On July 20, 2022, after the Swiss market close, ABB Ltd. (ABBN SW) (“ABB”) announced that the company intended to spin off its turbocharging business, to be called Accelleron Industries Ltd., into a standalone, publicly traded company. Accelleron is expected to list on the SIX Swiss Exchange in Zurich on October 3, 2022, subject to customary conditions. The separation was approved by ABB shareholders at an Extraordinary General Meeting on September 7, 2022. ABB shareholders will receive one share of Accelleron for every 20 shares of ABB owned. Management has indicated that Accelleron will be capitalized with $300 million in debt, and $150 million in cash, which equates to ~1.4x gross leverage and ~0.7x net leverage (based on 2021 pro-forma EBITDA). Additionally, it is expected that the company will pay dividends of 50% – 70% of net income, and 100% of net income if net leverage is below 1.0x operational EBITDA.

Over the past several years, ABB has realigned its portfolio of products and services to enhance its growth profile by increasing exposure to growth markets that include discrete industries, transport, and infrastructure, while decreasing the proportion of sales generated from short-cycle businesses, which management expects will reduce earnings volatility. The transformation of the portfolio has largely been accomplished under the leadership of CEO Bjorn Rosengren, who assumed the role in early 2020. In prior roles, including as CEO of Swedish engineering company, Sandvik, Mr. Rosengren proved successful in improving operational performance and delivering value while revamping the company’s decentralized operations and selling off underperforming businesses. ABB itself has previously been pressured to break up into smaller pieces from activist investors, including Cevian Capital, which owns almost 5.5% of the outstanding shares. In 2020 – 2021, the company spent $291 million on five acquisitions, while over the same time exiting several businesses, including solar inverters, power grids, and mechanical power transmissions. The spin-off of Accelleron and the planned (yet currently delayed) IPO of the E-Mobility business (i.e., EV charging) are the latest steps in this process.

Despite Accelleron’s focus on the marine, energy, rail, and off-highway sectors, the standalone company will likely be compared to auto parts suppliers that manufacture turbochargers, as well as more diversified industrial manufacturers of turbochargers, which trade on average at a steep discount to the current ABB multiple. Moreover, the parent company is not likely to receive a multiple rerating benefit given the relatively small contribution that the turbochargers business had on the overall conglomerate and the loss of a higher margin business. As such, we assume a steady post-spin valuation multiple for ABB.

On a pre-spin basis, we value shares of ABB at CHF 25 per share, consisting of CHF 0.55 per share in value from the Accelleron business and CHF 24.37 per share in value from the remaining businesses. On a post-spin basis we value shares of ABB at CHF 24 per share and Accelleron at CHF 11 per share (accounting for the 1:20 share distribution ratio).
In and of itself, we struggle to see the valuation creation opportunity from the spin transaction itself, other than a modest element in a more comprehensive series of ongoing restructuring activities.

In our view, despite Accelleron being differentiated from traditional turbocharging peers, given its off-highway and ESG skewed focus, and accounting for its wider than ABB margin profile, it is our view that shares of the new company will be rerated lower given trading levels for turbocharging peers that are at a significant discount to the current ABB multiple. Further, opportunities for a re-rating higher at ABB also appear limited as the loss of the higher margin turbocharging business will degrade the group’s consolidated margin profile. As such, we do not recommend shares for purchase ahead of the expected October 3 separation.

On a longer-term basis, we view favorably the underlying business of Accelleron, and note that in many ways its separation from ABB exhibits many characteristics of a classic spin-off orphan equity, in which a large conglomerate spins off a much smaller subsidiary into what could be viewed as a negative environment (i.e. the perception turbochargers are becoming obsolete given the current trend of reduced use of internal combustion engines in favor of electric vehicles). In that context, we highlight Accelleron’s marine, rail, and energy focus, which we view as end markets that are not as susceptible to EV shifts as the on-highway segment, along with its product’s emissions reduction benefits may be initially misunderstood as a differentiator for the standalone company and result in shares of the new company trading at an unwarranted discount in the public market. To that end, if shares of Accelleron are ultimately grouped with traditional automobile turbocharger peers, some of which trade as low as 2.3x 2023 EBITDA estimates, we may be inclined to recommend post-spin shares.

