MSG approves plan to explore a tax-free separation of its Sports & Entertainment business; shares indicating up more than 10% in pre-market trading

• MSG’s Board has authorized management to explore a possible tax–free spin-off, which would separate its Sports and Entertainment businesses into two publically-traded companies.
• If the company proceeds with a transaction, it is contemplated that current MSG holders would receive a pro-rata distribution equivalent to a ~2/3 economic interest in the standalone Sports entity while the remaining 1/3 interest would be retained by the Entertainment company.
• Mr. James Dolan is expected to be the Executive Chairman and CEO of both companies.
• A standalone Sports business would be expected to include the New York Knicks NBA franchise, the New York Rangers NHL franchise, the New York Liberty WNBA franchise, the company’s e-sports assets as well as the company’s training center in Greenburg, NY.
• In addition to a 1/3 interest in the Sports business, the Entertainment business, would include the company’s portfolio of music venues, including MSG, Radio City Music Hall, the Beacon, the Forum, The Chicago Theater and the Wang Theatre, as well as MSG Productions.  Entertainment would also retain interests in the TAO Group and Boston Calling along with stakes in the Azoff-MSG and Tribeca Enterprise joint ventures.  Additionally, MSG indicates the standalone Entertainment business to have ~$1 billion in cash on hand, which would ostensibly be used, in part, to fund the company’s new Sphere projects (in Las Vegas and London).
• Based on the most current balance sheet and diluted share count data, our base case sum-of-the-parts valuation estimate is revised slightly upward to $293 per share (from $290) while our bull case valuation moves to $368 per share (from $365).

On May 21, 2018, General Electric Co. (NYSE: GE) announced its intention to spin-off its Transportation business, which will then merge with Westinghouse Air Brake Technologies Corp. (NYSE WAB) (“Wabtec”) in a deal valued at $11.1 billion based on WAB stock closing price on April 19, 2018, the last day prior to media speculation about the potential deal. The transaction is expected to be tax-free to WAB and GE shareholders, and forecast to close in early 2019. Under terms of the agreement, GE will receive $2.9 billion in cash at closing; WAB shareholders will control 49.9% of the merged entity, while GE and its shareholders will control the remaining 50.1%. As the transaction is currently posited, GE shareholders will own 40.2%, with GE retaining a 9.9% ownership stake in the merged entity; however the final ownership percentages are subject to change, with GE retaining the right to increase the percentage ownership by the company’s shareholders.

Assuming GE’s current market multiple does not materially move on the spin-off from the current 12.1x 2019 estimates, accounting for $73.1 billion in net debt, and 8.7 billion shares outstanding, GE’s operations would be fairly valued at $15.83 per share. Including the assumed 9.9% stake in New WAB, GE would be fairly valued at $16 per share following the spin-off of its Transportation business. Applying a 14.9x multiple to New WAB’s estimated 2019 EBITDA, and accounting for $4.6 million in net debt (including the $2.9 billion payment to GE), and 193 million shares outstanding, a post-merger WAB fair value estimate of $108 per share is derived.

On May 8, 2018, La Quinta Holdings Inc. (NYSE: LQ) announced that the company’s Board of Directors has approved the distribution of CorePoint Lodging Inc., which will become the holder of the owned real estate assets previously held by La Quinta. The La Quinta Board of Directors also approved a 1-for-2 reverse stock split of shares of La Quinta common stock effective immediately prior to the distribution of CorePoint shares—reducing the number of shares outstanding to approximately 59 million.

La Quinta shareholders will receive one share of CorePoint Lodging common stock for every two shares of La Quinta common stock held as of 5:00 p.m., Eastern Time on May 18, 2018, the record date for the distribution (after giving effect to the 1-for-2 reverse stock split to occur immediately prior to the distribution, share holders will receive one share of CorePoint for every share owned of LQ). Shares of CorePoint will be distributed on May 30, 2018, after the market close.

Following the distribution of CorePoint Lodging, La Quinta, which will then continue to hold its management and franchise businesses, expects to complete its previously announced merger with Wyndham Worldwide Corporation  (NYSE: WYN). The completion of the CorePoint Lodging spin-off, followed by the completion of the La Quinta Merger, is expected to be completed on May 30, 2018. In connection with the closing of the Merger, La Quinta stockholders will receive $8.40 in cash per share (or $16.80 in cash per share after giving effect to the 1-for-2 reverse stock split to occur immediately prior to the distribution), without interest.

