Odds and Ends
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Recently Announced Spin-offs
On March 16, 2020, Sharp Corporation (SHCAY), announced that it would be carving out its LCD unit within the next two years. The idea is for Sharp to raise money from selling a stake in the business in order to invest in the next generation of panel technology. The business that will be spin-off generates about 700 billion yen to 800 billion yen ($6.5 billion to $7.4 billion) annually and accounts for ~30% of the company’s consolidated revenue. Sharp will retain a majority ownership of the business. The LCD unit develops and manufactures panels small to midsize LCD panels. The LCD unit has faced significant competition from Asian peers and will likely trade at a very low multiple.
On April 20, 2020, MSG Entertainment (MSGE) was spun off to MSG shareholders. I published a deep dive recently here (paywall). I was surprised at how cheap MSGE initially traded although it has rebounded to $81. My fair value estimate of MSGE is between $99 and $118. One nice aspect of MSGE is that it has an abundance of net cash on its balance sheet ($61 per share). I think this provides (or should provide) a nice floor on the stock’s valuation. Also, Dolan hasn’t been shy about buying back stock with MSGN, the other company he controls. With so much cash on the balance sheet and the Sphere delayed indefinitely, it wouldn’t surprise me if he bought back some stock.
On April 3, 2020, United Technologies (UTX), spun off Carrier, its HVAC division and Otis, its elevator division, into two independent public companies. Of the two spin-offs, Otis has the more attractive assets given it generates roughly 75% of its earnings from recurring maintenance service. Thus, it’s not as exposed to the economic cycle. However, Carrier appears to be trading at a bigger discount to fair value.
We recently published a deep dive on Otis (paywall). Otis is an attractive company as it generates ~75% of its earnings from servicing elevators and escalators. Thus, it is pretty well insulated from cyclical swings. It is trading at $55. We think fair value is $54.
We also published a deep dive on Carrier (paywall). Carrier is focused on HVAC, Refrigeration, and Fire & Security. The company is a solid business with high returns on capital, but it is more cyclical than Otis. During the Great Financial Crisis, revenue declined by 21% and operating earnings declined by 34%. We think fair value is in the $25 to $32 range, versus its current share price of $23.
On June 3, 2020, Ecolab (ECL) split off its upstream oil and gas business (ChampionX) through a share exchange. We recommended buying 99 shares of ECL and exchanging them for shares of APY/CHX. The trade works out to an expected $1,100 profit. CHY shares should be distributed sometime this week.
ChampionX (CHX) looks interesting on a standalone basis. Here is the company presentation. APY/CHX has rallied sharply in the past week, but the stock still looks interesting at the current valuation. It’s trading at a EV/2019 EBITDA multiple of 5.3x and a price to free cash flow multiple of 6.2x. It’s trading at a EV/2016 EBITDA multiple of 8.1x and price to 2016 free cash flow multiple of 9.4x.
IAC/Interactive (IAC) will spin-off its stake in Match Group (MTCH) at the end of June. Despite the imminent spin-off catalyst, IAC is trading at a negative $1.7BN value if you back out its ownership stake of MTCH and ANGI. In addition to its stakes in MTCH and ANGI, it has billions of cash, Vimeo, Dotdash, and a hodgepodge of other assets. In April, we recommended going long IAC and short MTCH. So far, the trade is up 21%, but significant upside remains over the next month. The trade is especially attractive because it should be profitable even if the market sells off.
More Spin-off Links