On July 28, 2011, L-3 Communications Holdings Inc. (NYSE: LLL) announced that its Board of Directors had approved a plan to spin off part of its Government Services unit, to be named Engility Holdings Inc., to shareholders in a tax-free distribution scheduled for 1H 2012. Businesses that will be spun off include L-3’s systems engineering and technical support as well as training and operational support services for the Department of Defense, other US government agencies, and other civil and international clients. L-3’s cyber solutions business will remain a part of the parent. The spin-off will comprise most of the businesses directly affected by the expected decline in active combat troops, as training and operational support services would appear far more exposed to impending US military spending cuts.

L-3’s more growth-oriented businesses will stay with the parent. Homeland security, intelligence, and cyber-security programs would seem to remain government spending priorities. Intelligence-related operations will account for roughly 12% of post-spin parent revenue. Following the transaction, L-3 should have a much stronger growth and margin profile. L-3 has underperformed its peer group of large US defense contractors over the previous 12 months and currently trades at lower multiples than the group. Management likely expects the spin-off to result in a higher valuation multiple for the parent that is more in line with that of peers.

L-3 expects that Engility will pay a dividend of $500-$650 million to the parent and carry debt/EBITDA in the range of 3x-4x. L-3 could use the cash for acquisitions to increase exposure to faster-growing non-commoditized electronics businesses. The transaction still requires final Board approval and a positive IRS ruling on the tax-free nature of the spin-off, as well as Department of Defense and SEC approval. The Department of Defense is likely to carefully consider the debt level placed on the spin-off to ensure that the entity will be able to continue as a going concern in a shifting Pentagon spending environment.

If one assumes L-3 receives a multiple in line with the peer group in terms of earnings and free cash flow, a fair value estimate of $74 per share can be reached, above the current price of pre-spin L-3. As a result, investors would receive the spin-off for free. Nevertheless, given that the defense industry is currently in a period of significant flux, relying too heavily on comparables to reach a fair value could be short sighted. Peer group multiples have declined precipitously over the past 18 months, and there certainly can be further multiple compression, as competition for new contract awards as well as re-competes should result in significant pricing pressure.

An investor may consider a pair trade or taking a counter position on a group of DoD contract-reliant companies as protection against downside risk from future weakness in defense spending. Given the long cycles of the industry, barring unforeseen international incidents, global troop levels going forward seem likely to remain well below levels of the previous decade. One might choose to buy L-3 ahead of a transaction that appears destined to unlock shareholder value, but consideration of ongoing industry weakness should be factored into a purchasing decision.

One may take some comfort in L-3’s healthy free cash flow generation. Over the last three years, the company has used funds from operations to aggressively buy back stock. As capital expenditures would appear limited over the next few years, one might expect management to continue to buy back shares or consider raising the dividend. Share repurchases in 2010-2011 totaled almost $1.8 billion; in addition, the company paid out $372 million in dividends. Guidance for 2012 includes up to $800 million in buybacks, which is about 11% of the company’s market value, and $190 million for dividends. Given management’s willingness to support the stock and reward shareholders, owners of the stock could be well positioned if and when a defense industry recovery begins. With fewer shares outstanding, net income improvement would be magnified at the per share level. Notably, however, the long defense industry cycles could require significant patience.

On July 14, 2011, ConocoPhillips (NYSE: COP) announced that its Board of Directors had approved the spin-off of its refining and marketing business via a tax-free distribution to shareholders. The spin-off, to be called Phillips 66, has filed for a listing on the NYSE under the ticker ‘PSX.’ Conoco shareholders will receive one share of PSX for every two shares owned of COP. The transaction will require SEC approval, and the company filed an IRS ruling request in November 2011. The separation is expected to be completed in 2Q 2012. Phillips 66 intends to issue about $7.8 billion in debt and make a $5.8 billion cash distribution to COP. The parent intends to use the funds to retire debt.

The spin-off entity’s operations include eleven refineries in the US, one in Ireland, and one in the United Kingdom. PSX also owns less than 50% stakes in refinery operations in Germany and Malaysia. Phillips 66 markets fuel to third-party-owned Phillips 66, Conoco, and ’76’ brand stations. PSX is the largest US refiner and the fourth largest (non-government-owned) global refiner. At the end of 2010, its worldwide crude oil processing capacity totaled 2.4 million barrels per day (including 2 million barrels in the US). As part of its marketing business, Phillips owns or leases and operates pipeline, barges, trucks, and terminals to transport processed petroleum products to sales points. Phillips operates in the midstream and chemicals markets through 50% equity stakes in DCP Midstream and CPChem.

