APi Group Corp. (NYSE: APG) operates two business segments: (1) Safety Services (69.5% of sales and 73% of adj. EBITDA in 2022), which designs, installs, inspects, monitors, repairs and services occupancy systems, including fire safety, electronic security & HVAC systems; and (2) Specialty Services (30.5% of sales and 27% of adj. EBITDA), which provides similar services for critical infrastructure, including electric, gas, water, sewer & telecommunications lines.

APG operates an asset-light, variable cost, recession resistant/statutorily mandated business that we estimate possesses mid-to-high single digit underlying organic growth prospects along with numerous tuck-in M&A opportunities in a fragmented market as well as a clear path to ~300 basis points of incremental margin improvement over the next 2-3 years (primarily from growth in higher margin/recurring service businesses as well as from synergy opportunities at the recently acquired Chubb Fire & Safety business). Moreover, with shares trading at ~9x 2024E EV/EBITDA and a free cash flow yield of ~10% APG trades at a significant discount to publicly traded peers, which trade at EV/EBITDA multiples of nearly 14x and FCF yields of ~3.5%, as well as relevant private market transaction valuations, which have averaged ~16x EV/EBITDA in recent years. In addition to the fundamental upside we see for shares as management executes on its growth/margin improvement initiatives, we also see the potential for APi to separate/monetize its Specialty Services segment, via spin-off or sale. In our estimation, such a transaction would unlock value and/or provide APG with incremental capital to either rapidly de-lever, pursue accretive tuck-in M&A and/or be returned to shareholders via share repurchases (while also increasing investor/management focus on the higher margin/faster growing Safety Services business). On the latter point, recent commentary suggests “everything is on the table”, in terms of unlocking value for shareholders.

Based on management guidance and commentary as well as peer and M&A valuations, APG’s Safety Services and Specialty Services businesses could be valued at ~$34 per share, and $7 per share, respectively. Accounting for corporate costs and projected net debt of ~$11 per share yields a base case sum-of-the-parts fair value of $30 per share (with bull and bear cases of ~$36.50 and ~$23.50 per share, respectively).

Potential catalysts include the separation/monetization of assets, accretive M&A, share repurchases, leverage reductions and/or better than expected growth and margins. Risks include management execution, competition, commodity & currency fluctuations, regulation, geopolitical disruptions and/or a recession.

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Madison Square Garden Entertainment Corp. (NYSE: MSGE) plans on spinning off its traditional live entertainment business from the MSG Sphere, Tao Group, and Networks businesses. The spin-off would be accomplished via a pro-rata distribution, to both MSGE Class A and Class B common stockholders, of shares in the spin company, to be equivalent, in aggregate, to approximately two-thirds economic interest in the spin company. Following the transaction, the spin company will retain the MSG Entertainment corporate moniker. The parent company will be renamed MSG Sphere Corp. and will retain a one-third economic interest in the spin company. If completed, it is expected that the spin-off transaction would be tax-free to MSGE shareholders.

The live entertainment entity would include the company’s portfolio of performance venues, including Madison Square Garden, Radio City Musical Hall, The Beacon Theater and The Chicago Theater, the entertainment & sports bookings business, and the Christmas Spectacular production. Meanwhile the parent would retain the MSG Sphere, which is a state-of-the-art entertainment facility being constructed at the Venetian Hotel in Las Vegas, NV (with expected completion in 2H 2023), a 67% interest in Tao Group Hospitality, which operates entertainment & dining brands, including Tao, Marquee, Lavo, Beauty & Essex, Cathedrale, Hakkasan and Omnia, along with the MSG Networks business, which owns two regional sports & entertainment networks, as well as an approximately 1/3 interest in the spin company. (Management suggests that the retained ownership in the SpinCo would be used for either a tax-free exchange offer for MSG Sphere common shares to raise capital or be distributed to MSG Sphere shareholders in a follow-on pro rata spin-off). It should be noted, for context, that the MSG complex has a long history of conducting tax-free spin-offs, most recently with the separation of MSG Sports (NYSE: MSGS) and MSGE in April 2020.

