Fair value increased to $48 (from $43) on initial 2017 outlook; we think a clear framework exists for an eventual separation of VVI’s businesses.

• VVI reported 2016 consolidated revenue growth of 10.6% to $1.2 billion with a 44% increase in adjusted segment EBITDA to $130.2 million. Organic revenue growth was 7.7%.

• The company ended 2016 with net debt of $230 million up from $143 million at the end of 3Q 2016 primarily due to the $50 million purchase of FlyOver Canada, which generates $9-$10 million of annual revenue with adjusted EBITDA margins of 55%, in December 2016.

• The company also issued initial 2017 guidance calling for ~5% consolidated sales growth with adjusted segment EBITDA of $144.5-$148.5 million (implying ~12.5% year over year growth).

• In our view, management is open to an eventual separation of its disparate businesses and we discern a clear framework for the conditions management views as necessary to exist for the two businesses to successfully standalone.

• To that end, we think the achievement of a $250 million revenue base at T&R remains the starkest benchmark. In pursuit of that threshold, we think the acquisition of attractions at iconic natural & cultural destinations with perennial demand will remain integral to VVI’s growth plans over the next several years. At M&E, we think it continues to be less about size than a more stable business mix, including ~$250 million of high-margin A/V & event technology work as well as an increased contribution from non-exhibition/corporate events, which is conducive to the maintenance of a higher than historical margin profile through the course of a cycle.

• Based on initial 2017 guidance, our fair value estimate, which reflects a blended multiple of 8x on 2017E consolidated segment EBITDA of $147.5 million, is increased to $48 per share (from $43).

• VVI shares have returned ~43% since our initial recommendation in May 2016 (versus gains of 10% and 21% for the S&P and Russell, respectively.)

AIN provides solid near and long-term guidance; we think the “peak” capital spending in 2017 portends a split as early as 2018-2019

• AIN reported consolidated 2016 adjusted EBITDA growth of 20% to $168.9 million as a slight decline at MC was more than offset by a jump to EBITDA of $16 million at EC (versus a $2.3 million loss in 2015, excluding a $14 million charge related to the BR725 program).

• For 2017, AIN sees MC adjusted EBITDA in the “upper-half” of its normal $180-$195 million range. At EC, management expects 25%-35% top-line growth in each of the next two years (driven by LEAP, Joint Strike Fighter and Boeing 787 programs) with “gradually” improving margins.  Moreover, the company indicated it remained “firmly” on track to achieve its 2020 target for EC of at least $450 million in sales and EBITDA margins on 18%-20%.

• AIN ended 2016 with net debt of $303 million and a leverage ratio of 1.8x. The company guided to 2017 capital spending of $95-$105 million, which it importantly indicated would likely be the “peak” of its spending program aimed at facilitating the steep ramp in business at EC.

• In addition to the execution on the ramp of new aerospace business, we think EC’s fading reliance on MC’s steady cash flow to fund facility investments will be an important consideration in management’s ultimate decision to separate its two disparate businesses.

• Our $51 fair value reflects a 7.5x multiple on 2017E MC EBITDA (supported by peer multiples and DCF analysis) and a 9.5x multiple on 2020E EC EBITDA (discounted back at 8%).  Please see the Hidden Opportunities Report dated 9/1/2016 for more information.

• Shares of AIN have returned ~14% since our initial recommendation in September 2016 (versus a 5.5% increase in the S&P 500 and a 9.5% increase in the Russell 2000).

CBS Corp. (NYSE: CBS) has formally announced its intent to split off CBS Radio, its broadcast radio business, which will be merged with Entercom Communications Corp. (NYSE: ETM) through an all stock, tax free Reverse Morris Trust transaction. CBS will commence an exchange offering with CBS shareholders to exchange CBS Radio shares for outstanding CBS shares. Immediately after the exchange, CBS Radio will merge with a subsidiary of Entercom and each outstanding share of Radio common stock will be converted into newly issued Entercom common stock. Holders of CBS Radio shares will receive approximately 105 million newly issued Entercom shares, or 72% of the combined company, to be known as Entercom, with Entercom shareholders owning the remaining 28% of the merged entity. The transaction is expected to close in the second half of 2017, subject to customary closing conditions including regulatory approvals and a vote by Entercom shareholders. ETM is also expected to divest approximately 15 of 244 stations to meet FCC ownership requirements. Entercom President and CEO David Field will be Chairman and CEO of the new company.

