NPO completes reconsolidation of GST; full-year 2017 pro forma EBITDA outlook is increased to $200-$205 million (from $193-$198 million); fair value increased to $91 (from $88)

• Effective 12:01 a.m. today, NPO consummated its joint plan of reorganization and reconsolidated GST back into NPO; we view this as a significant milestone for the company as it removes a long-running financial and legal overhang that will greatly simplify the company’s financials as well as broaden the investor base and allow for reallocation of management focus and capital.

• Concurrently, NPO continues to see improvements in underlying fundamentals, particularly in its core Sealing and Engineered Products segments; to that end, while 1H 2017 consolidated sales were roughly flat at $685 million due to lumpy sales at the Power Systems segment, pro forma adjusted EBITDA increased 20% to $112 million. Pro forma adjusted net income increased 37% to $42 million (or $1.93 per share) in 1H 2017.

• Moreover, the company increased its full-year 2017 pro forma adjusted EBITDA guidance for the second time this year to $200-$205 million (from prior guide of $193-$198 million and its initial outlook of $188-$193 million).

• The company ended 2Q 2017 with pro forma net debt of $437 million and a pro forma leverage ratio of 2.1x. (On the superficial “as reported” basis the leverage ratio is 4.7x.)

• Given recent results and NPO’s revised outlook, our full-year 2017 and 2018 adjusted pro forma EBITDA estimates are increased to $201 million (from $194.3 million) and $212 million (from $206 million).

• As such, our fair value estimate is increased to $91 per share (from $88), which reflects a blended multiple of 10.7x on 2018E EBITDA and implies more than 20% of additional potential upside.

On July 26, 2017, ServiceMaster  (NYSE: SERV) announced its intention to separate its American Home Shield (AHS) business from its Terminx and Franchise Services Group (FSG) businesses. The separation is expected to be conducted via tax-free spin-off of AHS to SERV shareholders in 3Q 2018. In the announcement, management cites efficient allocation of capital, independent access to capital markets, and increased management focus as the reasons for the separation. . Based on a preliminary valuation exercise, SERV can be fairly valued, on a sum-of-the-parts basis, at $48 per share. Given the current share price of $42.13, the fair value estimate implies almost 14% upside. For further details, please see the full report via the link above.

On July 17, 2017, Vornado Realty Trust (NYSE: VNO) completed the spin-off of JBG Smith Properties (NYSE: JBGS), regular way trading began on July 18, 2017. VNO shareholders of record as of July 7, 2017, received one share of JBGS for every two shares of VNO owned. We have adjusted our fair value estimate to incorporate the final capital structure, updated for recent performance, and peer comparable valuations. Our fair value estimate of $39 per share is based on 2018 estimated net operating income (NOI) of $352.2 million, capitalized at a 5.0% rate, adjusting for net debt of $1.7 billion, and shares outstanding of 137.8 million. The 2018 estimated NOI is based on annualized NOI of $342 million, which was calculated from 1Q 2017 earnings, and assumes 3% annual growth. It should be noted that management cites “”near-term”” potential for NOI to increase to $532 million in approximately six years. Assuming JBGS is able to achieve the stated NOI goal, shares could see meaningful appreciation from the current levels ($36 per share as of this writing). If 2023 NOI was capitalized between 5.5% and 6.0%, the company would be valued at almost $55 per share. It is worth noting that incorporated in the six-year target is approximately $50 million in NOI from a stabilization of the DC market, which is likely the largest variable in JBGS’s plan. Additional contributions to NOI are from assets under construction and near term development opportunities. Notably, management cites its net asset value (NAV), calculated at historical cost, at $41 per share. For further details, please see the full report via the link above.

