TEN Provides Spin-Off Timing Update, Evaluating Other Strategic Alternatives

• On January 7, 2020, after the market close, Tenneco Inc. (NYSE: TEN) issued a press release that detailed management changes and provided an update on the timing of the aftermarket and ride performance business (“DRiV”) spin-off.
• Effectively immediately, co-CEO and Director Roger Wood is stepping down. Wood was previously selected to become the CEO of the post-spin parent powertrain technology company (“New Tenneco”). Brian Kesseler will assume solo CEO of Tenneco while continuing to serve oversee the DRiV business.
• In addition, the company announced that given “current end-market conditions” it is no longer able to complete its planned spin-off in the previously indicated mid-2020 time frame. Management expects these prohibitive conditions to persist throughout 2020.
• The company did note that it is committed to the planned spin-off, and has completed all necessary steps for New Tenneco and DRiV to operate independently. A new time frame for completing the spin-off was not disclosed aside from “as soon as favorable conditions are present.” Management noted that it “continues to evaluate multiple strategic alternatives as well as options to deleverage”.
• TEN completed the acquisition of Federal Mogul on October 1, 2018, for an announced value of $5.4 billion in cash. As a result, TEN now carries $5.5 billion in net debt (consensus 2020 EBITDA is $1.5 billion).
• In December 2019 it was reported by The Wall Street Journal that the company had received a $4.3 billion bid for its powertrain business from Apollo Global Management (excluding certain liabilities, including pension obligations, which lowered the overall offer value). It is assumed that the bid was rejected.
• Given the high debt levels, soft light vehicle industry production, and potential suitors for the powertrain business, it appears reasonable that management delays the spin-off. A sale of the powertrain business could increase the company’s financial flexibility.
• While preliminary in nature, our latest look in terms of valuation for TEN’s spin-off suggests a combined fair value estate of $16 per share, with the Powertrain business being valued at $4.1 billion. Notably our Powertrain valuation assumed a discounted multiple to peers. Under an inline valuation scenario, a value of approximately $6 billion could be derived for the Powertrain business.
• For more details, please refer to the latest publication of The Spin-Off Report Calendar dated January 2020.

LNDC reiterates increasingly back-half weighted F2020E adj. EBITDA guidance of $36-$40 million on top-line growth of 8%-10%; leverage remains a concern, but metrics should improve in 2H F2020

• In 1H F2020 (May-ending), LNDC posted consolidated top-line growth of almost 13% to $281 million albeit with negative adjusted EBITDA of ~$1.2 million (compared with ~$7 million in the prior year period).
• Broadly, strong top- and bottom-line growth at Lifecore, which posted 24% and 67.5% growth in 1H F2020 sales and EBITDA, has been offset by margin pressure at Curation Foods (CF) due, largely, to weather-related supply headwinds (e.g. green beans) and rising raw material costs (e.g. avocados).
• LNDC’s new CEO, Dr. Albert Bolles, who took the helm in May 2019, remains keenly focused on improving margins at CF and expects to realize ~45% of the $18-$20 million of previously identified cost savings during 4Q F2020.
• In terms of F2020 guidance, LNDC reiterated its expectation for consolidated sales growth of 8%-10% with EPS and EBITDA of $0.28-$0.32 and $36-$40 million, respectively (compared with current consensus of $0.26 and $36 million).  Cash flow from operations is expected to be $26-$30 million.
• For 2Q F2020, consolidated sales are expected to be $154-$158 million with EPS of $0.06-$0.09, and adj. EBITDA of $7-$11 million (these figures compare with current consensus of $162 million, $0.20, and $14 million, respectively).
• At quarter-end, LNDC’s leverage and fixed-coverage ratios were 4.9x and 1.5x (compared with covenants of 5.0x and 1.2x), respectively. Notably, the company expects it will remain in compliance with covenants.
• Fair value is reduced to $13 per share (from $14), based on an unchanged blended multiple of ~11x on F2021 adj. EBITDA of $46.5 million and net debt of $130 million (previously $101.5 million); that said, further adjustments may be made following this morning’s conference call at 11 a.m. (ET).

