Above, please find a Hidden Opportunities update on Headwaters Inc. (NYSE: HW).

Withdraw recommendation of HW given its pending acquisition by Boral Limited for $24.25/share

• HW shares have returned ~44% since our initial recommendation in January 2016 (versus an about 9% gain in the S&P 500 and an 18.6% gain in the Russell 2000).
• Given our base-line assumption remains that Boral Limited’s (ASX: BLD) proposed offer to acquire HW for $2.6 billion or $24.25 per share closes, as announced, we withdraw our recommendation of the shares, as of today’s close.
• Nevertheless, we will continue to monitor HW for developments in the both the shareholder and regulatory approval processes.

Above, please find The Spin-Off Report FLASH on Hilton Worldwide Holdings Inc. (NYSE: HLT).

Hilton: Adjusting Estimates and Post-Spin Fair Values Following Analyst Day

Follwing Hilton Worldwide Holdings Inc.’s (NYSE: HLT) analyst day, we are revising our underlying assumptions for the post-spin entities’ revenue and earnings forecast. As background, HLT shareholders of record as of December 15, 2016, will receive one share of Hilton Grand Vacations (HGV) and two shares of Park Hotels & Resorts (Park) for every ten shares of HLT owned. Shares of Park and HGV will be distributed on January 3, 2017, after the market close, with regular-way trading expected to begin on January 4, 2017. Shares of Hilton Grand Vacations will trade on the NYSE: under the symbol “HGV”, while Park will also trade on the NYSE under the symbol “PK”. When-issued trading in HGV and PK is expected to begin on or about December 13, 2016, under the respective symbols “HGV WI” and “PK WI”. Additionally, Hilton previously announced that immediately following the HGV and PK share distributions, the company will conduct a one-for-three reverse share split.

During the company’s analyst day, senior management from all three post-spin entities detailed growth plans moving forward. Of particular interest was post-spin HLT’s discussion of earnings and cash flow usage, which included plans to pursue programmatic and opportunistic share repurchases. HLT expects compound annual revenue and adjusted EBITDA growth of 3.5% – 5% and 5% – 8%, respectively, along with cumulative free cash flow generation of $2.6 to $2.8 billion through 2019. Combined with debt issuance, the company expects $3.0 – $4.5 billion in cash will be available to the company, of which 15% – 20% will be used for quarterly dividends and the remainder available for share repurchases. The net result of share buybacks through 2019 would result in a 13% to 21% reduction in shares outstanding. In light of these projections we have revised our post-spin HLT earnings and fair value to incorporate management’s comments. Post-spin HLT can be fairly valued at $63 per share (previously $57), which is based on an average result of valuation exercises based on projected EBITDA and free cash flow. The revised estimates include a lower EBITDA forecast ($2.1 billion versus $2.4 billion) offset by an increased peer valuation multiple (10.7x versus 9.7x) and lower share count (290 million versus 330 million). The increased valuation multiple is a result of the expansion of peer comparable valuations since the initial Spin-Off Report publication on Hilton. We acknowledge the variance in valuations derived from EBITDA and free cash flow projections (see attachment), however we note that Marriott International Inc. (NYSE: MAR), which has an average RevPAR of $132.30 and average daily rates of $178.46, trades at 12.5x 2018E EBITDA. Valuing HLT at MAR’s EBITDA multiple would place the EBITDA valuation exercise in line with the free cash flow exercise, suggesting modest upside to the $63 per share FVE if HLT shares were to be valued on par with MAR.

Park’s portfolio will include 67 hotels and 35,418 rooms, forming one of the largest and most geographically diverse publicly traded lodging REITs. The REIT will have a high-quality portfolio of luxury and upper upscale assets, located across high-barrier-to-entry urban and convention markets, top resort destinations, select international regions, and strategic airport locations. The post-spin fair value estimate for Park increases to $41 per share (previously $40 per share) based on adjusted earnings (EBITDA of $903.6 million versus $915.7 million and FFO of $623.2 million versus $750.4 million) and updated peer valuation multiples (12.9x EBITDA versus 11.7x and 11.5x FFO versus 10.1x).

Hilton Grand Vacations will manage nearly 50 club resorts in the U.S. and Europe and will have an exclusive, long-term license agreement with Hilton Worldwide to market, sell, and operate resorts under the Hilton Grand Vacations brand. The HGV post-spin fair value estimate remains intact at $31 per share, however some underlying assumptions have changed slightly (2016 revenue base and 2017 growth assumption).