When-issued trading of Corepoint is expected to begin on or about May 17, 2018 under the ticker symbol “CPLG WI.” Shares of CorePoint Lodging common stock are expected to begin “regular way” trading on May 31, 2018, at which time trading in shares of La Quinta common stock will be suspended. CorePoint Lodging is expected to begin regular-way trading on the New York Stock Exchange (“NYSE”) under the ticker symbol “CPLG” on May 31, 2018.

The pre-spin sum of the parts estimate has been revised to reflect: La Quinta’s 1:2 reverse stock split, updated capital structure and distribution ratio, modest increase in financial performance, and industry peer multiples widening. LQ’s pre-spin fair value estimate increases to $22 per share, consisting of $14 per share in value from CPLG and $8.40 in cash to be received from the WYN acquisition of LQ. On a post-spin basis, shares of CPLG are fairly valued at $28 per share, reflecting the one-for-two reverse stock split. Based on today’s closing price of $19.61, the fair value estimate represents 14.5% upside for shares. As such, shares of LQ are recommended for purchase prior to the spin-off.

On May 7, 2018, after the market close, DXC Technology Company (NYSE: DXC) announced that its Board of Directors has set a record date of May 25, 2018 for the previously announced spin-off of its U.S. public sector business into a separate, publicly traded company named Perspecta Inc. The distribution of shares of common stock of Perspecta is expected to occur on May 31, 2018, after the close of trading on the New York Stock Exchange (NYSE). DXC stockholders will receive one share of Perspecta common stock for every two shares of DXC common stock held on May 25, 2018, the record date for the distribution. Perspecta is expected to complete its previously announced combination with Vencore and KeyPoint Government Solutions on May 31, 2018 immediately following the spin-off, subject to satisfaction of the conditions to the merger. Perspecta will be listed on the NYSE under the symbol “PRSP.”

When-issued trading for both DXC and Perspecta is expected to begin on or about May 24, 2018 and continuing up to and through the distribution date under the symbols “DXC WI” and “PRSP WI,” respectively. Regular-way trading in Perspecta’s common stock is expected to begin on June 1, 2018, the first trading day following completion of the separation.

The pre-spin sum-of-the-parts fair value estimate for DXC has been revised to $110 from $108 previously, reflecting updated pro forma balance sheet information for Perspecta (adjusted to give effect to the spin-off and mergers), as well as recent multiple expansion in the Commercial IT services sector. Post-spin, DXC and PRSP can be fairly valued at $91 and $39, respectively (versus our prior estimates of $87 and $41, for DXC and PRSP, respectively). With the pre-spin sum-of-the-parts estimate suggesting 9% potential upside from DXC’s current price ($101.65 as of yesterday’s close), the transaction appears to unlock modest incremental upside.

Withdraw recommendation of NPO with the reconsolidation of GST completed and the shares trading roughly in-line with our fair value estimate.

• With the reconsolidation of GST completed and the shares trading roughly in-line with our fair value estimate we think our thesis has largely played out and we withdraw our recommendation of NPO, as of today’s close.
• For context, shares have appreciated ~32% since our initial recommendation in April 2017 (versus a 12.5% increase in the S&P 500 and a 9% increase in the Russell 2000 indexes).

On May 1, 2018 aftermarket, Spirit Realty Capital Inc. (NYSE: SRC) announced that its Board of Directors has formally declared the distribution of common stock of Spirit MTA REIT (SMTA) in connection with the spin-off of SMTA from Spirit Realty Capital, Inc. The distribution will be made on or about May 31, 2018 to SRC stockholders of record as of 5:00 PM Eastern Time on May 18, 2018. Each SRC shareholder as of the record date will receive one share of SMTA common stock for every ten shares of Spirit common stock. When-issued trading will begin on May 17, 2018 and continue through and including May 31, 2018 under the symbols SRC WI and SMTA WI.

Our fair value estimates have been adjusted to reflect updated balance sheet information as of 1Q 2018 (Mar 31^st), as well as the announced 1:10 distribution ratio. The pre-spin sum of the parts fair value estimate for SRC remains unchanged at $9 per share. Post-spin, SRC and SMTA can be fairly valued at $7 and $22, respectively, versus our prior estimate of $7 and $20, respectively (the latter adjusted to reflect the 1:10 distribution ratio). With the fair value estimate representing 17% upside from current levels ($8.04 as of yesterday’s close), the transaction appears poised to unlock upside.

On May 1, 2018, KLX Inc. (NASDAQ: KLXI) announced its intention to sell its Aerospace Solutions Group business to The Boeing Company (NYSE: BA) and to spin off its Energy Services Group (ESG) business to KLX shareholders. The post-spin ESG company, to be named KLX Energy Services Holdings, Inc. (KLXE), provides technical and logistics services and related rental equipment to oil and gas exploration and production companies. Following the spin-off of KLXE, KLX will become part of Boeing Global Services. KLXI shareholders will receive $63 per share in cash following the spin off of KLXE.