“Griffon Corporation (NYSE: GFF) currently operates two business segments: (1) Consumer & Professional Products (54% of consolidated sales in September-ending F2021 and 39% of adj. EBITDA), which provides long-handled tools & landscaping products along with home organization/storage solutions and residential ceiling fans, primarily under the Ames, ClosetMaid and Hunter brands; and (2) Home & Building Products (46% of revenue in F2021 and 61% of adj. EBITDA), which provides residential garage/sectional & entry doors, via its Clopay brand, as well as commercial rolling steel doors & grilles.   In May 2022, shortly following the announcement of a deal to sell its defense electronics business, Telephonics (for ~16x TTM EBITDA), GFF’s Board began a process to review a broad range of additional strategic alternatives for its remaining businesses, including, among others, a sale, merger, divestiture or recapitalization. While Griffon has faced down pressure from activist investors in the past, the current campaign by Voss Capital, which currently controls ~5.2% of GFF and secured a Board representative in February 2022 (following a proxy contest where the Voss-backed nominee, H.C. Charles Diao, secured ~80% of the non-insider-controlled votes) has clearly gained traction.  In that context, at ~8.0x FTM EBITDA, we estimate incremental value could be unlocked via a range of potential transactions, including the sale of one, both or pieces of GFF’s businesses, in which management has anecdotally indicated there has been third-party interest, and, to a lesser degree, further improvements in its corporate compensation & governance paradigms. Based on management guidance and commentary as well as peer and M&A valuations, GFF’s Consumer & Professional Products (CPP) and Home & Building Products (HBP) businesses, could be valued at $17 per share, and ~$65 per share, respectively. Accounting for corporate costs and projected net debt of ~$35.50 per share yields a base case sum-of-the-parts fair value of $46.50 per share (with bull/bear cases of $54 and $39 per share, respectively). Potential catalysts could include asset sales or spin-offs, better than expected growth/margins, improved compensation/governance policies, share repurchases, and/or M&A. Risks include management execution/inaction, competition, customer concentration, raw material/cost inflation, currency fluctuations, leverage, regulations/legal liability, cyberattacks, pandemics and/or a recession.” – The Hidden Opportunities Report

On March 8, 2022, XPO Logistics Inc. (NYSE: XPO) announced that its Board of Directors approved a plan to spin off its tech-enabled brokered transportation services business (“Brokerage”) from its less-than-truckload (“LTL”) business. In addition, XPO announced its intention to divest its European and North American intermodal businesses. The brokerage business will assume the corporate moniker “RXO.”

The separation of Brokerage from LTL, if completed, is intended to be tax-free to XPO shareholders and would be accomplished via a pro-rata distribution of shares in the brokerage business to XPO shareholders. The separation is expected to be completed in 4Q 2022, subject to customary closing conditions including an effectiveness declaration of a Form-10 filing with the SEC, receipt of a tax opinion from counsel, debt refinancing terms, and final Board approval. Notably, as of this writing the company has filed at least one Form-10 with the SEC confidentially.

Following the separation, XPO shareholders will own shares in two independent companies that are leaders in their respective industries. The spin company, holding the asset-light truck brokerage business, is expected to have a low net debt leverage and will pursue an investment-grade credit rating. The parent company will become a pure-play LTL industry leader.

In reference to the asset divestitures, management stated that the European business will either be sold or listed on a European stock exchange, while the North American intermodal operation was sold to STG Logistics in late-March 2022 for $710 million. Notably, the spin announcement follows the August 2, 2021, spin-off of GXO Logistics Inc. (NYSE: GXO), which became a pure-play global contract logistics provider. Following the spin-off, the GXO share price increased by 58% in the initial four-month trading period, while shares of XPO declined 8% and the Russell 2000 advanced by 4.8% over the same time period.  (That said, from the time of the initial separation to the most recent spin-off announcement, shares of GXO were up 2.4%, while shares of XPO declined 27.8%., and the Russell 2000 declined 11.7%).