The pre-spin HLT fair value estimate remains at $30 per share. Given the implied upside from the current share price ($25.95 as of this writing), we continue to recommend shares of HLT heading into the spin-off transactions. Please see the Hilton Worldwide Holdings Inc. Spin-Off Report, dated November 16, 2106, and FLASH, published December 5, 2016, for further information.

Above please find the Spin-Off Report FLASH on Hilton Worldwide Holdings.

On December 5, 2016, Hilton Worldwide Holdings Inc. (NYSE: HLT) announced the distribution dates for the spin-off of Hilton Grand Vacations Inc. (HGV) and Park Hotels & Resorts Inc. (Park). HLT shareholders of record as of December 15, 2016, will receive one share of Hilton Grand Vacations and two shares of Park Hotels & Resorts for every ten shares of HLT owned. Shares of Park and HGV will be distributed on January 3, 2017, after the market close, with regular-way trading expected to begin on January 4, 2017. Shares of Hilton Grand Vacations will trade on the NYSE: under the symbol “HGV”, while Park will also trade on the NYSE under the symbol “PK”. When-issued trading in HGV and PK is expected to begin on or about December 13, 2016, under the respective symbols “HGV WI” and “PK WI”. Additionally, Hilton announced that immediately following the HGV and PK share distributions, the company will conduct a one-for-three reverse share split.

Park’s portfolio will include 67 hotels and 35,418 rooms, forming one of the largest and most geographically diverse publicly traded lodging REITs. The REIT will have a high-quality portfolio of luxury and upper upscale assets, located across high-barrier-to-entry urban and convention markets, top resort destinations, select international regions, and strategic airport locations. Hilton Grand Vacations will manage nearly 50 club resorts in the U.S. and Europe and will have an exclusive, long-term license agreement with Hilton Worldwide to market, sell, and operate resorts under the Hilton Grand Vacations brand.

In terms of strategic rationale, the separation makes sense in the context of attempting to garner a greater valuation for the entities as individual companies rather than as part of the current corporate structure. The transactions will complete the transformation of Hilton Worldwide Holdings, the parent, into an asset-light model whereby the company can capture a high-margin franchise as well as management fees, allowing it to generate significant free cash flow. Hilton Grand Vacations will be re-rated, in line with other timeshare operators. HGV has already transitioned into an asset-light business model, allowing for cash flow generation from management fees and sales commissions, which would give it greater operating flexibility as a standalone entity. The timeshare industry has seen some consolidation, and as a standalone entity the company could become a more attractive target to either a strategic or a financial buyer. As a REIT, Park Hotels & Resorts will be afforded preferential tax treatment, allowing it to pursue acquisitions of strategic properties at a faster pace than is possible within the current corporate structure.

The fair value estimates for post-spin PK and HGV of $40 per share and $31 per share, respectively, remain intact. The post-spin HLT fair value estimate has been revised to $57 per share (previously $19 per share) to reflect the reverse stock split. The pre-spin HLT fair value estimate remains at $30 per share, however the underlying capital structure assumption has been adjusted to better reflect the anticipated post-spin net debt position. Given the implied upside from the current share price ($25.97 as of this writing), we continue to recommend shares of HLT heading into the spin-off transactions. Please see the Hilton Worldwide Holdings Inc. Spin-Off Report, dated November 16, 2106, for further information. 

HW agrees to be acquired by Boral Limited for $24.25/share

• Headwaters (HW) has entered into a binding merger agreement with Boral Limited (ASX: BLD) to be acquired for $2.6 billion or $24.25 per share, which is an about 21% premium to the most recent close (and a 34% premium to HW’s 30-day VWAP).

• The purchase price is in-line with our fair value estimate and implies a roughly 11x multiple on our 2017 EBITDA forecast of $235.1 million.

• The transaction was unanimously approved by the Board’s of both companies and is expected to close in mid-2017, subject to HW shareholder and regulatory approvals.

• In our view, the purchase price is fair and although we see some modest overlap given Boral’s existing presence in the U.S. fly-ash and building products markets it is our assumption that the deal passes both shareholder and regulatory muster.

• As such, we think the shares should trade with only a modest spread to the $24.25 offer price in today’s session.

