Spin-off Links – December 2021

There has been a TON of spin-off activity.

New spin-off announcements, recent spin-offs trading, upcoming spin-offs – you name it, we got it..

Let’s get into it.

New Spin-off Announcements

On November 12, 2021, Johnson & Johnson (JNJ) announced that it will spin-off its consumer business ($15BN of revenue) within 18-24 months. The new consumer company will be named at a later date. The remaining company will consist of the pharma and med tech business (~$77BN of revenue). The thesis is that the consumer business will trade closer to a consumer multiple (P&G trades at an EV/EBITDA multiple of 17.6x while J&J trades at 13x). The transaction looks fairly interesting. LEAPs may be an interesting strategy as JNJ has low volatility so its options will likely be attractively priced. Because the spin-off won’t take place for 1.5+ years, I don’t think it is actionable today.

Ligand Pharmaceuticals Inc. (LGND) announced on November 11, 2021 that it is planning to split Ligand into two separate, publicly traded companies with one featuring the OmniAb business, and the other featuring Ligand’s existing collection of core royalties and the technologies, pipeline and contracts associated with the Pelican protein expression platform and the Captisol business. From what management has said, an IPO and eventual distribution of OmniAb shares to Ligand shareholders is the leading option on the table. In an IPO, Ligand expects OmniAb to issue less than 20% of its common stock, with Ligand retaining the remaining interest, which would eventually be distributed to Ligand stockholders as a tax-free transaction. Currently there is no given timeline for the transaction Their OmniAb business has seen significant progress this year, with the first regulatory approval for an OmniAb-derived antibody received during the Q3 and a second approval anticipated by year-end.

On November 9, 2021, General Electric (GE) announced its plans to split into three companies: One focused on healthcare, another devoted to energy and power, and the third dealing with aviation. The healthcare spinoff is slated for 2023, and GE plans to retain a 19.9% stake. The spinoff of the power business is planned for 2024. Investors were happy with the news as the stock shot up more than 5% to roughly $114. GE CEO Larry Culp says, “Greater focus and accountability will come from this structure.” He sees benefits from the move in terms of capital allocation and talent retention in each business, as well as gains for GE’s customers. The hope is, from the CEO’s perspective, that down the road, all three companies are targeting investment-grade credit ratings by continuing to deleverage. I think the spin-off will unlock value (Wall Street loves simplicity), but there’s really nothing actionable to do today as the first spin-off won’t take place until 2023. As such, I think GE will be in “spin-off purgatory” for the foreseeable future.

Recent Spin-offs

IBM (IBM) spun off Kyndryl (KD), its managed infrastructure services, on November 4, 2021. Kyndryl supports mission critical technology infrastructure for its customers. IBM distributed 80.1% of its Kyndryl shares to current IBM holders, and will exchange its remaining 19.9% stake in Kyndryl for outstanding IBM debt in the 12 months following completion. Kyndryl on a pro forma basis had 2020 revenue of $19.4 billion, down from $20.3 billion in 2019 and $21.8 billion in 2018. For the 2021 first half, revenue on a pro forma basis was $9.4 billion. Kyndryl had losses on a GAAP basis in both 2020 and the first half of 2021, but that includes one-time charges related to both workforce reduction and the spinoff. After reviewing management’s EBITDA estimates, I think they are reasonable. As such, the stock looks incredibly cheap at 0.39x revenue and 2.6x EBITDA. It’s closest peer, DXC, trades at 0.6x revenue and 3.9x EBITDA. KD is not an official buy recommendation as I struggle to see what the catalyst will be for the stock to re-rate.

However, 3 separate insiders have bought the stock in the open market, and this usually bodes well for subsequent 6 month stock performance.

While I don’t have the conviction to recommend the stock today, it’s probably cheap enough that it’s worth a trade.

Alliance Data Systems (ADS) spun off Loyalty Ventures (LYLT) on November 8, 2021. LoyaltyOne’s biggest revenue generator is Air Miles, and is the leading consumer targeted coalition marketing program in Canada. BrandLoyalty provides consumer marketing programs for grocers in various global regions.