The capital-intensive refinery business has been under pressure in recent years due to economic weakness, which resulted in reduced throughput and lower spreads. The refining and marketing business will be able to focus capital investment on refinery upgrades, while the remaining exploration and production (E&P) business can seek out ways to increase proved reserves, with a particular focus on raising liquids-based production. COP has not invested significantly in its refining operations in recent years. Given the potential return on investment from new oil development projects, it would appear difficult for management to divert resources to upgrading aging refineries in lieu of better opportunities in the exploration and production segment. Instead management has shuttered and sought to sell older production facilities. Nevertheless refining operations require certain threshold maintenance capital expenditures on an annual basis to meet certain safety and environmental standards. Rather than continue to funnel cash into a business with a potentially weaker and more volatile outlook, the separation seemed to be an easier course of action. As a standalone, PSX may continue to shutter older plants while focusing investment on more profitable operations. Capital allocation decisions as a combined company clearly favored the E&P segment. But as a standalone, it will be easier to fund future refinery needs. In addition, if one views a strong likelihood of high oil prices over the longer-term, E&P operations would seem to offer stronger returns, while refining margins can be squeezed when oil prices rise above $100 per barrel as it is more difficult to pass along those prices to consumers, unless prices are dictated entirely by demand, as opposed to geopolitical concerns or other issues.

When considering a variety of relative- and absolute-value metrics and methodologies, an investor may conclude that COP is currently fairly valued on a sum-of-the-parts calculation. A lack of investment in recent years has resulted in relatively weak refiner margins, and COP has idled facilities with the intent to sell or close certain older, less competitive facilities. However, an investor may find an opportunity post separation in the E&P business once it is no longer saddled with the volatile and capital-intensive refining operations. COP has bought back 15% of its stock over the last three years and is committed to continuing to buy back stock and raise dividends in the future. Following the cash distribution from the spin-off, COP should be well positioned to develop liquids-rich assets, make targeted acquisitions to build proved reserves, and/or lift the dividend.

One may reach fair value estimates of $74 for COP pre-spin and $62 post-spin and a fair value estimate of $24 (following a 1:2 share distribution) for PSX. COP is not recommended for purchase prior to the separation, given the current limited upside to the fair value estimate as well as the volatility currently being experienced by refiners and the challenges COP faces with its aging operations.

On July 25, 2013, ONEOK Inc. (NYSE: OKE) announced that its Board of Directors had approved plans to spin off its natural gas utilities into a separate publicly traded company, to be called ONE Gas Inc., through a tax-free distribution of shares to OKE shareholders. The distribution is expected to be completed in 1Q 2014. ONE Gas will be listed on the NYSE under the ticker “”OGS””. The distribution ratio has not been determined. The spin-off entity distributes natural gas to more than two million customers through the utilities Oklahoma Natural Gas Company, Kansas Gas Service, and Texas Gas Service. The parent will maintain its 41.3% interest, including general partner (GP) interest, in midstream master limited partnership (MLP) ONEOK Partners LP (NYSE: OKS). ONE Gas is expected to make a cash distribution to the parent of around $1.2 billion at the time of separation. The transaction still requires final Board approval, an affirmative ruling on the tax-free nature of the transaction, and regulatory approval.

The CEO and Chairman of OKE, John Gibson, will retire following the separation, while remaining non-executive Chairman of both entities. OKE President Terry Spencer will become CEO following the transaction, while Pierce Norton, Executive Vice President, will become CEO of ONE Gas. Norton previously ran ONEOK’s distribution segment. The separation appears to be an effort to simplify the corporate structure and increase distributions to the parent’s shareholders, as OKE will no longer fund the utilities’ capital expenditures. OKS’s growth strategy includes acquisitions and new construction programs. OKS has been investing in pipelines and natural gas liquids (NGLs) processing in the Bakken Shale. It also has transportation and processing assets in West Texas and Mid-Continent. The gas utilities serve customers in Kansas, Oklahoma, and Texas. Each entity is expected to pay a dividend.