On July 11, 2017, Consol Energy Inc. (NYSE: CNX) announced the filing of a Form 10 registration statement with the SEC for the tax-free spin-off of its Pennsylvania mining operations and other coal assets, to be named CONSOL Mining Corporation. The spin-off remains subject to the satisfaction of certain conditions, including, among others, obtaining final approval from the Company’s Board of Directors and the SEC declaring the Form 10 effective. The company expects to complete the separation “as early as 2017,” based on today’s press release. Effective August 2, 2017, David Khani will serve as Chief Financial Officer of the coal business and Don Rush, a current Vice President of the Company, will assume the role of Executive Vice President and Chief Financial Officer. Jimmy Brock has been appointed as Chief Executive Officer of the coal business and Katharine Fredriksen as President. The post-spin parent (ParentCo), a natural gas exploration and production (E&P) company, will continue to trade on the NYSE after the distribution, albeit under a new name (yet to be determined), and the stock symbol “CNX” or any new stock symbol that ParentCo may adopt. Nick DeIuliis will serve as the President and Chief Executive Officer of the E&P business and Don Rush will serve as the Executive Vice President and Chief Financial Officer.

Consol Energy, with a current market capitalization of approximately $3.4 billion, is one of the world’s oldest coal miners, tracing its origins to 1864 in northern Appalachia. The company also develops and produces natural gas, including methane and shale beds. Amidst a boom in domestic natural gas exploration earlier this decade, CNX, like many diversified fuel producers, has been increasingly shifting resources to its oil and gas business. Despite the current administration’s inclination to reduce environmental regulations surrounding coal production, natural gas has already exceeded coal as the country’s top source of electricity. In 2016, CNX’s coal operations generated $1.3 billion in sales (65% of consolidated sales), but only $2.0 million in pre-tax income (22% of total pre-tax income).  The company first spun off some of its coal assets in 2015 to form CNX Coal Resources LP (NYSE: CNXC). In February 2016, CNX sold its Buchanan Mine in southwestern Virginia and certain other metallurgical coal reserves to Coronado IV LLC (privately held) for approximately $420 million. In January 2017, CNX announced plans to sell or spin off its remaining coal business. CNX shares have declined approximately 18% year-to-date, versus a 15% decline in the SPDR Energy Select sector ETF (XLE) and an 8.4% gain in the S&P 500 (SPX). The decline largely reflects the highly competitive drilling environment in the region as well as a combination of some oversupply of shale gas and warmer winter temperatures this season. Recent challenges aside, the spin-off completes the transformation of CNX to an E&P company. Longer term, a combination of rising natural gas prices, productivity gains (drilling efficiencies) and cost controls should drive growth for the post-spin parent company.

CONSOL Mining Corporation will be listed on the NYSE (symbol to be determined) and is comprised of the Pennsylvania Mining Complex (consisting of the Bailey Mine, the Enlow Fork Mine and the Harvey Mine and the related coal preparation plant), the Company’s ownership interest in CNX Coal Resources LP (NYSE: CNXC), a publicly traded master limited partnership that owns a 25% undivided interest in the Pennsylvania Mining Complex (CNXC), the coal export terminal at the Port of Baltimore, undeveloped coal reserves located in the Northern Appalachian, Central Appalachian and Illinois basins, and certain related coal assets and liabilities. Based on information in the Form 10 filing, the company generated 2016 revenues of $1,230.9 million.

Consol’s mining operations can be most aptly compared to domestic and international thermal coal producers, including Foresight Energy LP (NYSE: FELP), Exarro Resources Ltd. (EXX SJ), and Alliance Resource Partners LP (NYSE: ARLP), among others. In the near term, the post-spin company will largely be valued based on its production volumes. In its most recent earnings presentation, CONSOL provided detailed 2017 guidance by segment. Management has guided to total 2017 coal production of between 25.6 and 26.6 million tons. The company’s closest comparable in terms of production is FELP, which is expected to generate 22 million tons this year and trades at an EV/production multiple of 91x. Applying this comparable multiple to the midpoint of guidance (26.1 million tons) generates an implied enterprise value of $2,375.1 million for the business. Consol also provided 2017 EBITDA guidance of $400 million for the coal business. Applying a comparable multiple of 6.0x to 2017E EBITDA generates an implied enterprise value of $2,400 million, or an average enterprise value of $2,387.6 million for the post-spin mining business. Finally, the post-spin company’s ownership interest in CNXC must also be considered. As of March 31, 2017, Consol held 11.6 million subordinated units (representing a 41.8 percent limited partnership interest) in CNXC. This ownership interest is valued at $182.1 million based on CNXC’s current share price. Note that over time, CONSOL may drop down assets into CNXC.