TIVO to merge with Xperi; suspends plan to separate its Products & IP businesses; coverage closed

• TIVO announced plans to merge with Xperi Corporation (NASDAQ: XPER) in an all-stock transaction that is expected to close in 2Q 2020 and will result in TiVo shareholders owning ~53.5% of the combined business, which will use the Xperi corporate moniker.  Based on yesterday’s closing price, the announced transaction implies value of ~$9.50 per TIVO share.
• In management’s estimation, the ~$3 billion combined entity will generate ~$1.1 billion in annual sales, including $570 million of product licensing and $525 million of intellectual property (IP) licensing revenue, with more than $250 million of operating cash flow (and ~$32 million of cap ex requirements).  [For context, TiVo’s most recent guidance, from November 2019, called from total sales of $655-$665 million with adjusted EBITDA of $190-$200 million.]
• In connection with the merger, each company’s debt will be refinanced on a combined basis and $1.1 billion of financing has been committed by Bank of America and RBC.
• As well, TIVO has suspended its previous announced plan to pursue a tax-free separation of its Products and IP Licensing businesses; as such, coverage of TIVO will be closed, as of toady’s close.

Ecolab Modifies Spin-Off Plan; Will Now RMT Upstream Energy Business With Apergy

• On December 19, 2019, before the market open, Ecolab Inc. (NYSE: ECL) announced that the company will combine its upstream energy business with Apergy Corp. (NYSE: APY) in a Reverse Morris Trust Transaction (RMT) that is expected to be tax-free to ECL and APY shareholders.
• Previously ECL had planned on spinning off the upstream energy business to share holders as a standalone company.
• Following the transaction ECL shareholders will own approximately 62% of APY, with existing APY shareholders controlling the remaining 38% of the combined company.
• In connection with the RMT, APY will issue approximately 127 million shares to ECL shareholders of record and will assume $492 million in net debt.
• Based on yesterday’s closing price, ECL’s upstream energy business is valued at $4.4 billion, or 12.5x 2019 EBITDA. The companies expect to realize run-rate synergies of $75 million within 24 months of closing, which would lower the valuation multiple to 10.3x 2019 EBITDA.
• Assuming 2019 base revenue and earnings for Apergy of $3.5 billion and $615 million in EBITDA (assumes no synergies), and revenue growth of 3%, APY would earn $615 million before interest, taxes, depreciation and amortization. APY shares currently trade at 11.6x 2020 consensus EBITDA, which if shares continue to trade at the current multiple implies an enterprise value of $6.8 billion. Accounting for post-merger net debt of $1.1 billion and 204 million shares outstanding, APY would be fairly valued at $33 per share on a preliminary basis.
• Following the separation, ECL is forecast to generate $11.1 billion in revenue and $2.7 million in EBITDA in 2020. Valuing shares at 21x, the higher end of specialty service providers, results in an enterprise value of $56.2 billion, or $172 per share when incorporating net debt of $6.7 million and 288 million shares outstanding.
• Accounting for the 62% ownership of post-merger APY, pre-spin ECL is fairly valued at $188 per share on a preliminary basis.

Drop Coverage of TiVo Effective Immediately

• On December 19, 2019, TiVo Corp. (NASDAQ: TIVO) announced an all-stock merger with Xperi Corp. (NASDAQ: XPER), valuing the combined company at an enterprise value of approximately $3 billion. 
• Given the proposed merger, TIVO is no longer pursuing a separation of its products business. As such, we DROP coverage effective immediately.
• Our prior estimates and fair values for TIVO should no longer be relied on.

Arconic Files Form-10 for Spin-Off of Global Rolled Products Business

On December 17, 2019, Arconic Inc. (NYSE: ARNC) filed an initial Form-10 with the SEC associated with the spin-off of Arconic Corporation, which will hold the businesses currently comprising Arconic Inc.’s Global Rolled Products (GRP) segment (Rolled Products, Extrusions, and Building and Construction). The businesses currently comprising Arconic Inc.’s Engineered Products and Forgings segment will remain in the existing company, which will be renamed Howmet Aerospace Inc. upon separation. The tax-free separation is expected be completed in the second quarter of 2020.

Arconic, with consolidated 2018 revenues of $14 billion, specializes in lightweight metals engineering and manufacturing. The company’s products, which include aluminum, titanium, and nickel, are used worldwide in aerospace, automotive, commercial transportation, packaging, building and construction, oil and gas, and industrial applications. Arconic’s operations consist of two reportable segments: 1) Global Rolled Products, which manufactures aluminum sheets and plates for the aerospace, automotive, commercial transportation, packaging, building and construction, and industrial products end markets; 2) Engineered Products and Forgings (EP&F), which manufactures fastening systems, forged jet engine and other components primarily for aerospace, industrial, commercial transportation, and power generation end markets. (Prior to 3Q 2019 the company reported a third segment, Transportation and Construction Solutions, which has been folded into GRP and EP&F).

