at $22.00 per share. We estimate SUNN (post spin) accounts for over half of LBTY’s current market capitalization ($12.00 per share from the new Class A common shares of SUNN). Post-spin, LBTY will retain its core European telecom assets, including the VMO2 JV (UK), Telenet (Belgium), Vodafone Ziggo (Netherlands), Virgin Media Ireland, and its venture investments. We value the remaining LBTY business at approximately $3.5 billion, or $9.60 per share, using a sum-of-the-parts (SOTP) approach.

LBTY has a strong track record of share repurchases, having reduced its share count by nearly 60% over the past seven years and an additional 10% planned for 2024 (with 8% done through 3Q 2024). Further potential upside drivers include incremental value from its Venture holdings and additional value unlocking from potential monetization of UK NetCo and Benelux HoldCo. We recommend purchasing shares of LBTY ahead of the planned separation due to 1) the implied upside to our fair value estimate of SUNN from any potential catchup to Swisscom’s (SCMN SW) dividend yield of ~4% (vs. SUNN’s implied dividend yield at 6.2% based on our fair value estimate), 2) a potential buyback at the LBTY level rewarding post-spin LBTY shareholders, 3) the potential incremental value creation in LBTY post-spin from its holdings in the Venture business (conservatively valued at 30% discount to BV in our fair value estimate of $1.2bn, including ITV, Lionsgate, Pax8 and Edgeconnex at $901 million, versus LBTY’s internal fair value estimate of $3 billion; and 4) further value unlocking at LBTY post-spin from potential monetization of  UK NetCo and Benelux HoldCo.

APi Group Corp. (NYSE: APG) operates two business segments: (1) Safety Services (70% of sales & 73.5% of adj. EBITDA in 2023), which designs, installs, inspects, monitors, repairs & services occupancy systems, including fire safety, electronic security, elevator and HVAC systems; and (2) Specialty Services (30% of sales & 26.5% of adj. EBITDA), which provides similar services for critical infrastructure, including electric, gas, water, sewer & telecommunications lines.  APG operates an asset-light, variable cost, recession resistant/statutorily mandated business that we estimate possesses mid-to-high single digit underlying organic growth prospects along with numerous tuck-in M&A opportunities in a fragmented market as well as a clear path to ~200 basis points of incremental margin improvement looking into 2025E (primarily from growth in higher margin/recurring service businesses as well as synergies from the Chubb Fire & Safety acquisition in January 2022).  Moreover, with shares trading at ~11.5x 2025E EV/EBITDA and a free cash flow yield of ~7% APG trades at a discount to publicly traded peers, which trade at EV/EBITDA multiples of ~15.5x and FCF yields of less than ~5.0%, as well as relevant private market transaction valuations, which have averaged ~16x EV/EBITDA in recent years. In addition to the fundamental upside we see for shares as management executes on its growth/margin improvement initiatives, we also see optionality in the Specialty Services segment, which could be separated or monetized, via spin-off or sale, to unlock  value and/or provide APG with incremental capital to either rapidly de-lever, pursue accretive tuck-in (or more transformative) M&A and/or be returned to shareholders via share repurchases (while also increasing investor/management focus on the higher margin/faster growing Safety Services business). On the latter point, management consistently indicates that “everything is on the table”, in terms of unlocking value for shareholders.  Based on management guidance & commentary as well as peer and M&A valuations, APG’s Safety Services & Specialty Services businesses could be valued at ~$44 per share and $9 per share, respectively. Accounting for corporate costs & projected net debt of ~$11 per share yields a base case sum-of-the-parts fair value of $42 per share (with bull & bear cases of $49 and $35 per share, respectively).  Potential catalysts include the separation/monetization of assets, accretive M&A, share repurchases, leverage reductions and/or better than expected growth and margins. Risks include management execution, competition, commodity & currency fluctuations, regulation, geopolitical disruptions and/or a recession.” The Hidden Opportunities Report

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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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