Spin-off Links – December 2019
Odds and Ends
- We are running a Friends and Family sale through December 23rd.
- The code “FandF” will get you 25% of an annual subscription.
- Sign up here!
- I was interviewed on Macro Ops. Check it out here.
- I really enjoyed talking with Brandon (the host) about the origins of my site and about which spin-offs look interesting today.
- Is the snow and cold already getting to you?
- Come to the Moneyshow conference in Orlando! I will be giving a presentation on spin-offs.
Recently Announced Spin-offs
On December 4, 2019, in conjunction with its earnings report, Verint (VRNT), an Israeli-American Analytics firm announced it intends to spin off its cyber intelligence business. The cyber intelligence business focuses on security and intelligence data mining. In fiscal 2019, it generated $433MM (35% of total) of total company revenue. The remaining business is focused on customer interaction and workforce optimization solutions. As part of the transaction, Apax Partners, will invest up to $400MM into VRNT. The spin-off is expected to be completed by Q1 2021.
On November 13, 2019, American Outdoor Brands (AOBC), announced that it is spinning off its Outdoor Products and Accessories business which sells accessories for shooting, hunting, cutlery, and outdoor products. During the last 12 months, the business is expected to generate $205MM in revenue and $28MM of EBITDA (14% EBITDA margin). The remaining business (parent company) will be rebranded as Smith and Wesson and will focus on firearms, strong cash generation and returning cash to shareholders via dividends. It is expected to generate revenue of $475MM and $98MM of EBITDA (21% EBITDA margin). Gun sales exploded in the years leading up to the 2016 US presidential election and fell off sharply after President Trump was elected. If you think a Democrat will win the 2020 US Presidential election, Buy AOBC.
On November 11, 2019, SunPower (SPWR), announced that it will be spinning off Maxeon Solar Technologies, its global solar panel manufacturing business, in a tax free transaction by Q2 2020. In conjunction with the spin-off, TZS, a Chinese supplier of silicon wafers, will invest $298MM into the business in exchange for a 28.8% ownership stake in the business. The remaining SunPower business will be focused on its growing commercial and residential solar panel installation business.
On September 4, 2019, Fortive (FTV), announced that it will spin off a global industrial company focused on transportation and mobility. The spin-off has $2.8BN of sales (36% of total) and will have 23% EBITDA margins. Products that the spin-off manufactures include fuel dispensers, point of sale systems, and EV charging modules. The spin-off is expected to grow at a mid single digit rate and generate consistent free cash flow. The remaining company will retain the Fortive name and has $5.0BN of sales (64% of total). It will be focused on higher growth end markets and will have significant recurring revenue (30%+) and mid 20% EBITDA margins. New Fortive will include the following divisions: Field Solutions, Product Realization, Health, and Sensing Technologies. Products include test, measurement and calibration tools & solutions, portable gas detection equipment, sterilization equipment, and sensor-enabled instruments. The transaction is expected to be “tax efficient” and completed in the second half of 2020.
On November 21, 2019, Recro Pharma (REPH), spun off Baudax Bio (BXRX), in a taxable transaction. Baudax is capitalized with $19MM and will be focusing on getting approval for an acute care drug. BXRX currently trades at $5.90 which implies a $60MM market cap and $41MM enterprise value. BXRX’s main drug, IV Meloxicam drug, won its appeal against the FDA, and the agency will re-review the drug’s application. If the drug is ultimately approved, analysts estimate that it could generate $300MM of peak sales. For what it’s worth, three brokers initiated on the company with a price targets that range from $8 to $12. I was hoping for a sell off, and may have bought it as a small speculative position. However, the stock has performed well in initial trading.
The more interesting opportunity in my mind is the RemainCo, Recro Pharma (REPH), as it is a pure play contract development and manufacturing (CDMO) company. This division is high margin and growing very well. It’s currently trading at 9.0x 2020 EBITDA and 15.4x 2020 EPS. This looks too cheap. The CDMO industry is consolidating and many of its competitors have been acquired at ~16x EBITDA. I published more details here (members only). BXRX was a taxable spin-off so there is no time restriction on BXRX or REPH being acquired.
There are no imminent spin-offs. However, the transaction that I’m most anticipating is Madison Square Garden’s (MSG) spin-off of its entertainment business. The entertainment business will own Madison Square Garden (the arena) and focus on live entertainment. It will have a very strong balance sheet (~$1.0bn of net cash).
The remaining business with be focused on sports. Its assets will include the New York Knicks franchise and the New York Rangers, as well as some other less valuable assets. I believe fair value for MSG is ~$414 and the stock trades at $287 a 31% discount. The primary reason for the discount is that James Dolan is the CEO and has a poor reputation with investors. Nonetheless, the spin-off could go a long way towards shrinking the discount to fair value.
Further, MSG fair value should likely grow over time given the scarcity value of the professional sports franchises and growing revenue. I recently published a deep dive on MSG here (members only). It looks attractive heading into the spin-off.
More Spin-off Links