Spin-off Links (July 2019)

Recent Members Only Research

Golar LNG Spin-off – What’s It Worth?

Madison Square Garden Spin-off – Deep Dive

Corteva – Deep Dive

Kontoor Brands – Deep Dive

Riviera Resources – Notes from Meeting with Management

Insurance Auto Auctions – Deep Dive

Recently Announced Spin-offs

On July 17, 2019, Ardagh Group (ARD), announced that it will be spinning off its Food and Specialty Metal Packaging business (business generates $355MM of EBITDA and $2.4BN of revenue) and then combining it with the business of Exal Corporation, a producer of aluminum containers. Exal is currently owned by the Ontario Teachers’ Pension Plan. The new company will be called Trivium. ARD shareholders will own 43% of the new company while the Ontario Teachers’ Pension Plan will own 57%. ARD did not announce a target completion date, but I’m assuming Q2 2020.

On June 17 2019, AECOM (ACM), announced that it would be spinning off its government management services business. The division generates ~$4BN in revenue which represents ~27% of total ACM revenue. The remaining business (Remainco) will be focused on designing, building, financing and operating infrastructure assets for other businesses and other organizations throughout the world.

After the announcement was made, Starboard, a 4% shareholder, wrote a letter to the company urging it to cancel its spin-off plans and instead sell its Construction Services business (15% of sales), which is lower margin. The tax free spin-off is expected to occur in the second half of 2020.

On May 21, 2019, Golar LNG (GLNG) announced that it will be spinning off its LNG carrier business. The spin-off will allow the remaining company to focus on its floating liquid natural gas business.  Management expects the spin-off to occur within months, however, it is dependent on market conditions. I published a deep dive into GLNG and what I think it’s worth. You can access it here (members only).

Recent Spin-offs

On June 28, 2019, Insurance Auto Auctions (IAA), a spin-off of KAR Auction Services (KAR), began regular way trading. As expected, there was no indiscriminate selling and IAA was strong in initial trading. The stock is currently trading at  an EV/’19 EBITDA multiple of 17.9x and a price / ‘19 EPS of 34x based on consensus 2019 numbers.  It’s closest peer, Copart (CPRT), trades at 23x ‘19 EBITDA and 36x ‘19 EPS. It could be argued that KAR is undervalued versus CPRT, but CPRT appears very expensive on an absolute basis. I will continue to watch IAA closely as it has an excellent business model. It would be a great name to own at the right price. However, currently I think the stock is fairly valued.

DowDuPont (DWDP) spin-off, Corteva Agriscience (CTVA), began trading on June 3, 2019. Corteva is a leading company in the seed and crop protection market. The company’s products help improve farmers’ yields and protect against insects and disease. Due to its heavy focus on technology and innovation, Corteva is viewed as a company with a robust competitive position. Here is a good interview with the CEO of Corteva that reviews the company’s strategy. I recently published a deep dive on the stock which you can access here.  I recently stumbled across a good interview with Corteva’s CFO. You can read it here.

CTVA is trading at 11.3x 2019 EBITDA guidance of $2.25BN (midpoint). This seems a little cheap as its closest competitor (but with less scale), FMC, is trading at 11.5x.

While CTVA’s valuation seems fair (to modestly cheap), I’m going to keep it on my watch list. It is fairly interesting given that the company is benefiting from the long term trend of a growing global population. Further, Corteva’s business is not particularly sensitive to the economic cycle.

On May 22, 2019, VF Corp (VF) spun off Kontoor Brands (KTB). Regular way trading began the next day.  KTB is a denim focused company. Its two main brands are Wrangler and Lee. I recently published a deep dive on the Kontoor Brands spin-off which you can read here (members only). At KTB’s current price, It’s trading at a P/E of 8.2x and a dividend yield of 7.1% ($2.24 annual dividend).

Upcoming Spin-offs

There are no imminent spin-offs. However, the spin-off that I’m most anticipating is Madison Square Garden’s (MSG) spin-off of its sports business. It will consist of the New York Knicks franchise and the New York Rangers, as well as some other less valuable assets. The remaining business will own Madison Square Garden (the arena) and focus on live entertainment. It will have a very strong balance sheet (~$1bn of net cash). The stock is currently trading at a sizeable discount to fair value. 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 interesting heading into the spin-off.

More Spin-off Links

Curran Capital: Kontoor Brands Investment Thesis

Seeking Alpha: Masco – Expect Another Portfolio Upgrade

Seeking Alpha: Continental Offers Value But It’s Too Early

Seeking Alpha: Spirit Master Trust Update

Gardner Denver: 1 + 1 May Equal 3

Bloomberg: United Technologies and Raytheon to Merge

Barrons: Investors Should Be Wary of United Technologies and Raytheon Merger

Barrons: United Technologies Looks Attractive

Value Investor Club: KLX Energy

Value Investor Club: Long IAC, Short ANGI and MTCH

Motley Fool: Gap Spin Off of Old Navy is Right Move

WSJ: Get a Lift with the Elevator Industry

Seeking Alpha: Eagle Materials Spin-off Adds No Value

Forbes: Corteva Spin-off a Gem for DuPont Shareholders

Seeking Alpha: Tenneco – Maximum Pessimism Leads to Huge Returns