Arconic separated from aluminum producer Alcoa Corp. (NYSE: AA) in November 2016 as part of a strategy pursued by then-CEO Klaus Kleinfeld to invest in finished products and dissociate the company from its tight correlation with the commodity cycle. The separation of the GRP business follows the rejection of a $10 billion offer for the entire company by private equity firm Apollo Global Management LLC in January of this year, a proxy contest against the company by hedge fund Elliott Management, and Kleinfeld’s abrupt departure after allegations of lackluster stock performance, missed profit forecasts and inefficient spending. Under current management, Arconic has been in the midst of a broader portfolio review to maximize shareholder value. In addition to the separation, Arconic has previously indicated it will also consider the sale of businesses that do not best fit into engineered products & forgings or global rolled products. The company also plans to reduce operating costs by approximately $200 million on an annual run-rate basis.

PRELIMINARY VALUATION

Shares of Arconic currently trade at 7.3x 2021 consensus EBITDA– roughly in line with GRP segment competitors, which on average trade around 7.0x. Howmet competitors trade at a premium to current ARNC given differentiated products and wider margins. The aerospace supplier comp group trades on average at ~10.5x 2021 consensus. If shares of the parent company are sufficiently rerated higher from the transaction, and the spin company is able to improve margins from recent performance, the transaction has the potential to unlock a modest amount of value.

In 2018, the spin company (“New Arconic”) generated $7.4 billion in revenue, an increase of 9.1% versus the prior year period, according to the company’s Form 10 filing. Through 3Q 2019 New Arconic revenue has declined by 1.1% versus the first nine months of 2018. Assuming a 2% revenue decline in 2019, flat revenue in 2020, and a 2% increase in 2021 the company would generate $7.4 billion in sales. In 2018 New Arconic would have earned approximately $542 million of EBITDA, representing a 7.3% margin. Notably through 3Q 2019 the company would have generated 8.4%. Based on ARNC’s prior segment reporting the Global Rolled Products business generated segment level EBITDA of 11.9%. 8.5% and 6.9% in 2016 through 2018. It appears reasonable to assume as a standalone company could operate with margins approximating 11% in 2021 when incorporating standalone corporate expense and the rebound in sales. Under these assumptions, New Arconic would generate EBITDA of $818 million. If shares were valued at 7.0x, the spin company would have an enterprise value of $5.7 billion.

Excluding the revenue contribution of the spin company, Howmet Aerospace would have recorded 2018 revenue of $6.6 billion. Modeling 5% sales growth in 2019, and 3% annually in 2020 and 2021, Howmet could generate sales of $7.4 billion in 2021. Assuming a 23% EBITDA margin, the company’s EBITDA would approximate $1.7 billion. Peers to the aerospace supplier business trade on average at 10.5x 2021 consensus, which implies an enterprise value of $17.8 billion for Howmet. Incorporating $8.1 billion in net debt, which includes ~$2.8 billion in unfunded pensions and related obligations, and 432.9 million shares outstanding, a preliminary pre-spin, sum-of-the-parts fair value estimate of $36 per share is derived.

DuPont to Spin Off Nutrition & BioSciences, RMT N&B with IFF

On December 16, 2019, DuPont de Nemours Inc. (“DuPont”) (NYSE: DD) announced a definitive agreement to spin off its Nutrition & Biosciences (N&B) business, which will be acquired by International Flavors and Fragrances Inc. (“IFF”) (NYSE: IFF) in a Reverse Morris Trust (RMT) transaction. The transaction values the combined company at $45.4 billion on an enterprise value basis, reflecting a value of $26.2 billion for the N&B business based on IFF’s share price as of December 13, 2019. Under the terms of the agreement, DuPont shareholders will own 55.4% of the shares of the new company and existing IFF shareholders will own 44.6%. Upon completion of the transaction, DuPont will receive a one-time $7.3 billion special cash payment, subject to certain adjustments. The spin-off of the N&B business, which is expected to be tax-free to shareholders, is expected to be completed by the end of the first quarter of 2021.

The combination of IFF and N&B creates a global leader in high-value ingredients and solutions for global Food & Beverage, Home & Personal Care and Health & Wellness markets, with estimated 2019 pro forma revenue of approximately $11 billion and EBITDA of $2.6 billion (EBITDA margin of approximately 23%), excluding synergies. The combined company will have leadership positions across key Taste, Texture, Scent, Nutrition, Enzymes, Cultures, Soy Proteins and Probiotics categories. IFF expects to realize cost synergies of approximately $300 million on a run-rate basis by the end of the third year post-closing. In addition, the combined company targets over $400 million in run-rate revenue synergies, which would result in more than $175 million of EBITDA, driven by cross-selling opportunities and a broader customer base. Separately, IFF confirmed its 2019 full-year guidance for revenues of $5.15 billion- $5.25 billion, adjusted EPS of $4.85-$5.05 and adjusted EPS (excluding amortization) of $6.15-$6.35.

