On December 15, 2011, Covidien plc (NYSE: COV) announced plans to separate into two independent publicly traded companies. The spin company will be a leading manufacturer of generic drugs in the US, including acetaminophen. The pharmaceuticals business accounts for about $2 billion of COV’s $11.6 billion in annual sales. The parent (‘New Covidien’), a diversified medical products and supplies company, was spun off from Tyco International (NYSE: TYC) in 2007 and is based in Dublin, Ireland. The company sells a wide variety of vascular, respiratory, operating room monitoring, and nursing care products. About 80% of the parent’s revenue (post-separation) is generated from medical device sales.

The spin-off is expected be conducted via a tax-free distribution to shareholders, to be completed in mid-2013. Capital and liability allocations are yet to be finalized. The spin-off will require regulatory approval, an effective Form 10 filing with the SEC, an affirmative IRS ruling, and final approval from the board of directors. The spin company, which will assume the name ‘Mallinckrodt,’ intends to list on the NYSE under the symbol ‘MNK’.

As reasons for the separation, COV management cites differing business models, sales channels, customer profiles, and regulatory approval processes for the two businesses. The pharmaceuticals business may be able to focus more closely on its product pipeline and international expansion following the transaction.

The transaction is the latest from Covidien, which in recent years has transformed itself into a more focused medical devices company through acquisitions and divestitures. In doing so, the company was attempting to unlock value, given that medical devices companies trade at a premium to generic drug manufacturers. The pharmaceuticals business may have been a drag on the company’s valuation, as such the parent company may in fact experience a reduction in the costs of capital following the transaction.

The separation of the pharmaceuticals business will increase post-spin Covidien’s gross margins; R&D expense will become a smaller percentage of sales, while cash flow is expected to remain strong. New Covidien should be able to capitalize on industry growth trends for the foreseeable future, given a continued rollout of new products, expansion into international markets, and achieving deeper penetration in existing emerging markets. A fair value estimate of $56.98 per share for New Covidien can be derived.

Investors with a longer investment time horizon may see acceptable returns in New Covidien, given that the company will generate significant free cash flow, of which management intends to return 50% to shareholders through share repurchases and dividends.

Mallinckrodt appears to be focusing on developing an increasing number of branded pharmaceuticals to foster faster growth and higher margins. Vertically integrated manufacturing in both generics and nuclear imaging provide a favorable cost structure, which may make Mallinckrodt a takeout target. A fair value estimate of $6.71 per share for Mallinckrodt can be derived. On a sum-of-the-parts basis, a $63.69 fair value estimate can be derived. Given COV shares currently trade above this fair value, shares are not recommended for purchase prior to the spin-off transaction.

On August 29, 2011, General Growth Properties Inc. (NYSE: GGP) filed a Form 10 Registration Statement with the SEC to effect a pro rata, taxable special dividend spin-off to existing shareholders of a 30-mall portfolio, totaling 21.1 million square feet. The spin-off is part of General Growth’s ongoing plan to focus on its core assets, which management defines as high- quality premier malls, and is expected to be completed before year-end 2011. The spun-off company, which will be named Rouse Properties (“Rouse”), will consist of 30 “B” malls, is expected to qualify as a real estate investment trust (REIT) and be listed on the New York Stock Exchange under the symbol RSE. GGP Management intends for the special dividend to satisfy a portion of its 2011 REIT taxable income distribution requirement.

Upon the distribution, GGP will be composed almost entirely of “A” mall locations with high- quality tenants that on average are generating sales approaching $500 per square foot. After spinning off the lower-producing and more capital-intensive assets of Rouse, the parent company’s key operating metrics, such as occupancy and sales per square foot, will compare favorably with those of its peers. If applying roughly an in-line capitalization rate to post-spin GGP, one arrives at a fair value estimate of $14 per share.

As a standalone entity, Rouse’s pure-play portfolio of “B” malls, while not as high quality as the parent company’s portfolio, will be uniquely positioned, as a majority of the company’s properties are the dominant players in their respective markets. Further, many of Rouse’s malls are located in one-mall markets where one could argue that new competition is not likely to enter for the foreseeable future. With Rouse as a standalone entity, its management will be able to make necessary capital investments that would likely not have been made within the context of the larger GGP profile, and this in turn could result in an improved tenant base moving forward. Even given the existing state of the portfolio, investors can arrive at a fair value estimate of $5 per share, assuming a 1:10 distribution ratio.