The utility segment, which comprises three natural gas local distribution companies (LDCs), should be a relatively stable dividend generator. Management has guided for operating income of $227 million in 2013, compared to about $216 million in 2012. The growth is due to higher allowed rates in all three states. Assuming $55 million in interest on the $1.2 billion in debt following the separation, and $66 million in taxes, earnings of $0.51 per share are generated based on a 1:1 share distribution of OGS from OKE. Compared to a group of natural gas LDCs on earnings, potential payout rate and dividend yield, and assets, a fair value of $9.39 per share can be reached. Upside could result from improved efficiency (as ROE lags current allowable return set by OGS’s state regulators), or higher allowed rates of return.

OKS is expected to pay OKE about $548 million in distributions in 2013, including general partner incentive rights. The distribution to the general partner is expected to be predominantly tax deferred. Assuming about $75 million in annual corporate costs (including interest expense), OKE could distribute about $1.86 per share to holders, depending on taxes and distribution coverage ratio. Assuming a yield in line with other pure-play MLP general partners, OKE could be valued at about $50 per share. Alternatively, using a discounted cash flow model assuming 18% distributable cash flow growth in the early years (as incentive distribution rights enable OKE to capture about 65% of incremental distributions from OKS), a fair value of $52 per share can be reached. Upside to this valuation could come from higher-return projects at the MLP. Risks would be generated from more volatile commodity prices as OKS invests more heavily in processing and NGL infrastructure. Longer term, higher interest rates will increase the costs of OKS’s capital and potentially make the yield less appealing. However, those issues could be several years away. The sum-of-the-parts valuation of $60.39 per share offers limited capital appreciation potential, thus making the current entry point appealing primarily to investors seeking the safe dividend of the utility spin-off coupled with potential distribution growth from the parent.

Not surprisingly, on August 27th, 2013, F&N announced its intention to spin off its properties arm, Frasers Centrepoint Limited (FCL), by distributing two shares of FCL for every one share of F&N. The listing of the new company has been approved by the Singapore Stock Exchange, and the spin-off was unanimously approved at the Fraser and Neave’s Extraordinary General Meeting held on November 13th. Pending several additional regulatory and creditor approvals, the spin-off will be completed, at the earliest, by the end of November 2013 and, at the latest, during the first quarter of 2014.

A fair value for FCL’s stock, based on the average P/B multiple of the major Singaporean developers, is SGP 1.8 (SGD 3.6 on a 1:2 distribution-ratio adjusted basis), while a price of SGP 1.33 would imply the company is trading near historical lows on a book value basis. Given the opportunities for growth in the Asia Pacific region, the synergies that can exist between private and public (i.e. through REITs) ownership of the assets as well as the benefits from the existence of an owner-operator with interests in another real estate company (i.e. TCC Assets), shares of Frasers Centrepoint Limited are recommended for purchase at a price below SGD 1.8, with an ultimate target of SGP 2.1. Additionally, the company has a successful track record in the real estate business, it continuously manages to pre-sell most of its residential units and currently has over SGP 3 billion in unrecognized sales. Investors, however, should be aware that the Singaporean real estate market has shown signs of cooling after a period of significant price increases, and property values could correct or remain stable in the upcoming years.

Fraser and Neave, post spin-off, could be worth SGD 2.4 per share, a price below which it is recommended for purchase. While this price is based on rich multiples, it reflects the significant growth opportunities that exist in the food and beverage sector in Southeast Asia. Even more importantly, Fraser and Neave will have a net cash position in excess of SGP 900 million, thus being able to participate actively in M&A transactions. Given that Fraser and Neave will generate more than half of its operating income from its publically traded subsidiaries and associates, it is of outmost importance to monitor their stock performance. Currently, a price of SGP 1.60-1.70 would indicate that one can purchase the stock of Fraser and Neave and receive all of its private ventures for free.

The sum-of-the-parts valuation of a pre spin-off Fraser and Neave leads to a target price of SGD 6.0, slightly above the company’s current stock price. While the upside-to-downside potential for the stock is not very favorable, shares are recommended due to strong fundamentals and the strong probability that the high case scenario, with a target price of SGD 6.9, will materialize. For investors interested in only one of the two companies though, a post spin-off selloff could provide more favorable entry points.

