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.

On April 12, 2018, Essendant Inc. (Nasdaq: ESND) and Genuine Parts Company (NYSE: GPC) announced that the companies have entered into a definitive agreement to combine Essendant and Genuine Parts Company’s S.P. Richards business. The transaction, which is tax-free to Essendant and Genuine Parts Company shareholders, is structured as a Reverse Morris Trust (RMT) transaction, in which Genuine Parts Company will separate S.P. Richards into a standalone company and spin off that standalone company to Genuine Parts Company shareholders, immediately followed by the merger of Essendant and the spun-off company. The transaction is expected to close before the end of 2018, subject to regulatory and Essendant shareholder approvals and other customary closing conditions.

Accounting for $816 million in net debt (adjusted to account for the $347 million cash distribution to GPC) and 73.9 million shares outstanding (including 36.2 million new shares issued to GPC shareholders), post-merger ESND can be fairly valued at about $9.50 per share. The fair value estimate is roughly in line ESND’s current share price ($9.83 as of this writing). Given the nature of GPC’s core business, we would expect that upon completion of the RMT, shares of ESND would see increased turnover as GPC shareholders exit their acquired position in ESND.

Assuming that post spin shares of GPC trade at a slightly higher multiple representing the increased margins, shares would be fairly valued at $91 per share (net debt adjusted for the expected $347 million cash distribution received). Incorporating the 51% ownership of the merged ESND entity, which is valued at $704 million or ~$5 per GPC share, a pre-spin sum-of the-parts valuation of $96 per share is derived for GPC.

On April 10, 2018, Tenneco Inc. (NYSE: TEN) announced that it has signed a definitive agreement to acquire Federal-Mogul Corporation, a global automotive and commercial auto parts supplier to original equipment manufacturers (OEMs) and the aftermarket. Federal-Mogul is being acquired from Icahn Enterprises L.P. (NASDAQ: IEP) for a total consideration of $5.4 billion to be funded through cash, Tenneco equity and assumption of debt.  Separately, Tenneco announced its intention to separate the combined businesses into two independent, publicly traded companies through a tax-free spin-off to shareholders that will establish an aftermarket & ride performance company and a powertrain technology company. The acquisition is expected to close in the second half of 2018, subject to regulatory and shareholder approvals and other customary closing conditions, with the separation occurring in the second half of 2019.

On a pre-spin sum-of-the-parts basis, shares of Tenneco can be fairly valued at $70 per share when incorporating pro forma net debt of $4.8 billion and 80.9 million shares outstanding. Given the current depressed multiple of TEN, this transaction presents an opportunity to unlock significant value. The increased scale at both sides of the business presents opportunities to expand margins beyond that used in our preliminary valuation, which could result in further multiple expansion.

On April 5, 2018, Fiat Chrysler Automobiles N.V. (“FCA”) (NYSE: FCAU, MTA:FCA) announced that the company has authorized management to separate the Magneti Marelli business from FCA. The separation is expected to be affected via a distribution of shares in a new holding company to FCA shareholders, and is currently contemplated being completed by year-end 2018, or early 2019. Based on an analysis of projected EBIT for both post-spin companies, pre-spin Fiat can be fairly valued at $26. With the pre-spin sum-of-the-parts valuation suggesting 17% upside from current levels ($22 as of this writing), the transaction appears to unlock substantial incremental upside.

On April 3, 2018 after the close, Pentair plc (NYSE: PNR) announced that its Board of Directors has approved the previously announced spin-off of its Electrical business, nVent. The distribution is expected to occur prior to the open of business on April 30, 2018. Each Pentair shareholder will receive one share of nVent for every share of Pentair held as of the close of business on April 17, 2018, the record date for the distribution. The company expects when-issued trading for nVent shares to begin on April 16, 2018 and continue through April 30, 2018.

Based on the company’s recently reported financial results and balance sheet information for the quarter ended December 31, 2017, the pre-spin sum-of-the-parts fair value estimate for PNR has been revised to $78 (from $77 previously). The fair value estimate for NVT has been adjusted to reflect updated pro forma balance sheet information as of December 31, 2017, which specifies $941.5 million in net debt. Post-spin, PNR and NVT can be fairly valued at $47 and $31 respectively—versus our prior estimates of $45 and $32, respectively. With the pre-spin sum-of-the-parts estimate suggesting 14% upside from current levels ($68.91 as of yesterday’s close), the transaction appears to unlock modest upside.