CBS has struggled with its radio business, which has faced intense competition from satellite broadcaster Sirius XM Holdings Inc. (NASDAQ: SIRI) as well as on-demand digital services from Pandora Media Inc. (NYSE: P), Apple Inc. (NASDAQ: AAPL), Spotify, and others. Given the tax consequences of an outright sale of the business, CBS announced in July 2016 that it was exploring strategic options for its radio business, which culminated in an S-1 filing for a planned IPO. For CBS, the separation divests a volatile business facing a continued secular decline from digital competition and follows a similar strategy taken in 2014 with CBS Outdoor, the company’s outdoor advertising unit, which was spun off as Outfront Media Inc. (NYSE: OUT).

For Entercom, the transaction provides significant scale, creating a local media and entertainment company with a preeminent radio platform of 244 stations covering 23 of the country’s top 25 markets. The combined company will have a pro forma market capitalization of over $2 billion (based on current stock prices) and combined revenues of approximately $1.7 billion. Adjusted EBITDA is expected to approach $500 million, including $25 million of synergies that are expected within 12-18 months post-close and the potential for additional local synergy opportunities over time. The transaction is also expected to be accretive to Entercom’s normalized free cash flow per share and adjusted EPS.

From a strategic perspective, the merger adds strong broadcast assets and will capitalize on Entercom’s existing prominence in radio, allowing the combined company to compete more effectively with other media by expanding key verticals such as sports, news, and entertainment and adding an enhanced digital news and events platform. Trends in radio listenership remain stable, as the number one daytime broadcast medium (vs. television, PCs, smart phones and tablets) with approximately 240 million monthly adult listeners (flat with 2015), according to data from Nielsen.

Following the merger with CBS Radio, Entercom will have significantly more scale, and opportunities to realize the previously mentioned cost synergies. Based on trailing revenue and EBITDA for the combined entity, it can be forecast that New ETM could generate revenue of $1.7 billion and EBITDA of $510 million in 2017 based on revenue growth of 3.5% and stable EBITDA margins. The peer group for publicly traded radio broadcasters is comprised of ETM, Townsquare Media Inc. (NYSE: TSQ), and Cumulus Media Inc. (NASDAQ: CMLS). This peer group trades on average 8.6x 2017E EBITDA, while ETM itself trades at 9.2x the current consensus estimate that does not incorporate the CBS Radio transaction. Applying the peer multiple to forecasted EBITDA, and accounting for estimated net debt of $1.9 billion, the combined company’s market capitalization would total $2.5 billion. Assuming 104.4 million new ETM shares are issued to CBS shareholders electing to exchange in the split-off, a fair value estimate of $17 per share is assigned to the merger ETM, implying 10% upside from the current share price ($15.85 as of this writing).

Accounting for the lost revenue and EBITDA, and assuming modest 2% revenue growth in 2017, post split-off CBS is forecast to generate $13.5 billion in revenue and $3.0 billion in EBITDA (when assuming 22.6% EBITDA margin). Peers to CBS include media companies such as Time Warner Inc. (NYSE: TWX), The Walt Disney Co. (NYSE: DIS), and Twenty-First Century Fox Inc. (NASDAQ: FOXA), which currently trade at 10.8x 2017 consensus EBITDA, a slight premium to CBS’s current multiple of 10.6x. Applying the peer multiple to the estimated $3.0 billion in EBITDA results in an enterprise value of near $33 billion. Adjusting CBS’s net debt for the transaction, and assuming 404 million shares outstanding, CBS can be fairly valued at $63 per share, in line with the current share price. ($64.15 as of this writing). Notably, the assumed post-split CBS share count assumes 26 million shares are exchanged for shares of ETM based on the current value of ETM shares to be issued and the current CBS share price.

