Spin-off Links – June 2021
The spin-off bonanza continues.
As the global economy recovers, companies that had halted their spin-off plans are now moving forward with them.
And new companies are announcing break up plans in the never ending quest to create value.
As a result, we are staying super busy.
While it’s hard to argue markets are cheap, I continue to find a ton of interesting special situations.
Just last week, I recommended a “special situation wrapped in a special situation”.
It’s a post re-org equity that is also a spin-off (with insider buying). Sign up as a premium member to access the idea.
In terms of spin-off news, just this week, two new spin-offs will begin trading.
First, Brookfield Asset Management Reinsurance (BAMR) began trading on Monday.
We published a deep dive on the opportunity here (paywall).
Second, DTE Energy (DTE) will spin off its midstream business tomorrow. It will trade under the DTM and is already trading in the when issued market.
We will publish a deep dive for members tonight (stay tuned).
Alright let’s get into the spin-off news…
New Spin-off Announcements
Glaxosmithkline (GSK) announced that it would spin off its consumer health business.
As a reminder, GSK created the business in 2018 when it merged its consumer business with Pfizer’s (PFE). The transaction combined GSK’s consumer brands like Theraflu and Sensodyne with Pfizer’s (Advil, Robitussen, etc.).
Per terms of the announcement, GSK would own 68% of the JV while Pfizer would own the remaining 32%.
This week, GSK confirmed that the consumer division would be spun off into an independent public company by the middle of 2022. I need to do more work, but I think there is upside to GSK based on this spin-off.
Assuming the consumer division trades at 22x EBIT (P&G trades at 23x) and RemainCo GSK trades at 12x (pharma peers trade at >20x), GSK is worth $52, implying ~32% upside.
Options might be an attractive way to play the opportunity and I published a Twitter thread detailing how. Feedback welcome!
Click here to access more of my notes on GSK (I’m long GSK options).
As mentioned above BAM Reinsurance (BAMR) began trading earlier this week.
It’s a weird situation.
It is designed to be economically equivalent and exchangeable for Brookfield Asset Management (BAM) shares. And will pay the same dividend.
The spin-off ratio was 1 share of BAMR for every 145 shares of BAM.
As such, it looked like an indiscriminate selling candidate.
Alas, it didn’t materialize (BAMR price > BAM price).
Nonetheless, I will keep watching in case an opportunity presents itself.
You can find more details in my deep dive (paywall).
As mentioned above, DTE Energy (DTE) will spin off its midstream business tomorrow.
The business will be named DT Midstream and trade under the ticker DTM.
This is another indiscriminate selling candidate as it’s perceived as a “bad business”.
However, I would like to own it at the right price.
It owns a bunch of non-utility natural gas pipeline, storage, and gathering business that generated good free cash flow.
What’s the right price?
To be determined (deep dive will be finished tonight!).
At ~$39, its current price in the when issued market, it looks pretty fairly priced.
SolarWinds (SWI) just announced its spin-off of N-able (NABL) will begin when issued trading on July 9 and regular way trading on July 19.
N-able provides cloud based software to managed service providers.
The spin-off is growing nicely (+15% in 2020) and has a long runway for growth.
The controversy here is that SolarWinds had a security breach whereby hackers added malicious code to the company’s software system.
That code was pushed out to SolarWinds customer base and for months thousands of companies and non business entities were compromised.
The hack is not directly related to the spin-off, but N-able has suffered a reputational hit by its association.
It appears there has been a slight hit to revenue growth (Q1 revenue growth is expected to be 13% vs. 15% in 2020), but Q2 revenue growth is expected to accelerate.
From a sum-of-the-parts perspective, SolarWinds does not look that attractive. It’s trading at 6.5x forward revenue. The spin-off’s closest peer (Datto Holdings) is trading at a slight premium to that multiple (7.3x).
I will publish a deep dive with a full valuation analysis next week. But N-able is another company I would like to own at the right price.