United Technologies and Raytheon to Combine Aerospace Businesses; Planned Spin-Offs of Otis and Carrier Remain on Track; Merger Expected to be Completed in 1H 2020, Following Spin-Offs

• On June 9, 2019, United Technologies Corp. (NYSE: UTX) and Raytheon Co. (NYSE: RTN) announced plans to combine their respective aerospace businesses in a merger of equals. Previously, UTX had announced plans to separate its portfolio into three businesses by spinning off its Carrier HVAC, and Otis Elevator businesses into separate, stand-alone public companies. The merger with RTN is expected to be completed in 1H 2020 after the spin-offs, which are currently contemplated to be completed at the end of 1Q 2020.
• Under the terms of the proposed merger, UTX shareholders will own approximately 57% of the combined entity, with RTN shareholders owning the remaining 43% of the new entity, which will adopt the corporate moniker Raytheon Technologies.
• Management highlights the significant number of synergies between the UTX aerospace business and RTN as a rationale for the combination. The combined company (ex-Otis and Carrier) will generate approximately $73.6 billion in revenue and $13.5 billion in EBITDA in 2019, by management’s estimates.
• With over $1 billion in gross cost synergies, and opportunities for revenue synergies, the combined aerospace businesses will generate about $6 billion in free cash flow in 2019, with double digit growth toward $8 billion in 2021.
• We revise our preliminary, pre-spin fair value estimate for UTX of $156 per share (previously $150 per share as published in The Spin-Off Report June Calendar), which values the Aerospace business at 12.0x 2019E EBITDA of $8.2 billion, Carrier at 13.5x 2019E EBITDA of $4.4 billion, and 15.0x 2019E EBITDA of $2.2 billion for the Otis business.
• Our fair value estimate values UTX’s Aerospace business prior to the merger. Assuming the combined company would generate ~$13.5 billion in EBITDA with ~$26 billion in net debt, and 1.5 billion shares outstanding (RTN shareholders to receive 2.3348 shares of combined company for each share of RTN held at the time of the merger) as well as experience modest multiple expansion to 13.0x, the combined company would have a market capitalization of $149.5 billion, or $99 per share. Note that the 57% ownership of the combined company by UTX shareholders equates to approximately $100 billion in enterprise value for UTX’s Aerospace business.
• For further information, please see The Spin-Off Report June Calendar entry and ALERT on United Technologies dated November 27, 2018.

KAR Auction Services to Complete Spin-Off of IAA Inc. on June 28, 2019; Maintain BUY rating on KAR, increase pre-spin fair value estimate to $70 (from $64)

• On June 5, 2019, after the market close, KAR Auction Services Inc. (NYSE: KAR) announced that it will complete the spin-off of its insurance auto auction business, IAA Inc., on June 28, 2019. IAA Inc. will begin regular-way trading on June 28, 2019, on the NYSE under the ticker “IAA”
• Shares of IAA will be distributed to KAR shareholders of record as of June 18, 2019. KAR shareholders will receive one share of IAA for every share of KAR owned as of the record date. When-issued trading of IAA is expected to begin on or about June 17, 2019.
• We adjust our post-spin fair value estimates for KAR and IAA to reflect the most recently reported performance, the updated Form 10 filing, investor presentations, peer multiples, and our newly introduced 2020 estimates. We increase our fair value estimate for IAA to $36 (previously $30) and maintain our post-spin KAR fair value estimate of $34.
• IAA is valued at 14x 2020E EBITDA of $431 million. The 14x multiple is a discount to peer Copart Inc.’s (NASDAQ: CPRT) current multiple of ~19x given the lower margin profile (28% vs. ~38%) and its less international exposure (12% vs. ~17%).
• Post-spin KAR is valued at 11.0x 2020E EBITDA of $604 million. Our estimate incorporates a 21% EBITDA margin, a ~100 basis point increase from 2018, as we expect margins to widen toward more historical levels (~22%). KAR currently trades at 11.2x 2020 consensus EBITDA.
• Following the separation, we are attracted to both company’s industry fundamentals and market share positions. For IAA, increasing incidents of total loss claims should provide for mid-to-high single digit organic revenue growth with opportunities to widen margins from current levels.
• Post-spin KAR, with both physical on-online presence, and increasing RPU, is forecasted to grow revenue at a high single digit rate annually with opportunities to improve profitability from current levels as previous acquisitions are fully integrated.
• On a pre-spin basis, our fair value estimate is revised to $70 (previously $64). We maintain a BUY rating on shares of KAR ahead of the spin-off. For more details, please refer to The Spin Off Report dated December 14, 2018 and UPDATE dated April 2, 2019.

