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For those interested in international micro-cap spin-offs, check out Klondex Mines (KLDX). It is being acquired by Hecla Mining (HL), and the deal was just approved by shareholders. Just prior to the acquisition, KLDX will be spinning off its Canadian assets into newly formed company called, Havilah Mining Corporation (Havilah). Havilah will be capitalized with $7.0MM for a 13.46% ownership stake which implies a $52MM enterprise value. However, $7MM is a drop in the bucket considering the total transaction is valued at ~$500MM so I’m not sure how valid that $52MM EV is. The transaction is expected to close on July 20th so its moving quick!
Retail Value Inc (RVI), a DDR Corp (DDR) REIT spin-off, began trading on July 2 and has been strong out of the gate. A recent Seeking Alpha article articulates the bull case.
Veoneer (VNE), an Autoliv (ALV) spin-off, also began trading on July 2. VNE is focused completely on supplying auto parts to the autonomous driving market which is large and growing. VNE is currently trading at $47.94, implying a market cap of $4.2BN and an EV of $3.2BN. It trades at a EV / 2018 revenue multiple of 1.3x. If you assume that VNE should trade at the same multiple as Aptiv (1.9x) there is decent upside. But remember that APTV has a 16% EBITDA margin and VNE isn’t expected to generate positive EBITDA until 2020! So I think the discount is justified.
Spin-off News and Analysis
In May, General Electric (GE) announced its plans to spin off and then merge its transportation division with Wabtec (WAB) in Q1 2019 to create a global leader for rail equipment, services and software. Click here for my notes and full thoughts. In June, GE announced it will spin off its healthcare division in 2019. I estimate GE Healthcare is worth ~$65BN.
On June 29, 2018, Novartis (NVS) announced it intends to spin off its Alcon eye care business which it acquired fully in 2015. This is a familiar pattern (CARS, CNDT, etc.). Large corporate makes strategic acquisition assuming “growth synergies” only to spin-off the division years later after disappointing results. It reminds me of Warren Buffett’s quote from the 2014 Berkshire Hathaway letter to shareholders….
“Investment bankers, being paid as they are for action, constantly urge acquirers to pay 20% to 50% premiums over market price for publicly-held businesses. The bankers tell the buyer that the premium is justified for “control value” and for the wonderful things that are going to happen once the acquirer’s CEO takes charge. (What acquisition-hungry manager will challenge that assertion?) A few years later, bankers – bearing straight faces – again appear and just as earnestly urge spinning off the earlier acquisition in order to “unlock shareholder value.” Spin-offs, of course, strip the owning company of its purported “control value” without any compensating payment. The bankers explain that the spun-off company will flourish because its management will be more entrepreneurial, having been freed from the smothering bureaucracy of the parent company. (So much for that talented CEO we met earlier.)
If the divesting company later wishes to reacquire the spun-off operation, it presumably would again be urged by its bankers to pay a hefty “control” premium for the privilege. (Mental “flexibility” of this sort by the banking fraternity has prompted the saying that fees too often lead to transactions rather than transactions leading to fees.)”
Pfizer (PFE) recently announced that it will reorganize its company into three divisions: innovative medicine, established medicines, and consumer healthcare. Many are speculating that this reorganization is a prelude to a consumer healthcare spin-off after Pfizer failed to find a buyer.
Non Spin-off Related Stuff:
Howard Marks recently published his latest memo which is always worth a read. In it, he discusses passive vs. active trends. He explores the question, “How much of the investing that take place has to be passive for price discovery to be insufficient to keep prices aligned with fair values?” Currently 40% of equity mutual funds are invested passively. At some point passive strategies may take so much share that prices may diverse from intrinsic value to the benefit of active managers.
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