The proposed separation comes as MSGE nears the completion of its new state of the art Sphere arena in Las Vegas, Nevada, which was originally announced in 2018.  The project’s budget increased from an initial estimate of $1.2 billion to the current expected cost of approximately $2.2 billion. Management has made serval key decisions in an effort to increase the cash flows necessary to fund the project; however. the company has also taken on an increased debt load to fund the project. Notably, MSGE was separated from the sports business in 2020, which resulted in a significant net cash balance to fund construction.  Subsequently, the company acquired MSG Networks (in an all-stock deal), seemingly to harness its cash flow generation to further fund operations and construction. Nonetheless, given the significant negative impact the COVID-19 pandemic had on MSGE’s operations, the company now carries a significant net debt position.

The proposed spin-off will separate the fairly stable entertainment and bookings business along with the highly valuable Madison Square Garden arena, from a business that is in transition as it looks to stabilize subscriber count at Networks and an unproven Sphere arena. (Management has indicated it is looking to sell its ownership position in Tao).

On a pre-spin, sum-of-the-parts basis, we assign a fair value estimate of $75 per share to Madison Square Garden Entertainment Corp. Our fair value estimate includes $34 per share in value from the parent company (MSG Sphere), and $41 per share in value derived from New MSGE. Given the implied upside from the current share price, combined with our view that MSGE’s assets are undervalued within the current corporate structure, we recommend shares of MSGE prior to the spin-off. Following the separation, we expect investor skepticism surrounding MSG Sphere’s as yet unproven ability to drive profitable revenue at the Las Vegas Sphere will likely weigh on shares, at least initially. That said, we think longer term investors that believe in the Sphere concept could see significant returns over time if the company is able to execute on its strategy to maximize utilization at the facility.

On March 30, 2022, before the market open, Crane Holdings Co. (NYSE: CR) announced that its Board of Directors had approved a plan to spin off its Aerospace & Electronics (AE) and Process Flow Technologies (PFT) businesses into a separately traded, standalone public company. The separation, if completed, is expected to be accomplished via a tax-free distribution of the Aerospace & Electronics and Process Flow Technologies businesses to CR shareholders. Following the transaction, which is expected to be completed within approximately 12 months from the announcement, CR shareholders will own 100% of the new entity.

Following the transaction, the parent company will control the Payment & Merchandising Technologies (PMT) business, as well as the Engineered Materials (EM) segment; it will change its corporate name to Crane NXT and is expected to trade on the NYSE under the symbol “CXT.” The spin company will retain the former corporate name Crane Co. and the “CR” ticker on the NYSE. In connection with the spin-off, it is expected that Crane Co. will issue $300 million in debt, with the proceeds being retained by Crane NXT. CR shareholders of record as of March 23, 2023, will receive one share of Crane Co. for every share of Crane Holdings Co. held. Crane Co. common stock is expected to be distributed on April 3, 2023, with regular-way trading commencing on April 4, 2023.

In terms of rationale, management clearly believes that by separating the PMT business from the AE, PFT, and EM segments, the market will more easily be able to compare both companies to their respective peer sets. Management has historically compared the relative valuation of CR to the S&P Midcap 400 Capital Goods Index, and noted that over the prior 10-year period, the stock traded on average at a 3-turn discount on a forward EV/EBITDA basis. Further, the company noted that since 2019, the discount had widened to above 3x. The current discount to the index has narrowed and is now approximately 1 turn.

The crux of management’s argument for separating the PMT business is rooted in its belief that the spin company will attract a more focused investor base that will re-rate the stock to more accurately reflect the growth, margin, and technology attributes of the business. Management believes that Crane NXT is most comparable to SMID-cap industrial technology companies, which have historically traded in the low- to mid-double digit range on forward EV/EBITDA. Historically, sell-side coverage has looked more toward traditional payment companies that trade in the mid-single digit range as a proxy for valuing PMT within the current conglomerate structure.

The ultimate success of the spin-off in terms of creating shareholder value will be dependent on the re-rating of Crane NXT. While it is our opinion that the business attributes of the PMT business warrant a premium multiple to traditional payment peers, it remains unclear what the actual market multiple will be. It is probable that the shares will trade lower in initial trading, as a lack of analyst coverage and shareholder rotation out of the parent company are likely to depress the shares. Following initial trading, Crane NXT will become a “show me” story, where management probably will have to more clearly articulate its business and growth strategies, along with meeting its financial targets, before a fully SMID-cap industrial technology multiple could be awarded. That said, we see value in Crane NXT and expect that over time, the market will expand the multiple awarded to the shares.