On January 11, 2012, Comverse Technology Inc. (NASDAQ: CMVT) announced its intention to distribute 100% of the shares of its wholly owned subsidiary Comverse Inc. to shareholders on a pro rata basis. CMVT is a holding company that, through its subsidiary Comverse, provides a variety of value-added software and system services, including converged billing and active customer management as well as mobile internet, among others. Additionally, CMVT’s majority-owned subsidiaries include 54.3% control of Verint Systems Inc. (NASDAQ: VRNT) and 66.5% control of Starhome B.V. (private). Verint provides a suite of enterprise workforce optimization applications which capture, distill, and analyze underused information sources such as voice and video. Starhome provides software-based wireless mobility solutions that direct traffic on international wireless networks when users roam outside their home network. The spin-off entity is expected to trade under the ticker ‘CNSI’ on the NASDAQ following the transaction, which is tentatively scheduled for 3Q FY2012 (ending October 30). The distribution is subject to final approval by CMVT’s Board of Directors, the SEC, and CMVT shareholders. CMVT does not expect to recognize a gain from the distribution.

Post transaction, the parent company will consist of the current VRNT and Starhome holdings, while at the same time the holding company structure will be eliminated. It is expected that post-spin CMVT will then merge with or acquire the remaining shares of VRNT in a tax-efficient manner. The spin-off entity’s operations will consist entirely of CNSI.

One could argue that the spin-off should unlock value in VRNT, which appears to trade at a discount to peers based on reduced liquidity (owing to the large CMVT stake) as well as on the ongoing relationship with CMVT, which is just now fully emerging from the option backdating scandal that led the former CEO to flee to Namibia (to be discussed later in this report). One may reach a sum-of-the-parts fair value estimate of $7.42 per share for CMVT prior to the transactions. This analysis is based on the notion that the spin-off and elimination of the holding company should unlock value and that the shares could be considered for purchase. However, one may prefer to await further details as to how a merger would be consummated to determine whether the value of the VRNT stake will be truly realized. CMVT could also be viewed as an attractive arbitrage opportunity before the spin-off on a sum-of-the-parts basis by subtracting the market value of the VRNT stake and cash from the current market price, leaving a stub value of $0.24 per share, well below any comparable or arguably reasonable price-to-sales ratios for the stock.

On June 28, 2012, News Corp. (NYSE: NWSA) confirmed plans for a tax-free spin-off of its publishing unit. The spin entity, which will adopt the News Corp. name, will contain the newspapers and Dow Jones businesses, the book publishing business, and the digital realty business. The remaining assets, to be renamed Fox Group Inc., will be television and film related. Rupert Murdoch will serve as Chairman of both entities as well as CEO of Fox Group. The transaction is projected to be completed in 1H 2013. Both companies will have a dual share structure, including both ‘A’ and ‘B’ shares. The transaction will require an affirmative IRS ruling related to the tax-free nature of the spin-off as well as a declaration by the SEC of effectiveness of filings and any additional regulatory approvals.

The separation appears to be an attempt to separate the scandal-plagued publishing segment, which is in a secular decline, from the faster-growth, higher-return film and television businesses. Upon separation, Fox Group’s growth profile will favorably compare to larger content focused media companies. Post-spin Fox Group may provide longer-term investors with attractive returns, given its growth profile and opportunities to expand margins.

New News Corp.’s News and Information business will dominate the company’s results. With the newspaper industry in a secular decline, it appears that a stabilization of the revenue base may in fact be the most optimistic scenario. Following the transaction, investors may be cautious on New News Corp. given the underlying fundamentals, which could lead the stock to trade below the fair value estimate. Investors may wish to exercise caution in initiating a position, given the high likelihood of continued deterioration despite what may appear to be an attractive valuation based on cash flow or dividend yield.

