There has been a lot of spin-off news since my last “spin-off links” article…

But before we dive into it I just want to highlight that I just published a new idea.

Usually I look for obscure, hidden opportunities, but my latest recommendation is a large cap that is too cheap to ignore. It’s a well positioned company throwing off gobs of cash, trading at a cheap absolute and relative basis with heavy insider buying. Technical selling pressure is coming to an end, and the CEO is heavily incentivized to get his stock price up.

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Alright, now let’s dive into the spin-off news…

New Spin-off Announcements

Vista Outdoor (VSTO) announced this week that it plans to split into two publicly traded companies, separating their Outdoor Products ($1.3BN in revenue) and Sporting Products ($1.7BN) segments. Here’s the slide deck presentation.

After the spin-off, the Sporting Products business (which will be renamed) will continue to be the world’s leading manufacturer of ammunition. Following the separation, Outdoor Products (also to be renamed) will be an industry-leading, diversified portfolio of outdoor brands, like CamelBak. The estimated total global addressable market for the outdoor products will be ~ $100 billion.

The transaction is anticipated to be a tax-free distribution to shareholders of 100% of the stock of its Outdoor Products segment, which will become the new, independent publicly traded company. The split is expected to be completed in 2023.

My guess is this translation is being driven by ESG concerns. Nobody wants to own a gun company (the spin-off). However, this could be an interesting set up as the spin-off will pay a nice dividend. Vista reported results recently and they looked good. Guidance for 2022 is for growth which is a little surprising as American Outdoor Brands (AOUT) expects sales to decline by ~10%. This idea isn’t actionable today, but looks like an interesting set-up.

Brookfield Asset Management (BAM) plans to spin off its asset management business into a new publicly traded company. This new business would control Brookfield’s fee-generating assets, which include real estate, infrastructure, credit, private equity and renewable energy.

The spin off was first considered in February as a way to simplify Brookfield’s structure and make it easier for investors to value the two companies. This would make the RemainCo an“asset-light” business. We have seen Brookfield take similar steps before, just last year they spun off its reinsurance business through a special dividend, and before that they did the same thing with their private equity segment.

As of now there currently isn’t a timeline for the completion of the transaction. But this is an interesting situation. Brookfield is an admirable company, and it could make sense to buy in ahead of the break up to take advantage of the value creation.

Aramark (ARMK) recently announced that it expects to spin-off Aramark Uniform Services (AUS) as an independent publicly traded company.

Aramark provides food and facilities services to companies in the education, sports, leisure, healthcare, and business sectors. While AUS provides work uniforms, for use in manufacturing, industrial, automotive, and food service industries. The spin-off makes sense as it would seem like there is little synergistic value in keeping the two businesses together as they serve two rather different end markets.

The transaction is intended to be a tax-free spin-off to Aramark and its stockholders, with an expected completion date by the end 2023.

Citius Pharmaceuticals, Inc. (CTXR), the late-stage biopharmaceutical company, announced recently that it plans to split into two separate publicly-traded companies through an IPO of the Spin-co. The split is expected to take place in H2 2022.

The SpinCo will focus on developing and commercializing its therapy I/ONTAK for the treatment of rare forms of cancer, which will build off of the late stage trial that was completed for I/ONTAK in Dec. 2021. Alongside the split, SpinCo plans to submit a biologics license application in H2.

The RemainCo is to be made up of Citius’ other pipeline assets, including Mino-Lok, its solution for treating bloodstream infections caused by catheters. This stock could be interesting. I’ve reached out to the company to learn more.

Fortune Brands (FBHS) has announced that it will separate into two individual publicly traded companies through a spin-off of their Cabinets business ($2.9BN of sales), one of their three main operating segments. The remaining company will consist of their Water Innovation, and Outdoors & Security segments ($4.8BN of sales). Here is the slide deck for the transaction.

As the business stands today (pre break up), it is very cyclical with about 40% of the Cabinets business exposed to new residential housing. With the spin-off, the RemainCo, comprised of the Water Innovations and Outdoor & Security segments will likely have a less cyclical, higher margin product portfolio, with lower exposure to new residential housing and higher exposure to repair and remodeling expenditure will enhance its ability to maintain strong margins.

It is expected to be a tax-free transaction and is estimated to be completed in the next 12 months. The will be a “good co, bad co” transaction.” Fortune Brands has been a good long term stock. It has compounded revenue at 9% and EPS at 24% since 2012. It’s only trading at 12x forward earnings. This looks like an interesting set up. Here’s a good VIC write up from 2019.

Recent Spin-offs

Sanofi (SNY) spun off Euroapi (EAPI:EPA), its active pharmaceutical ingredients (API), on May 5. The API business is Sanofi’s “made in Europe” solution to the region’s heavy reliance on materials sourced from countries like China and India—an issue thrown into relief by the COVID-19 pandemic.

The new company is the largest API player in the European Union and number 2 on the global API market, with approximately €1 billion ($1.2 billion) in expected sales by 2022.

Sanofi investors received 1 share in the spin-off for every 23 shares owned. Sanofi will retain 30% of shares of EUROAPI. In addition, French Tech Souveraineté is going to buy 12% of the company from SNY for up to €150 million. This implies a max valuation of €1.25BN.