In terms of rationale, presumably XPO management is seeking to replicate the benefits of the GXO spin-off in creating two pure-play, investment grade companies that would alleviate the apparent conglomerate valuation discount that XPO currently receives. In relation to the GXO spin-off, the initial strategic review that began in mid-January 2020 was rooted in management’s frustration that, despite industry-leading scale and operating performance in terms of growth, profitability and free cash flow generation, its myriad businesses traded at persistent discounts to their most relevant peers. In pursuit of narrowing that perceived discount, XPO indicated that feedback from its investors overwhelmingly pointed to two primary potential actions: (1) simplifying the business (hence the spin-off, which essentially separates its freight-moving and warehousing businesses); and (2) achieving an investment-grade credit rating.

In August 2022, the company announced that Mario Harik would succeed Brad Jacobs as CEO of XPO following the separation of the Brokerage business. Mr. Jacobs will retain the executive chairman role at XPO and will assume the non-executive chairman role at the spin-off, RXO. For context, Mr. Harik has served as LTL president since October 2021, and has been credited with architecting the company’s “industry-best technology platform” during his tenure as the company’s chief technology officer (CIO) since 2011.

We approach the pre-spin sum-of-the-parts valuation based on the current reporting structure, which includes two segments: North American LTL, and Brokerage & Other Services. We separate out the European operations from Brokerage & Other and estimate an after-tax proceed from an assumed sale. As previously noted, XPO has yet to file a public Form-10 with the SEC, as such the valuation exercises outlined below are subject to updates upon further public disclosures. At this time, we refrain from assigning post-spin fair value estimates given the lack of capital allocation disclosures and will update post-spin valuations following a public Form-10 filing.

On a pre-spin, sum-of-the-parts basis, we estimate that the fair enterprise value for XPO Logistics totals $12.3 billion when accounting for approximately $205 million in corporate costs capitalized at 8.9x (the weighted average of multiples used for LTL, Brokerage, and Europe). Incorporating current net debt of $3.3 billion, and 115 million shares outstanding, we fairly value shares of XPO at $78 per share (see Exhibit 11). Given our view that following the separation, both companies will be viewed more favorably as they approach investment grade credit ratings, as pure play investment vehicles for their respective industries, and expected industry and company growth, combined with the implied upside to our fair value from the current share price, we rate pre-spin shares of XPO at BUY.

“AirBoss of America Corp. (TSX: BOS), a diversified provider of primarily rubber-based products, reports three operating businesses: (1) AirBoss Defense Group (53.0% of 2021 sales and 84% of EBITDA), which provides a range of survivability products to, among others, the defense and healthcare sectors; (2) AirBoss Rubber Solutions (28% of 2021 sales and 19% of EBITDA), which is North America’s second largest custom rubber compounder; and (3) AirBoss Engineered Products (28% of 2021 sales), which provides customized rubber-based products, largely to the auto sector (albeit with a keen eye on diversification in coming years). In our view, at less than 5.0x 2023E EV/EBITDA and ~8.0x 2023E EPS we estimate that AirBoss is undervalued relative to the sum value of its parts. In fact, it is our view that the company’s Defense Group or ADG, which enjoys a record pipeline of more than $1.5 billion in potential new business as well as high barriers to entry, could alone be conservatively worth, inclusive of corporate costs and net debt, ~$20 per share (besides the value we see in its Rubber Solutions business and the optionality offered by a potential turnaround in its Engineered Products segment). Moreover, we think the company’s low leverage, history of consistent dividend growth (i.e., a ~15.5% CAGR since 2007), high insider ownership (i.e., management owns 21% of the outstanding shares) and distinctly less cyclical nature of its underlying businesses offer investors an attractive risk/return in the current market environment (with seemingly minimal downside and potentially asymmetric upside in the event of a large-scale contract award or even an eventual sale of the company). Considering management commentary as well as peer/M&A valuations and reflecting a blended multiple of ~12.5x 2023E EV/EBITDA (and 15.5x 2023E EPS), value of C$30 per share, C$5 per share, and (C$1) per share can be assigned to BOS’s Defense Group, Rubber Solutions, and Engineered Products businesses, respectively. Accounting for corporate costs and projected net debt of ~(C$10) per share yields a sum-of-the-parts fair value of C$24 per share (with bull/bear cases of ~C$30 and ~C18 per share). (Note: The preceding per share figures have been converted from USD at an exchange rate of ~1.25x.) Risks include management execution, particularly on large contracts, competition, customer concentration/credit risk, currency, commodity & interest rate fluctuations and or legal/environmental liabilities..”- The Hidden Opportunities Report