The post-spin parent company can be most aptly compared to E&P peers including Southwestern Energy Co. (NYSE: SWN), Gulfport Energy Corp. (NASDAQ: GPOR), Cabot Oil & Gas Corp. (NYSE: CBT), and Crescent Point Energy Corp. (CPG CN), among others. As in the exercise above, total production can be used as a basis for valuation. Based on 2018 production guidance of 505 billions of cubic feet equivalents (Bcfe) (the midpoint of guidance), and applying a comparable peer multiple of 9.0x EV/total production, the post-spin E&P company can be valued at $4,545 million.  Management has similarly provided 2017 EBITDA guidance of $575 million for the E&P operations. Applying a peer multiple of 9.6x to estimates EBITDA generates an implied enterprise value of $5,520.0 million, or an average implied enterprise value of $5,032.5 million.

The above exercises generate a total implied enterprise value of $7,602.2 million for pre-spin CNX. Based on net debt of $2,750.3 million (balance sheet as of March 31, 2017), CNX shares can be fairly valued at $21. With the pre-spin sum-of-the-parts estimate suggesting 41% upside from the current price, the transaction appears to have the potential to unlock considerable incremental value.

On July 3, 2017, BGEO Group PLC (BGEO LN) announced plans to demerge BGEO Group into two separately listed, publicly traded companies: one company will focus on BGEO’s banking business (Bank of Georgia) while the other will focus on BGEO’s investment business (BGEO Investments). In the company announcement, reasons for the demerger were listed as creating increased flexibility, growth opportunities, regulatory clarity, opportunity to create efficient tailored capital structures, and increasing investor clarity, amongst others. The transaction is expected to be completed in six to 12 months, with 1Q 2017 being targeted. Following the demerger, BGEO Investments will retain a 9.9% stake in Bank of Georgia with management implying that a 0.9:1 share distribution ratio will be used. On a sum-of the parts basis, including an estimated holding company net debt of GBP 123 million, BGEO Group’s fair value is estimated at GBP 41.61 per share, implying 12.6% upside from the current share price of GBP 36.96. For further details, please see the full report via the link above.

On June 29, 2017, after the market close, MetLife Inc. (NYSE MET) announced that the company’s Board of Directors approved the spin-off of Brighthouse Financial. MET shareholders of record as of July 19, 2017, will receive one share of Brighthouse Financial Inc. for every 11 shares of MET owned. Brighthouse Financial shares will be distribution on August 4, 2017, after the market close, and are expected to begin regular way trading on August 7, 2017, the first trading day following the distribution, on the NYSE under the symbol BHF. Our fair value estimates have been updated to reflect the final share distribution ratio, updated capital structures, and current peer multiples. For further details, please see the full report via the link above.

On June 26, 2017, Vornado Realty Trust (NYSE: VNO) announced details associated with the tax-free spin-off of its Washington D.C. business–currently known as Vornado Charles E. Smith– which will combine with The JBG Companies to form JBG Smith Properties. The distribution of JBG Smith common shares and common limited partnership units is expected to occur on July 17, 2017 (the “Distribution Date”). Vornado will distribute all of its JBG SMITH common shares by way of a pro rata special distribution to Vornado common shareholders. Each Vornado common shareholder will be entitled to receive one JBG Smith common share for every two Vornado common shares held as of the close of business on the record date of July 7, 2017. The pre-spin sum-of-the-parts estimate for VNO remains unchanged at $114. Our post-spin fair value estimate for JBGS has been adjusted to $23 per share (previously $22 per share), reflecting updated pro forma balance sheet information. Post-spin, the fair value estimate for VNO remains unchanged at $102 per share. With the pre-spin sum-of-the-parts fair value estimate for VNO representing 20% upside to the shares’ current price ($94.75 as of this writing), pre-spin shares are recommended for purchase. For futher details, please see the full report via the link above.

