Spin-off Links – April 2020

Before we get into the spin-off news, I want to highlight several deep dives that we’ve recently published for our premium subscribers:

Otis Spin-off Deep Dive

Carrier Spin-off Deep Dive

Arconic Spin-off Deep Dive

Howmet Aerospace Deep Dive

Recently Announced Spin-offs

On February 24, 2020, Sanofi (SNY) announced that it will be spinning off its active pharmaceutical ingredient (API) manufacturing business through an IPO in 2022. The active ingredient is the ingredient in the drug that is biologically active. The new company will have $1.2BN sales in 2022. SNY expects to IPO 70% of the company on the Euronext Paris and retain the remaining 30%. The rationale for the spin-off is that the API business could serve companies other than Sanofi and benefit from a market that is growing at 6% per year. This looks like an interesting company, but unfortunately, it won’t begin trading until 2022.

Recent Spin-offs

On April 1, 2020, Arconic Inc (ARCN) broke up into two companies. The spin-off, Arconic Corporporation, trades under the same ticker (ARNC) as the former parent. The spin-off is focused on global rolled products, aluminum extrusions, and building and construction systems. It’s best comp is Kaiser Aluminum (trades at 5.8x forward EBITDA). Given the imminent recession and its cyclical exposure, Arconic Corporation sold off sharply as expected, but has since rallied. Given ARNC’s leverage and cyclical exposure, I would not want to own ARNC right now. At the right price and time, it will be a buy (I am currently short). I recently published a deep dive here (paywall).

The remaining company was renamed Howmet Aerospace and trades under the ticker HWM. Its best comp is Precision Castparts, a company that was acquired by Berkshire for 13.3x EBITDA. Although the macro environment is challenging, I believe Howmet is a great company with a bright future. It is currently trading at 8.5x forward EBITDA and 13x forward earnings. I’m assuming EBITDA declines by 22% in 2020 and that EPS declines by 36%. I published a deep dive here (paywall) with additional details.

On April 3, 2020, United Technologies (UTX), spun off Carrier, its HVAC division and Otis, its elevator division, into independent public companies. Of the two spin-offs, Otis looks more attractive given it generates roughly 75% of its earnings from recurring maintenance service. Thus, it’s not as exposed to the economic cycle.

We recently published a deep dive on Otis (paywall). Otis is an attractive company as it generates ~75% of its earnings from servicing elevators and escalators. Thus, it is pretty well insulated from cyclical swings. It is trading at $46. We think fair value is $54.

We also published a deep dive on Carrier (paywall). Carrier is focused on HVAC, Refrigeration, and Fire & Security. The company is a solid business with high returns on capital, but it is more cyclical than Otis. During the Great Financial Crisis, revenue declined by 21% and operating earnings declined by 34%. We think fair value is $25 to $32, significantly higher than the current price of $14. Nonetheless, I’m approaching the stock cautiously given its high debt load and cyclical headwinds.

Imminent Spin-offs

Madison Square Garden (MSG) announced it will spin off MSG Entertainment (MSGE) to its shareholders on April 17, 2020 to shareholders of record as of the close of business on April 13, 2020. Shareholders will receive one share of MSGE for every share of MSG that they own.

MSGE closed in the when issued market at a price of $90. At that price, MSG Remainco (the sports business) is valued at $152 per share. This looks like a very attractive valuation. Key valuation drives are the Knicks (worth $4.6BN according to Forbes), the Rangers (worth $1.65BN according to Forbes), and $285MM of net debt. Add it all up and the remaining company is worth $5,965MM or $248 per share (24MM shares outstanding). The other appealing aspect of the remainco is the sports have historically been defensive (NBA and NHL league revenue grew during the Great Financial Crisis) and asset value should continue to appreciate driven by growing league revenue over time.

More Spin-off Links

Seeking Alpha: Buy Otis

Seeking Alpha: Buy Carrier

Horizon Kinetics: Civeo Investment Overview

Value Investor Club: Liberated Syndication

Forbes: James Dolan Profile (MSG)

Clarke Street Value: Buys and Watch List