RCI Hospitality (NASDAQ: RICK) operates two primary business segments: (1) Nightclubs (~70% of consolidated sales and 80% of adj. EBITDA in F2021), which owns and operates 50 gentlemen’s clubs in 13 U.S. states; and (2) Bombshells (~29% of total revenue and ~20% of adj. EBITDA), which operates 12 military-themed, casual dining restaurants & bars. (The “Other” segment, which contributed ~1% of sales in F2021, is primarily comprised of RICK’s media division, which owns several industry trade publications, award shows and websites as well as sales of the energy drink, Robust.)

In our view, RICK, which, on a consolidated basis, targets compound annual free cash flow per share (FCF) growth of 10%-15% (at minimum), is, at ~6.5x F2024E EBITDA and a ~12.5% FCF yield, undervalued relative to the sum value of its parts. On the fundamental front, in pursuit of its FCF goals, RICK intends to further consolidate the Nightclubs business, which enjoys structural barriers to entry and generates high margins with durable cash flow, at 3x-5x EBITDA (and cash-on-cash returns of 25%-33%), as well as organically expand its Bombshells sports bar concept, via both company-owned and franchised locations (again, targeting cash-on-cash returns of 25%-33%).

RICK will also repurchase shares when its FCF yield exceeds 10%. On the transactional front, we think RICK’s Bombshells concept presents optionality for a spin-off or sale as it gains incremental scale toward ~$50 million of annual EBITDA. (In fact, management has anecdotally indicated that a financial sponsor offered ~14x, or ~$280 million, for Bombshells in mid-2021, but the Board concluded the transaction was premature and offered inadequate value.)

Based on management commentary as well as peer and M&A valuations, value of $81 per share and $30 per share can be assigned to RICK’s Nightclubs and Bombshells businesses, respectively. Accounting for projected net debt and corporate costs of ~$37 per share yields a base case sum-of-the-parts fair value of ~$74 per share (with bull and bear cases of $52.50 and $95.50, respectively). Potential catalysts include a spin-off or sale, better than expected growth/margins/FCF, stock buybacks, and/or acquisitions. Potential risks include execution, regulatory changes, including on employment classifications, zoning and liquor licenses, cost inflation, changes in consumer behavior, insurance liability, a pandemic, and/or a recession.

On January 19, 2022, after the market close, Encompass Health Corp. announced that it intended to spin off its Home Health and Hospice (HH&H) business into a standalone, publicly traded company. As currently posited, the plan is to include a rebranding of the HH&H business as “”Enhabit Inc.”” and the transaction will be conducted via a tax-free distribution of shares to existing EHC shareholders in 1H 2022 (currently targeted for July 1, 2022). The spin-off, if completed, is subject to the customary closing conditions, including the effective declaration of a Form 10 filing with the SEC, regulatory approvals, and the receipt of a favorable IRS private letter ruling in relation to the tax-free nature of the proposed transaction. It is expected that Enhabit will trade on the NYSE under the ticker “”EHAB.”” While the details have not been finalized, given information in the company’s Form 10 filing, it is expected that EHC shareholders as of a yet-to-be-determined record date would receive one share of EHAB for every two shares of EHC owned.

For context, the spin-off announcement was the culmination of a strategic review that began in December 2020, shortly after activist investor Jana Partners disclosed a 1.8% passive stake in the company, which is currently at ~2.0% (down from a peak of ~2.6%). In April 2021, the chief executive of the HH&H business, April Anthony, announced that she was stepping down from her post, effective mid-June 2021. Ms. Anthony was replaced by Barbara Jacobsmeyer. (As well, the company named Crissy Carlisle, previously EHC’s chief investor relations officer, as HH&H’s chief financial officer.) In July 2021, the company indicated that EHC’s Board had concluded that a full or partial separation, “”by either private or public means,”” of HH&H would “”enhance the long-term success and value of the business.””