TIVO’s second ITC victory could be a step toward an eventual settlement with CMCSA; new CEO’s experience with split/sale situations is a positive, in our view 

• Last night, the International Trade Commission (ITC) ruled that Comcast’s X1 platform infringed on a content search function patent, representing the second such victory for TiVo since November 2017.  (While the decision is a positive, we would note that the court also ruled that CMCSA did not violate two other TiVo patents at issue.)
• The ruling, along with a third investigation into the potential infringement of six additional patents opened by the ITC in May 2019, could be a catalyst toward an eventual settlement between TiVo and Comcast, which would result, by our estimation, in the resumption of ~$60 million in annual license fees (as well catch-up payments for IP use since March 2016).
• Additionally, we would note that TIVO’s incoming CEO, Mr. Dave Shull, (who will also join the Board) has a successful (and relevant) track record, most recently overseeing the split and ultimate sale of The Weather Channel.  Previously, he was an executive in varying capacities at DISH Network/EchoStar.  (As well, former interim CEO, Ragu Rau’s appointment as Vice Chairman should help provide “continuity in on-going discussions with strategic parties”.)
• The company continues to expect to complete the previously announced spin-off of its Products business in 1H 2020. (That said, the company has indicated that it will continue to engage in discussions with interested parties regarding potential strategic transactions throughout the separation process.)
• On the fundamental front, TIVO recently increased 2019E sales, EBIT and EBITDA guidance to $644-$660 million (from $640-$650 million), $123-$133 million (from $120-$126 million) and $175-$185 million (from $172-$178 million), respectively.
• Fair value remains $14 per share, reflecting 2020E adj. EBITDA of $187.5 million and multiples of 8.0x and 12.5x for Products and Licensing, respectively.

DowDuPont Completes Spin-Off of Corteva; Maintain BUY on CTVA and DD

• On June 3, 2019, DowDuPont Inc. (formerly NYSE: DWDP) completed the spin-off of Corteva, the company’s agriculture sciences business. Following the spin-off, DowDuPont changed its corporate moniker to DuPont Inc.
• DuPont and Corteva are currently trading on the NYSE under the symbols DD and CTVA, respectively. Each DWDP shareholder received 1 share of Corteva for every 3 shares of DWDP held on the record date of May 24, 2019. In addition, a 1:3 reverse stock split became effective on June 1, 2019, for shares of DD.
• The post-spin fair value estimates for post-spin DuPont is increased to $82 per share (previously $80 per share) on a lower than expected share count, while CTVA’s fair value is revised to $37 per share (previously $40). The fair value estimates imply EV/2019E EBITDA multiples of 12x for DD and 11x for Corteva (previously 13x).
• For DD, while the fair value estimate of $82 is approaching the current share price ($74.70 as of this writing), our rating recommendation is a BUY. While we continue to expect a softer start to 2019, owing to weakness across several end markets, DD should experience earnings leverage throughout the year. In addition, a recently announced $2 billion share repurchase should lend incremental support for the shares.
• For CTVA, with the fair value estimate of $37 representing significant upside to the current share price ($24.70 as of this writing), our rating recommendation is BUY. CTVA shares are trading at 8x 2019E EBITDA, a significant discount to agriculture chemical peers at 11x. Corteva shares have suffered some near-term pressure owing to a weaker corn planting season (affected by flooding and other weather-related issues in the U.S.). That said, we expect an improving demand outlook throughout the year and into 2020, and see long-term value in the shares as a pure-play agriculture science company—particularly amidst industry consolidation.
• For more details, please refer to The Spin Off Report dated January 14, 2019 and UPDATE dated May29, 2019.