Withdraw recommendation of SWK with strategic review concluded and shares trading at fair value

• Today, SWK reported roughly in-line 4Q 2016 results and provided initial 2017 EPS guidance of $6.85-$7.05, which, at the mid-point, implies 7% year over year growth and compares with the prior consensus forecast of $6.97. Organic top-line growth is expected be ~4% while free cash flow conversion should be ~100% of net income in 2017. [Note: management’s forecasts exclude the recently announced Newell & Craftsman acquisitions as well as the Mechanical Security divestiture.]

• All told, SWK shares have appreciated ~54% since our initial recommendation in February 2014 (versus a 25% increase in the S&P 500 and an 18% rise in the Russell 2000).

• That said, with SWK having concluded its strategic review and the shares trading roughly in-line with our $125 fair value estimate we prefer to maintain a disciplined approach and formerly withdraw our recommendation of SWK, as of today’s close.

BOBE sells the Restaurants business and bolsters its Foods operation with the acquisition of Pineland Farms; withdraw recommendation with stock up ~25% today

• BOBE announced the sale of Bob Evans Restaurants to Golden Gate Capital for $565 million (plus working capital liabilities of $40-$50 million). The company indicates the purchase multiple was “slightly north of 8x” and estimates net cash proceeds from the transaction of $475-$485 million. Proceeds from the sale will be used to repay debt and distribute a $7.50 per share dividend. The deal is expected to close by the end of F2017 (April-ending).

• At the same time, BOBE announced the purchase of Pineland Farms Potato Co. for $115 million, bolstering the product offerings at BEF Foods. Management estimates that the purchase price, net of synergies, was ~8.5x trailing 12-month EBITDA. The deal is expected to close by the end of F2017 and management estimates the combined entity will generate sales of $470 million with EBITDA of $105 million in F2018.

• In our view, this transaction represents the culmination of an effort lead by activist investor, Sandell Asset Management, currently an ~8% holder, that began in September 2013. For context, Sandell’s most recent commentary, from October 2016, suggested value of $56-$64 per share could be unlocked through a broad range of transactions, which included a sale of the Restaurants business.

• Thus, with the stock up ~25% of today’s news and the shares trading modestly above our $57 fair value estimate, which represented an about 10.5x blended multiple on F2017 EBTIDA of $141 million, we withdraw our recommendation of BOBE, as of today’s close.

• Shares of BOBE have returned ~26% since our initial recommendation (versus ~15% increases in the S&P 500 and Russell 2000). Since the shares were highlighted in our year-end conference call with clients, on December 2, 2016, BOBE shares have returned 31% (versus ~5% gains in the S&P and Russell).

On January 16th, Atlas Copco AB (Ticker: ATCOA SS, Market Capitalization: SEK 329,404 million), a Swedish industrial conglomerate, announced its decision to split into two companies through a tax-free spin-off a business focusing on mining and civil engineering customers. The transaction is subject to shareholder approval at the firm’s 2018 Annual General Meeting that will take place on April 24th, 2018. NewCo is expected to be listed in the second quarter of 2018.

The spin entity will comprise the existing Mining and Rock Excavation Technique business as well as the Construction Tools business. The parent will focus on the Compressor Technique, Vacuum Technique and Industrial Technique businesses. The primary rationale for the spin-off is that the two entities cater to different clients and, consequently, are subject to different demand drivers. As a case in point: approximately two-thirds of NewCo’s revenue is derived from mining companies, while the vast majority of the remaining sales comes from civil engineering firms. For the parent company, on the other hand, manufacturing clients are responsible for more than half of sales, followed in importance by firms in the process industry.

This divergence has also manifested itself in Atlas Copco’s financial results: revenue, operating income and new orders for businesses such as Compressor Technique and Industrial Technique were flat to positive in the first nine months of 2016 compared to the same period in 2015, while the Mining and Rock Excavation Technique division saw much steeper declines in its financial metrics. Furthermore, there are limited synergies between the businesses, thus minimizing any negative effects from the separation. At the same time, both companies are expected to be market leaders in their respective areas of operations.

