On April 5, 2023, Sodexo SA announced the intention to spin off its benefits and rewards services businesses into a standalone, publicly traded company. The BRS segment has been renamed, Pluxee, and the new publicly traded company will adopt the same corporate moniker. The transaction, which is scheduled to be completed on February 1, 2024, is supported by SW’s founding family’s investment firm, Bellon SA, which expects to remain a long-term shareholder in both post-spin entities. Sodexo will hold a special meeting on January 30, 2024, to formally approve the separation.

Management’s rationale is seemingly rooted in an attempt to unlock shareholder value. For its part, shares of SW FP have significantly underperformed the broader market over the prior five- and ten-year periods. This underperformance can be attributable to the company’s rather stagnant topline growth and margin profile; however, obscured within the consolidated results is that the Pluxee business is actually growing and presents sizeable upside potential in terms of both revenue and earnings. As a standalone company, Pluxee will be able to attract a more focused investor base that may appreciate its growth potential and tech enabled solutions, which provide cash flow generation on leverageable assets that will expand margins. In that frame of mind, it could be posited that as a standalone entity, Pluxee would be awarded a higher valuation multiple, and the spin-off would create shareholder value.

Over the past five years, shares of Sodexo have traded on average at 9.3x forward EBITDA estimates. (Shares have performed well over the past year and now trade at 10.5x forward consensus EBITDA.) Following the separation, Sodexo will continue to be compared to the two main food service provider competitors, which are valued roughly in line with where Sodexo currently trades. Following the spin-off of Pluxee, Sodexo’s single-digit growth and EBITDA margins appear to be below current expectations for both ARMK and CPG, which would appear to argue for a multiple that is roughly in line with the current SW FP multiple.

As for Pluxee, the post-spin peer set is challenged by the company’s unique business, which in our mind does not have an ideal public comparable given the large-scale employee benefits program. Instead, we look to companies providing similar technology enabled payment solutions that do not necessarily include employee benefits yet exhibit similar underlying fundamentals. To that end, Pluxee’s peer set trades at a premium to the valuations of the food service providers that SW FP has historically been compared to.

We forecast that Pluxee will increase revenue by 13% in F2024, followed by a more normalized 8% in F2025. We expect that following the initial year as a standalone company, margins will expand to 37% in F2026, resulting in EUR 475 million in EBITDA. Valuing shares at 11.0x our F2026 EBITDA estimate, we assign a EUR 41 per share fair value estimate to Pluxee. We forecast that Sodexo (ex-Pluxee) will generate annual revenue growth of 6%, and operate with EBITDA margins of 5.5%, resulting in F2026 EBITDA of EUR 1.4 billion. Valuing shares at 10.0x our F2026 EBITDA estimate, we fairly value shares of post-spin Sodexo at EUR 75 per share. On a pre-spin basis, we value shares of Sodexo at EUR 116 per share, consisting of EUR 41 per share in value from Pluxee operations, and EUR 75 per share from post-spin Sodexo.

Newpark Resources Inc. (NYSE: NR) operates two business segments: (1) Fluids Systems (~70% of consolidated 2023E sales and ~30% of adj. EBITDA), which provides drilling, completion & stimulation fluids (or “mud”) to oil, natural gas & geothermal customers; and (2) Industrial Solutions (30% of 2023E sales and 70% of adj. EBITDA), which provides recyclable composite matting used in facilitating temporary worksite access for, among others, the utility, infrastructure construction, energy and broader industrial sectors.

In recent years, Newpark has pursued a transformation from a primarily oilfield services company, focused on the cyclical/volatile, and lower margin/return energy exploration & production (E&P) sector into a specialty rental & services company with applications across a broader scope of sectors, secular growth tailwinds, particularly in the power transmission & distribution as well as critical infrastructure arenas, and a significantly higher margin/return profile. In that pursuit, the company has monetized/exited several asset-heavy/low returning businesses, including the sale of its industrial blending and mineral grinding businesses as well as the exit from its fluids operation in the Gulf of Mexico, which have served to reduce the company’s overall complexity and asset intensity as well as unlock capital for share repurchases and leverage reduction. More recently, NR has indicated it is exploring strategic alternatives for its remaining Fluids Systems business which, if successful, will complete the company’s multi-year transformation and in our estimation yield incremental benefits, in terms of accretive capital allocation opportunities and improved management/investor focus, beyond the potential near term re-rating benefits toward a valuation more in-line with specialty rental & services peers (as opposed to legacy oilfield service providers).