Drop Coverage of General Electric Company Effective Immediately

• General Electric Company spun off its Transportation business, which was combined with Wabtec Corp. (NYSE: WAB) in a Reverse Morris Trust (RMT) transaction. The spin-off and merger was completed on February 25, 2019.
• Given the transaction has now passed our coverage mandate of 90 days post-spin, we DROP coverage of General Electric. effective immediately.
• Our prior estimates and fair values for GE should no longer be relied on.

Eagle Materials Inc. to Spin Off Heavy and Light Materials Businesses

On May 29, 2019, Eagle Materials Inc. (NYSE: EXP) announced that its Board of Directors had approved plans to separate its Heavy Materials and Light Materials businesses into two independent, publicly traded corporations by means of a tax-free spin-off to Eagle shareholders. The separation is expected to be completed in the first half of calendar 2020, subject to final Board approval and receipt of a favorable tax opinion. In addition, the company announced that it is actively pursuing alternatives for its Oil and Gas Proppants business with the support of an independent financial advisor and that the Board will continue to evaluate other strategic alternatives that may arise prior to completion of the separation. Management teams and boards for both companies have not yet been named.

Eagle Materials, headquartered Dallas, Texas, with a market capitalization of $3.8 billion, is a diversified materials and building supplier. The company operates three segments: Heavy Materials (which manufactures cement, concrete, and aggregates for residential and commercial construction), Light Materials (gypsum wallboard and recycled paperboard used in residential construction), and Oil and Gas Proppants (more commonly referred to as frac sand; used in oil and gas extraction) For F2019 (March), the company generated $1.4 billion in revenues (essentially flat on a year-over-year basis) and EBIT of $79.7 million.

Today’s announcement follows a strategic review (April 2019) by the company’s Board and management team, with input from its shareholders, including activist investor Sachem Head Capital Management (8.3% ownership stake). The latter has agitated for the divestment of the Oil and Gas Proppants business, which, due to its ties to the oil and gas industry, has been a drag on the company’s valuation in recent years. Notably, many of EXP’s end markets have experienced consolidation, and the company is a small player compared to its peers. Shares have appreciated approximately 43% year-to-date (from a bottom of $53 in December 2018) — largely the result of Sachem’s involvement, and currently trade at approximately 9x F2020E EBITDA.

Post-spin, EXP’s Heavy Materials business will operate as a pure-play, U.S.-only cement and aggregates company, focused on low-cost production. Primary drivers of demand for cement are public infrastructure spending on roads and bridges, which contributes approximately 50% of overall demand, followed by residential (25%) and nonresidential construction. The industry outlook for the Cement business appears favorable, with domestic cement consumption forecasted to exceed domestic production capacity over the next several years owing to positive basic underlying fundamentals, including low unemployment, low interest rates, and higher wages.

The post-spin Light Materials business will remain a producer of gypsum wallboard and recycled paperboard, with an approximate 10% market share. Fundamentals appear favorable, with overall wallboard shipments expected to increase and price increases expected to offset increased freight costs. Wallboard demand has been growing at an approximate 5.5% CAGR (2010-2017), with demand roughly 35% below peak levels.

As a starting point for deriving a sum-of-the-parts valuation, we estimate F2020 revenues for each of EXP’s business segments in the Exhibit below. On a consolidated basis, we estimate F2020E revenues and EBITDA of $1.7 billion and $510 million, respectively.

Comparables for EXP’s Heavy Materials business include Cement business include Martin Marietta Materials Inc. (NYSE: MLM) and Vulcan Materials Company (NYSE: VMC) in Cement; and (Summit Materials Inc. NYSE: SUM) and U.S. Concrete Inc. (NASDAQ: USCR) in Concrete. For the Light Materials business, comparables include Continental Building Products Inc. (NASDAQ: CBPX), USG Corporation (NYSE: USG) in Wallboard; and Cascades Inc. (CAS CN), GPK, WRK, and (NYSE: SON) in Paperboard. Oil & Gas comparables include Covia Holdings Corp. (NASDAQ: CVIA), Emerge Energy Services LP (NASDAQ: EMES), Hi-Crush Partners LP (NASDAW: HCLP), and U.S. Silica Holdings Inc. (NASDAQ: SLCA).