For DuPont, the spin-off of the N&B business is another step in the company’s complex restructuring following the breakup of chemical giant DowDuPont. As background, the current DuPont Inc. is the result of the spin-off Dow Inc. (NYSE: DOW) which took place in April of this year, followed by the spin-off of the agriculture business, Corteva Inc. (NYSE: CTVA) in June. The transaction underscores the consolidation of the food-flavoring industry, as growth appears to be slowing and flavor manufacturers struggle with volatile raw-materials prices. DuPont is also said to be exploring further refinement of the business—specifically a potential divestiture of its Transportation business. Following the spin-off of the N&B business, DuPont will remain a global leader in technology-based materials. The post-spin company will be comprised of three business segments: 1) Electronics & Imaging , which supplies materials to manufacture photovoltaics and solar cells; materials and printing systems to the advanced printing industry; and materials and solutions for the fabrication of semiconductors and integrated circuits; 2) Transportation & Advanced Polymers, which manufactures engineering resins, adhesives, lubricants, and parts to engineers and designers in the transportation, electronics, healthcare, industrial, and consumer end-markets; and 3)  Safety & Construction, which  provides engineered products and integrated systems for construction, worker safety, energy, oil and gas, transportation, medical device, and water purification and separation industries.

PRELIMINARY VALUATION

In the companies’ current form, the N&B business, whose peers generally receive a premium valuation multiple versus specialty chemical peers, is being valued at a discount within DD’s larger structure. For its part IFF currently trades at 13.6x 2021 consensus EBITDA with peers averaging almost 17.5x 2021 consensus EBITDA while DD currently trades at 10.1x 2021 EBITDA. Anecdotally management did note that the acquisition price for the merger equates to about 18x EBITDA. We expect that IFF’s discount would narrow following the merger with N&B as the company exploits opportunities for revenue and cost synergies from the business combination as well as from the acquisition of Frutarom in late 2018. It is estimated that on a pro forma basis IFF would operate with an EBITDA margin of approximately 24% with opportunities to widen to 26% by the end of year three based on approximately $300 million in cost and $400 million in revenue synergies.

Following the separation, it can be estimated that IFF can grow revenue in the low-mid single digit range while expanding margins from the noted synergies. Estimating revenue of $12.9 billion in 2021 and EBITDA margins of 24.5%, the company would generate $3.2 billion in EBITDA in 2021. Assuming shares begin to receive a multiple closer to in line with peers of 15.0x (low end of peers), and post-merger net debt of $11.3 billion (includes $7.3 billion dividend to DD), and shares outstanding of 239.4 million (includes 132.6 million issued to DD shareholders), International Flavors and Fragrances would be fairly valued at $151 per share.

Absent N&B, DD would have generated approximately $16.4 billion in revenue in 2018. Through 3Q 2019 the company has seen year-over-year revenue declines in the mid-single digit range. Assuming a revenue decline of 7% in 2019, 3% in 2020 and flat in 2021, DD would generate sales of $14.8 billion in 2021. Assuming margins of 27% (roughly inline with where the company currently operates on a pro forma basis) DD ex-N&B would earn $4.0 billion before interest, taxes, depreciation, and amortization. Assuming DuPont’s multiple remains about the same at 10x, and accounting for post-spin net debt of $8.7 billion and shares outstanding of 740.8 million, post-spin shares of DD would be fairly valued at $42 per share. Incorporating the 55.4% ownership of post-merger IFF, pre-spin shares of DD are fairly valued at $69 per share.

Online Spin-Off Tracker: Real-Time Tracking of All Spin-Off Announcements, Form-10 Filings, and Recently Completed Spin-Offs, with market prices compared against The-Spin-Off Report’s fair value estimates to highlight investment opportunities.