Shares of CR currently trade at 9.2x the consensus 2024 EBITDA estimate. Following the separation, Crane Co. will be compared directly to flow control and aerospace part supplier peers, which respectively trade at 13.0x (in a range of 9x–18x) and 10.5x (in a range of 8x-15x) the consensus 2024 EBITDA estimate. If we assume CR shares currently assign weighted peer multiples (based on 2022 adjusted operating income contribution) to AE and PFT, this implies that Crane NXT is valued at 7.1x, which would be slightly ahead of the aforementioned “traditional payment” peers, yet below the SMID-Cap industrial technology group. (It should be noted that over the past five- and ten-year periods, shares of CR have traded, on average, at 8.2x.)

On a pre-spin, sum-of-the-parts basis, we assign a fair value estimate to Crane Holdings Co. of $132 per share, consisting of $74 per share in value from new Crane Co. and $58 per share in value from post-spin Crane NXT (see Exhibit 18). Given the implied upside to our fair value estimate, combined with our favorable outlook on an eventual re-rating of Crane NXT, we recommend shares of CR ahead of the planned separation.

IAC Inc. (NASDAQ: IAC), a media and interactive commerce conglomerate, is currently comprised of holdings in two public companies, including stakes of ~84% and ~17% in Angi Inc. (NASDAQ: ANGI) and MGM Resorts International (NYSE: MGM), respectively, a minority investment in privately-held car sharing company, Turo, as well a collection of operating assets that are broadly reported under three business segments:

(1) Dotdash Meredith, a leading digital & print publisher;

(2) Search, which primarily consists of Ask Media Group;

(3) Emerging & Other, which is most notably comprised of the company’s Care.com and Vivian Health businesses as well as Mosaic Group, The Daily Beast, IAC Films and an incubator platform, dubbed Newco (which currently has early stage businesses spanning the social gaming, telemedicine, home services, social networking and online recruiting sectors).

IAC has a long history of value unlocking transactions, in which it has typically acquired relatively nascent businesses, grew them, both organically & by acquisition, and ultimately monetized them via spin-off or sale, including, among others, Ticketmaster, ILG, Lending Tree, HSN, Expedia, TripAdvisor, Trivago, Match Group, Angi, Inc. and, most recently, Bluecrew. In our view, shares are currently undervalued with the implied value of its private holdings (or the so-called “stub”), based on the current market prices of its public holdings inclusive of net debt, at $1.06 billion, which is notably the lowest implied value seen over the last two years and well below our $3.23 billion fair value estimate.

In terms of its private holdings, based on IAC’s guidance & commentary, as well as peer and M&A valuations, we value Dotdash Meredith at $26 per share and Emerging & Other at $10 per share, which awards per share values of $7 and $3 to Care.com and Vivian Health, respectively, while assigning zero value to the other businesses (i.e., Mosaic, The Daily Beast, IAC Films & Newco).  Search’s profits are assumed to partially offset corporate costs while Turo is valued at ~$3 per share. For its public holdings, based on the current market prices, we value ANGI at ~$11 per share and MGM at ~$25 per share.  Accounting for remaining corporate costs as well as net debt yields a total sum-of-the-parts value of ~$67 per share (with bull and bear cases of ~$92 and ~$43 per share, respectively).

Potential catalysts include the spin-off or sale of businesses, better than expected growth/margins, and/or accretive capital allocation (i.e., share buybacks and M&A).

On May 5, 2022, before the market opened, Vista Outdoor Inc. (NYSE: VSTO) announced that its Board of Directors approved a plan to spin off its Outdoor Products segment into a separate, independent, publicly traded company. The spin-off is expected to be tax-free to shareholders and is currently targeted to be completed in the calendar year 2023, subject to customary closing conditions including an effectiveness declaration of a Form 10 filing with the SEC, and final Board approval. Today, the company operates under two segments, Sporting Products (57% of revenue in F2022) and Outdoor Products (43% of revenue in F2022), which, on a consolidated basis, generated $3.0 billion in revenue and $730 million in adjusted EBITDA in March-ending F2022.

The separation accomplishes two main objectives. First, the separation of the Sporting Products (“SP”) business (firearms ammunition) from Outdoor Products should rectify the heavily discounted multiple that has persistently weighed on VSTO shares. Outdoor Products’ potential shareholder base should significantly increase as well. Secondly, separate capital structures will allow for a more efficient use of cash flow. Outdoor Products will continue to pursue a roll-up strategy and investments in new products under its existing brands, while SP will prioritize debt reduction, dividend payment, and share repurchases.