As Encompass Health Corp., the company currently operates two businesses: (1) Inpatient Rehabilitation (~78% of sales and 82% of EBITDA in 2021), which operates 145 hospitals in 35 states and manages three inpatient rehabilitation units via management contracts; and (2) Home Health & Hospice (~22% of revenue and 18% of EBITDA), which operates 252 home health and 99 hospice services/locations in 34 states.

EHC’s business, which is focused on growth via a three-pronged strategy comprised of (1) internal bed expansions at existing locations, (2) the organic development of new locations (so-called “”de novos””), and (3) acquisitions, is currently being pressured by increased labor costs that are primarily related to the COVID-19 pandemic. These labor issues have left the company paying more to staff its facilities and forced to reduce admissions due to staff shortages, resulting in margin pressure at both HH&H and IR. It is our opinion that over time, these pressures will abate via volume and pricing increases, allowing for a return to historical margins. Further, the secular tailwinds both businesses enjoy (aging and more active populations), along with highly fragmented competitive landscapes, should allow for earnings growth ahead, which can be viewed positively in the current volatile market environment. Notably, both businesses enjoy cost advantages and score highly versus peers on service metrics, per patient surveys.

On a pre-spin basis, we fairly value shares of Encompass Health Corp. at $81 per share, consisting of $27 per share in value from Enhabit and $54 per share in value from post-spin Encompass. It is our thesis that the current operating environment, with high labor costs affecting margins, will normalize over time, resulting in margin expansion beyond our near-term estimates, and that trading multiples will revert to historical norms for both the Home Health & Hospice business and the Inpatient Rehabilitation business. As such, we see value in pre-spin EHC shares, especially in light of the recent sell-off (on management’s updated 2022 guidance), which we believe presents an attractive risk-reward scenario for investors ahead of the proposed July 1, 2022, spin-off of Enhabit. As such, we rate pre-spin shares of EHC at BUY.

On a post-spin basis, we fairly value shares of Enhabit at $54 per share (accounting for the anticipated 1:2 share distribution ratio) and post-spin Encompass at $54 per share.

On June 23, 2021, GlaxoSmithKline plc (NYSE: GSK, GSK LN) detailed plans to spin off its ownership interest in the company’s Consumer Healthcare business. The separation, which is expected to be completed on July 16, 2022, will be accomplished by a distribution of GSK HealthCare shares to GSK shareholders of record, in what management cites as a “tax efficient” manner for both U.K. and U.S. shareholders. Shares will be listed on the London Stock Exchange under a yet-to-be determined symbol, with ADRs to be listed in the U.S. GSK will retain approximately 20% of its current ownership stake (68% of the JV) in the new healthcare company, which it intends to sell in a timely manner post-separation. In conjunction with the separation, New GSK is expected to receive a GBP 8 billion dividend from the spin company. The spin company is targeting net debt-to-EBITDA of up to 4.0x and is looking to achieve an investment-grade credit rating.

The spin-off is the culmination of GSK’s transformation initiatives that began in 2017 that includes strengthening R&D, asset divestitures, and the creation of a joint venture (JV) with Pfizer that combined the two companies’ respective consumer healthcare businesses. The JV was created with an all-equity transaction that resulted in a leading consumer healthcare business that was expected to realize significant cost synergies of GBP 500 million by 2022. GSK retained 68% ownership interest in the JV, with Pfizer controlling the remainder. As stated in the original JV announcement, GSK intended to demerge its equity interest into a separate, London-listed publicly traded company within three years of closing. The JV closed on August 1, 2019.

Haleon, the name to be adopted by the spin company, will be the number one global consumer healthcare player, with 2021 annual sales of GBP 10 billion and a 22.1% operating margin. The company will control 20 brands that each have over GBP 100 million in sales and five products that each have a global leadership position. Recognizable significant brands in the company’s portfolio include SENSODYNE, POLIDENT, Advil, Theraflu, and Centrum, among others.

