Spin-off Links – March 2021

There has been a ton of news in the spin-off world (both recent spins and new announcements) and I’ve been cranking out deep dives.

It’s a weird time in the market.

There are definite areas of froth (SPACs, EV companies, meme stocks, etc.), but at the same time, I’m finding a ton of really attractive opportunities.

In February I recommended two new names, and I have several other ideas teed up.

Without further ado, here’s the latest spin-off news….

Recently Announced Spin-offs

Exelon Corp. (EXC) announced its plan to separate its power-generation unit from the U.S. company’s utilities business in an effort to streamline operations and increase shareholder value. The parent company plans on structuring the deal as a tax-free spinoff that is expected to be completed in the Q1 of 2022. Distribution ratio has yet to be determined.

Exelon is the latest company to unload power-generating or pipeline assets to focus on regulated utilities with guaranteed margins/predictable returns. The company owns roughly 31 gigawatts of capacity including the largest U.S. fleet of nuclear plants, which has faced pressure as reactors struggle to compete with natural gas, wind, and solar. As a result, there has been a drag on the shares and the public markets will likely see the benefit in separating the units.

“The market doesn’t assign a lot of value to merchant fleets.” and boosting the company’s share price is probably one of the main drivers for the transaction,” according to Katie Bays, an analyst at FiscalNote Markets. “A hybrid company like Exelon will trade at a discount.” Here’s a good Seeking Alpha article that dives deeper into the opportunity and valuations of each business. I don’t think the idea is actionable at this point. The EXC chart doesn’t look good.

Here are my notes.

Vivendi (VIVEF) announced that it is exploring spinning off a portion of Universal Music Group in part to reduce Vivendi’s conglomerate discount. Vivendi recently completed the sale of 10% of Universal to Tencent at a 30 billion euro valuation, increasing Tencent’s ownership stake to 20%. Vivendi plans to retain 20% of Universal and potentially distribute the remaining 60% of the company to Vivendi shareholders.

Universal Music has been doing very well recently due to surging popularity of streaming offsetting drops in publishing and advertising revenue due to the pandemic. Originally, Vivendi had planned to complete the spin-off in 2023 but has accelerated those plans. Universal Music is the world’s largest record label and represents many famous artists including Taylor Swift and Lady Gaga.

Universal will list in the Netherlands Currently, Vivendi has a 35 billion euro market cap. UBS estimates it will be worth 18.4 billion euros (including its 20% stake in Universal). Vivendi shareholders will also receive their pro rata share of Universal worth ~18 billion euros (60% x 30 billion euros). Thus, Vivendi appears to be trading roughly inline with its sum-of-the-parts valuation.

This week, Zimmer Biomet (ZBH) announced that it will spin off its Spine and Dental businesses into an independent public company. The tax free spin-off is expected to be completed by mid 2022.

The Remainco will have ~$6.1BN in revenue and is the market leader in knee and hip implants.

The Spin-off generated ~$900MM in 2020 revenue and is focused on Spine (#6 in the market) and Dental (#5 in the market). Spine and Dental were paired together because they use similar materials. I don’t think this situation is actionable right now, but the spin-off could be interesting given the size differential of spin-off vs. parent (could see indiscriminate selling).

I will keep my notes on this transaction here.

PavMed (PAVM) announced Monday that its majority owned subsidiary, Lucid Diagnostics, will spin off into a separate public company. According to a news release, PAVM said if favorable market conditions continue to hold, Lucid will be spun off through an IPO or a business combination with a healthcare SPAC. Furthermore, PAVM believes the spin-off would be in the best interests of the company and its shareholders, while PAVM will still remain the largest shareholder following anyone of the aforementioned transactions. Finally, the transaction will be necessary to help it fulfil its long-term potential as it seeks to unlock its present value and execute on a major new commercial initiative.

The company also announced that Lucid is launching a major new commercial initiative which seeks to accelerate EsoGuard commercialization while also targeting multiple sales and marketing channels and building Lucid’s own network of EsoCheck operators to assure sufficient testing capacity and geographic coverage to accommodate demand. I don’t have an edge on this situation. The company is pre revenue but appears to have promising technology. I don’t know if its $321MM market cap is wildly over or undervalued.

Here are my notes.

Recent Spin-offs

TechNip FMC (FTI) completed its spin-off of Technip Energies (THNPY) recently. Shares were trading in France earlier in the week, while the ADR has yet to begin regular trading. Technip FMC was created nearly four years ago through the merger of Technip (French) and FMC (US) primarily to merge their subsea (underwater oil and gas equipment) businesses. Technip also had an onshore/offshore engineering construction business (that business is the spin-off.

The spin-off co is an engineering and construction company focused on the liquid natural gas market (they construct liquid natural gas floating processing facilities both onshore and floating). This company generates around €6bn in sales.

The spin-off looks attractive. It’s trading at a cheap absolute and relative valuation and will benefit from a number of secular tailwinds. I published my deep dive recently here (paywall).

On February 1, 2021, Verint Systems (VRNT) spun off its Cyber Intelligence business segment, Cognyte (CGNT), into its own, separately traded public company.

Cognyte has already experienced a wave of selling pressure and looks attractive. It’s trading at 4.0x revenue versus its closest comp FireEye at 5.1x revenue. Or you could comp it to Palantir at 50x sales! Here is my deepdive (paywall).

The remainco (Verint) looks interesting too. It’s trading at ~5.0x revenue,a discount to its closest comp NICE which trades at 8.0x. Further, Apax Partners (well regarding PE shop) will be investing another $200MM into the company (they already invested $200MM in 2019) and so shareholder alignment will be high.

Upcoming Spin-offs

On its quarterly call, IAC/Interactive (IAC) confirmed that it would spin off 100% of Vimeo in Q2. Vimeo has performed incredibly well in 2020 and has a great outlook in 2021 and beyond.

It recently raised capital at a $5.8BN valuation or 17x annualized revenue. This may seem pricey (because it is), but many fast growing tech companies are trading at 30x or even 50x revenue.

One play is to buy IAC now to get access to the spin-off which will probably trade very well. I think many investors are doing this as IAC has been incredibly strong in the past couple of months.

By my math, at Vimeo’s current valuation, IAC is worth $228 per share. But if you assume Vimeo trades up to 40x revenue, IAC is worth $315 per share.

It’s a bit speculative, and I’m not ready to make that bet.

More Spin-off Links

H&R REIT Spin-out Unlocks Value

Volkswagen Eyes Porsche IPO

Bull Case for Arlo Technologies

Clark Street Value Write Up on Technip Energies

Topicus.com: This Unknown Spin-off Stock Is A Mini Constellation Software

Voss Capital Commentary on AOUT

Hi Sun Technology Worth 3x Market Price on SOTP

Cognyte is a Buy

Gator Capital Investment Thesis on BBXIA

Clark Street Value Aptevo Investment Case