It should be noted that it used to be considered a superior structure to have divisions that did not share the same customers and cycles, since that lent a counter-cyclical stability to a company. Such companies were often accorded higher, not lower valuations, and their balance sheet risk was considered lower. In the past half-decade or so, with the ascendance of indexation as the preferred mode of investment, companies are favored for index inclusion when they have a discrete industry profile, as opposed to a multi-industry or conglomerate structure. Therefore, by separating, even at the cost of increasing their business cyclicality risk—which is clearly the case here—they have the possibility of a higher valuation (lower cost of capital) if it means index inclusion, which could draw a certain additional and (for the time being) continuing demand for their shares.

Currently, the Compressor Technique business is the largest within Atlas Copco, and will generate more than half of the parent company’s revenue. The division provides industrial compressors, gas and process compressors and expanders, as well as air and gas treatment equipment and air management systems. Itsmanufacturing base is located in Belgium, the US, China, Germany and Italy. The business generated SEK 46.2 billion in sales during 2015. The Industrial Technique business manufactures industrial power tools, assembly systems, and quality assurance products. The business has manufacturing units in Sweden, Germany, the US, the UK, France, Japan and Hungary. For 2015, it generated revenue of SEK 14.6 billion. The last major business of the parent entity, Vacuum Technique, was created recently and will start disclosing separate financial results in 2017. The division stems from Atlas Copco’s acquisition of Edwards Group in 2014, and focuses on vacuum products, exhaust management systems, valves and related products.

On a pro forma basis, Atlas Copco post spin-off generated trailing-twelve-month revenue of SEK 74 billion. Based on a reported 20% operating profit margin, the post-spin entity’s operating income was approximately SEK 14.8 billion. Based on the 20x average enterprise value-to-EBIT multiple of a group of European industrial equipment and flow control companies, post-spin Atlas Copco is valued at SEK 295 billion.

NewCo’s operations will primarily comprise the Mining and Rock Excavation Technique business; the division manufactures and sells equipment for drilling and rock excavation as well as related consumables and services. Its 2015 sales were SEK 26.7 billion. In addition, the Construction Tools division within Atlas Copco’s Construction Technique business and caters to civil engineering clients will also be part of the spin entity. NewCo’s pro forma revenue for the twelve months ending on September 30th, 2016, were SEK 28 billion. Based on the pro forma operating income margin of 16%, the new entity generated pro forma EBIT of SEK 4.5 billion in the past twelve months.

NewCo’s main competitors include Metso Oyj, FLSmidth & Co A/S and Sandvik AB. They trade at an average enterprise value-to-EBIT multiple of 16.6x. Based on that multiple, the spin entity is valued at an enterprise value of SEK 74 billion.

On a sum-of-the-parts basis, Atlas Copco’s enterprise value stands at SEK 370 billion. Incorporating SEK 17.2 billion in net debt and SEK 0.1 billion in minority interests, the firm is valued at SEK 353 billion, or SEK 290 per share.

Withdraw recommendation of LEA with shares trading roughly in-line with our fair value:

• Today, at a conference appearance, LEA provided slightly above-consensus 2017E revenue and core operating earnings guidance of $19.5 billion and $1.6 billion, respectively, driving shares up almost 5%. (For context, prior consensus stood at $19.2 billion and $1.57 billion, respectively.)
• All told, LEA shares have returned more than 30% since our initial recommendation in March 2015 (versus increases of almost 8% in both the S&P 500 and Russell 2000 Indexes).
• That said, with the shares having traded modestly above our initial fair value estimate we prefer to maintain a disciplined approach and withdraw our recommendation, as of today’s close.
• Nevertheless, we will continue to monitor LEA for an opportunity to re-recommend the shares if valuation shifts over the course of the auto cycle, if we discern a change in management’s perspective on the benefits of its conglomerate operating structure and/or pressure from activist investors re-emerges.