Following the separation, New GSK (ParentCo) will focus on vaccine and specialty medicines development, while continuing to rationalize its general medicines portfolio for profitability and cash. The strengthened balance sheet will support increased R&D and provide opportunities for opportunistic acquisitions of late-stage development assets. New GSK is targeting 5% revenue and 10% operating profit CAGR through 2026, which incorporates assumptions on the company’s current late-stage development products and expected loss of exclusivity on certain products. A key focus will be on allocating resources to treat infectious diseases, HIV, oncology, and immunology/respiratory ailments, with products both currently marketed and in late-stage development. Longer term, the company is targeting more than GBP 33 billion in revenue in 2031, from the current ~GBP 24 billion. In terms of profitability, management cites opportunities to increase adjusted operating margin from the current/2021 estimate of mid-20s% to over 30% in 2026 via sales mix shift and cost savings opportunities, which have been increased from GBP 800 million to GBP 1 billion.

In conjunction with the separation of Haleon, the consumer healthcare business will issue a separation dividend of approximately GBP 10 billion, of which 32% (~GBP 3.3 billion) will be paid to Pfizer and GBP 7 billion will be dividended to GSK, which will result in net debt for the parent company of approximately GBP 18.8 billion. GSK plans on distributing one share of Haleon for every share of GSK owned, PFE will retain its 32% ownership stake, and GSK will maintain 20% of its ownership position (implying post-separation ownership of 13.6% of Haleon shares). GSK and PFE have stated that they will exit their respective positions in a timely manner, without specifying a timeframe. Based on current shares outstanding and post-spin ownership, Haleon will have shares outstanding of approximately 9.4 billion. It should be noted that as 45.6% of the new company will be sold by PFE and GSK, added to the potential for GSK shareholders to exit the consumer business holding, the shares could see pressure in initial trading.

On a pre-spin basis, we fairly value shares of GlaxoSmithKline at GBP 18.60 per share, consisting of GBP 6.23 per share and GBP 12.37 per share from Haleon and New GSK, respectively. In U.S. dollar terms, we value shares of GSK at $47 per share based on the current exchange rate and the 2:1 ADR ratio. Given the limited upside to our pre-spin fair value estimates, and the above-noted potential for significant selling pressure due to the intention of both PFE and GSK to exit their ownership stakes in Haleon, we rate pre-spin shares of GSK at NEUTRAL. Following the separation, we see upside potential for New GSK from the company’s late-stage pipeline and operating margin expansion opportunities, and we would initially favor shares of New GSK versus Haleon

On June 23, 2021, GlaxoSmithKline plc (GSK LN, NYSE: GSK) detailed plans to spin off its ownership interest in the company’s Consumer Healthcare business. The separation, which is expected to be completed on July 16, 2022, will be accomplished by a distribution of GSK HealthCare shares to GSK shareholders of record, in what management cites as a “tax efficient” manner for both U.K. and U.S. shareholders. Shares will be listed on the London Stock Exchange under a yet-to-be determined symbol, with ADRs to be listed in the U.S. GSK will retain approximately 20% of its current ownership stake (68% of the JV) in the new healthcare company, which it intends to sell in a timely manner post-separation. In conjunction with the separation, New GSK is expected to receive a GBP 8 billion dividend from the spin company. The spin company is targeting net debt-to-EBITDA of up to 4.0x and is looking to achieve an investment-grade credit rating.

The spin-off is the culmination of GSK’s transformation initiatives that began in 2017 that includes strengthening R&D, asset divestitures, and the creation of a joint venture (JV) with Pfizer that combined the two companies’ respective consumer healthcare businesses. The JV was created with an all-equity transaction that resulted in a leading consumer healthcare business that was expected to realize significant cost synergies of GBP 500 million by 2022. GSK retained 68% ownership interest in the JV, with Pfizer controlling the remainder. As stated in the original JV announcement, GSK intended to demerge its equity interest into a separate, London-listed publicly traded company within three years of closing. The JV closed on August 1, 2019.