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

• GFF shares have returned 33.5% since our initial recommendation in July 2015 (versus ~4% increases in both the S&P 500 and the Russell 2000).

• That said, with the shares trading roughly in-line with our fair value fair value estimate and at ~9.5x 2017E EBITDA we prefer to maintain a disciplined approach and withdraw our recommendation, as of today’s close.

• Nevertheless, we will continue to monitor GFF for an opportunity to re-recommend the shares if valuation shifts or if we discern any softening in management’s decidedly resistant stance on an elimination of its conglomerate operating structure.

• This week, GFF issued initial 2017E segment EBITDA guidance, which excludes about $40 million of corporate costs, of $225 million or better (compared with 2016 segment EBITDA of $218 million).

• Our current $21 fair value reflects a blended multiple of about 9.5x on 2017E EBITDA $192 million less projected net debt of $875 million (and a diluted share count of 43.6 million).

Withdraw recommendation of MATW with shares trading modestly above our fair value

• MATW shares have returned 40.1% since our initial recommendation in March 2016 (versus an about 6.6% increase in the S&P 500 and a 19% rise in the Russell 2000).

• That said, with the shares trading modestly above our fair value estimate and at 12.2x 2017E EBITDA we prefer to maintain a disciplined approach and withdraw our recommendation, as of today’s close.

• Nevertheless, we will continue to monitor MATW for an opportunity to re-recommend the shares if valuation shifts or as incremental developments toward any potential strategic alternatives materialize, including a separation of the company’s Brand Solutions and Memorialization businesses.

• Our current fair value of $64 per share is based on a blended multiple of roughly 10x on F2018E EBITDA of $275 million less projected net debt of $590 million.

Withdraw recommendation of TG with shares trading modestly above our fair value

• TG shares have returned 47.4% since our initial recommendation in October 2015 (versus an about 6.3% increase in the S&P 500 and a 10% rise in the Russell 2000).

• That said, with the shares trading modestly above our fair value estimate and at 9.0x 2017E EBITDA we prefer to maintain a disciplined approach and withdraw our recommendation, as of today’s close.

• Nevertheless, we will continue to monitor TG for an opportunity to re-recommend the shares if valuation shifts or as incremental developments toward any potential strategic alternatives, including a spin-off or sale of one (or all) of its businesses as well as a monetization of its stake in kaléo, materialize.

• Our current $20 fair value reflects a blended multiple of 9.0x on 2017E EBITDA of $80 million plus the ~$19 million fair value of TG’s stake in kaléo less projected net debt of almost $50 million.

Fair value increased to $31 (from $30); FRGI remains under-levered and tempered expansion plans will flex free cash flow potential, which we think makes it an attractive PE target

• FRGI reported 3Q 2016 revenue up 5.9% to $182.3 million with adjusted EPS of $0.30 (compared with consensus of $183.7 million and $0.31 per share). Consolidated adjusted EBITDA fell 1% to $21.7 million (versus consensus of $22.4 million).

• At Pollo Tropical (PT), revenue increased 13.4% to $103.8 despite a comparable store sales decline of 1% while adjusted EBITDA was down slightly at $12.1 million on an 11.6% margin. At Taco Cabana (TC), revenue declined 1.5% to $78.4 million on a comparable store decline of 4.1% while adjusted EBITDA was also down slightly at $9.6 million on an 12.3% margin.

• For 2016, FRGI largely maintained previous guidance expect for the expectation of same store sales being flat to down 2% at PT (versus prior commentary of down 1% to up 1%) and that capital expenditures would be in a range of $82-$85 million (down from $90-$100 million).

• FRGI ended 3Q 2016 with a net leverage ratio of less than 0.7x.

• For 2017, the company expects to open 12-13 PT stores and 8-10 TC locations, of which ~3 may be PT conversions. Given tempered growth, FRGI expects capital expenditures of $57-$68 million, including $35-$43 million for new restaurants, $14-$16 for remodels and $8-$9 million on IT, which we think is a level that will allow the company to generate positive free cash flow in 2017.

• In our view, as an under-levered company with attractive free cash flow potential in a slower growth strategy FRGI is an attractive target for potential acquirers, particularly amid increased pressure from an activist with a history of pushing for sales and an on-going search for a new CEO.

• FRGI trades at about 7.5x 2017E EV/EBITDA (versus peers at 8.5x and the average M&A transaction valuation of 9.5x).

