Spin-off Links – April 2021

Recently Announced Spin-offs

Dell (DELL) announced last Wednesday that it plans to proceed with the spinoff of its 81% ownership of enterprise software maker, VMware, which it intends to complete in the fourth quarter of 2021. The announcement should not come as a surprise as the company said in July it was exploring a spin-off of its 81% stake in VMware in order to unlock value for shareholders. After the deal is set to close in Q4 2021, Dell CEO Michael Dell will remain chairman of the VMware board.

Under the terms of the spinoff, VMware will distribute a special cash dividend of $11.5-12B to all VMware shareholders. This special cash dividend also includes Dell, which will receive $9.3-9.7B that it will use to pay down debt to position the company for investment grade ratings.

“By spinning off VMware, we expect to drive additional growth opportunities for Dell Technologies as well as VMware, and unlock significant value for stakeholders,” says Michael Dell. “Both companies will remain important partners, providing Dell Technologies with a differentiated advantage in how we bring solutions to customers. At the same time, Dell Technologies will continue to modernize its core infrastructure and PC businesses and embrace new opportunities through an open ecosystem to grow in hybrid and private cloud, edge and telecom.”

I’ve updated my sum-of-the-parts model and think Dell is conservatively worth $118, implying ~16% upside. This valuation assumes Dell trades at 6.0x EBITDA and 4.8x FCF. This is probably too conservative.

Here are my notes.

CommScope Holding Company, Inc (COMM) announced its plan to spin-off its Home Networks business. The planned separation of CommScope’s Home Networks business and operating expense reduction represents early steps in the Company’s CommScope Next strategy to optimize the business portfolio, drive above-market growth, and control costs. The separation is expected to be completed by the end of the first quarter of 2022 through a tax-free spin-off to shareholders to form a new and independent publicly traded company.

With its long heritage of offering market-leading technologies and solutions, Home Networks will be well positioned to deliver superior home and consumer-oriented products and to unlock substantial value across its broad product lines and customer base.

Home Network looks unattractive at this point. Home Networks generates the majority of its revenue from selling set top cable boxes to cable companies. Given prolific cord cutting, this business is in secular decline. As such, it would have to get incredibly cheap for me to be mildly tempted to buy it.

Lennar Corp. (LEN) announced recently its plan to spin-off all or parts of its “non-core” businesses to become a pure play homebuilder and financial services company. News of the spin-off sent Lennar’s stock up 11% in afternoon trading. Lennars focus on its core homebuilding business comes at a time where the Covid-19 pandemic forced many people to look for larger places to work from home increasing demand for housing. The expected size of of Lennar’s spin-off enterprise would be between $3 billion and $5 billion in asset base, with no debt, and could include Lennar’s commercial mortgage business.

“We (are focusing) on driving higher returns with less noise in our numbers from lumpy profits,” Lennar Chairman Stuart Miller said, adding that this would “increase visibility for the capital markets” into its core operation.

“Expect to hear a lot more about the spin over the next quarters as our thinking matures. Today, we can only give a brief sketch of the future of this program. I know you will thirst for more detail, but we are not in a position to give it at this time. But we did feel that it was time to share our thinking with the investment world as we work to fill out the detail and build a new company.”

Here are my notes.

Recent Spin-offs

Fortitude Gold (FTCO) is a recent spin-off of Gold Resources (GORO), a $250MM market cap gold and silver producer. The spin-off was immediately dismissed since it was a mining company with a history of heavy capex and losses. However, the parent company filed a 10-k subsequent to the spin-off which broke up discontinued operations resulting in the Fortitude having actually generated a positive net income of $10.6MM in 2020.

The problem with the stock now is that the uselife life of its Isabella mine is ~3.5 years which will cause revenue and earnings to decline precipitously in 2025 unless another has been developed by then. As such, the seemingly right way to value the company is by giving it credit for its existing cash balance as well as the cash it is expected to generate over the next 4 years. If the company can successfully develop other projects, such as its recently announced promising future mine in Nevada named Golden mile, it will deserve a terminal value and the stock could easily double from here.

I would love to buy the stock at a decent discount to the value of this undiscounted cash flow and cash, but it is unlikely it will get that cheap.

Here is my deep dive (paywall).

Upcoming Spin-offs

Merck (MRK) announced recently that it has filed a Form 10 registration statement with the SEC in connection with its intended spinoff of its women’s health, biosimilars and established brands businesses into a standalone, publicly traded company, Organon.

Organon will be a global healthcare company formed through a spinoff from Merck to focus on improving the health of women throughout their lives. It will have a portfolio of more than 60 trusted medicines that address an entire spectrum of conditions women face and other medical needs. The spinoff is expected to have a global footprint with significant scale and geographic reach, world-class commercial capabilities, and approximately 10,0000 employees with headquarters in Jersey City, New Jersey.

I think it’s going to be an interesting situation because the spin-off represents about 15% of Merck sales and will likely be sold indiscriminately. I’m currently working on a deep dive. Stay tuned.

Here are my notes.

Recently, IAC/Interactive (IAC) held its investor day. Here are the slides.

The analyst day confirmed a strong business model and expected growth of 30% per year going forward. Vimeo believes its market opportunity will be $70BN by 2024. Long term Vimeo expects to generate 20%+ EBITDA margins.

Vimeo recently raised capital at a $6.0BN valuation or 16x 2021 revenue. This is indeed pricey, but many fast growing SaaS companies are trading at 25x or higher.

One play is to buy IAC now to get access to the spin-off which will probably trade very well.

By my math, at Vimeo’s current valuation, IAC is worth $225 per share. But if you assume Vimeo trades up to 40x revenue, IAC is worth a lot more and is a buy ahead of the spin-off.

SolarWinds (SWI) announced last week the initial public filing of a Form 10 registration statement with the U.S. Securities and Exchange Commission for its spin-off of its managed service provider (MSP) business into a standalone, separately-traded public company to be named N-able, Inc.

A managed service provider (MSP) delivers services, such as network, application, infrastructure and security, via ongoing and regular support and active administration on customers’ premises, in their MSP’s data center (hosting), or in a third-party data center.

N-able provides cloud-based software solutions for MSPs, enabling them to support digital transformation and growth within small and mid-size enterprises. It partners with over 25,000 MSP partners, empowering them to deliver best-in-class managed services in a scalable and repeatable way. The spin-off represents 30% of total revenue and is growing faster (+15%) than the Remainco (+4%).

The Remainco will be focused on providing software solutions to help companies manage all IT needs (network utilization and performance analytics, etc.).

The company is trading at 15.5x forward EBITDA and 16.0x free cash flow and seams reasonably valued. I will dig into the sum-of-the-parts valuation to see if this transaction will unlock value. It is expected to be completed in Q2 2021.

More Spin-off Links

Potential Merger Arbitrage Situation: Bluegreen Vacation Holdings Acquiring Bluegreen Vacations Corporation

To Spin or Not to Spin? Disposals Create Fortunes and Headaches

How a Young Outsider Turned Vimeo into a Billion Dollar Business

Podcast Interview on LSYN with Adam Wilk

Interesting Liberated Syndication Thread