Spin-off Links – April 2019

Recent Members Only Research

Alcon Spin-off Thoughts

New Dow Spin-off Analysis

Livent Spin-off Overview

KAR Auction Services Spin-off (IAA) Deep Dive

Recently Announced Spin-offs

On March 25, 2019, Naspers (NPSNY) announced that it will be spinning off its stake in Tencent (TCEHY) and other internet assets by the end of the year. Naspers owns a 31% stake in Tencent due to an early investment in the company. That stake is worth $136BN. Naspers entire market cap is $88.3BN and it also owns significant other internet and ecommerce assets. Naspers plans to list all of its internet assets outside of South Africa including mail.ru, iFood, DeliveryHero, Udemy, MakeMyTrip, Tencent and others. The largest asset (by far will be Tencent). The spin-off is expected to be 75% owned by Naspers and to have a free float of 25%. I published additional through on the spin-off here.

Recent Spin-offs

On April 9, Alcon (ALC), a spin-off of Novartis (NVS), began trading. Alcon sells vision products and surgical products for opthalmic surgeons. The stock has strong fundamentals, margin expansion potential, and defensive characteristics. Unfortunately, the stock is expensive, trading at 29x 2019 earnings. At that valuation, It’s hard to get too excited about the stock’s prospects. I posted a more in depth analysis which you can read here (for members). Barron’s wrote recently that the stock deserves a long, hard look.

On April 1, Ironwood Pharmaceutical (IRWD) spun off its R&D division, Cyclerion (CYCN), which is focused on developing treatments for rare diseases (5 drugs in development). Activist biotech investor, Alex Denner of Sarissa Capital, was the catalyst behind the break up. CYCL has been capitalized with $165MM (raised through a private placement) which is enough capital to run the company for 2 years. Currently, the stock is trading at $15.43 and an implied market cap of $431MM. The president of the company recently acquired $4MM of stock. This bodes well for the future prospects of the stock, but I have no edge on this stock and will pass unless it trades below its cash levels on its balance sheet. I’ve had good success (NVTR and APVO) investing in healthcare spin-offs once they are trading below cash.

On April 1, DowDuPont (DWDP) spun off its material science business which will be called Dow (DOW). The company makes generic chemicals. DowDuPont shareholders will receive 1 share of DOW for every 3 shares of DWDP that they own. I published some thoughts on DOW which you can read here (members only). The stock has been very strong due to bullish analyst notes. The most appealing aspect of the stock is it sports a hefty 5%+ dividend yield.

Upcoming Spin-offs

In late May, VF Corp (VF) will spin-off it’s demin business which is comprised of the Wrangler and Lee brands. The new company will be called Kontoor Brands (KTB). The idea is to separate the slow growing denim business, from the fast growing core business (Vans, North Face, Dickies, etc.). I’ve provided preliminary details here. KTB is targeting a 5% dividend yield and a 60% payout ratio. In 2018, KTB generated $225MM of net income. Assuming a 5% decline (revenue and net income has been declining) in 2019 would yield $214MM of net income in 2019. Assuming a 50% payout (to be conservative given declines in net income), the expected dividend would be $107MM. Management expects the company to trade at a 5% dividend yield which implies a $2.1BN market cap.  This implies a P/ 2019 EPS ratio of 10x. KTB is expected to have $900MM of net debt which translates to an EV of $3.0BN. On an EV / ‘19 EBITDA basis, KTB would be trading at 8.8x EBITDA which appears fair. I will be publishing more research for members ahead of the spin-off.

On June 2, DowDuPoint (DWDP), will spin-off, Corteva Agriscience. Recently, DWDP spun-off Dow Inc (DOW) which is produces generic chemicals. Corteva will be a leading company in the seed and crop protection market. The company’s products help improve farmer’s yields and protecting again insects and disease. Due to its heavy focus on technology and innovation, Corteva is viewed as a company with a robust competitive position. Here is a good interview with the CEO of Corteva that reviews their strategy. Stay tuned for more analysis as the spin-off approaches. Management has provided 2019 EBITDA guidance of $2.8BN. Corteva’s pure play peer’s (FMC and BASF) trade at 10.0x 2019 EBITDA. Quick math implies a $28BN enterprise value for Corteva would be fair. The company is expected to have $11.2BN of net debt (including pension liability) which implies a fair market cap of ~$16.8BN. This is just a rough estimate, and I will refine my analysis as the spin-off approaches.

Spin-off Links

GAP – Old Navy Spin-off Looks Interesting

Naspers – Tencent Spin-off Quick Thoughts

Good Article on Naspers Upcoming Spin-off of Tencent

Seeking Alpha – Naspers: Unicorns in the Stable

What Alcon’s Spin-off Can Teach Bausch Health (Barrons)

As Spin-off, Alcon Joins Successful Crowd of Healthcare Spin-offs (BioPharma Dive)

Interview with CEO of Alcon (CNBC)

Levi Strauss Shows Solid Macro Footing for VF Corp (The Street)

Vans Will be a Brand Leader for VF Corp (MarketWatch)

VF Corp Announces Denim Spin-off On Track for May (Latest Slide Deck)

CNBC: Starboard Announces New Stake in KAR

KAR Announced Positive IRS Ruling

Seeking Alpha: Livent is a Pure Play Lithium Value Stock

Seeking Alpha: Covetrus is a Wonderful Company at a Fair Price

Seeking Alpha: Corepoint Lodging Write Up

Dow’s Attractive Dividend Proposition for Investors (Seeking Alpha)

Third Point Calling for Sony to Be Broken Up (Motley Fool)

Post Files for IPO of Active Nutrition Business (Food Dive)

Our Take On New Fox (Seeking Alpha)

Should Altaba Investors Stay or Go? (Barrons)

Barrons Argues to Avoid L Brands Despite Potential Breakup