Haleon, the name to be adopted by the spin company, will be the number one global consumer healthcare player, with 2021 annual sales of GBP 10 billion and a 22.1% operating margin. The company will control 20 brands that each have over GBP 100 million in sales and five products that each have a global leadership position. Recognizable significant brands in the company’s portfolio include SENSODYNE, POLIDENT, Advil, Theraflu, and Centrum, among others.

Following the separation, New GSK (ParentCo) will focus on vaccine and specialty medicines development, while continuing to rationalize its general medicines portfolio for profitability and cash. The strengthened balance sheet will support increased R&D and provide opportunities for opportunistic acquisitions of late-stage development assets. New GSK is targeting 5% revenue and 10% operating profit CAGR through 2026, which incorporates assumptions on the company’s current late-stage development products and expected loss of exclusivity on certain products. A key focus will be on allocating resources to treat infectious diseases, HIV, oncology, and immunology/respiratory ailments, with products both currently marketed and in late-stage development. Longer term, the company is targeting more than GBP 33 billion in revenue in 2031, from the current ~GBP 24 billion. In terms of profitability, management cites opportunities to increase adjusted operating margin from the current/2021 estimate of mid-20s% to over 30% in 2026 via sales mix shift and cost savings opportunities, which have been increased from GBP 800 million to GBP 1 billion.

In conjunction with the separation of Haleon, the consumer healthcare business will issue a separation dividend of approximately GBP 10 billion, of which 32% (~GBP 3.3 billion) will be paid to Pfizer and GBP 7 billion will be dividended to GSK, which will result in net debt for the parent company of approximately GBP 18.8 billion. GSK plans on distributing one share of Haleon for every share of GSK owned, PFE will retain its 32% ownership stake, and GSK will maintain 20% of its ownership position (implying post-separation ownership of 13.6% of Haleon shares). GSK and PFE have stated that they will exit their respective positions in a timely manner, without specifying a timeframe. Based on current shares outstanding and post-spin ownership, Haleon will have shares outstanding of approximately 9.4 billion. It should be noted that as 45.6% of the new company will be sold by PFE and GSK, added to the potential for GSK shareholders to exit the consumer business holding, the shares could see pressure in initial trading.

On a pre-spin basis, we fairly value shares of GlaxoSmithKline at GBP 18.60 per share, consisting of GBP 6.23 per share and GBP 12.37 per share from Haleon and New GSK, respectively. In U.S. dollar terms, we value shares of GSK at $47 per share based on the current exchange rate and the 2:1 ADR ratio. Given the limited upside to our pre-spin fair value estimates, and the above-noted potential for significant selling pressure due to the intention of both PFE and GSK to exit their ownership stakes in Haleon, we rate pre-spin shares of GSK at NEUTRAL. Following the separation, we see upside potential for New GSK from the company’s late-stage pipeline and operating margin expansion opportunities, and we would initially favor shares of New GSK versus Haleon.

Amerco (NASDAQ: UHAL), the parent company of U-Haul, North America’s largest do-it-yourself (DIY) moving company, operates three reportable segments: (1) Moving & Storage (93% of sales and 96.5% of EBITDA in F2021), which rents trucks, trailers, and towing equipment as well as owns/operates a large portfolio of self-storage space; (2) Property & Casualty Insurance (2% of sales and 2% of EBITDA), comprised primarily of Repwest Insurance, which provides insurance for U-Haul customers and equipment; and (3) Life Insurance (5% of revenue and 1.5% of EBITDA in F2021), which  serves the senior citizen market via its Oxford subsidiary.

UHAL is the dominant player in the DIY moving market, with durable competitive advantages in proximity, availability, and price. In our estimation, at ~5.0x F2023E EV/EBITDA and ~9.0x F2023E EPS, UHAL is undervalued relative to the sum value of its parts, particularly the high-margin/low-incremental-capex Storage portion of its core business. In that context, we would also highlight the stark shift in management’s tone during the company’s most recent earnings call, which suggested a seemingly greater willingness to explore potential avenues for unlocking incremental value from its self-storage business (e.g., via a REIT conversion or a spin-off, among others) as well as potentially to pursue ancillary measures, such as the institution of a regular dividend, a stock split, share repurchases, and/or a change in the corporate moniker to U-Haul.