On a pre-spin basis, a fair value estimate of $26 per share for NWSA can be derived, consisting of $22 per share for Fox Group Inc. and $3.44 per share for New News Corp. Given that NWSA shares currently trade above this fair value estimate, the shares are not recommended for purchase prior to the transaction.

However, those with a longer investment time horizon may still wish to consider Fox Group. Current profitability below that of peers combined with an attractive growth rate at the higher margin Cable Network Programming segment may present acceptable long term returns. In a five year growth scenario upside potential to $39 per share could be achieved.

On August 1, 2012, United Online Inc. (NASDAQ: UNTD) announced plans to separate its FTD business from its Content & Media and Communications operations via a tax-free distribution to UNTD shareholders. The transaction is subject to final approval by the Board of Directors, a favorable ruling from the IRS, and an effectiveness declaration from the SEC. The separation is expected to be completed in the third quarter of 2013. The remaining businesses are under strategic review, with the eventual spinning off of the Content & Media segment a possible alternative.

The spin-off entity, FTD Companies Inc. (‘FTD’), will comprise UNTD’s FTD business, an Internet and telephone marketer of flowers and specialty gifts. FTD utilizes a clearinghouse network of independent FTD florists that provides delivery services. FTD was acquired by United Online in August 2008. The parent company will retain the Content & Media and Communications businesses. The Content & Media segment provides online social networks focused on allowing people to reconnect with individuals from their past. Sites include Memory Lane, Classmates, and StayFriends. The Communications segment primarily provides dial-up Internet service under the NetZero and Juno brands, but also has entered the wireless 4G market, a potential growth area.

If the FTD business is compared to and valued in line with its closest direct competitor, 1-800-FLOWERS.COM (NASDAQ: FLWS), it would appear that the market is ascribing very little to zero value to the remaining businesses. This report does not in any way pretend to represent that the remaining businesses are of the highest caliber. However, with a net cash position and what is likely several years of cash generation ahead, the implied value of United Online’s other businesses appears disjointed from the reality of its financial statements in respect to being capitalized with a net cash position and should be able to generate positive cash flow for several years. The transaction has the potential to be a value-creating catalyst as the market revalues the remaining businesses.

FTD is a solid business that generates stable cash flow. Management has indicated it is positioned for growth, which means cash flow would likely be used for acquisitions to foster top-line growth above the mature industry’s mid-single-digit pace. International expansion to capitalize on the Interflora brand is the most likely use of cash.

The remaining businesses (‘New United Online’) may experience stabilization, as the core Internet-access user base experiences a low churn rate, resulting in positive cash flow generation for several years. Entrance into the wireless market provides an avenue to growth, and that business has amassed 41,000 subscribers in relatively short order. However, it remains to be seen whether the technology can compete in an environment in which devices are increasingly 4G-enabled. Content & Media will likely struggle to maintain a paying user base in a Facebook-focused world.

Through a variety of metrics, a pre-spin fair value estimate of $8.39 can be derived, consisting of $6.35 for FTD Companies Inc. and $2.04 for New United Online. Given the upside from the current share price to the fair value, shares of UNTD are recommended for purchase prior to the transaction. Initial selling pressure on New United Online beyond a reasonable level may offer investors an attractive entry point. – The Spin-Off Report

On October 16, 2012, Murphy Oil Corporation (NYSE: MUR) announced that its Board had approved a plan to separate its downstream operations, Murphy USA, from its exploration and production (E&P) business by distributing shares of the new entity via a tax-free spin-off to MUR shareholders. The transaction will be subject to an affirmative ruling from the IRS and effective declaration of filings by the SEC. The spin-off is expected to be completed in 2H 2013. Murphy USA intends to list on the NYSE under the ticker ‘MUSA’. Murphy USA’s operations consist of a chain of over 1,100 retail gasoline outlets, as well as seven product-distribution terminals and two ethanol production facilities located in North Dakota and Texas. MUSA is considering the sale of the ethanol plants as well as two product terminals. The parent will become a pure-play independent E&P company, with its principal operations focused in the US (primarily the Eagle Ford Shale in south Texas), Canada, and Malaysia. The UK retail operations will remain with the parent, although Murphy continues to evaluate strategic options for these assets, with a sale being the most likely alternative.