Based on management guidance and commentary as well as peer and M&A valuations, NR’s Fluids Systems and Industrial Solutions businesses could be valued at ~$2 per share, and ~$10 per share, respectively. Accounting for corporate costs and projected net debt of ~$2.50 per share yields a base case sum-of-the-parts fair value of ~$10 per share (with bull and bear cases of ~$11 and ~$8.50 per share, respectively). Potential catalysts include the monetization of assets, improved capital allocation flexibility, including toward incremental balance sheet flexibility, accretive tuck-in acquisitions and/or share repurchases as well as better than expected growth & margins. Risks include management execution, competition, customer loss, technological disruption/obsolescence, commodity & currency fluctuations, regulation, cyber-attacks, pandemics and/or a recession.

On March 15, 2022, Solvay SA (SOLB BB) announced the next step in their GROW strategy. In an attempt to simplify operations, the company will separate into two independent publicly traded companies. EssentialCo, which will retain the Solvay company name, would control the leading mono-technology businesses, including soda ash, peroxides, silica, and coatis (all currently reported within the Chemicals segment) and SpecialtyCo.,which will adopt the corporate moniker Syensqo (pronounced “Science Co.”) and include the current Materials segment as well as the majority of the Solutions segment. Shares of Syensqo will be distributed to Solvay shareholders on a one-for-one basis, and it is expected that the company will trade under the symbol “SYENS” in Brussels.

In terms of rationale, management highlights the simplification of the operating structure and differing capital needs for the businesses currently under the Solvay corporate structure. At the core of the separation, post spin New Solvay will be a mature company focused on decarbonizing its chemical processes through innovations, making targeted investment in its highest opportunity capital expenditures while maintaining a competitive dividend payout. Syensqo will be a growth company focused on being a leader in specialty chemicals, with a more capital intensive product portfolio products competing in faster growing markets than New Solvay.

It is our opinion that the Syensqo assets are currently undervalued within the larger Solvay corporate structure. Shares of SOLB currently trade at approximately 5.5x the consensus 2024 EBITDA estimate, which is the low end of a peer set of commodity chemical producers. Further, the current trading multiple is well below that of a basket of specialty chemical producers with similar end market exposures, which currently average approximately 7x – 10x depending on Syensqo’s segments (peers with exposure to composites and specialty polymers trade at the higher end of the range). Over the past five years, shares of Solvay have traded on average at 6.2x forward EBITDA estimates.

We would expect that upon separation, Syensqo would be re-rated higher, given the company’s non-commodity product portfolio, exposure to growth from the aerospace and automotive end markets, and its leading position in many of its categories. Conversely, with a lower growth profile, and a more shareholder-oriented return strategy, the parent company New Solvay would likely remain trading at the current trading multiple, as it already trades near the low end of peers with soda ash, peroxide, and silica exposure. While the discount to peers may be unwarranted, especially in light of soda ash producers trading at near 7.5x on average and Solvay being a market leader, we take a conservative view that shares of Solvay will remain at roughly the same multiple in the near term, with multiple expansion optionality if the company is able to widen margins.

On a pre-spin, sum-of-the-parts basis we value shares of Solvay at EUR 145 per share, consisting of approximately EUR 25 per share from New Solvay and EUR 119 from Syensqo. Post-spin, we expect investors to favor Syensqo for its end market exposures and growth potential versus the more mature chemical portfolio that makes up New Solvay, which likely results in selling pressure on New Solvay following the distribution.

Worthington Industries Inc. (NYSE: WOR) is set to spin-off its Steel Processing business into a standalone, publicly traded company on December 1, 2023, to shareholders of record as of November 21, 2023. Shares of the new company, which will adopt the corporate moniker Worthington Steel, will trade on the NYSE under the ticker “WS.” WOR shareholders of record will receive one share of WS for each share of WOR held. The parent company will change its name to Worthington Enterprises, and will continue to trade under the symbol “WOR.” Shares of Worthington Steel are expected to begin “when-issued” trading on or about November 28, 2023, on the NYSE under the ticker “WS WI”. Worthington Enterprises is expected to begin trading on an “ex-distribution” basis on or about November 28, 2023, under the ticker “WOR WI”. Worthington Steel and Worthington Enterprises will begin trading “regular-way” on December 1, 2023.

