On Tuesday, March 22, 2011, the Board of Directors of Punch Taverns plc (PUB LN) announced its decision to proceed with plans to spin off the company’s managed pub business as Spirit plc. The decision follows the announcement made in October 2010 that the company had started a comprehensive review of company strategy, operating performance, and capital structure. This strategic review was initiated to address the effects of a sizeable debt burden in an environment of slowing discretionary spending, falling property values, and a UK ban on smoking that took effect on July 1, 2007, all of which have contributed to the company’s significantly diminished market capitalization since peak valuations in mid-2007.

On Tuesday, March 22, 2011, the Board of Directors of Rieter Holding AG (RIEN SW) announced its decision to proceed with plans to separate the Textile Systems and Automotive Systems division into two distinct listed companies. Subject to the approval of shareholders at the Annual General Meeting on April 13, 2011, Rieter Holding will distribute shares of the Automotive Systems division on a one-for-one basis in the form of a special dividend. The name of the new company will be Autoneum Holding AG.

Autoneum will be listed on the SIX Swiss Exchange on May 13, 2011. The current Rieter Textile Systems division will continue to trade as an independent company under the name of Rieter (RIEN SW). Notably, two board members and largest shareholders of Rieter Holding support the transaction. In connection with the separation, these shareholders have agreed to grant to Autoneum a subordinated loan of CHF 12.5 million each and not sell their Autoneum shares for a certain period of time.

Rieter acquired its Automotive Systems division in the mid-1980s in order to create a counterweight to its established but cyclical business in the textile machinery sector. Rieter Automotive Systems is the leading global manufacturer of systems for noise and heat control in motor vehicles. The division develops and manufactures noise and heat control systems, components, and modules, including carpet and trunk systems, engine bay, and underbody systems for the world’s major automotive manufacturers. In 2010 the Automotive Systems division posted sales of CHF 1,715.4 million, equivalent to 66.3 percent of total group sales.

On March 31, 2010, RMB Holdings Limited (“RMB Holdings”), a South African investment holding company, announced its intention to consider a restructuring of its existing investment portfolio. On Wednesday, December 15, 2010, the company decided to proceed with the restructuring of its banking and insurance portfolio through the unbundling of its publicly-traded and privately-held insurance interests.
Currently, the company’s portfolio of strategic investments in South African financial services groups comprises both insurance interests and an interest in the shares of FirstRand Limited (“FirstRand”), one of South Africa’s largest diversified financial services companies. The company will separate the insurance and banking interests through the unbundling of the insurance interests as Rand Merchant Insurance Holdings Limited (“RMI Holdings”). As a result of the restructuring, the insurance interests of RMI Holdings will include the following:

On November 11, 2010, Straits Resources Limited (“Straits Resources”) (Ticker: SRL AU) announced that the company had entered into a proposed scheme of arrangement with PTT Mining Limited (“PTTML”)-a subsidiary of PTT Plc (Ticker: PTT TB)-under which PTTML would acquire 100 percent of the issued shares of Straits Resources at a price of AUD 1.72 per share.
According to the proposed structure-as set forth in the Demerger Scheme Booklet and Acquisition Scheme Booklet released on Monday, December 20, 2010-the acquisition of Straits Resources will occur subsequent to the demerger of the Straits Resources metals business. Following the demerger, newly named Straits Metals Limited (“Straits Metals”) will hold the following assets:

On July 28, 2010, the Board of Directors of ArcelorMittal announced its intention to conduct an assessment of the potential spin-off of the company’s stainless steel and specialty steels businesses from its global steel and steel related products businesses. The stainless steel division has plants operating in Brazil, Belgium, France, and China. In the first nine months of 2010, it produced 1.59 million metric tons of steel and USD 4.18 billion in sales, equivalent to approximately 6.8 percent of ArcelorMittal’s total revenue for the period.
The spin-off comes as producers are struggling with lower stainless steel prices and higher raw material costs, namely that of iron ore. On December 7, 2010, the ArcelorMittal Board of Directors approved the proposed spin-off. The company will convene an extraordinary general meeting of the ArcelorMittal shareholders on January 25, 20111 to approve the proposed separation.
Following the spin-off, the stainless steel division will be known as APERAM. Upon approval, ArcelorMittal shareholders will receive one APERAM share for every twenty ArcelorMittal shares held on the record date. Shares in APERAM will be listed on Euronext Paris, Euronext Amsterdam, and in Luxembourg. In the United States, they will trade on the over-the-counter market in the form of NY Registry Shares. Notably, following completion of the spin-off, Chairman and CEO Mr. Lakshmi Mittal is expected to own 31,866,913 ordinary shares in the APERAM, representing approximately 40.83 percent of its outstanding voting shares.

Upon further reflection, it seems quite possible that the importance of the concluding sentence in the excerpt above is prone to betrayal by the subtlety and brevity with which it has been presented to the readers of this report. That being the case, further clarification is in order.  As discussed in the original report, the valuation of Fiat Industrial proceeded on the basis of automobile manufacturer multiples, rather than industrial equipment manufacturer multiples. The lack of a suitably large set of comparable companies required such an approach. The result was a conservative valuation with only brief mention of the potential for additional price appreciation should the industrial business trade at a premium multiple. Notably, however, no analytical framework was presented for properly understanding why such an outcome might transpire and the potential prices that would result in the event of such an outcome. Such a framework is included herein.

On April 21, 2010, Fiat S.p.A. (F IM) announced its intention to demerge its non-automotive businesses into a newly formed company to be named Fiat Industrial S.p.A. (FI IM), which will begin trading on the Milan Stock Exchange on January 3, 2011. Though Fiat will remain listed on the Milan, Paris, and Frankfurt stock exchanges, the shares of Fiat Industrial are not expected to be listed in either Paris or Frankfurt. The transaction is expected to be effected on a tax-free basis, with Fiat shareholders receiving one share of Fiat Industrial for every share held.

Notably, Fiat’s equity capital structure is comprised of three classes of equity: ordinary, preference, and savings shares. Each share class differs in the priority of dividend distributions and the allocation of earnings. Post-demerger, Fiat and Fiat Industrial will continue to have the same three equity share classes.

On a post-demerger basis, the prospective annualized rates of return of Fiat and Fiat Industrial through potential multiple expansion alone are estimated to be in the high single digit to low double digit range. The superior long-term growth prospects of Fiat Industrial, however, appear to provide the investor with more attractively skewed source of optionality—that is, a similar base level of return in the short-term through multiple expansion (i.e., nine to ten percent if annualized over 1.5 years), with a significantly more attractive growth profile in the long-term (i.e., an annualized EBITDA growth rate projection of 31 percent, compared to 24 percent for Fiat).

Moreover, an additional source of optionality is present thorough the use of arguably conservative valuation multiples for Fiat Industrial. In the five year period ending in 2009, the average trading profit margin of the combined businesses of CNH and Iveco was 6.18 percent, compared to an average trading profit margin of 2.29 percent for the remaining automotive businesses. Not only was the margin higher, but performance was consistently positive, a characteristic which may very well be deserving of a premium multiple.

Ergo, while not extraordinarily attractive on the basis of current operations, the shares of pre-demerger Fiat, post-demerger Fiat, and Fiat Industrial are recommended as potentially attractive sources of growth optionality with a strong bias towards Fiat Industrial. Such optionality may very well become more attractive in the event of a diminution in market value resulting from the demerger.