The planned separation follows in the footsteps of other integrated oil breakup announcements in the past two years. MUR is one of the last remaining integrated oil companies that continue to own and operate a substantial chain of retail gas stations, as ExxonMobil (NYSE: XOM), BP (NYSE: BP), and others sold their stations over the previous two decades to focus on higher returns from exploration and production. Most of MUR’s retail stations in the US are located in Wal-Mart Stores Inc. (NYSE: WMT) parking lots. The stores are smaller than the industry average and generate a far higher percentage of revenue from sales of fuel than from higher-margin, more stable merchandise and food services. MUR is typically the low-cost fuel seller in an area and generates strong volume due to its prime locations near Wal-Mart Supercenters. As a result, MUR generates higher traffic and gross profit per store than the industry average, but profit per store is far more volatile. MUR is adding 200 stores at Wal-Marts over the next three years. Thus, it should be able to expand at a faster rate than other publicly traded peers in the near term.

The transaction shares many similarities but also has key differences with the April 2013 tax-free distribution of shares of convenience store operator CST Brands Inc. (NYSE: CST) by refiner Valero Energy Corp. (NYSE: VLO). In both cases, strong free cash flow generation from the retail operations was being funneled back into the capital-intensive parent. The spin-offs should enable the new entities to focus capital decisions on improving profitability at their retail chains. For CST, the focus is likely to be on increasing food service offerings inside established stores, thereby lifting margins. While MUR can also make certain alterations at the smaller kiosks, the increased funding is likely to be used to expand the footprint: first, by adding additional kiosks, potentially larger than the current 208-square-foot format, at WMT Supercenters in the Southeast and Midwest, and eventually by expanding geographically. In both cases, the spin-offs also seem like efforts to unlock shareholder value, as multiples on shares of convenience store chains have been far higher than those of either refiners or E&Ps. The spin-off of CST appears to have successfully unlocked value for VLO shareholders; however, given the great volatility of refiners in recent months, it is difficult to quantify with certainty.

One may reach a fair value of $59 per share for the post-spin Murphy Oil when valuing the E&P operations to a peer group on the basis of proved reserves, PV-10, and daily production, as well as using a modified DCF to consider the potential value of proved reserves and adding the value of the UK retail operations based on recent M&A multiples or simply valuing on PP&E. For the spin-off, a fair value of $14 per share is reached by considering the profitability of the retail chain assuming long-term average fuel spreads, while taking into account growth projections, and adding in the value of the ethanol plants based on recent M&A multiples or at cost, and separately considering the terminals and midstream operations. Based on a $73 sum-of-the-parts valuation, the stock is recommended for purchase prior to the transaction, given the upside from the current stock price, MUR’s ability to unlock value through subsequent transactions, and the spin-off entity’s ability to fund stronger growth post spin. One may also consider the potential for MUR to continue repurchasing shares following the transaction, since the spin-off entity is expected to distribute $500 million to the parent at the time of the spin.

One may note that CST saw no significant selling pressure following its spin-off from VLO despite the fact that VLO was a member of the S&P 500 and CST was not, a usual cause of initial selling. As a result, it might be concluded that convenience store operators are in demand by investors considering ongoing multiple expansion for the group. So investors interested in MUSA may choose to buy prior to the transaction rather than waiting for selling pressure in initial trading, which may never materialize. The key risk to purchasing shares months prior to the transaction would be hydrocarbon pricing. One can reduce risk by hedging the oil and natural gas exposure of the parent with a group of global E&Ps or companies listed in the peer group valuations found in the second half of this report. – The Spin-Off Report

On August 30, 2012, SAIC Inc. (NYSE: SAI) announced plans to spin off its government technical services businesses, including enterprise IT operations, from its solutions-focused business, via a tax-free distribution to SAI shareholders. The spin entity (‘New SAIC’) will keep the SAIC name and exchange its ticker for ‘SAIC’, while the parent will be renamed Leidos Holdings Inc. and is expected to apply for an NYSE listing under the ticker ‘LDOS’. The transaction is subject to final approval by the Board of Directors, a favorable ruling from the IRS, likely Pentagon review, and an effectiveness declaration from the SEC. The separation is expected to be completed in 2H FY2014 (ending January 31, 2014).