On October 31, 2016, Vornado Realty Trust (NYSE: VNO) announced a tax-free spin-off of its Washington, DC business, known as Vornado/Charles E. Smith, and a definitive agreement to merge SpinCo with the operating company and certain select assets of The JBG Companies, a leading Washington, DC real estate company. The combined company, to be named JBG Smith Properties, intends to be listed on the New York Stock Exchange under the ticker symbol “JBGS” and will be the largest pure-play Washington, DC real estate company. Vornado shareholders are expected to own approximately 74% of the combined company, JBG’s limited partners are expected to own approximately 20%, and JBG management is expected to own approximately 6% (all percentages subject to closing adjustments). The distribution is expected to be made on a pro rata 1:2 basis to VNO shareholders. The transactions are expected to be completed in the second quarter of 2017, subject to effectiveness of the SEC registration statement, filing and approval of JBG Smith’s listing application, Hart-Scott Rodino and receipt of regulatory approvals and third party consents by each of Vornado and JBG, and formal declaration of the distribution by Vornado’s Board of Trustees. Vornado anticipates that the combination of post-spin Vornado and JBG Smith’s dividends will be at least equal to Vornado’s current annualized dividend of $2.52 per share.

Since Vornado’s spin-off of Urban Edge Properties (NYSE: UE) in January 2015, VNO shares have declined roughly 13% versus an about 7% increase in the S&P 500 and an almost 14% increase for UE. Consequently, management has grown increasingly more vocal about its frustration with the current price of its stock, which it deems as trading at an unwarranted discount to net asset value (NAV). Reflecting that frustration, on the company’s management had previously indicated that a further “de-conglomeration” of the business, in an effort to reduce complexity and narrow the discount was a measure that would “absolutely” be considered. A spin-off of the Washington DC assets makes sense given the perceived undervaluation of the Vornado’s premier New York City assets.

The combined JBG Smith Properties portfolio will consist of 50 office properties totaling approximately 11.8 million square feet, 18 multifamily properties with 4,451 residential units, and 11 other properties, which total approximately 0.7 million square feet. These assets are located in premier submarkets within the Washington, DC metropolitan area, concentrated in Downtown District of Columbia, Crystal City and Pentagon City, the Rosslyn-Ballston Corridor, Reston, and Bethesda. In addition, the combination is expected to result in approximately $35 million of synergies.

Following the spin-off, Vornado will be a best-in-class, highly focused, New York-centric office and high street retail REIT that will own 18.7 million square feet of Class A Manhattan office properties; the largest, highest-quality and unique Manhattan high street retail portfolio, encompassing 3.1 million square feet in 72 properties; and prime franchise assets in San Francisco (the 1.8 million square foot 555 California Street) and Chicago (the 3.7 million square foot theMART).

Excluding the Washington, DC segment contribution, post spin VNO would have generated $1,969.5 million in revenue and $1,379.1 million in EBITDA in 2015. Assuming 3% revenue growth in 2016 (slightly ahead of the 2% growth through 3Q 2016) and 5% growth in 2017, VNO would generate $2,130 million in revenue in 2017 and $1,491 million in EBITDA when applying a 70% margin. The 70% margin is in line with 2015 results. VNO currently trades at 20.1x consensus 2017 EBITDA, a premium to higher end retail-focused REIT peers, which generally trade between 18.0x and 19.0x 2017 consensus, and roughly in line with higher end office-focused REITs. The premium NYC locations of VNO likely warrant at a minimum a valuation at the higher end of office focused REIT peers based on the ability to drive higher rent per square foot. Valuing post-spin VNO between 20x and 21x estimated 2017 EBITDA (at the higher end of peers) results in an enterprise value of $30.6 billion. The post-spin company will also retain its ownership positions in Alexander’s Inc. (NYSE: ALX) (1.7 million shares), Urban Edge Properties (NYSE: UE) (5.7 million shares), and Pennsylvania Real Estate Investment Trust (NYSE: PEI) (6.3 million shares), which are currently valued at $905 million.

Given the lack of disclosures on the spin company, aside from historic operating results of VNO’s Washington, DC segment, valuation of the spin company relies on management’s assumed values of the assets contributed to the new company, which values the transaction at $8.4 billion based on gross asset value (based on price per square foot or per unit metrics). Accounting for debt of $2.4 billion, the implied equity valuation totals $6.1 billion. VNO shareholders will control approximately 74% of the merged company, or almost $4.5 billion. On a pre-spin, sum-of-the-parts basis, shares of VNO are assigned a preliminary fair value estimate of $116 per share when accounting for the current net debt, less $1.5 billion assigned to the spin company, and 189 million shares outstanding.