On February 11, 2010, Motorola, Inc. (NYSE: MOT) announced that it would spin off its Mobile Devices business, which manufactures mobile phones, and its Home business, which provides video and data set-top boxes to cable television and telecommunications providers, in a tax-free distribution to shareholders. The spun-off entity will be named Motorola Mobility, Inc. and will trade on the New York Stock Exchange (NYSE) under the symbol ‘MMI.’ Shareholders of record as of December 21, 2010, will receive one share of MMI for every eight shares owned of MOT. Shares of MMI are scheduled to trade regular way beginning January 4, 2011. The company will be capitalized with $3.5 billion in cash, will have no debt, and will not assume any of Motorola’s current underfunded pension liability.

Immediately after the spin-off is complete, Motorola, Inc. will implement a reverse stock split, at an exchange ratio of 1:7. Further, the company will be renamed Motorola Solutions, Inc. and will begin regular-way trading on the New York Stock Exchange under the ticker symbol ‘MSI’ on January 4, 2011. Motorola Solutions will comprise the current company’s Enterprise Mobility Solutions business, which manufactures and services two-way radio, data, and voice communications products, along with the iDEN infrastructure business. Motorola’s Networks business will be sold to Nokia Siemens Networks B.V. for $1.2 billion (excluding the iDEN infrastructure business and certain licensing activities), with the sale expected to be completed by year-end 2010 or early 2011.

The separation of these two businesses will give investors a choice between a speculative, potentially high-growth business (high risk, high reward) in Motorola Mobility, and a significantly more stable business with attractive free cash flow attributes in Motorola Solutions.

Motorola Mobility’s near-term future performance depends highly on the prospects of its Android-based mobile devices and its ability to protect its share of the rapidly growing smartphone market. Some would argue that Android-based phones have performed as well as they have only because of a lack of competition from Apple’s (NASDAQ: AAPL) iPhone, which had been offered only to customers of AT&T (NYSE: T). This will change in early 2011, however, when iPhones are introduced to Verizon subscribers, a development that could weigh heavily on Motorola’s prospects. Others, by contrast, would point to Android’s ability to take market share in a market that is projected to grow +300% in the next four years as reason to attach high-growth multiples to this business. The analysis in this report, however, points to the fact that, despite its rapid growth in smartphones, the company has negligible free cash flow and earnings and that any deviation from this performance, positive or negative, is speculative. Our fair value estimate of $12 per share which is admittedly conservative, is based on the company’s $3.5 billion net cash balance (inclusive of an estimated $300 million contingent contribution) and the fact that its Home segment is able to offset the losses from Mobile Devices and allow the consolidated business to operate at close to break-even.

A less conservative approach, which extrapolates the company’s third quarter results into a full-year earnings estimate, places a valuation of $13 per share on these operations, for a fair value estimate of $25 per share when factoring in the $3.5 billion in cash. This scenario reflects little contribution from the Mobile Devices segment, but simply assumes that it can operate at break-even so as not to be a drag on the earnings of the Home business. It would not be surprising to see Motorola Mobility achieve a valuation closer to this $25 per share estimate, however, this arguably does not provide the margin of safety that would be required for a business as volatile as Motorola Mobility has been in recent years. For believers in Motorola’s Android-based products, a scenario is outlined wherein the company could be worth $55 per share by 2014.

Motorola Solutions, on the other hand, is a cash cow with a business that has been significantly more reliable in recent years than that of Motorola Mobility. Approximately two-thirds of its business is government based, a segment that is quite stable, although it has slowed along with the rest of the economy. Although this business will assume Motorola’s $1.9 billion underfunded pension liability, it will still have a net cash position of over $1,600 million (including this liability) once the Networks business is sold. Separately, this business will also have $1.5 billion in tax credits at its disposal, which are expected to translate into an effective tax rate of 20% for the foreseeable future. Using a target free cash flow yield of 8%, one arrives at a fair value estimate of $52 per share for MSI based on 2009 results, with future growth in free cash flow to be driven by mid-single-digit revenue growth, modest margin expansion, and the utilization of its tax credits.

On a sum-of-the-parts basis, the $12 per share fair value estimate for Motorola Mobility and the $52 per share fair value estimate for Motorola Solutions amount to a fair value estimate of $8.90 for pre-spin Motorola, Inc. This is roughly on par with the current price of MOT shares and, therefore, does not present a compelling opportunity. Investors should base their post-spin investment decisions regarding Motorola Mobility and Motorola Devices on their fair value estimates of $12 per share and $52 per share, respectively.