Management indicated the primary reason for the separation is to avoid organizational conflict of interest (OCI) rules that prevent each entity from pursuing certain projects, particularly related to US Department of Defense (DoD) contracts. The separation will enable Leidos to bid on an additional pool of up to $37 billion in contracts annually over the next three years, while New SAIC could pursue as much as $25 billion in available contracts over a three-year period without OCI restrictions. However, LDOS will compete with large, well-capitalized defense contractors such as L-3 Communications Holdings (NYSE: LLL), Lockheed Martin Corp. (NYSE: LMT), and General Dynamics Corp. (NYSE: GD) for those contracts.

One may also consider that the parent will maintain higher-margin programs with modestly greater exposure to commercial and non-DoD government programs, which may offer better growth prospects. About 20% of revenue for Leidos is generated by non-defense contracts, while 96% of New SAIC’s revenue comes from the US government. As a result, the parent could lower its cost of capital, while the spin-off will take on $500-$700 million in debt in the transaction, leaving the parent with only modest net debt. Leidos may tap credit markets in the future to expand opportunities in the commercial markets, including in the health, energy, and engineering industries, through acquisition or headcount growth. Management indicates that about 25% of current Leidos revenue is generated from healthcare, energy, and engineering markets, with the potential to grow that share to 35% in a few years. Greater exposure to faster-growth, higher-margin markets could result in multiple expansion. Leidos also has a leading position in cybersecurity markets, which have shown steadier growth in recent years due to burgeoning threats. Most of the Command, Control, Communications, Computers, Combat Systems, and Intelligence (C5I) programs will be housed within Leidos. Some of this work may be directly transferable to the commercial realm, which offers growth opportunities at higher margins.

SAIC repurchased $471 million in shares in FY2012, and Leidos plans to continue that program following the spin-off. The current plan authorizes a 40-million-share buyback. New SAIC could also consider a buyback program, provided management is comfortable with the debt load, particularly if the stock is under pressure post-spin. Management expects the present dividend to be continued and to remain unchanged when divided between the two entities. Current Chairman and CEO John Jumper and CFO Mark Sopp will remain with Leidos, while New SAIC will be led by Tony Moraco, currently head of SAIC’s Intelligence, Surveillance and Reconnaissance (ISR) Group, and SAIC Comptroller John Hartley will be CFO of the new company.

Leidos generated annual revenue of about $6.5 billion in FY2013, compared to slightly less than $4.7 billion for New SAIC. However, management has guided for an annual revenue decline of about 8% in FY2014 to $10.0-$10.7 billion. The bulk of the pull-down should be on the New SAIC side, given declining defense spending and the loss of former contracts.

While the modestly wider profit margin and more stable backlog are likely to result in a higher earnings multiple for Leidos following the transaction, that is likely to be partially offset by a slightly lower multiple for New SAIC. Meanwhile, New SAIC is more exposed to reduced overseas deployments, which could result in further weakness in revenue. In addition, higher G&A costs for the two standalone companies will also weigh on both entities following the transaction. Longer term, management expects the elimination of conflicts of interest will open up new opportunities for the two companies, but that will likely only become more visible over a two- to three-year period, particularly given competitive bidding pressures for commoditized DoD service contracts. The company is also undergoing a restructuring to lower the cost structure in the new lower defense spending environment.

Considering historical and comparable multiples on earnings and cash flow, LDOS can be fairly valued at about $11.37 per share and New SAIC at about $3.29 per share, for a sum-of-the-parts value of $14.66 per share. Given limited upside to the current share price, SAI is not recommended for purchase prior to the separation. One would not expect substantial forced index or sector selling pressure following the transaction, as both companies would still fall within the defense industry, and New SAIC would appear likely to fit into the S&P 500 (although one cannot completely rule out its removal to the MidCap 400). Given the higher margins and stronger growth prospects for the parent, however, New SAIC is likely to be under greater selling pressure post transaction. One would expect LDOS to trade higher following the transaction due to multiple expansion as investors take into account faster growth rates and wider margins. This may present an opportunity to purchase LDOS immediately following the spin. New SAIC is more likely to trade lower in the first months following the spin, much like similar lower-margin defense spin-offs of the last two years, including Engility Holdings Inc. (NYSE: EGL), Huntington-Ingalls Industries Inc. (NYSE: HII), and Exelis Inc. (NYSE: XLS). This may offer an opportunity for investors to purchase the stock at a discounted price to the peer group in the 90 days after the transaction.