NPO agrees to sell its Power Systems business (aka Fairbanks Morse) to Arcline Management for $450 million; re-affirms 2019 EPS guidance of $3.90-$4.04

• EnPro has agreed to sell its Fairbanks Morse engine business, which comprised the Power Systems segment, to private-equity firm Arcline Investment Management for $450 million or ~10.5x 2019E adjusted EBITDA. (Notably, the sale price compares with our previous ~$500 million valuation, which was derived with an 8.5x multiple on 2021E EBTIDA of $59.5 million.)
• The deal is expected to close in 1Q 2020 and net after-tax proceeds of ~$375 million.  Funds are expected to be used to reduce debt, bringing NPO’s net leverage ratio to ~1.1x (from 2.6x at the end of 3Q 2019), as well as fund future acquisitions (targeted in the core SP & EP businesses) and share repurchases (~$35 million available on of current authorization).
• Concurrently, the company re-affirmed its full-year 2019 EPS guidance of $3.90-$4.04 per share, including Power Systems as a discontinued operation (see Exhibit #1 on page #2).
• At least initially, our fair value estimate, accounting for the sale of the Power Systems segment, moves to $74 per share (from $80 per share), reflecting a blended multiple of ~7.5x on 2021E EBITDA of ~$200 million (see Exhibit #2 on page 2).  That said, we will likely make further adjustments following this morning’s conference call and/or our discussions with management.

CNDT to move listing to NASDAQ (from NYSE) on December 23^rd; we continue to see myriad options to unlock value as strategic review is completed in 4Q 2019/1Q 2020

• Conduent announced that it would move its listing to the NASDAQ exchange (from NYSE), effective December 23^rd; the company will retain the CNDT ticker.
• Unrelatedly, management recently noted that it would complete the on-going strategic and operational review (disclosed August 2019) in late 4Q 2019 or 1Q 2020 with any potential divestiture actions likely in 1H 2020.
• On the topic of potential divestures, management is looking to monetize assets that could command a premium valuation from third-parties due to their scale and scarcity value, are undeforming and/or reduce portfolio complication.
• Specifically, it has been reported in the business press that CNDT has been exploring the potential monetization of both its Transportation segment as well as its BenefitWallet business (within Commercial Industries).
• The use of potential proceeds could include debt reduction, share repurchases and/or strategic M&A; regardless, the company targets a net leverage ratio of ~2.0x by year-end 2019 (versus 2.5x at the end of 3Q 2019 and its 3.75x covenant).
• On the fundamental front, in November 2019, CNDT reaffirmed its 2019 guidance calling for consolidated sales to decline 4%-5% with adj. EBITDA margins of 10.8%-11.6%, implying adj. EBITDA of $480-$510 million.
• For 2020, the company expects consolidated sales will decline 4%-6%, including the 3% impact of the California MMIS contract loss, with flat margin and free cash flow conversion profiles. (By segment, Transportation is expected to see low-single digit top-line growth while sales declines will moderate and accelerate at Commercial and Government, respectively.)
• Our fair value estimate remains ~$8.50 per share, reflecting a blended multiple to ~7x on 2020E adj. EBITDA of ~$447.5 million and net debt of $1.29 billion.

TEN Reportedly Receives a Bid for its Powertrain Business, According to WSJ

• Tenneco Inc. (NYSE TEN), according to The Wall Street Journal, has recently received a bid for its powertrain business from Apollo Global Management.
• The bid reportedly totaled around ~$4.3 billion but excluded certain liabilities, including pension obligations, which lowered the overall offer value. As such, TEN seemingly rejected the bid.
• Notably, shares of Tenneco are up approximately 9% on the news.
• In April 2018, TEN announced the company planned on spinning-off its Aftermarket & Ride Performance Business from its Powertrain operations. The spin announcement was made in conjunction with TEN disclosing that it would acquire Federal-Mogul Corp. from Ichan Enterprises L.P. (The acquisition was completed on October 1, 2018 for total consideration of approximately $5.6 billion in cash and stock.)
• Since the initial spin announcement, shares of TEN have declined nearly 75% (priced to last night’s close), while the S&P 500 has increased 20% over the same period of time.
• TEN’s poor share price performance appears at least in part due to TEN having trouble completing the proposed spin-off due to its increased debt levels (current net debt of $5.85 billion) and a slowdown in the auto industry.
• If a bid were made it may prove timely and a boost to TEN shares while negating the need to spin-off the Aftermarket business. However, given TEN’s share price performance it is reasonable to think management may be hesitant to sell the business at what could be viewed as a bargain price.
• While preliminary in nature, our latest look in terms of valuation for TEN’s spin-off suggests a combined fair value estate of $16 per share, with the Powertrain business being valued at $4.1 billion. Notably our Powertrain valuation assumed a discounted multiple to peers. Under an inline valuation scenario, a value of approximately $6 billion could be derived for the Powertrain business.
• For more details, please refer to the latest publication of The Spin Off Report Calendar dated December 2019.