As it currently stands, the company operates under four reportable segments: Steel Processing (~71% of revenue and ~58% of adjusted EBIT in F2023), Consumer Products (~14% of revenue and ~37% of adjusted EBIT in F2023), Building Products (~12% of revenue and ~17% of adjusted EBIT in F2023), and Sustainable Energy Solutions (~3% of revenue and a ~13% drag on adjusted EBIT in F2023).

In terms of rationale for the separation, following the Tempel acquisition, management believes that the Steel company has sufficient scale to operate as a standalone entity. Additionally, given the volatility that is inherent in the price of steel, a standalone Worthington Enterprises should see a lower degree of volatility arising from steel price swings and the resultant impact from Steel’s unconsolidated JVs. Following the separation, both companies will be respective leaders in their dominant businesses, and investors likely will favor the reduced complexities in reporting (i.e., less unconsolidated JVs per company), which may attract new investors and/or more sell-side coverage, both of which we would view as a positive.

In relation to valuation, shares of WOR currently trade at 8.5x forward EV/EBITDA, having averaged just 7x over the past five years. The trading multiple undoubtedly has historically been weighed down by the company’s exposure to the steel industry, with a basket of peers in the building products and consumer products industries currently averaging approximately 11.0x forward EV/EBITDA, while steel processing and mill peers trade at just over 7x forward EV/EBITDA. It is worthy to note that shares of AWI, which may be a fair proxy for post-spin WOR given the WAVE joint venture partnership, currently trades at 8.9x forward EV/EBITDA and has averaged a multiple of 9.5x over the past five years.

On a pre-spin, sum-of-the-parts basis, we fairly value shares of WOR at $72 per share. On a post-spin basis, we assign a $28 per share fair value estimate to Worthington Steel and $44 per share fair value estimate to Worthington Enterprises. Given the time frame to spin completion, we refrain from recommending shares ahead of the transaction completion. Instead, we look to capitalize on any irrational selling pressure that may arise following the separation.

Despite near term economic uncertainty as exhibited by 1Q F2024 results, the company remains a dominant player in most of its core businesses (steel processing and building products [WAVE]), and both post-spin companies will have strong balance sheets and will be positioned to weather the current macro environment and have ample liquidity to capitalize on attractive acquisitions. Worthington Steel looks to capitalize on the decarbonization of transportation and the energy transformation through its electrical steel business, while Worthington Enterprises will participate in demand from government stimulus, environmental investment, population shifts and on- and near shoring (moving production back to the U.S. or closer in proximity).

In terms of favorability, we believe that investors will prefer the parent company’s exposure to multiple industries and the removal of volatility from the steel market, which may result in a sell-off of WS shares. With market leadership positions in the building products segment, which derives the majority of the post-spin parent company’s earnings, we view favorably on the company’s positioning to capitalize on increases in residential and non-residential new construction and remodels.

Albany International Corp. (NYSE: AIN) operates two business segments: (1) Machine Clothing (~59% of consolidated 2022 sales and ~74% of adj. EBITDA), which manufactures and supplies customized, highly-engineered, consumable machine clothing to the paper & packaging industries; and (2) Engineered Composites (41% of 2022 sales and 26% of adj. EBITDA), which provides advanced composite engine & airframe parts to the aerospace & defense sectors. AIN’s Machine Clothing (MC) business is a high-margin, high-free cash flow generating leader in the provision of highly engineered, customized, consumable belts & fabrics that are critical/essential components in the production of all paper grades, which is admittedly a relatively slow growing industry, while the Engineered Composites (AEC) segment is a high-growth, cash-consuming (modestly, at least in the near-term), innovator of lightweight but durable products for the aerospace & defense sectors, which enjoy secular tailwinds.

