Spin-off Links – March 2022 – Stock Spinoff Investing

Spin-off Links – March 2022

2022 spin-off activity is off to a strong start.

But before we get into it, I just wanted to highlight that I published a deep dive of ZimmerBiomet (ZBH)’s recent spinal/dental spin-off, ZimVie (ZIMV) for premium subscribers.

ZimVie Deep Dive

In the coming weeks, I will publish deep dives on Embecta (BDX spin-off) and ESAB (Colfax Spin-off).

New Spin-off Announcements

On March 9, 2022, XPO Logistics (XPO) announced that it will spin-off its truck brokerage business as it believes its the company is being valued with a conglomerate discount. It also announced that it will sell its European business and North American intermodal operations to pay down some debt. The spin-off is expected to take place by year end. We are still digging in, but this transaction should unlock value.

On January 19, 2022, Encompass Health (EHC) announced it will spin off its home health health and hospice business. This decision is the conclusion of a strategic review which began in December 2020. The spin-off is expected to take place in the first half of 2022. The company hasn’t decided whether this will be a partial spin-off or a full spin-off.

What is Home health and hospice revenue and EBITDA?
- Annualized revenue of $1.1BN. $186MM of annualized EBITDA.
- According to Credit Suisse the best comps for Home Health and Hospice are AMED (15.5x TTM EV/EBITDA) and LHCG (20.6x TTM EV/EBITDA).
- Assuming a 13x multiple (given an unproven management team), the Home Health and Hospice business is worth $2.4BN on an EV basis.
What is RemainCo revenue and EBITDA?
- Annualized revenue of $4.0BN. Annualized EBITDA of $926MM.
- Credit Suisse believes a 9x EV/EBITDA is appropriate for RemainCo.
- Assuming a 9x multiple, RemainCo is worth $8.3bnn on an EV basis.

Currently, EHC trades at an enterprise value of $10.5BN vs. $10.7BN (implied by SOTP). Thus, this transaction should unlock some equity value.

Recent Spin-offs

Zimvie (ZIMV), a recent spin-off from Zimmer Biomet (ZHM), began trading on March 1, 2022. I had highlighted that it looked unattractive in the when-issued market trading in the high $30 to low $40 range. It opened at $32.80 and declined precipitously.

The ZimVie business consists of a spine business (54% of revenue) and a dental business (46% of revenue). The spine business is shrinking but management promises a turn around. The dental business is growing. Neither business is a market leader – dental is #5 and spine is #6. The business generated $66MM of free cash flow in 2019 (last “normal year”) but free cash flow declined in ‘20 and ‘21. Further, the company will have to incur public company expenses and $13MM annually of interest expense.

ZimVie could be a takeout candidate, but that will have to wait for 2 years (there is a 2 year restriction on acquisitions of tax free spin-offs).

ZimView could be attractive at the right price

I published a deep dive with more analysis here (paywall).

Exelon (EXC), one of the largest power generators in the US, spun-off Constellation (CEG) on February 1st. Constellation is comprised of EXC’s competitive power generation and retail energy business. Exelon spun-off 100% of Constellation. Investors received 1 CEG share for every 3 EXC shares held.

CEG is now the largest clean energy producer in the US with two main business units, Exelon Nuclear (America’s largest fleet of nuclear power plants), and Exelon Power (fleet of natural gas, hydroelectric, wind, solar, landfill gas and oil assets).

Constellation has performed well in initial trading as it has benefitted from index buying. It’s currently trading at $50, which implies an EV/EBITDA valuation of 8.4x. It’s peers, VST and NRG, trade at 6.7x and 8.3x respectively. Constellation is trading at a dividend yield of 1%. I was hoping for heavy selling pressure, but it didn’t materialize. I initially wasn’t too excited about Constellation, but a subscriber has shared some good analysis on discord (paywall), and I’m going to reevaluate the stock.

Exelon RemainCo is a 100% regulated utility company with 6-8% targeted EPS growth. Guidance for 2022 EPS is $2.18 – $2.32. EXC is currently trading at ~18.7x ‘22 EPS, in-line with peers.

Upcoming Spin-offs

Becton Dickinson and Co (BDX) the U.S. medical device maker, is set to spin-off Embecta, it’s diabetes care business, April 1st. While relatively smaller in comparison to BDX, Embecta will be one of the world’s largest pure-play diabetes companies.

As it stands, SpinCo, is the leading producer of diabetes injection devices, producing approximately 8 billion injection devices annually and serving 30 million patients, more than any other company in the world. In fiscal 2020, the Diabetes Care business (mainly insulin pens and syringes) generated revenue of nearly $1.1 billion. Today’s diabetic population, estimated at 463 million individuals worldwide, is expected to increase to 700 million by 2045. It also has a geographically diverse revenue and manufacturing footprint, with 48% of revenues generated outside of the United States, including 17% of revenues from emerging markets.

The transaction upon completion will be a tax free distribution, where BDX will distribute 1 share of the Embecta for every 5 shares of BDX.

I’m spending more time on Embecta and believe it will be a high quality company that would be worth owning at the right price.I will publish a deep dive in the next few weeks.

Post Holdings (POST), the consumer packaged goods holding company, expects to spin off 80.1% of its stake in BellRing Brands (BRBR), by the end of Q1 2022.

BellRing is Post’s nutrition business, think protein shakes, bars, etc. Post originally IPO’d a minority share in BellRing in 2019. With this transaction, POST will spin-off 78MM shares of BRBR. It will retain 19.5MM shares. POST has not clarified what it will do with the remaining BRBR shares, but may exchange the shares for debt at a later time.

Shareholders will receive 1.26 shares of BRBR for every share of POST. In conjunction with the spin-off, BRBR will pay out a special dividend of $400MM or ~$3 per share.

From my perspective, neither side of this transaction looks particularly compelling. By my math, POST is trading at an EV/EBITDA multiple of 11.1x pro forma for the spin-off of BRBR. BRBR is trading at an EV/EBITDA multiple of 16x and a price to free cash flow multiple of 21x.

I will continue to do work on both companies but nothing looks actionable at this point.

Spin-off Links

ZimVie Deep Dive (paywall)