• On November 9, 2021, General Electric Co. (NYSE: GE) announced plans to spin off its Healthcare business and its Renewable Energy and Power Businesses, resulting in three publicly traded, standalone companies. As the plan is currently posited, GE expects to spin off Healthcare in early 2023 and Renewable Energy and Power in early 2024, with the separations being completed as tax-free distributions to GE shareholders. Following the separations, General Electric will retain its corporate name and will control the current Aviation business. GE plans to retain a 19.9% ownership stake in GE HealthCare.

• Shares of GE HealthCare are expected to be distributed on January 3, 2023, after the market close and begin trading on January 4, 2023. GE shareholders of record as of December 16, 2022, will receive one share of GE HealthCare for every three shares of GE owned. GE HealthCare will trade on the NASDAQ under the symbol “GEHC.”

• The announced spin-off transactions do not come as a complete surprise. GE stock has been under pressure for several years as lower sales, an inflated cost structure, significant debt (including pension obligations), and a lack of cash flow have led pundits to suggest that the sum of the company’s parts was worth more than the value the market has awarded it as a conglomerate. In terms of rationale, management cites increased strategic focus, allowing for company-specific growth opportunities that may not be available in the current conglomerate structure. The transactions follow a years-long industry trend of large industrial conglomerates separating into more focused entities, which has included the breakup of multi-industry companies such as ITT Corp., Tyco International, Ingersoll Rand plc (NYSE: IR), Dow, DuPont (NYSE: DD), and Danaher, among others.

• On April 28, 2022, after the market close, Fortune Brands Home & Security Inc. (NYSE: FBHS) announced that its Board of Directors had authorized the company to pursue a tax-free spin-off of its Cabinets business. It was posited that the separation, if completed, would be consummated in approximately 12 months from the announcement, implying a 2Q 2023 distribution to shareholders. However, the company has more recently stated that it is ahead of schedule and is targeting a completion of the separation by year-end 2022. The transaction is subject to customary closing conditions, including an effectiveness declaration of a Form 10 filing with the SEC and final Board approval.

• The spin company will adopt the corporate moniker MasterBrand Inc. and is expected to trade on the NYSE under the ticker “MBC.” Shares of MBC will be distributed to FBHS shareholders on a one-for-one basis. The company does not intend to pay dividends, a departure from FBHS’s policy, which is to pay a regular quarterly dividend.

• As the company stands today, FBHS operates under three reporting segments: Water Innovations (formerly Plumbing; 36% of sales), Outdoors & Security (27% of sales), and Cabinets (37% of sales). Following the separation, MasterBrand, as a pure-play cabinet company, will give investors exposure to the leading cabinet company in North America, which exhibits a lower growth profile than the current corporate rate, while the parent company’s Water Innovations and Outdoors & Security segments’ top-line growth will improve as they capitalize on current housing market trends, such as limited existing homes available for sale and an increasing rate of homeownership.

• Regarding the rationale for the separation, it appears that FBHS is looking to shed the slower-growth and lower-margin Cabinets business to allow for a better growth and margin profile at the remaining parent company. The Cabinets segment has experienced several hundred basis points lower growth in sales, albeit partially from acquisitions in other segments, than Water Innovations and Outdoors & Security, and it operates with margins approximating 10%, while Outdoors & Security and Water Innovations operate with margins of approximately 15% and 23%, respectively. Following the separation, the parent company should see a higher revenue growth rate and overall margin profile, which we would expect to allow for a rerating of FBHS to more closely resemble its peer group’s multiples. For reference, FBHS currently trades at 8.7x the 2023 consensus EBITDA estimate, while its best comparison for the Cabinets business trades at 6.4x the comparable measure, and the parent company comparables trade, on average, at 10.0x 2023E consensus EBITDA. Given the relative trading ranges, we would expect MasterBrand to trade down in terms of multiple and the parent company to experience multiple expansion.

• On a pre-spin basis, shares of Fortune Brands Home & Security are fairly valued at $76 per share, consisting of $13 from Master Brand, and $63 from post-spin FBHS. We rate pre-spin shares of Fortune Brands Home & Security at BUY. We believe the company has competently managed the current commodity price environment through price increases while maintaining demand, and we would expect that as interest rates rise, customers will continue to be driven to the repair and remodel market as opposed to new home construction. Further, the company’s portfolios of leading brands position it well for 2023, when inflation pressures should begin to subside, albeit more likely in the back half of the year.