Clearly, the businesses have vastly divergent end-market exposures as well as growth, margin and capital intensity profiles. Historically, it has been the shared use of AIN’s core weaving technology and manufacturing expertise as well as the ability of AEC to leverage MC’s robust free-cash flow generation to fund growth/capital investments that we discern have been the key factors in keeping the two businesses together.  That said, we think it reasonable to postulate that as AEC continues to gain scale toward $100 million-plus in annual adj. EBITDA and becomes self-funding (i.e., consistently free cash flow positive) over the next several years management could ultimately consider a potential separation, which, beyond any re-rating benefits, we estimate would result in more focused management and capital allocation strategies while also allowing investors to better target their investment dollars by creating two pure-play entities (of which each could reasonably attract interest from financial and/or strategic acquirers).

Based on management guidance and commentary as well as peer and M&A valuations, AIN’s Machine Clothing and Engineered Composites businesses could be valued at ~$74.50 per share, and ~$55 per share, respectively. Accounting for corporate costs and projected net debt of ~$25.50 per share yields a base case sum-of-the-parts fair value of $104 per share (with bull and bear cases of ~$110 and ~$99 per share, respectively).  Potential catalysts include the separation of assets, accretive allocations of capital toward acquisitions and/or share repurchases as well as better than expected growth & margins. Risks include management execution, competition, product liability, customer loss, technological disruption/obsolescence, commodity & currency fluctuations, regulation, cyber-attacks, pandemics and/or a recession.

On August 18, 2023, Novartis AG (NOVN SW, NYSE: NVS) announced the company had filed a shareholder information brochure in relation to a proposed spin-off of its generic drug business, Sandoz. If completed, the separation would be accomplished via a dividend in kind whereby NOVN shareholders of record would receive one share of Sandoz for every five shares of NOVN. The Sandoz spin-off is planned to occur on or around October 4, 2023, with a primary listing on the SIX Swiss Exchange, and an American Depositary Receipt (ADR) program in the U.S. Sandoz will trade on the SIX under the ticker “SDZ SW”.

Novartis’s planned spin-off of its generics business follows an industry trend where large pharmaceutical companies have shed non-core assets to focus on higher margin patent protected drug portfolios. As with other industries in recent years, investor preference has shifted from diversification to specialization, with many spin-offs resulting in a higher margin growth company and a more mature cash flow-oriented company that provides investors greater choice to fit their styles. Inherent in most of these types of spin-offs (growth vs cash flow) is an expectation that the growth company would see a valuation multiple expansion that would ideally offset any multiple contraction that would be assigned to the cash flow company.

Given that NOVN currently trades at the higher end of large pharmaceutical peers, it should be expected that the parent company would not see a large degree of multiple expansion, if any at all, while the generics company would likely experience a valuation contraction to approximate peers. In this framework, any value unlocked from this transaction is likely to be earnings based versus the structural re-rating that sometimes occurs in these types of transactions.

We value shares of Sandoz at 9.0x our 2024 EBITDA estimate, in line with its generics peer group, implying a post-spin enterprise value of $18.2 billion. Accounting for expected net debt of $3.6 billion, 419 million shares outstanding (based on the one-for-five share distribution ratio), and the current USDCHF exchange rate, we assign a post-spin fair value estimate of CHF 31 per share to Sandoz. We apply an 11.5x multiple to the parent company earnings, which is roughly equivalent to the current trading multiple and at the higher end of the peer group range and estimate post-spin Novartis to be worth $218.7 billion on an enterprise basis. Accounting for estimated post-spin net debt, current shares outstanding and FX rates, we assign a fair value estimate of CHF 91 per share to post-spin NOVN. On a pre-spin basis we fairly value shares of Novartis AG at CHF 98 per share, consisting of CHF 91 per share in value from the parent company and CHF 6 per share in value from the spin company.

On September 14, 2022, Danaher Corp. (NYSE: DHR) announced that it plans to separate its Environmental & Applied Solutions segment into a standalone, publicly traded company via a tax-free spin-off. The separation is subject to customary closing conditions, such as final Board approval, an effectiveness declaration of the company’s Form 10 filing by the SEC, and an opinion on the tax-free status of the separation. The spin company will adopt the corporate moniker Veralto Corp.

