Spin-off Links – August 2020
Recently Announced Spin-offs
Aaron’s Inc. (AAN), a leading omnichannel provider of lease-purchase solutions, announced that it intends to split into two companies: Progressive Leasing and the Aaron’s Business. The spin-off is expected to be completed by the end of the year. Progressive Leasing is Aaron’s division which partners with third party sellers (Best Buy, Lowe’s, etc.) to offer a lease to own purchase option. Progressive’s biggest retail partners are (i) Cricket Wireless (ii) Mattress Firm (iii) MetroPCS, with their largest segments being concentrated in mobile phones, jewelry, and furniture. The Aaron’s business is their own furniture store which offers lease-to-own options but takes on the risk of being a stagnating brick & mortar store. Aaron’s write-offs, which originally surged due to larger online presence in 2019 which forced more labor into sales rather than collections, have begun to stabilize around 3.7%, but the business viability as a whole remains questionable, especially with the entry to lease-to-own programs across other stores like Big Lots. So, Progressive is the better business here, returning strong cash flows in a quickly growing business (doubled from 2015 to 2018) and is picking up big names like Best Buy and Overstock. I will dive deeper with a SOTP and see if any value is unlocked, but as of now this name looks interesting.
SAP SE (SAP) announced that it intends to take Qualtrics public through an IPO. Qualtrics is the market leader and creator of the Experience Management (XM) software category, a large, fast-growing and rapidly evolving market. SAP intends to remain the majority owner of Qualtrics. In January 2019, SAP purchased Qualtrics for $8 billion. Bloomberg intelligence believes the company could be valued as high as $18.7 billion in an IPO. Spin-off through IPO transactions tend to be less attractive as they are closely followed. Nonetheless, we will follow this transaction in case there is an opportunity.
On August 27, 2020, Maxeon Solar (MAXN), a spin-off from SunPower (SPWR), began regular way trading. In its first day of trading, the stock declined by 49% and closed at $19.00 on 3.5MM of trading volume. It has since rebounded slightly.
Maxeon Solar is essentially the international business of SunPower and is primarily focused on manufacturing solar panels. It currently has 0% gross margins but has plans to achieve >15% gross margins and >12% EBITDA margins in-line with peers. This plans seems feasible primarily because it is currently losing $145MM per year due to a long term polysilicon contract that will expire over the next two years.
At its current price, the stock is trading at a market cap of $643MM and an enterprise value of $507MM. It is trading at an EV/revenue multiple of 0.4x. Check out our deep dive (members only) for additional details including its valuation relative to where solar manufacturing peers trade.
Smith and Wesson (SWBI) spun off American Outdoor Brands (AOUT) on August 24, 2020. The business consists of several brands targeting outdoor oriented consumers, specifically hunters, fishers, hikers, and others in the same category. Sales grew slightly in 2019, but declined in fiscal 2020. Further, EBITDA margins declined from 16% in 2018 to 7% currently. Assuming the stock deserves to trade at 14.9x EBITDA inline with outdoor apparel peers, it is worth ~$182MM or ~$13 per share. The business historically has not generated significant free cash flow. In fiscal years 2018, 2019, and 2020, it generated $12MM. AOUT would have to trade at a significant discount to fair value for me to get interested in the stock, as the business faces significant challenges. We recently published a deep dive (members only) on the spin-off. Disclosure: I’m currently short AOUT.
I expect the merger of Pfizer’s (PFE) off-patent branded business with Mylan (MYL) to close by year end. Pfizer shareholders will own 57% of the new entity, while Mylan shareholders will own 43%. The new company is expected to have pro forma 2020 revenue of $19BN to $20BN, EBITDA of $7.5BN to $8.0BN and free cash flow of >$4.0BN. On a pro forma basis, the new company is trading at 4.9x free cash flow and 5.6x EBITDA. Why is it so cheap? Mylan has high leverage and it (along with other generic manufacturers) is under investigation for a price fixing. Nonetheless, it looks interesting.
More Spin-off Links