Spin-off Links – March 2019

Recent Spin-offs

On February 8, Henry Schein (HSIC) spun off its animal animal health business and then immediately merged it with Vet’s First Choice to create a new company called Covetrus (CVET). The stock opened at $41 and has declined to $33.69. It’s still expensive trading at 19.2x ‘19 EBITDA, but it’s starting to look interesting given the strong defensive outlook for animal health. I published additional thoughts on the opportunity here [subscribers only].

On February 25, 2019, GE Transportation completed its merger with Wabtec (WAB). GE shareholders received 1 share of WAB for every 186 shares of GE. The transaction makes a lot of sense as there will be ample opportunity to capture synergies and benefit from the cyclical recovery in the locomotive market. But at 17.1x 2019 adjusted EPS guidance ($4.10), the stock doesn’t look compelling. Barron’s disagrees and is bullish.

On March 1, 2019, FMC Corp (FMC), spun off its remaining ~85% Livent (LTHM) stake. LTHM has declined from its October IPO price of $17 to its current price of $12.80. We recently posted [subscribers only] a spin-off overview which reviews the opportunity. LTHM trades at a slight discount to its peers on a P/E and EV/EBITDA basis, but uncertainty regarding the long term supply/demand outlook for the lithium market is keeping me on the sidelines for now.

On March 8, Eli Lilly (LLY) spun off its remaining ~80% stake in Elanco (ELAN), its animal health business through a share exchange. LLY announced that the final exchange ratio would be 4.5121 shares of ELAN for every share of LLY. Last week, we published an article showing how an odd lot provision created a very attractive opportunity to make $890 in the share exchange. So far, the trade is working out at ELAN has performed well since the exchange ratio was finalized. ELAN is set up to be a good stock over the long term as it is defensive and has ample opportunity to improve margins.

Recently Announced Spin-offs

On February 4, Ecolab (ECL) announced plans to spin off its upstream energy business in a tax free transaction by mid year 2020. The upstream business manufacturers chemicals for drilling and well completion services. Ecolab’s remaining business will be focused on providing chemicals for refineries and petrochemical plants. This will be an interesting situation to watch as the spin-off’s market cap will likely be ~10% of the size of the remaining company. Check out our resources page for more info on the spin-off.

On February 28, 2019, Gap (GPS) announced that it would be spinning off its Old Navy brand into a standalone public company in a tax-free transaction. The spin-off is expected to be completed in 2020. Investors cheered the announcement as the stock is trading up 23% in the after-market.

On March 1, Eaton Corp PLC (ETN) announced that it intends to spin off its Lighting Business in a tax free transaction by the end of 2019. The lighting business focuses on LED lighting and control solutions. Its products are designed to maximize performance and energy efficiency. In 2018, the business had $1.7BN in sales (7% of company sales). The units operating margins are lower than Eaton’s other business unit margins. This was another motivator for the spin-off. Eaton’s announcement is consistent with other industrials that have recently proceeded with spin-offs (HON) or recently announced spin-offs.

Spin-off News and Analysis

KAR Auction Service Spin-off – Deep Dive Analysis [Subscribers Only]

EBAY is worth $55-63 if it Spins Off its Classifieds Business and Stubhub (Elliott Management)

EBay Nears Agreement With Activists Elliott Management and Starboard Value (The Street)

Gap Is Spinning Off the Stronger Old Navy Brand Into Its Own Company (Bloomberg)

Why Gap is Splitting Up (Motley Fool)

More Upside Ahead for Gap (Seeking Alpha)

Garrett Motion – An Underfollowed And Misunderstood Cash Flow Machine (Seeking Alpha)

Wyndham Destinations: An Undervalued Vacation Ownership Leader (Seeking Alpha)

United Technologies – Review of 2018 Results and Updated Valuation [Subscribers Only]

Apergy Short Thesis (Value Investors Club)

Zoetis Stock Gains Because People Keep Spending on Their Pets (Barron’s)