On March 23, 2018, Modern Times Group MTG AB (MTGB SS) announced plans to demerge into two businesses– Modern Times Group MTG AB and Nordic Entertainment Group – by distributing all of the shares in Nordic Entertainment Group (comprising MTG Nordic Entertainment, MTG Studios and Splay Networks) to MTG’s shareholders, and listing these shares on Nasdaq Stockholm. The company’s Board is expected to propose the distribution and listing of the shares at an Extraordinary General Meeting (EGM) of its shareholders during the second half of 2018. A fair value range of SEK 393 to SEK 455 can be derived, implying significant upside from the current share price in a positive rerating scenario.

On March 14, 2018, Prudential plc (PRU LN) announced plans to demerge its UK & Europe business, M&G Prudential, from its international operations, resulting in two separately listed, publicly traded companies, both of which will be headquartered and listed in London. The international business, Prudential plc, a leading international insurance group focused on high-growth opportunities in Asia, the US and Africa. Timing of the demerger is subject to a number of factors including the completion of the sale of £12 billion in U.K. annuities assets to Rothesay Life, as well as the transfer of the company’s Hong Kong insurance subsidiaries to Asia from Britain, the latter of which is expected to completed by the end of 2019 and subject to regulatory approval. Applying respective peer group multiples to the post spin entities results in a pre-spin fair value estimate of £19.95. This preliminary fair value estimate represents 3% implied upside from the current share price, while noting that shares are up approximately 7% following the demerger announcement.

Close coverage of KAMN with shares trading at a slight premium to fair value and management opposed to GAMCO’s non-binding spin-off proposal

• With the shares trading at a slight premium to our fair value estimate and management opposed to a spin-off, at least in the near-term, we will close coverage of KAMN, as of today’s close.
• For context, shares of KAMN have returned ~52% since our initial recommendation in April 2016 (versus a 32% increase in the S&P 500 and a 39% rise in the Russell 2000).
• We will continue to monitor KAMN for an opportunity to re-recommend the shares if valuation shifts or if incremental steps toward potential strategic alternatives materialize as the Distribution and Aerospace businesses each continue to gain scale toward sales of $1.5 billion and $1.0 billion, respectively.

Ultra SC Inc., the U.S. public services (USPS) spin-off of DXC Technology Company (NYSE: DXC) filed an updated Form 10 which included pro forma financial information. Based on updated capital structure information, the pre-spin sum-of-the-parts fair value estimate for DXC has been revised to $108 (from $111 previously). Post-spin, DXC can be fairly valued at $87. The post-spin fair value estimate for Ultra SC has been revised to $41 (versus $24 previously), based on a 1:2 distribution.

Withdrawing recommendation of FRGI as disappointing 1Q 2017 results portend longer-than-expected turnaround and the shares lack any apparent transactional catalyst; fair value reduced to $24 per share (from $28)

• Last night, after the market close, FRGI reported 1Q 2017 sales declined 0.6% to $175.6 million while adjusted EPS fell ~32.5% to $0.25 (versus consensus of $0.29). Consolidated adjusted EBITDA fell ~10.5% to $34.5 million.

• At PT, revenue increased slightly to $99.8 million as new store openings masked a troubling 6.7 % decline in same store sales; segment adjusted EBITDA fell 6% $55.5 million. At TC, sales declined almost 2% to $75.8 million on a same store decline of 4.5% while adjusted EBITDA fell 20% $12.3 million.

• Considering these results (and management’s conference call commentary), it seems evident FRGI’s turnaround (aka the Strategic Renewal Plan) will take an extended period of time and financial results are likely to further deteriorate in the nearterm. To that end, our revised fair value of $24 per share (previously $28) reflects a blended multiple of ~8.5x on 2017E EBITDA of $83 million (previously $94 million). 

• Clearly, our initial thesis has not played out; as such, with the shares trading slightly above our revised fair value and no transactional catalyst (i.e. a spin-off or sale) apparent on the near-term horizon we prefer to keep clients focused on more actionable ideas and think it prudent to withdraw our recommendation of FRGI, as of today’s close (albeit with the acknowledgment that the shares are likely to be pressured in today’s session)