On June 20, 2010, Liberty Media Corporation (NASDAQ: LCAPA, LCAPB, LINTA, LINTB,LSTZA, LSTZB) announced that its Board of Directors had approved the tax-free split-off of its Liberty Capital and Liberty Starz businesses from its Liberty Interactive business. As a result, Liberty Interactive will emerge as a stand-alone, asset-backed security, while Liberty Capital and Liberty Starz will retain their status as tracking stocks within the newly formed entity, currently called Splitco. Each outstanding share of Series A or B Liberty Capital and Liberty Starz tracking stocks will be redeemed, on a 1:1 basis, for Series A or B Splitco Capital or Splitco Starz tracking stocks, respectively. Liberty Media Corporation expects the shareholder vote on the proposed split-off to occur in the first half of 2011, with the transaction to follow shortly thereafter. Significant discounts to fair value persist at all of the Liberty entities, and, because of this, shares of Liberty Interactive, Splitco Capital, and Splitco Starz are recommended for purchase.

After the split-off, Liberty Media Corporation will be composed solely of the Interactive Group (LINTA, LINTB), which owns video and online commerce companies such as subsidiary QVC, Inc., as well as interests in HSN, Inc. (32%), Expedia, Inc. (24%), Tree.com, Inc. (25%), IAC/Interactive Corp. (12%), and Interval Leisure Group (29%). The transaction should lend greater transparency to these operations and erase the tracking stock discount attached to this security, which could be a catalyst for share price appreciation of as much as 40%. Further, Liberty Interactive expects to improve its long-term credit outlook after divesting the liabilities associated with the Splitco entertainment businesses. If one were to attach a conservative target free cash flow yield of 10% (a 10x multiple) to the QVC operations, while giving full value to the entity’s publicly traded investments, shares of Liberty Interactive would be worth $22 versus their current price of $15.76.

Shares of Splitco Capital (CAPA, CAPB) are similarly attractive, as the value of its publicly listed investments (the most prominent being a 40% equity stake in Sirius XM Radio), less net liabilities, is approximately 14% higher than this segment’s current market capitalization. Splitco Capital also has private businesses, including the Atlanta Braves, which boost its estimated fair value to $77 per share, or over 30% higher than the entity’s current share price. Although the potential tax consequences of its investment in Sirius XM Radio could explain part of this discount, Liberty has proven to be adept at avoiding these taxes, as demonstrated most recently by its transaction with DIRECTV, Inc. Regardless, these taxes are more than reflected in the current share price, making the Capital Group an attractive way of gaining exposure to its publicly traded investments at a discount to current market value.

Finally, Splitco Starz (STZA, STZB), valued at only 6.5x consensus 2011E EBITDA, represents a fair value estimate approximately 20% higher than the company’s current share price, while valuations based on a target free cash flow yield of 8% represent upside of nearly 40%. Although Splitco Starz will continue to be a tracking stock and, as such, may trade at a discount to fair value, Liberty management has a track record of taking advantage of this discount by repurchasing significant amounts of stock. Splitco Starz, with over $900 million in net cash, will have ample balance sheet capacity to either repurchase shares and/or pay dividends. It should be noted that this same tracking stock discount and share repurchase opportunity exists with Splitco Capital, where the number of outstanding shares has shrunk by 34% since March 2008.

Liberty Media co-founder John Malone, one of the leading entrepreneurs in the media and telecommunications industry, holds 38.7% of the voting power in the Splitco tracking stocks, with a 3.5% ownership interest in Splitco Capital A shares, an 83.7% ownership interest in Splitco Capital B shares, and a 93.2% ownership interest in Splitco Starz B shares. As Chairman of the Board of both Liberty Media Corporation and Splitco, Mr. Malone is considered to have operating control over the newly formed entity.