On February 14, 2011, Marriott International Inc. (NYSE: MAR) announced plans to spin off its timeshare business through a tax-free special dividend by late 2011. The spun-off business, which will be named Marriott Vacations Worldwide Corporation, will focus on developing and operating timeshare and fractional ownership units under the Marriott and Ritz-Carlton brands. Shares of Marriott Vacations are expected to trade on the NYSE under the symbol “VAC.” Following the spin-off, Marriott International will focus on lodging management and franchises. The Marriott family is expected to hold 21% of the common stock of each entity following the special dividend. The separation still requires SEC approval and an affirmative IRS ruling.

The spin-off of Vacations Worldwide (“VAC”) from Marriott International has the potential to remove the near-term drag on MAR’s share price. The timeshare business has been much slower to recover from the global recession, margins are low, and risks related to developing properties are higher. As a result, MAR’s operating margins trail those of its peers, and growth projections are well below those for industry leader Starwood Hotels. In addition, MAR will generate annual royalty fees from VAC post-spin to allow VAC to continue to market products under the Marriott and Ritz-Carlton brands.

Post spin, MAR’s growth prospects should improve, margins could widen, the valuation multiple considered by investors will likely expand, and revenue generated from the licensing agreement should partially offset the timeshare segment EBITDA contribution. As a result, one could reasonably argue that the fair value estimate of MAR will actually rise following the separation. Utilizing a variety of metrics, one can easily arrive at an estimate of $31 per share, above the current share price. An investor would essentially be getting the timeshare business for free if the stock is purchased prior to the spin.

On December 5, 2011, Entergy Corporation (NYSE: ETR) announced plans to separate its electric transmission business and merge the operations with independent electric transmission company ITC Holdings Corporation (NYSE: ITC). ETR expects to divest its electric transmission operations into newly formed Mid South Transco LLC and distribute the entity to shareholders in a tax-free spin-off. Transco will then be merged with ITC in an all-stock Reverse Morris Trust transaction. ITC plans a $700 million recapitalization prior to the merger. The transactions will result in Entergy shareholders owning 50.1% of the shares of pro forma ITC, and ITC shareholders owning the remaining 49.9% of the company. The transactions require approval by state and local utility regulators, the Federal Energy Regulatory Commission (FERC), and ITC shareholders, as well as an IRS private letter ruling. On September 24, 2012, ITC and ETR filed a joint application with the FERC seeking approval for the transaction. ETR has already filed the required forms with several state utility companies in preparation for the transaction. The transaction is expected to close in 2013, provided it clears regulatory scrutiny.

On January 10, 2013, Texas regulators raised serious questions about ETR’s regulatory filings, which were approved in October 2012. The filings were related to ending certain Texas contracts as a prerequisite to completing the spin-off. If the filings are found to have been misleading, the previous Texas regulatory approval may be reversed, which could delay the transaction. ETR resubmitted its filings in February 2013.

Entergy expects to receive $1.775 billion in proceeds from debt that will be assumed by ITC and issued as part of the transaction. ETR intends to use the cash to retire debt. As of December 31, 2011, ETR had net debt of nearly $11.5 billion. Meanwhile, prior to the merger, ITC will implement a $700 million recapitalization plan, which may include a special dividend, share repurchases, or a combination of the two. The separation transaction will enable ETR to reduce its debt level and focus new investment on its coal, gas, and hydroelectric power generation facilities. Entergy owns and operates power plants with approximately 30,000 megawatts of electric generating capacity, and it is the second-largest nuclear generator in the United States. The rate base for pro forma ITC is expected to be about $7.1 billion by year-end 2013. The merged entity will focus on required new investments in electric transmission infrastructure.