Given the diversity of EXP’s operations, we derive a bear, bull and base case valuation scenario, based on a 9x, 10x, and 11x blended multiple on F2020E EBITDA. Based on a 10x EV/F2020E EBITDA multiple, and factoring in for net debt, a pre-spin sum-of the parts fair value estimate of $100 can be derived. With the fair value estimate suggesting 15%-17% upside to the current share price, the transaction appears to unlock incremental upside.

EXP plans a tax-free separation of its Heavy and Light Materials businesses and is in active pursuit of strategic alternatives for the Oil & Gas Proppants segment

• Today, EXP announced plans to separate its Heavy Materials (i.e. Cement and Concrete) and Light Materials (i.e. Wallboard and Paperboard) businesses via a tax-free spin-off to shareholders.  The transaction is expected to be completed in 1H C2020.
• As well, the company disclosed that it is actively pursuing strategic alternatives for its Oil & Gas Proppants (or frac sand) business.
• Given these announcements, Sachem Head Capital, an activist investor that owns more than 8% of EXP, has withdrawn its director nominations (and proposals) and will support the Board’s recommendations at the 2019 Annual Meeting.
• Notably, the company also indicated that it would continue to evaluate any value-creation opportunities (ostensibly potential transactions with strategic players in the Heavy & Light Materials sectors) that may arise as it moves toward the separation.  (In that context, we would note that many of EXP’s end-markets have experienced consolidation in recent years and the company remains a relatively small player, by comparison, to competitors, including Buzzi Unicem, Cementos Argos, Cemex, CRH, Heidelberg, and LafargeHolcim as well as USG Corp., National Gypsum Co., Georgia-Pacific, Continental Building Products, Saint-Gobain, and PABCO Buildings Products.)
• I our view, EXP has a unique set of attractive assets and the shares remain undervalued relative to the sum of its parts.  Our current fair value estimate of $100 per share (previously $110) reflects a blended multiple of ~10x on F2020E EBITDA of $510 million (previously $539 million).
• For additional information please also see the alert published today by The Spin-Off Report, which will also be providing coverage of the impending transactions.  

DuPont, Corteva Began When Issued Trading, Fair Values Revised; Maintain BUY on DWDP

• On May 24, 2019, shares of Corteva and post-spin DuPont began when-issued trading under the symbols “DD-WI” and “CTVA-WI,” respectively. The spin-off is to take place on June 1, 2019. Each DWDP shareholder will receive 1 Corteva share for every 3 shares of DWDP held on the record date of May 24, 2019. Following the spin-off, on June 3, 2019, Corteva and DuPont will trade on a “regular way” basis on the NYSE under the symbols “CTVA” and “DD,” respectively.
• DWDP is to conduct a reverse stock split effective immediately following the Corteva distribution. The 1:3 split, which was approved and finalized at the Board meeting on May 24^th, implies one new share of DD common stock for three shares of current DWDP common stock.
• The fair value estimate for post-spin DuPont and Corteva are adjusted to $40 and $80 (respectively (from $39 and $88), reflecting a 1:3 distribution and 1:3 reverse stock split for DD, as well as updated balance sheet information for Q1 2019. The fair value estimates imply EV/2019E EBITDA multiples of 12x and 13x for DD and Corteva, respectively. 
• Shares of DD-WI and CTVA-WI are trading at $63 and $29, respectively.
• With the DWDP pre-spin fair value estimate of $40 suggesting 30% upside to the current share price, we maintain our BUY recommendation, noting that despite a softer start to 2019, both companies should experience earnings leverage throughout the year despite near-term weakness across multiple end markets. In when-issued trading, CTVA shares are trading at 9x 2019E EBITDA, a discount to agriculture chemical peers at 11x. A recently announced $2 billion share repurchase also lends support for post-spin DD shares.
• For more details, please refer to The Spin Off Report dated January 14, 2019 and UPDATE dated May 8, 2019.