Assuming managements guidance for $110 million in EBITDA, and applying a 7.2x multiple, shares of KLXE would be valued at almost $17 per share. Based on the $63 per share purchase price for ASG, a pre-spin sum-of the parts fair value estimate of $80 per share is derived. Based on initial trading following the announcement, the fair value estimate implies 12% upside from the current share price of $70.80. Today’s decline implies that the ESG business is being valued at just 2.5x 2018E EBITDA, which is well below the peer average, and below the low end of the peer group range (5.0x).

TFII posted solid 1Q 2018 results and re-iterated 2018E adj. EBITDA guidance of ~$600 million; Logistics segment re-aligned to include Last Mile business (formerly in P&C); base case fair value increased to $42 per share (from $38)

• In 1Q 2018, TFII posted adjusted EBITDA growth of ~18% to $129 million despite a modest decline in total revenue to $1.19 billion.  Adj. EPS increased 60% to $0.56.
• Results reflected markedly improved performance at the Truckload segment as well as solid results at the P&C and Logistics businesses.  (Note: the company re-aligned the latter two segments with the company’s Last Mile business now included in Logistics rather than P&C.)
• Management backed its 2018E adjusted EBITDA guidance of ~$600 million and provided longer-term margin commentary targeting “double-digit” margins at TL, margins of 14%-16% at P&C and ~150-200 basis points of margin expansion at LTL.
• Free cash flow in 2018 is expected to be ~$300 million (or ~$3.30 per share) and the company sees a potential $100-$200 million sale lease-back transaction, which could close in 2H 2018 million.  FCF and leaseback proceeds will be deployed toward share repurchase (2-3 million), M&A (~$100 million) as well as modest debt reduction (to less than 2.5x).
• While no incremental information was garnered regarding a potential spin-off of the U.S. TL business, which could still be a 2H 2018 event, management intimated other dispositions (e.g. P&C) were not currently being explored. That said, we continue to see improving internal execution amid recovering underlying fundamentals as supportive of additional near-term upside for TFII shares, which have appreciated more than 35% since our initial recommendation in June 2017 (versus a 8.5% increase in the S&P and a 10% rise in the Russell).
• Our based case fair value estimate of $42 per share (previously $38) reflects TFII’s segment re-alignment, a blended multiple of 7.8x on 2019E EBITDA of $623 million and projected net debt of ~$1.1 billion, implying 17% of incremental upside.

On April 25 2018, Whitbread plc (LSE: WTB) announced its intention to separate Costa Coffee from WTB. The separation is expected to be affected via a distribution of shares to WTB shareholders, and is expected to be completed within 24 months. The separation has already been approved by Whitbread’s Board of Directors. Shares of Costa will be listed on the London stock exchange. Based on the current earnings of the two segments, on a preliminary basis, the separate entities could have a market capitalization of GBP 8.7 billion, or GBP 47 per share, implying almost 14% upside from the current share price of GBP 41.64. Further upside to this preliminary valuation could be derived from a re-acceleration of sales at Costa, or further accretive acquisitions at the company’s hotel operations.

On April 23, 2018, Henry Schein Inc. (NASDAQ: HSIC) announced plans to spin off its Animal Health business, Henry Schein Animal Health (“HSAH”), and merge it with Vets First Choice (privately held), a leading provider of technology-enabled animal health care services. Immediately following the transaction, which is structured as a Reverse Morris Trust (RMT) and tax-free to HSIC shareholders, HSAH will combine with Vets First Choice to form a new publicly traded company, to be called Vets First Corp. Upon completion of the transaction, Henry Schein shareholders will own approximately 63% and Vets First Choice shareholders will own approximately 37% of the new company; Henry Schein expects to receive between $1.0-$1.25 billion in cash on a tax-free basis.

On a pre-spin sum-of-the-parts basis, shares of HSIC can be fairly valued at $84 per share when incorporating current HSIC net debt of $2.3 billion and 154.3 million shares outstanding. Note that shares currently trade at 11.5x 2019E EBITDA, essentially in line with their 10-year average. Given the implied upside to the current share price, which is derived primarily from revenue growth and margin expansion from Vets First as opposed to any meaningful multiple expansion, the transaction appears to have the potential to unlock meaningful value. That being said, this preliminary valuation does not incorporate the undisclosed capital structure of Vets First or the profitability of the online business. Significant net debt and/or a lack of profitability at Vets First Choice would provide potential risk to the derived fair value estimate.