Considering our financial projections as well as peer and M&A valuations, value of $902 per share and $18 per share can be assigned to UHAL’s Moving & Storage and Insurance businesses. Accounting for projected net debt of ~$155 per share yields a base-case sum-of-the-parts value of roughly $765 per share (with bull/bear cases of $907 per share and $624 per share, respectively). Potential catalysts include the monetization/separation of assets, earnings growth, more granular financial disclosures, and/or the implementation of a regular dividend, stock split, or share repurchase program. Potential risks include management execution, competition/pricing pressure, and/or a recession.

On December 20, 2021, after the market close, Fortress Transportation and Infrastructure Investors LLC (NYSE: FTAI) announced that it had confidentially filed a Form 10 with the SEC in relation to a potential spin-off of its infrastructure business. The spin-off, if completed, is expected to benefit both post-spin entities, given differing end-markets, strategies, and performance.

As currently posited, the spin-off would be completed via a pro rata distribution of shares in the infrastructure business to FTAI shareholders of record as of a yet-to-be determined date. FTAI initially stated that it targeted completion of the separation in 1H 2022 and that it would be subject to standard conditions, including final Board approval. Subsequently, the company has stated that it expects to complete the separation in April 2022. It should be noted that while management appears confident that the transaction can be completed within the brief period from the time of this writing, minimal disclosures have been made public, aside from ancillary commentary made during public appearances. As of this writing, it is unclear how many confidential Form 10s have been filed with the SEC.

Management has stated that it expects the post-spin companies to adopt the corporate monikers of FTAI Aviation and FTAI Infrastructure. As for capital structure, it is looking to raise $500 million in debt financing and is also contemplating, but has not yet finalized, an alternative structured equity component for $300 million, both of which will be placed with Aviation. Management stated that Aviation will carry about $1.8 billion in debt and that Infrastructure will carry about $1.2 billion in debt. Per management, targeted debt-to-EBITDA is said to be 4x-5x for FTAI Infrastructure and 3x-4x for FTAI Aviation, although it is unclear if that is on a net or gross basis.

For our sum-of-the-parts valuations, for Aviation we assign an in-line 10.5x multiple to $550 million in EBITDA, resulting in an enterprise value of approximately $5.8 billion. For the Infrastructure business, we assign a one-turn discounted multiple of 6.0x to the Jefferson and P&T operations and an 11x multiple to Transtar. We note that our Transtar multiple is a discount to those of the far-larger-reach rail operators used for comparison but is a premium to the implied purchase multiple, as the company’s relationship with U.S. Steel should provide a stable earnings base, with opportunities to expand revenue sources in the future. Based on our applied multiples, FTAI Infrastructure’s operating segments would have an enterprise value of $1.6 billion. We value Corporate & Other assuming a $60 million loss run rate at 9.8x, the weighted average of our applied multiples. Based on these calculations, we derive a consolidated $6.8 billion pre-spin fair enterprise value. Accounting for net debt of $3.2 billion and 99.2 million shares outstanding, we fairly value pre-spin shares of FTAI at approximately $37 per share.

We view positively the Aviation company’s ability, post-separation, to receive a rerating to a higher multiple to more closely approximate those of other aircraft leasing companies, while noting that a growing services business could provide incremental upside. For Infrastructure, the company’s terminal assets appear to be uniquely positioned to capitalize on increased demand for NGLs in addition to oil-by-rail distribution. Further, the Transtar acquisition provides a sizeable and stable earnings base for an independent infrastructure company to grow from, given its relationship with and proximity to U.S. Steel production facilities. Lastly, the widening of the potential investor base that comes with converting to a C-corp should not be overlooked. FTAI currently has passive ownership, whereas many of the peers cited in this report have ownership profiles dominated by index funds that may now be able to purchase shares of the post-spin entities. Given the implied upside from the current share price, the company’s differentiated asset base, and the incremental benefits that the spin-off will provide to shareholders, we rate FTAI at BUY prior to the separation.