Mallinckrodt Announces Updated Spin-Off Structure; Maintain HOLD

• On May 28, 2019, Mallinckrodt plc. (NYSE: MNK) announced updated plans for the spin-off of its Specialty Generics business, which includes a modification of the final allocation of assets between the two companies. Mallinckrodt will spin off its Specialty Generics business from its Specialty Brands business, as previously announced; however, the drug AMITIZIA (lubiprostone) will remain with the Specialty Brands company.
• Excluding AMITIZIA, Specialty Generics sales for the 12 months ended March 29, 2019 were $722.6 million. Sales for the Specialty Brands segment– including AMITIZIA–were $2.528 billion for the same period.
• The modified spin structure is expected to result in less post-spin debt for the spin entity. While a final capital structure has yet to be determined, the new Specialty Generics company anticipates raising a more conservative amount of debt of up to $300 million. Net proceeds from the debt will be distributed to the parent
• This composition change to more modest leverage assumptions for the new spin-off company does not change MNK’s guidance of reducing net debt by more than $1 billion utilizing free cash flow and spin-off proceeds, although the goal attainment may be later in the second half of the year.
• Mallinckrodt Inc. is expected to be listed on the NYSE and will assume the MNK ticker symbol. The Specialty Brands company will continue to be listed on the NYSE, renamed Sonorant Therapeutics plc, and is expected to adopt SRTX as its ticker symbol. The spin-off is expected to occur in the second half of 2019.
• The fair value estimates for post-spin MNK and SRTX have been revised to $4 (from $3) and $5 (from $14), respectively. The fair value estimate for MNK reflects updated asset allocation between the two companies, estimated debt of $300 million for post-spin MNK, and reduced applied multiples for both companies, owing to heightened litigation and revenue risk from a recent DoJ investigation.  Note, however that post-spin capitalization structure has not been determined as of this writing and is subject to change. For more details, please refer to The Spin Off Report dated May 6, 2019.

VVI expands its Pursuit segment with the acquisition of a majority stake in Mountain Park Lodges; fair value increased to $65 per share (from $62 per share)

• Today, Viad Corp. announced an agreement to acquire a 60% stake in Mountain Park Lodges, a group of seven hotels (and an undeveloped land parcel) with ~735 rooms in and around Jasper National Park in Alberta, for $75 million (or C$99 million).
• The transaction, which is subject to approval by Parks Canada, is expected to close in mid-June and add $16-$18 million of sales and $9-$10 million in adjusted segment EBITDA in 2019.  (Note: financial results from the acquired properties will be fully consolidated in VVI’s reported statements and a non-controlling interest expense related to the previous owner’s 40% share will be recorded).
• In our view, the Mountain Lodge Park properties, which include  the Sawridge Inn & Conference Center (152 rooms), Pyramid Lake Resort (62 rooms), The Crimson Hotel (99 rooms), Chateau Jasper (119 rooms),  Pocahontas Cabins (57 rooms), Marmot Lodge (107 rooms) and the Lobstick Lodge (139 rooms, will serve as an attractive complement to VVI’s existing assets in Jasper, which include the Columbia Icefield Adventure, the Columbia Icefield Skywalk and its Maligne Lake boat tours.
• As well, we view the transaction as another important step toward Pursuit’s achievement of a $250 million sales base, which we discern is the starkest benchmark precipitating an eventual split of VVI’s two disparate businesses.  (At GES, the framework for a split seems less about size than a more stable business mix, including more A/V, event technology and non-exhibition/corporate business.)
• Our fair value estimate is increased to $65 per share (from $62 per share) based on a blended multiple of ~8.0x on 2019E/2020E blended EBITDA of ~$180 million (previously $170 million) as well as projected net debt of ~$170 million (previously ~$95.5 million).