On October 28, 2016, Huntsman Corp. (NYSE: HUN) filed a Form 10 registration statement with the SEC to spin-off its pigments & additives and textile effects business. The spin-off will be a tax-free distribution of shares in the new company via a pro rata distribution to shareholders of record. The spin-off is expected to be completed in 1H 2017.

Huntsman Corp., a chemical producer, reports in five segments: (1) Polyurethanes (37% of revenue and 43% of EBITDA in 2015); (2) Performance Products (24% of revenue and 36% of EBITDA in 2015); (3) Advanced Materials (10.5% of revenue and 16.5% of EBITDA in 2015); (4) Textile Effects (7.5% of revenue and 4.5% of EBITDA in 2015); and (5) Pigments & Additives, which includes HUN’s titanium dioxide (TiO2) offerings contributed 21% of sales in 2015 but was roughly break-even from an EBITDA perspective. The company had previously disclosed that it was exploring a separation of its cyclical TiO2, additives and textiles businesses via a strategic combination, initial public offering (IPO), or spin-off. On August 3rd, HUN agreed to sell its European Surfactants business to Innospec (NASDAQ: IOSP) for $225 million (or about 9.4x estimated EBITDA of $24 million).

Management has articulated broad segment guidance calling for adjusted EBITDA “improvement” at Polyurethanes (PU), a result “similar” to 2015 at Performance Products (PP), and “moderate” increases at Advanced Materials (AM) and Textile Effects (TE). HUN expects adjusted EBITDA at the Pigments & Additives (PA) segment to be “slightly positive” in 2016. Within the context of this guidance as well as the current consensus forecast of 2016 adjusted EBITDA of $1.2 billion, it can be reasonably projected that the PU segment could generate 2016 adjusted EBITDA of $558 million, while PP, AM, and TE could generate $449 million, $222.5 million, and $60 million, respectively. P&A can be expected to post 2016 EBITDA of $25 million (notably, however, management suggests that the normalized earnings power for the business is around $400-$500 million of annual EBITDA).

Publicly traded competitors in the PU business, per filings, include BASF (BAS GY), Dow Chemical (NYSE: DOW), Lyondell (NYSE: LYB), and Covestro (1COV GY), which trade, on average, at about 7.0x 2016E EBITDA. Applying the peer multiple to PU’s 2016E EBITDA implies a segment enterprise value of $3.9 billion. Competitors to PP include BASF, Air Products & Chemicals (NYSE: APD), Dow, Tosoh Corp (4042 JT), Wanhua Chemical (600309 CH), Akzo Nobel (AKZA NA), Croda International (CRDA LN), Clariant (CLN VX), and Sasol Ltd. (NYSE: SSL), which trade at slightly more than 9x. Applying the peer multiple to PP’s 2016E EBITDA suggests a segment EV of $4 billion. At Advanced Materials, competitors, including Olin Corp. (NYSE: OLN), BASF, Kraton (NYSE: KRA), and Evonik Industries (EVK GY), trade at slightly more than 7.5x 2016E EBITDA. Based on the peer multiple, a segment enterprise value of almost $1.7 billion could be derived. Given a lack of public comparables, one could apply a 6.5x multiple to the lower-margin Textile Effects business, implying a $391 million value based on 2016E EBITDA. Competitors in the P&A space, including Chemours (NYSE: CC), Tronox (NYSE: TROX), Kronos (NYSE: KRO), and Lanxess AG (LXS GY), trade at almost 9x 2016E EBITDA, in a range of ~6x-13.5x. Applying a lower-end valuation of 6.0x to 2016E EBITDA implies a P&A segment value of $150 million. For its part, HUN currently trades at about 7.5x 2016E EBITDA, which suggests that the spin-off of its low-margin, cyclical TiO2 business could, at the least, result in multiple expansion at the parent.

Accounting for $150 million of corporate costs capitalized at ~7.5x, or the weighted average applied to segment earnings, as well as net debt of $4.1 billion, yields a sum-of-the-parts valuation of $4.9 billion, or $20 per share (based on a diluted share count of 240 million).