The separation will be accomplished via a one-for-three share distribution of Veralto shares to DHR shareholders of record as of September 13, 2023, and is expected to be completed on Saturday September 30, 2023. Shares of Veralto are scheduled to begin trading on the NYSE under the ticker “VLTO” on October 2, 2023. “When-issued” trading for Veralto and Danaher is expected to begin on or about September 27, 2023, under respective symbols “VLTO WI” and “DHR WI.”

The decision to separate the EAS business is consistent with DHR’s history of spin-offs, including the 2015 spin-off of its communications business, which was acquired by NetScout Systems Inc. (NASDAQ: NTCT) in a Reverse-Morris Trust transaction, the 2016 separation of the company’s former Test & Measurement business into Fortive Corp. (NYSE: FTV), and the split-off of its dental business into Envista Holdings Corp. (NYSE: NVST). The Veralto spin completes DHR’s transformation into a pure-play life sciences tools and diagnostics company.

Of note, in relation to recent financial performance, certain pieces of the business are currently dealing with several headwinds. Most notably, the company continues to work through lapping COVID sales that is still declining. Secondly, management continues to deal with customers’ overstocked inventories and restricted access to capital. Management has highlighted China customers as working through inventories, resulting in decreased or canceled orders coupled with decreased funding availability to Biotechnology segment customers. Management expects these two factors to be mostly worked through during the 2H 2023. Notably, the EAS business is somewhat insulated from the headwinds that will remain with post-spin DHR.

Post-spin we would expect that VLTO would see a valuation multiple contraction to approximate more closely that of its peer se;, however, it could be argued that, given Veralto’s forecasted margin profile is roughly 300 basis points higher than peers, the company would be awarded a slight premium. Absent the lower margin Veralto business, DHR will also exhibit margins above its peers, which could also warrant a slight premium and an increase in its trading multiple versus the current level.

On a pre-spin, sum-of-the-parts basis, we fairly value shares of Danaher Corp. at $268 per share, consisting of $242 per share in value from post-spin DHR and $26 per share in value from Veralto. Given that the current share price approximates our fair value estimate, and the limited timeframe until the completion of the separation (September 30, 2023), we rate pre-spin shares of DHR at NEUTRAL. Following the spin-off, we would expect shareholder rotation out of Veralto due to the relative size difference of the post-spin entities and the differing industry end markets. Post-spin, we would favor VLTO shares at a discount to our fair value estimate given the lack of current industry headwinds facing the parent company and the current trading multiple of the pre-spin company (which implies minimal multiple expansion opportunities given peer trading). We would revisit post-spin DHR upon a contraction in the trading multiple as we do view favorably the longer-term prospect of the company, given management’s historical ability to grow revenue, earnings, and shareholder value in normal operating environments.

Masimo Corporation (NASDAQ: MASI) operates two business segments: (1) Healthcare (~62% of consolidated 2023E sales), which develops, manufactures & sells non-invasive patient monitoring devices/technologies, most notably its pulse oximeter, for professional (e.g., hospitals) and, to a lesser degree, consumer customers; and (2) Non-Healthcare (38% of 2023E sales), which develops, manufacturers & sells high-end, home audio equipment/platforms to consumers. 

Since the announcement of the ~$1.06 billion acquisition of Sound United, which became the foundation of the company’s Non-Healthcare segment, in February 2022, MASI’s share price has shed 50% (versus a 2.8% decline in the Russell 2000 and a 1.2% gain in the S&P 500), representing a more than $6.5 billion erosion in the company’s market capitalization.  In that context, we estimate at the current valuation MASI’s core Healthcare business is trading at a significant discount to peers and its own 3-, 5- and 10-year trading averages while also assigning a fraction of the value paid for the Non-Healthcare/consumer audio business. Moreover, it is evident that the broad investor criticism & precipitous market decline in the wake of the Sound United transaction set the stage for activist investor, Politan Capital, to build a ~9% stake in the company by August 2022 and gain 2 (of 5) Board seats (with ~70% of the non-insider vote) in June 2023.  Following its resounding (albeit hard fought) victory, the activist continues to push for further improvements in MASI’s corporate governance paradigm and will undoubtedly hold management accountable on (or accelerate) its commitment to a three-year time horizon before considering a divestiture of the Non-Healthcare business (assuming the strategic rationale for the deal fails to materialize). Additional catalysts could stem from new product launches, including Stork and PerL, as well as a favorable outcome in MASI’s patent infringement litigation in front of the ITC against the Apple Watch, which is set for trial in October 2023.  