On May 24, 2010, Sun Healthcare Group, Inc. (‘Old Sun’) announced the proposed spin-off of its senior healthcare services business from its real estate operations. The spun-off entity will retain the name Sun Healthcare Group, Inc. as well as the ticker symbol ‘SUNH.’ The parent entity in the transaction will be a recently formed subsidiary named Sabra Health Care REIT, Inc. (‘Sabra’), which will trade on the Nasdaq Global Select Market under the ticker symbol ‘SBRA.’ Shareholders of Old Sun, as of the November 5, 2010, record date, will receive one share of New Sun and one share of Sabra (after a three-for-one reverse stock split) for every three shares owned of Old Sun. The distribution is scheduled for November 15, 2010. Finally, the distribution of New Sun shares will be taxable to shareholders as ordinary dividend income, although the company expects to pay a cash dividend of approximately $0.17 per share in conjunction with the spin-off, which is intended to cover the estimated tax burden.

Upon separation, New Sun’s rent expense will increase significantly, which is expected to weigh on the company’s earnings and result in negligible free cash flow. The company will have relatively little net debt (less than 1x EBITDA), although this statistic does not account for the company’s rent obligations, which, when capitalized, show that New Sun has a high degree of leverage. Because of this, it is reasonable to expect New Sun to trade at a discount to peers on an EV/EBITDA basis and at the low end of the comparable company range on an EV/EBITDAR basis. A fair value of $10 per share for New Sun reflects this relative valuation and offers investors the additional margin of safety that could be gained from the company’s significant net operating loss carryforwards, which are worth an estimated $3.40 per share. Although New Sun’s pro forma financials are not particularly attractive, New Sun will have opportunities to improve operating margins as an independent company. These potential improvements could have a dramatic impact on the company’s earnings and free cash flow because of its low net margins of less than 2% currently.

Sabra will own eighty-seven of Old Sun’s nursing home properties and will file for real estate investment trust (‘REIT’) status with the IRS immediately following the completion of the spin-off, with the intent of commencing its taxable year on January 1, 2011, under REIT status. The company will have New Sun as its sole tenant – a feature that will likely warrant a discount to comparables despite long-term lease agreements of ten to fifteen years. Valuing Sabra at discounted multiples of funds from operations, net operating income, and revenues returns a fair value estimate of $21 per share, while multiples at the low end of comparable metrics imply a valuation as high as $25 per share. Going forward, Sabra will focus on growing and diversifying its tenant base via acquisition, although its ability to do so could be a concern should its equity (and, presumably, its acquisition currency) trade at a discount due to its tenant concentration.

The fair value estimates of $10 per share and $21 per share for New Sun and Sabra, respectively, imply a sum-of-the-parts estimate of $10.33 for the pre-spin entity once adjusted for the exchange ratio and reverse stock split. This represents approximately 11% upside to the company’s current share price of $9.27, and, therefore, shares of Sun Healthcare Group are recommended for purchase prior to the distribution. Following the spin-off, investors should base their investment decisions on the $10 per share fair value estimate for New Sun and $21 per share fair value estimate for Sabra.

On August 25, 2010, General Growth Properties, Inc. (NYSE: GGP) (‘General Growth’) filed a Form 10 Registration Statement with the SEC to effect a pro rata, tax-free spin-off to existing shareholders of its strategic development and master planned community businesses. The spin-off is part of General Growth’s restructuring plan and is expected to occur upon the company’s emergence from bankruptcy, which is expected on November 8, 2010. General Growth shareholders will receive 0.0983 shares of the spun-off entity, which will be named Howard Hughes Corp. (‘Hughes’), for every General Growth share owned, or approximately one Hughes share for every ten shares of General Growth. Hughes is expected to trade on the New York Stock Exchange under the ticker symbol ‘HHC.’

Both Hughes and newly restructured General Growth (‘New GGP’) will be raising new equity capital as part of their restructuring, and General Growth’s share price has approximated a sum-of-the-parts valuation based on the price where these entities are issuing new shares. These valuations, however, appear conservative, and investors can conservatively arrive at an $18 fair value estimate for the combined company relative to its current price of approximately $16 per share. Based on this discount, shares of General Growth are recommended for purchase before the separation of Hughes. Investment opportunities for New GGP and Hughes should be based on their fair value estimates of $12 per share and $60 per share (nearly $6 per current share), respectively, as independent entities. Further, both Hughes and the newly restructured General Growth (‘New GGP’) are attractive long-term investment opportunities with significant appreciation potential above these fair value estimates, which reflect current market conditions.