Following the transaction, ITC will have over 30,000 miles of electric transmission lines, including the almost 16,000 miles contributed by ETR. ITC’s geographic footprint will be significantly expanded, as its current Great Plains/Midwest focus will now include Gulf Coast assets. A regional headquarters will be established in Jackson, Mississippi. A map of New ITC’s transmission lines can be found on page 23 of the attachment. Provided the deal is approved, ITC will generate higher ROEs from the investment in electric transmission lines than did Entergy, as the business will fall within the jurisdiction of FERC rather than state and local regulators. Since 2005, FERC has authorized higher ROEs to spur infrastructure investment.

A post-merger ITC fair value estimate of $100 per share (including the $700 million, or $13.60 per share, used for a special dividend or share repurchase prior to the merger) can be reached due to the expanding rate base, higher return on investment, and potential new projects. Post-spin ETR could be valued at $52 per share. An ETR pre-spin sum-of-the-parts valuation of $73 per share is due to the higher value the transmission business is awarded under the umbrella of ITC and the benefit that will accrue to ETR shareholders, who will end up owning 50.1% of the business. However, other ongoing operational concerns could make ETR a higher risk investment than ITC ahead of the merger. Risks to the ITC investment include potential failure of the merger to meet regulatory approval, or lower rates awarded by FERC or state regulators in the future.

On August 8, 2012, Liberty Media Corporation (NASDAQ: LMCA, LMCB) announced it would spin off all assets other than the 100%-owned subsidiary Starz LLC, thus making the premium movie service an independent company. The non-Starz businesses will be spun off to shareholders in a tax-free distribution scheduled to be completed by the end of 2012. The new company (‘New Liberty’) will maintain the Liberty Media name, while the cable unit (which includes Starz, Encore, and affiliated distribution services) will be called Starz. The transaction still requires an IRS private letter ruling, registration of statements with the SEC, and any additional government approvals. In connection with the spin-off, it is expected that Starz will make a $1.8 billion cash distribution to New Liberty, of which $400 million was already distributed. At the time of the transaction, Starz is expected to have $1.5 billion in gross debt and an undetermined amount of cash.

Businesses that will be part of the separated entity include the Atlanta Braves baseball team and TruePosition Inc., a provider of equipment and technology to enable cellular E-911 services. Liberty Media also holds positions in publicly traded companies, including satellite radio service Sirius XM Radio Inc. (NASDAQ: SIRI), book retailer Barnes & Noble Inc. (NYSE: BKS), and concert promoter Live Nation Entertainment Inc. (NYSE: LYV), as well as small stakes in companies such as Time Warner Cable (NYSE: TWC), and Sprint Nextel Corporation (NYSE: S).

The rationale behind an outright recommendation of LMCA pre-spin is rooted in the fact that when the value of Liberty Media’s holdings in public companies and its net cash position are subtracted from the current market value, the remaining businesses appear to be heavily discounted versus peers. When adjusting Liberty Media’s market capitalization for the public holdings and the $1.26 billion net cash position, the remaining businesses trade at 2.3x EV to 2011 adjusted OIBDA, versus a valuation of 11.2x for peers. It might be expected that the separation of Starz from Liberty Media would reset the valuation of Starz to more closely approximate that of peers. At the same time, with over 96% of New Liberty’s post-spin net asset value being publicly traded equities and net cash, the value of LMCA post spin should be easily identifiable. Additionally, longer-term investors may wish to consider the high degree of optionality that may arise from future transactions in New Liberty’s public holdings, such as Sirius XM Radio and Barnes & Noble.

On a pre-spin basis, one can arrive at a fair value estimate of $141 per share for Liberty Media, consisting of $23 per share for Starz and $118 per share for New Liberty. Given the potential for price appreciation as a result of the spin-off transaction, shares of LMCA are recommended for purchase ahead of the transaction. Those with an investment time horizon beyond that of the spin transaction may see further upside if the core public holdings benefit from improving business conditions or if LMCA is able to monetize the positions in a tax-advantageous manner.