Based on management guidance and commentary as well as peer and M&A valuations, MASI’s Healthcare and Non-Healthcare businesses could be valued at ~$140 per share, and ~$12 per share, respectively. Accounting for projected net debt of ~$6.50 per share yields a base case sum-of-the-parts fair value of $146 per share (with bull and bear cases of ~$159 and ~$132 per share, respectively).  Potential catalysts include the separation/monetization of assets, corporate governance improvements, favorable litigation awards, leverage reductions and/or better than expected growth & margins from new product launches. Risks include execution, competition, technological disruption, commodity & currency fluctuations, regulation, cyber threats, pandemics and/or a recession.

Novartis to Spin-Off Sandoz on or about October 4, 2023

On August 18, 2023, Novartis AG (NOVN SW, NYSE: NVS) announced the company had filed a shareholder information brochure in relation to a proposed spin-off of its generic drug business, Sandoz. NOVN will hold an Extraordinary General Meeting (EGM) on September 15, 2023, at which time investors will vote to approve the posited spin-off. If completed, the separation would be accomplished via a dividend in kind whereby NOVN shareholders of record would receive one share of Sandoz for every five shares of NOVN. The Sandoz spin-off is planned to occur on or around October 4, 2023, with a primary listing on the SIX Swiss Exchange, and an American Depositary Receipt (ADR) program in the U.S.

In 2022, NOVN generated $50.5 billion in revenue and $16.7 billion in core operating income, as compared to $51.6 billion and $16.6 billion in the prior year. As the company currently stands, NOVN reports under two segments: Innovative Medicines, which contributed $41.3 billion in revenue in 2022, and Sandoz, which registered sales of $9.2 billion in 2022.

Innovative Medicines focuses on development and marketing of novel medicines and includes treatments for cardiovascular, immunology, neuroscience, solid tumors, and hematology. Well known products include Cosentyx (marketed for psoriasis) and Entresto (chronic heart failure). Year-over-year Innovative Medicines revenue declined by 2% in 2022 as significant growth from cardiovascular products, in particular 31% growth in revenue from Entresto, was offset by generic competition for the segments more established brands (Afinito/Votubia and Gilenya). Through 1H 2023 segment revenue increased by 5% on key product strength (Entresto, Kesimpta, Pluvicto, and Kisqali), which was partly offset by generic competition. Generic competition lowered revenue grew by 5 percentage points, while pricing added an additional 3 percentage point headwind. Core operating margins widened to 36.9% in 1H 2023 versus 36.2% in 1H 2022.

Sandoz controls NOVN’s portfolio of generic pharmaceuticals and biosimilars. Sandoz revenue decreased by 4% in 2022 and operating income declined by 8% as higher investments to generate sales and inflationary costs reduced margins to 20.6% versus 21.4% in the prior year. Through 1H 2023 sales increased 4%, largely on strength in Europe on products regionally launched within the prior 12 months, which was partially offset by pricing. Sandoz 1H 2023 core operating profit declined by 2% as margins were 19.6% versus 21.2% in 1H 2022.

The separations of generics from “Innovative Medicines” follows an industry trend where pharmaceutical manufacturers separate out the lower margin and in general revenue declining generics businesses from the higher margin, higher growth potential, yet involving higher R&D expense, proprietary development businesses. Following the separation, the parent company will optically have an improved growth and margin profile, while the spin company’s dedicated capital structure will allow it to pursue attractive off-patent opportunities and return capital to shareholders.

In conjunction with NOVN’s 1H 2023 results, management updated its full year 2023 guidance to include Innovative Medicines sales growth of high single digit, and core operating income increase of low single digit to mid-teens (includes corporate expenses and excludes Sandoz contribution). Sandoz sales are expected to increase by mid-single digits, and core operating income to decline in the low double-digit range based on standalone company costs and continued inflationary pressures.