New GGP appears poised to emerge from bankruptcy as a leaner, more focused organization. After fending off a $10 billion takeover bid by rival Simon Property Group, restructuring $14.9 billion in secured debt, and spinning off the somewhat more speculative Hughes business, New GGP will boast a far more stable portfolio of income-producing mall properties. If one attaches a 15x multiple to estimated 2010 pro forma funds from operations, or a capitalization rate of just under 8.5% based on forecast net operating income, one arrives at a fair value estimate of $12 per share. These multiples, however, represent discounts to comparable companies and reflect valuation levels that are below historical averages, implying meaningful appreciation potential should multiples improve as the economy recovers.

As a stand-alone entity, Hughes will have the financial flexibility to fund additional master planned communities, which are large-scale, long-term commitments requiring significant capital investment. Given the current state of the real estate market, however, there is little visibility into the intrinsic value of its current assets and the timing of their development and ultimate sale, making Hughes a more speculative investment than New GGP. Because of this, a slight discount to book value may be warranted, despite the fact that impairment charges to these assets have been negligible in recent months and transactions related to these assets, although limited, point to values that are significantly higher than their book value. Further, many of these assets had been owned by the predecessor, The Rouse Company, for decades prior to the merger with General Growth and are, therefore, likely to be recorded on the balance sheet for far less than market value, even when taking into consideration the current market for real estate. Still, one can value Hughes at a 10% discount to book value, which represents a discount relative to a somewhat unimpressive peer group, and arrive at a fair value estimate of $60 per share, which represents significant upside to where the company is currently raising equity capital.

Lastly, investors may view Brookfield Asset Management’s involvement as a strategic owner and manager as an indication of Hughes’ upside potential. It is safe to assume that Brookfield would not be investing new equity capital into Hughes at $48-$50 per share without the expectation of a meaningful return on their investment, and the company’s track record in growing book value per share (compounded annual growth of 10% and 15% for the trailing five- and ten-year periods, respectively, not including dividends) indicates that it is a disciplined investment group with a history of successfully identifying profitable investment opportunities. Considering these factors, Hughes appears to have significant appreciation potential as a long term investment.

Stewart Information Services Corp. (NYSE: STC) is a title insurer and real estate information provider headquartered in Houston, Texas. Despite a recent return to profitability, the company currently trades at less than 0.6x book value, a multiple that represents a discount relative to comparable companies. Although it could be argued that the current valuation of the consolidated company is attractive in its own right based on the discount to book value, Stewart Information Services’ (‘Stewart’) valuation appears even more attractive when analyzed on a sum-of-the-parts basis, much like other title insurance companies that have recently spun off their information services operations. Investors who value these two businesses separately will find that Stewart’s fair value in today’s market is nearly 50% higher than the company’s current share price. Therefore, shares of Stewart Information Services are recommended for purchase.

As with the rest of the title insurance industry, Stewart’s title business has seen revenues decline in recent years due to the lower levels of activity in the real estate market. Stewart also fell victim to the significant increases in its title insurance loss experience, which, when combined with the depressed top line, led to substantial losses over the last three years. These losses, however, appear to be behind the company, as Stewart has aggressively cut costs and has started to see insurance losses decline significantly from their peak. Further, the company does not expect to have any further reserve strengthening adjustments going forward, nor does it appear to have significant risk in its investment portfolio, which is invested primarily in the debt securities of various corporations and utilities and in foreign government bonds and treasuries.

The book value of Stewart’s title insurance business, as a stand-alone entity, is conservatively $385 million. Although it could be argued that a valuation on par with book value is warranted given the company’s return to profitability and the lower risk of declines in shareholders’ equity, other, arguably higher-quality comparables trade at a discount to book value. Therefore, if one assumed a valuation for Stewart’s title insurance business of 0.59x book value, which represents a 30% discount to First American Financial Corp. (NYSE: FAF), one would arrive at a valuation for this business of $227 million, which is nearly equivalent to the company’s current consolidated market capitalization. Under this scenario, therefore, investors are receiving the company’s real estate information business for free.

It is not surprising that Stewart’s information business is ignored, as this business accounts for less than 5% of the consolidated company’s revenues. This segment has significant value, however, having posted EBITDA of $15.4 million through the first six months of 2010. If one were to annualize this figure and attach a discounted EV/EBITDA multiple of 5.5x to the forecast EBITDA of $30.7 million, one would arrive at a fair value estimate of $155 million, which is more than 85% of the current enterprise value of $180 million for the consolidated company.