D.R. Horton increases cash offer for 75% of FOR to $17.75 per share (from$16.25); DHI’s bid is deemed “superior” to Starwood’s current go-private offer of $16 per share

• This morning, D.R. Horton (NYSE: DHI), the largest homebuilder in the U.S., increased its offer to acquire 75% of Forestar to $17.75 per share (from $16.25 per share).

• As well, FOR’s Board has deemed DHI’s proposal, which keeps the company a publically-traded entity, as “superior” to Starwood Capital’s current bid of $16.00 per share for 100% of FOR. (Note: Starwood initially disclosed an accepted offer of $14.25 per share in cash on April 13th and subsequently increased its bid to $15.50 per share on June 22nd.)

• FOR indicates that it will continue to negotiate with Starwood until end of business on June 28th and that DHI’s revised offer is irrevocable until 1 p.m. on June 30th.

• In addition to the obvious monetary consideration, we continue to think that the tie-up of DHI (a homebuilder) and FOR (a land development company) offers interesting strategic and financial synergies that could provide incremental upside to FOR shareholders over the longer-term. For one, DHI’s national footprint scale would increase FOR’s ability to identify new land-assets, which could then be developed and sold to DHI (as well as other builders) at market prices. Additionally, we think the deal would give FOR better access to lower cost capital as well as allow it to better leverage SG&A expenses. (As such, we do not view the $20 million termination fee that would have to be paid to Starwood as an insurmountable hurdle to the ultimate consummation of this transaction.)

D.R. Horton offers $16.25 per share for 75% of FOR, a superior offer to Starwood’s previous go-private offer of $14.25; FOR would remain a public company

• This morning, D.R. Horton (NYSE: DHI), the largest homebuilder in the U.S., offered to acquire 75% of Forestar for $16.25 per share, which represents a 14% premium to the $14.25 per share cash offer made by Starwood Capital on April 13^th.
• Under the proposal, FOR would remain a public company allowing shareholders to participate in additional upside from the new strategic relationship and be led by Donald Tomnitz, who prior to his retirement in September 2014 ran DHI for over 15 years.
• On the strategic relationship front, the tie-up of DHI (a homebuilder) and FOR (a land development company) offers interesting synergies.  For one, DHI’s national footprint scale would increase FOR’s ability to identify new land-assets, which could then be developed and sold to DHI (as well as other builders) at market prices.  Additionally, we think the deal would give FOR better access to lower cost capital as well as allow it to better leverage SG&A expenses.
• DHI indicates that while the parties have engaged in discussions in previous years there has been no recent contact with FOR regarding the current proposal.  Nevertheless, it is our view that DHI’s proposal is clearly superior to Starwood’s go-private offer of $14.25 per share (both in terms of immediate financial upside as well as the longer-term opportunity for FOR to organically expand into a national land-development company).  As such, we would expect FOR’s Board to engage with DHI quickly and act in the best interest of shareholders.

On May 9, 2017, Pentair Plc (NYSE: PNR) announced plans to separate its Electrical business into a new, stand-alone publicly traded company via a tax-free spin-off. The transaction is expected to be completed by the second quarter of 2018, subject to customary market, regulatory and other conditions.