SNC-Lavalin (TSE: SNC), a professional services and project management (PS&PM) company, operates five core business segments, including (1) Engineering Services, (2) Nuclear, (3) Operations & Maintenance (O&M), and (4) Linxon, which are collectively referred to as SNCL Services, as well as (5) Capital, which, in part, includes a portfolio of investments in infrastructure assets, most notably a 6.76% stake in Highway 407 ETR, a tollway connecting the greater Toronto area. The remaining (non-core) segment, Lump-Sum Turnkey (LSTK) Projects, has been in run-off since mid-2019 and is primarily comprised of three legacy construction projects, of which two will be completed in 2023 (with the bulk of the actual physical work being finished in late 2022) and the last in 2024.  In our view, SNC shares are undervalued relative to the underlying value of the SNCL Services business and the Capital segment’s portfolio of investments, most notably SNC’s stake in the Highway 407 tollway.

We think the ongoing wind-down and ultimate completion of the all company’s legacy LSTK projects, which have been a significant drag on overall profitability in recent years (but where the incremental financial risk, excluding overhead costs, is estimated to be capped at ~$225 million), should precipitate a re-rating of SNC shares more in line with PS&PM peers, such as WSP Global (WSP CN) and Stantec Inc. (STN CN), which trade at ~11x 2024E EBITDA (compared with SNC’s current valuation of less than 8.0x). Additionally, we estimate the value of its stake in the Highway 407 tollway could itself be worth ~$10 per share after-tax, based on recent transactions (including SNC’s own sale of a ~10% stake in the project in August 2019 and the Chicago Skyway transaction in September 2022). Based on management guidance and commentary as well as peer and M&A valuations, SNC’s SNCL Services business and the Capital segment’s portfolio of investments could be valued at $45 per share and ~$10 per share, respectively. Accounting for projected future losses from LSTK Projects, corporate costs, projected net debt, and non-controlling interest of ~$17.50 per share yields a base case sum-of-the-parts fair value of $37.50 per share (with bull and bear cases of ~$47 and ~$27 per share, respectively).  Potential catalysts include the roll-off/completion of unprofitable legacy LSTK contracts, the opportunistic monetization of capital investments, better than expected growth/margins at the core SNCL Services business, and/or accretive tuck-in M&A. Risks include management execution, raw material/cost inflation, leverage, competition, currency fluctuations, regulation, legal liability, labor issues, pandemics and/or a recession.

On July 19, 2022, before the market open, Jefferies Financial Group Inc. (NYSE: JEF) announced plans to separate its oil and gas exploration & production business, Vitesse Energy, into a standalone, publicly traded company via a tax-free spin-off. The separation is expected to be completed prior to year-end 2022. The planned spin-off, along with the completed sale of Idaho Timber, and together with management’s plans to merge Jefferies Group LLC into Jefferies Financial Group Inc., will allow the companies to meet SEC requirements for duplicate filings, and eliminate the need to report Merchant Banking as a separate reportable segment. The merger part of the transaction was completed on November 1, 2022. Post-spin and sale, the legacy Merchant Banking portfolio’s net book value will decline to under $1 billion (from approximately $1.6 billion).

Today, JEF describes itself as being “engaged in investment banking and capital markets, and asset management. The company is currently focused on building out its investment banking division, capital markets business, and alternative asset management.” Additionally, JEF has a legacy portfolio of businesses and investments, many of which are related to the operations of Leucadia, which the company classifies as its “Merchant Banking” business. JEF is in the process of liquidating these assets or transferring them into the asset management arm of JEF.

We approach our valuation under the assumption that little to no value is currently being attributed to Vitesse Energy within the current JEF stock price. Further, we view the current JEF shareholder base as unlikely to have meaningful interest in holding shares of the oil and gas entity following the distribution, as their probable reason for owning Jefferies is for the financial market exposure. Under these assumptions, we do not expect a significant move in JEF’s share price following the distribution, and we anticipate significant volatility in shares of Vitesse as JEF shareholders rotate out of the distributed shares, with little to no traditional sell-side coverage being assumed in the near term. That combination of factors may present an opportunity to buy VTS at a steeply discounted price relative to the assets that the company owns.

On a pre-spin basis, we fairly value shares of Jefferies Financial Group at $38 per share. Given limited upside to fair value from the current market price, we rate pre-spin JEF shares at NEUTRAL. Following the separation, we will reassess our recommendation and would become incrementally more positive on both spin and parent companies if they were to trade at a significant discount to peers on book and earnings valuation metrics.