Notably, in terms of rationale, specialty pharmaceutical companies trade at a premium to generic manufacturers. NOVN currently trades at 11.6x forward EBITDA, which is roughly in line with peers such as Pfizer Inc. (NYSE: PFE) and Merck & Co. Inc. (NYSE: MRK), while generic manufacturers such as Teva Pharmaceutical Industries Ltd. (NYSE: TEVA) trade at closer to 7.0x forward EBITDA. As such following the separation it should be expected that the parent company would not see a large degree of multiple expansion, while the generics company would likely experience multiple contraction top approximate peers.

Based on 1H 2023 results, and managements guidance, we forecast that as standalone companies, Sandoz and Novartis (ex-Sandoz) will generate $1.9 billion and $17.7 billion in respective EBITDA during 2023. Valuing Sandoz at 7.0x and Novartis at 12.0x, implies post-separation enterprise values of $13.1 billion and $212.7 billion. Incorporating current net debt and diluted shares outstanding, as well as the current USD/CHF exchange rate, we preliminarily assign a pre-spin fair value estimate of CHF 92.00 per share to NOVN SW.

On June 21, 2022, Kellogg Co. (NYSE: K) announced that its Board of Directors approved a plan to separate the company into three standalone, publicly traded companies. The separation, which was posited to be completed via tax-free spin-offs, would have resulted in shareholders of record owning interests in, as referenced at the time of the announcement, “Global Snacking Co.,” “North America Cereal Co.,” and “Plant Co.” In February 2023, in conjunction with the company’s 2022 year-end results, K announced that it now plans to retain its plant-based business while spinning off just its North America cereal business. In terms of timing, management is currently targeting the spin-off to be completed by year-end 2023, subject to customary closing conditions including the final approval from the Board of Directors, an effectiveness declaration of the company’s Form 10 filing by the SEC, and receipt of a private letter ruling from the IRS in respect to the tax-free nature of the transaction, amongst others.

The spin company will control the North American Cereal business, adopt the corporate moniker WK Kellogg Co. and intends to trade on the NYSE under the symbol “KLG.” The parent company, a global snack-focused business, will change its name to Kellanova following the separation and continue to trade on the NYSE under the ticker “K.”

Management’s stated rationale for the separation largely hinges on the idea that it believes that Kellanova’s growth and margin profile has been obfuscated withing the current conglomerate structure. Following the separation, Kellanova’s superior revenue growth and margins, relative to WK Kellogg’s, will be more apparent to investors, while WK Kellogg’s dedicated sales force and management, combined with its independent balance sheet, will allow management to make investments in its supply chain to expand margins.

In theory, upon the separation, the snacks-focused growth company with higher margins should be re-rated to a higher valuation multiple while the cereal company will likely be re-rated lower. Interestingly, with K currently trading at 11.0x 2024 estimates, it approximates that of WK Kellog peers. However, given the spin company’s margin profile and goal of “stabilized” sales, the shares will trade at a discount to the group.

On a pre-spin, sum-of-the-parts basis, we fairly value shares of Kellogg Co. at $73 per share, consisting of $3.50 per share in value from WK Kellog and approximately $70 per share in value from Kellanova. With shares trading at 11.0x the current 2024 consensus EBITDA estimate, current negative volume trends across the business, and the impending separation, combined with the implied upside to our fair value estimate, we view it as prudent to rate shares of K at NEUTRAL ahead of the expected 4Q spin-off of WK Kellogg.

While we do not see a pre-spin opportunity, we do anticipate the potential for post-separation investment opportunities, depending on the ultimate initial trading range of Kellanova and WK Kellogg. Of primary interest would be if WK Kellogg experiences an initial sell-off of shares due to investors exiting the spin company ownership position in favor of maintaining a position in the more growth oriented, geographically diversified snacks company, which should pressure shares of WK Kellogg in initial trading. Additionally, given the relative estimated market capitalizations of the post-spin company’s it should be expected that WK Kellogg will not be included in the S&P 500 (K is currently a constituent and we would expect Kellanova to remain in the index), which would also create indiscriminate/forced selling by indexed investors. If shares of WK Kellogg trade at a significant discount, investors may see an opportunity to invest in a “classic spin-off” where an “unloved” and underinvested entity is able to significantly improve operations and offer significant out sized returns over the longer term. Given a separate management, focused sales force, and an independent balance sheet, if management were to successfully widen margins to approximate that of peers and delever following the investment phase, WK Kellogg could show significant earnings growth potential in the out years.