The stock is trading at $30 and looks pretty attractive trading at 6.3x my estimate of normalized EBITDA ($200MM). I just don’t know what the catalyst is for the stock to re-rate. I don’t think the stock is going to initiate a dividend any time soon, but it is relatively cheap.

We have seen two insiders buy in the open market.

bluebird bio, Inc. (BLUE) spun off its oncology division, 2seventy bio (TSVT), in a tax free transaction on November 5th. The distribution ratio was 3:1 ratio and the company was funded with $441M in cash. The company is focused on oncology drugs and has a bunch of drugs in development. I have no clue on the outlook for the pipeline. If the stock sold off to below cash ($19.50), I may be interested in owning it for a trade, but at the current price the stock is trading well above net cash on its balance sheet.

Realty Income (O) and VEREIT (VER) closed their merger and spun off both of their properties that were focused on office properties into a combined company called Orion Office REIT Inc. (ONL). While there is significant uncertainty regarding the future of office space given the pandemic inspired preference with working from home, I believe the companies are still going to need office space. Further, Orion’s office space is typically outside of cities which may make it more attractive to companies that want to minimize commute time for employees.

Orion looks attractive at 10.3x EBITDA vs. peers which trade between 13x and 23x EBITDA. Additionally, Orion will likely initiate a dividend which will be a catalyst for the stock to re-rate. While I was hoping for a 8% to 9% yield, I think a lower yield is more likely (at Orion’s current price). Consensus 2022 adjusted funds from operations estimate is $135MM. If Orion pays out 50% of that (mgmt has guided it will be at the low end of peers), it’s dividend will be 6.7%. An attractive yield but not crazy attractive. Its close peer BDN trades at a dividend yield of 5.7%. At that yield, ONL would be a ~$22 stock.

Upcoming Spin-offs

Vector Group (VGR) will spin off its real estate division, Douglas Elliman, before year end. Douglas Elliman, one of the nation’s largest residential real estate firms and a major player in the Long Island market, but has expanded much further such as Florida and California. The new public company will trade under the ticker (DOUG), and will focus solely on real estate. This transaction makes a ton of sense as tobacco and real estate are unrelated. Vector Group holders will get one share of the spinoff for every two VGR shares held. The company also expects that the new company will pay $0.05 per share quarterly dividend to Douglas Elliman common stockholders. Vector (VGR) will continue to pay $0.20 per share quarterly dividend. The real estate business is booming with revenue and EBITDA soaring. Meanwhile the Tobacco business remains steady. The Tobacco business is facing a bit a a mix shift issue (lower priced cigarettes are growing faster than more premium cigarettes). Here’s my thinking on a potential SOTP valuation. DOUG should trade at 0.5x current revenue (inline with COMP and RLGY). The Remainco should trade at ~7x EBITDA, a slight discount to PM/MO/BTI. These assumptions yield an expected enterprise value of $3.2BN inline with its current EV. A couple caveats: 1) if RemainCo increased its dividend significantly (it has the potential to) this would drive upside. 2) If the spin-off traded closer to 1x revenue, it would drive upside.

Spin-off Links

MSGE is a Cheap Stock

  • I agree this stock is cheap. The problem is we don’t know when the value gap will close due to the Dolan discount (Chairman doesn’t have the best reputation in corporate governance). Over a 5 year basis, I think the stock will do quite well.

Harley Davidson: EV Bike Spin-off/SPAC

  • Looks moderately interesting. Not a reason to buy the stock. Harley will maintain a 74% equity ownership in the business.

VIC: Sylvamo (Need to create a free account to review)

  • Decent Write Up.

Intel: Mobileye IPO Could Be A Masterstroke

  • Partial IPO makes sense to highlight Intel’s cheapness. Will be one to watch.

VIC: LGL Group Write Up (need to make a free account to access)

  • Good write up on LGL which is an interesting spin-off/special situation involving Mario Gabelli.

WSJ: Biotech Hedge Funds Suffer Big Losses

  • Biotech stocks are in a bear market (see Aptevo). Could be a good time to invest.

Great Article on What Typically Happens Following Dutch Tender Offers

  • Stocks typically fall after completion of a Dutch Tender Offer but then subsequently perform well.

Did I miss anything?

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