MDP commentary suggests renewed potential for a deal with TIME, which could be accretive to fair value in our estimation

• At a conference appearance yesterday, commentary from MDP’s CFO, Joe Ceryanec, suggested the company’s interest in a potential combination with TIME may have been renewed following its reported rejection of a an ~$18 per share takeover offer from a consortium led by Edgar Brofman Jr. [Note: merger talks between the two parties publically failed in March 2013 prior to Time being spun-off from Time Warner (NYSE: TWX.) in June 2014.]
• In our view, a deal with TIME would undoubtedly provide scale to MDP’s Publishing business and could be accretive in the first year (see Exhibits #1 and #2). It would also likely be a pre-cursor to (or even be announced along with) a separation of MDP’s Broadcasting and Publishing businesses.
• On the Broadcasting front, MDP continues to expect another round of consolidation in 2017 and remains interested in expanding its TV footprint. In that effort, while a deal with TIME would require a significant deployment of capital, management expressed confidence that it had the financial wherewithal/capacity to accomplish its expansion goals across its current platform (i.e. magazine, digital and broadcasting).
• Our current sum of the parts fair value estimate (FVE), which does not include potential acquisitions, is $61 based on blended 9x multiple applied to F2017E EBITDA of ~$350 less projected net debt of $385 million.
• That said, based on a wide-range of assumptions, illustrated in Exhibits #1 and #2, a potential merger with TIME could offer initial incremental upside to ~$65 per share, which would imply appreciation potential of more than 10% from the current quote.
• Shares of MDP have returned ~44% since our initial recommendation (versus a 20.5% increase in the S&P 500 and a 28% increase in the Russell 2000).

SWK to sell the majority of its Mechanical Security business to dormakaba for $725 million in a tax-efficient transaction:

• SWK has agreed to sell the majority of its Mechanical Security business to Swiss-based dormakaba Holding AG (DOKA SW) for $725 million. Tax leakage is expected to be less than 3.5% as SWK expects to use capital loss carry-forwards to collect after-tax proceeds from the sale of ~$700 million.

• The deal includes commercial hardware brands BEST Access, phi Precision and GMT, which collectively generated trailing 12-month (TTM) sales and EBITDA of $270 and $52 million, respectively, implying an EV/EBITDA valuation of almost 14x.

• For context, the potential for a partial divestiture has been rumored about in the press during recent months and this deal is roughly in-line with our previous valuation expectation of ~$750 million (see 10/12/2016 Update for more information).

• The transaction is expected to close in 1Q 2017 and, in and of itself, be about $0.20 dilutive to 2017E EPS. That said, SWK expects dilution will be more than offset by $0.25 of accretion from the Newell Tools acquisition, new lower-interest financing strategies and the opportunity to redeploy transaction proceeds toward opportunistic share repurchases.

• Management indicates that this transaction marks the conclusion of its strategic review and that its intends to retain for the long-term its Electronic Security ($1.5 billion in TTM sales) and Automatic Doors businesses ($0.3 billion) as well as a small portion of its Mechanical Security business, namely the Sargent and Greenleaf brands (~$50 million in TTM sales).

• Thus, with shares having returned a total of about 45% since being initially highlighted by The Hidden Opportunities Report (versus increases of 23% and 18% in the S&P 500 and Russell 2000, respectively) we will cease coverage of SWK.

• That said, we continue to view SWK as a solid-long term holding and see modest near-term upside to our $125 fair value.

On December 15th, Crown Resorts Ltd (Ticker: CWN AU, Market Capitalization: A$8,282 million—US$6,098 million) released an update on its reorganization plan that was announced on June 15th. The firm decided to sell a 13.4 percent stake in Melco Crown Entertainment Ltd to its partner Melco International Development Ltd for US$18 per US ADR. Consequently, its stake in the venture will decline to 14 percent. Furthermore, it was announced that Crown Resorts will not proceed with the development of its Alon project in Las Vegas and will pursue alternatives, including a sale, to maximize its value.

Given that the shareholding in Melco Crown Entertainment and the Las Vegas project were two important pillars of InternationalCo, i.e., the entity that would result from the spin-off of its international operations, Crown Resorts has resolved to abandon the demerger. The company’s strategy has shifted; instead of maximizing the value of its international assets, the firm is focusing on domestic operations, reducing leverage and returning capital to shareholders. The expected A$1.6 billion in proceeds from the sale will be used to repay debt (A$800 million) and reward shareholders through dividends (A$500 million) and share buy-backs (A$300 million). At the same time, the proposed IPO of a REIT that will hold a 49 percent stake in certain Australian hotels and associated retail assets remains on track.

Based on this development, Crown Resorts will be no longer covered by The Global Spin-Off Report.