Stewart has a strong balance sheet, with a net cash position of $76.7 million, excluding non-controlling interests. Further, it finished 2009 with nearly $140 million of tax loss carry-forwards but has taken a valuation allowance against most of these losses. These valuation allowances can be evaluated for reversal as the company returns to profitability and should help Stewart accrue book value at a faster rate going forward as these assets help lower its effective tax rate. As a point of reference, if one adjusted the company’s current shareholders’ equity by adding back all $140 million of these tax loss carry-forwards, Stewart would be trading at 0.44x book value.

Lastly, Stewart should realize a higher level of earnings going forward, as it continues to aggressively manage expenses and as it sees its loss experience steadily (although most likely slowly) revert to the lower levels the title insurance industry has experienced historically. It should be noted that, even at their worst levels, losses in title insurance are well below those experienced in other lines of insurance, thus making significant further declines to book value unlikely.

Stewart has announced no plans to undertake the separation of its title insurance and real estate information business and one should not expect such a transaction to occur in the near future. It is evident, however, that the company is significantly undervalued relative to a sum-of-the-parts valuation of these two businesses, and a spin-off of Stewart’s information segment is a reasonable means for management to unlock the latent value currently residing within the company. Such a valuation shows that the fair value of the consolidated company is nearly $17 per share, or almost 50% higher than the current value of STC shares. As such, shares of Stewart Information Services are recommended for purchase.

On May 18, 2010, Questar Corporation (NYSE: STR) announced that its Board of Directors had authorized a plan to spin off the company’s exploration and production business, midstream field services business, and commodity marketing business from its natural gas utility operations and pipeline operations. The spin-off, to be named QEP Resources, Inc. (‘QEP Resources’), will be listed on the NYSE under the symbol ‘QEP.’ The transaction will be enacted via a tax-free distribution to existing shareholders of Questar Corporation (‘Questar’) that is scheduled for June 30, 2010, with regular-way trading to start July 1, 2010. Shareholders of record as of June 18, 2010, will receive one share of QEP Resources for every STR share held. Lastly, it should be noted that QEP Resources will replace pre-spin Questar in the S&P 500 index.

The exploration and production business of QEP Resources has a track record of growing production and proved reserves at a faster pace than its peers in recent years. The company is also one of the lowest-cost producers among its peers, which, in combination with above-average growth in reserves, warrants a premium valuation based on proved reserves. Unlike many of its peers, however, QEP Resources also operates a midstream business, the value of which would not be reflected in a reserve-based analysis. A comparable analysis of QEP Resources returns a sum-of-the-parts valuation of $38 per share, significantly higher than the current price in the when-issued market of $32.25 per share. In view of these considerations, shares of QEP Resources are recommended for purchase.

Going forward, shareholder value will likely be driven by growth in proved reserves, which have increased at compounded annual rates of over 21% during the last three years and 16.5% during the last ten years. Further, this growth appears to have been non-dilutive, as book value per share for Questar Market Resources (the entity, excluding Wexpro, being spun-off) grew at a compounded annual rate of nearly 22% since 2001. If one values the E&P business based on these reserves, valuation should grow by a comparable amount using multiples consistent with those in today’s market. These multiples, however, are also reflective of natural gas prices, which are still relatively low and stand to rebound with the return of economic expansion. Based on this, future double-digit growth in the E&P business, which accounts for approximately 85% of the sum-of-the-parts valuation, appears likely.

The company’s midstream business is also expected to realize significant growth in coming years, as the company will finish building one new processing plant by the end of 2010 and another by the end of 2011. QEP Resources expects these plants to help drive compounded annual EBITDA growth of over 23% from 2010-2012, which, at constant EV/EBITDA multiples, should bolster the valuation for this segment by a comparable amount.

QEP Resources may also benefit from the financial flexibility it will enjoy once it begins to operate independently from the parent company’s utility business. QEP Resources has significantly less net debt than comparable companies (approximately 1.2x estimated 2010 EBITDA versus as high as 2.3x for some of its peers), a position that could help finance future growth initiatives. With returns on equity and invested capital that, though somewhat low due to the level of gas prices, are among the highest in its peer group, the company is poised to post significant earnings growth for an extended period of time.