Upon separation, John L. Stauch, Senior Vice President and Chief Financial Officer of Pentair, will become post-spin Pentair’s CEO and Karl R. Frykman, the current President of Pentair’s Water segment, will become post-spin Pentair’s COO. Existing Board member David A. Jones will become Chairman. Beth A. Wozniak, the current President of Pentair’s Electrical segment, will become CEO of the post-spin Electrical company. Randall J. Hogan will retire as Pentair’s Chairman and CEO and will serve as Chairman of the post-spin Electrical company. Pentair expects to continue to pay its quarterly dividend and will set dividend policies for each business following completion.

The Electrical business, which is to be named at a later date, generated approximately $2.1 billion in sales in 2016 (43% of PNR consolidated sales). The business is focused on improving utilization, lowering costs and maximizing customer uptime. Its industrial enclosures, fastening systems and thermal management technologies help protect sensitive equipment, buildings and critical processes and help keep people safe. Strategic business groups include Enclosures, Thermal Management and Electrical & Fastening Solutions.

The post-spin parent company, which will retain the Pentair name and ticker symbol, is leading global water company focused on smart, sustainable water and fluid processing applications. The business, which generated approximately $2.8 billion in sales in 2016 (approximately 57% of PNR’s consolidated sales), designs, manufactures and delivers innovative solutions to residential, commercial and industrial customers who place a premium on high quality water and fluids. Strategic business groups include Filtration & Process, Flow Technologies and Aquatic & Environmental Systems.

After a period of sustained underperformance, Pentair shares have lagged the broader market over the past five years. The shares are trading approximately 20% below their 5-year peak of almost $83 in 2014. Despite signs of stabilization in the industrial market, Pentair has not yet begun to experience revenue recovery. The company’s 2017 guidance, which calls for a 2% decline in organic revenues, was among the weakest in the group. Cost reduction and productivity initiatives are projected to generate 15% EPS growth this year, despite lower revenue. With revenue growth faltering, Pentair has turned its attention to improving the balance sheet, with the company expected to use its $3.15 billion in proceeds from the sale of its Valves & Controls business to Emerson Electric Co. (NYSE: EMR) primarily to reduce debt. In addition, Pentair is focused on remixing its portfolio with bolt-on mergers and acquisitions, similar to other diversified industrial growth companies such as Fortive Corp. (NYSE: FTV), Roper Technologies Inc. (NYSE: ROP), and Danaher Corp. (NYSE: DHR).

Comparables to Pentair’s Water business include engineered components companies such as SPX Flow Inc. (NYSE: FLOW), and Flowserve Corp. (NYSE: FLS) among others. These companies trade at 14.6x estimated 2017 EBITDA. As a starting point for valuation, assuming that the business generates flat revenue in 2017, the Water segment would generate 2017 sales of $2.8 billion. Assuming margins of 17.5%, the Water business would generate 2017 segment income of $486 million. Applying a multiple of 14x generates an implied enterprise value of $6.8 billion for this business.

The post-spin Electrical company peer set, which includes companies which manufacture fastening, grounding, bonding, and electrical protection equipment, currently trade, on average, at 17.7x estimated 2017 EBITDA. It should be noted that the electrical peers set trades in a wide range (9x – 32x), while PNR itself trades at 16.3x 2017 consensus EBITDA. Assuming a 1% decline in Electrical sales in 2017, and margins of 21.5%, both roughly in line with management’s guidance, the standalone Electrical company would generate $450 million in segment income. Applying a multiple of 16x (approximating PNR’s current multiple) generates an implied enterprise value of $7.2 billion.

The above exercises generate a total implied enterprise value of $14 billion for pre-spin Pentair (see Exhibit). Accounting for pro forma net debt of $1.1 billion (balance sheet as of March 31, 2017, adjusted for $3.15 billion in proceeds from the EMR valves transaction), and 182.2 million shares outstanding, pre-spin Pentair can be fairly valued at $71 per share. The fair value estimate represents 3.4% upside to PNR’s current price ($68.27 as of this writing). For post-spin Pentair, the incremental risk/reward appears favorable given the potential for incremental growth through mergers and acquisitions and organic growth in an economic recovery, coupled with balance sheet improvements.