The stock is currently trading at €13.90. This implies a market cap of €1.2BN and the same enterprise value. On an EV/EBITDA basis the stock is trading at 10.8x EBITDA which seems reasonable. The business is very capital intensive (~10% of sales) and is not growing very well.

The stock doesn’t look particularly compelling, but could be interesting if it starts to demonstrate success growing its CDMO business.

Bausch Health (BHC) recently IPO’d 10% of Bausch + Lomb (BLCO) at an offering price of $18, down from the initial range of $21 to $24. The stock has performed poorly in initial trading. BLCO is trading at a pretty attractive multiple (11x EBITDA). This compares very favorably to Alcon (ALC) which trades at ~18x EBITDA.

Currently BHC owns 90% of BLCO. BHC’s market cap is $3.5BN and its stake in BLCO is worth $5.0BN. Thus, RemainCo is being valued by the market at negative $1.5BN despite it generating over $2BN of EBITDA.

Why the market anomaly? The spin-off has been delayed as it’s going to take longer than originally expected to de-lever due to 1) IPO of only 10% of BLCO (instead of 20%) 2) lower than expected valuation for BLCO 3) indefinitely delayed IPO of Solta.

Also, XIFAXAN, Bausch Health’s irritable bowel syndrome product generates 34% of its revenue (and more of EBITDA). XIFAXAN’s patent doesn’t expire until 2028, but Norwich (a generics company) has challenged XIFAXAN’s patent. The final trial will be in August 2022 unless a settlement is reached. If a settlement is not reached, the spin-off of Bausch and Lomb will be re-evaluated.

Right now, a compelling trade would be to buy BHC and short BLCO, but BLCO is very hard to borrow. I think the situation is interesting, and at some point, there is going to be an obvious opportunity. But I’m not seeing it yet.

AT&T (T) completed its full spin-off of Warner Media on April 8th and both stocks started trading separately on April 11. As part of the deal, Warner Media merged with Discovery (DISCA).

AT&T shareholders received 0.24 shares of Warner Bros. Discover (WBD) for each AT&T share owned. Warner Bros. initially performed well but has slumped recently. The reason? 1) NFLX announced disappointing results, bringing down the whole streaming industry and 2) WBD reported a “messy” quarter.

I think the stock looks very attractive from a valuation standpoint. WBD is trading at 6.4x 2023 EBITDA guidance and 5.3x 2023 FCF guidance. 2023 guidance was re-iterated on the Q1 2022 call. It obviously looks cheap relative to Netflix (14x EBITDA) but also looks cheap on an absolute basis.

The merger of Warner Bros iconic content library and DTC platform with Discovery has eliminated the “terminal value” question for Discovery. WBD is going to be around whether the future is DTC, Pay TV or some combination of the two.

Upcoming Spin-offs

Fortress Transportation and Infrastructure (FTAI) announced during its Q1 earnings that its board had approved its FTAI Infrastructure spin-off, and expects to complete the transaction in the next 4 to 8 weeks.

Currently, the business consists of an aviation engine leasing business and an infrastructure business. Neither business has much to do with the other, and so a spin-off makes sense.

The other interesting aspect of the set up is the company will go from a K-1 producing company to a C-Corp. This could attract many more investors and lead to index fund buying.

More work to do on this one, but it looks like an interesting opportunity. Here is a good write up on VIC (need to create free account to access) which outlines the bull case.

I will do more work in the coming weeks to determine whether there is an opportunity.

Spin-off Links

Primaris REIT Spin-off VIC Write- Up (Need to make free account to access)

  • Good write up. Stock looks interesting to me, but not compelling.

ESAB Corp: Looks To Be A Solid Welding Play After The Spin-Off

  • Good overview of ESAB on Seeking Alpha.

Boyar Warner Bros Discovery (and other) Presentation

  • Good presentation on WBD and other stocks.

Good Write-up on Douglas Elliman (DOUG)

– Stock is cheap on a relative and absolute basis. With insider buying. My one concern is “normalized earnings” – the current period is definitely elevated. So what is a fair multiple on normalized earnings. But at worst, I think this is probably a good trade.

Elliott is Pushing for a Break Up of Western Digital

– Elliott believes the stock could double by 2023 if the spin-off takes place

Warner Bros. Discovery Write-Up

– Good summary of bull case

Notes from IR Call with Fortune Brands

– This spin-off should unlock value but isn’t actionable right now.

Fortune Brands: Cheap With A Potential Catalyst In The Form Of Upcoming Spin-Off

– Author makes a good case that Fortune Brands is a good long term stock.

BAM is a Buy (Seeking Alpha Article)

  • Brookfield is a high quality company which has compounded value for a long time. I need to spend more time on it as it could be a good core holding, especially with the upcoming spin-off.

VIC Write up on Embecta (EMBC) – need to create free account to access

  • The author argues that the company will reinvest to build out its pipeline. I agree that’s what it’s going to do, but I think it will take some time.
  • It does look very cheap, but I would prefer to wait until we start to see some positive progress.