Spin-off Links – May 2021

New Spin-off Announcements

AT&T Inc.(T) announced that it had reached a deal to spin off WarnerMedia (CNN, HBO, TNT, TBS, and Warner Bros. studio) and simultaneously merge it with Discovery Inc. (DISCA), creating a new publicly traded company.

The move comes just three years after AT&T’s creation of WarnerMedia through its $85 billion acquisition of Time Warner, which was scrutinized by the DOJ on antitrust grounds.

This combination of Discovery, Inc. and WarnerMedia will form one of the largest global streaming players. The new “pure play” content company will own one of the deepest content libraries, with over 200,000 hours of programming across all streaming platforms.

The deal is expected to create substantial value for shareholders of both companies, better positioning them to take advantage of growing DTC (direct-to-consumer) trends in the media industry. The construction of the new company will create significant scale and investment resources with projected 2023 Revenue of approximately $52 billion, adjusted EBITDA of approximately $14 billion, and an industry leading Free Cash Flow conversion rate of approximately 60%. It is also expected to create at least $3 billion in cost synergies annually for the new company to increase its investment in new content and scale its DTC business.

Under the terms of the agreement, which is structured as an all-stock, Reverse Morris Trust transaction, AT&T would receive ~$43 billion, in a combination of cash, debt securities, and WarnerMedia’s retention of certain debt. AT&T’s shareholders would receive stock representing 71% of the new company, and Discovery shareholders would own 29% of the new company. This transaction is anticipated to close sometime mid-2022.

L Brands, Inc. (LB) announced its plans to spin off their Victoria’s Secret brand rather than sell it. Creating two separate publicly traded companies in Bath & Body Works and Victoria’s Secret.

Bath & Body Works, one of the world’s leading bath, body and home fragrance retailers, with more than 2,000 stores in operation globally and online.

Victoria’s Secret, including Victoria’s Secret Lingerie, PINK and Victoria’s Secret Beauty, a leading retailer of intimates and beauty products, which is also sold globally at just under 1,400 retail locations, as well as online.

The company expects to create these companies through a tax-free spin-off of Victoria’s Secret to L Brands’ shareholders. The separation is expected to close sometime in August.

This announcement comes after efforts from L Brands to sell Victoria’s Secret last year to the PE firm, Sycamore Partners, with the deal falling apart due to the Covid pandemic. Regardless of the failed deal, over the last year we have seen an extremely strong year for L Brands, as stimulus payments and relaxed Covid restrictions helped boost shopper traffic. L Brands said the split will allow both brands to continue to build on this newfound momentum. As separate entities, each brand will be able to maximize management focus and financial flexibility in order to thrive in an evolving retail environment and deliver profitable growth.

Alliance Data Systems Corporation(ADS) announced its plans to spin off its LoyaltyOne segment which includes its Netherlands-based BrandLoyalty business and Canadian AIR MILES Rewards Program.

Alliance Data Card Services, provide payment products and digital solutions, as well as operates private-label and cobranded credit card and loyalty programs. The LoyaltyOne’s biggest revenue generator is Air Miles, and is the leading consumer targeted coalition marketing program in Canada. BrandLoyalty provides consumer marketing programs for grocers in various global regions.

The spinoff is expected to be tax-free, resulting in two independent, U.S. based, publicly traded companies, Alliance Data and “Spinco”, positioned to pursue their respective unique growth opportunities and build long-term value.Once the spin-off is completed, Alliance Data stockholders will own shares of both companies, with Alliance Data retaining a minority stake in Spinco. At the time of the spinoff, Spinco expects to complete a debt financing and dividend the net proceeds to Alliance Data. The spin-off is anticipated to be completed by the end of this year. This transaction looks interesting as it will unlock value (RemainCo and Spin to be valued on different metrics).

The ODP Corporation (ODP) announced that it plans to break up into two companies: ODP and “NewCo”.

ODP is a provider of retail consumer and small business products and services distributed through 1,100 Office Depot and OfficeMax locations as well as the eCommerce presence, officedepot.com.

“NewCo”, is a B2B solutions provider serving small, medium and enterprise level companies taking on the following segments: Use Core Contract, CompuCom, and Grand & Toy and Federation.

The separation is expected to occur through a distribution of shares as a tax-free dividend to ODP’s shareholders as of a record date. After which, ODP shareholders will own 100% of the equity in both of the publicly traded companies. The separation is expected to occur during the first half of 2022.

This looks like an interesting situation. The business is in secular decline, but is extraordinarily cheap at an EV/revenue multiple 0.2x and price to cash flow of 3.7x. Meanwhile, they are in the process of selling their CompuCom business and breaking up the remaining business. Finally, Sycamore Partners, a ruthless PE shop who has a phenomenal track record of returns, is trying to merge the business with Staples. This transaction would make all the sense in the world as Sycamore could cut costs and pay itself hefty dividends even if in the long term the business goes bankrupt.

Here are my notes.

U.S. device maker Becton, Dickinson and Company (BDX) plans to spin off its diabetes care business ($1.1BN in revenue, 6% of revenue) to focus on diagnostic testing, medication delivery and other businesses.

The Diabetes Care business introduced the world’s first specialized insulin syringe in 1924. Today, this business 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. The business has grown slightly but at a slower rate than the rest of Becton’s business. As such, I think the primary reason for the spin-off is to shed a slower growing business and have the remaining business re-rate higher.

The spin-off, once completed, should be an interesting opportunity. The diabetes market is large. Today’s diabetic population, estimated at 463 million individuals worldwide, is expected to increase to 700 million by 2045. The spin-off will have to innovate by introducing new ways to delivery insulin, but I’m optimistic (at first blush) that it will be able to do so.

The spinoff is expected to be tax-free and to be completed in the first half of 2022.

Spin-off Notes

Recently Completed Spin-offs

This week, IAC/Interactive (IAC) spun out its stake in Vimeo (VMEO). For every share of IAC owned, shareholders received 1.6235 shares of VMEO.

In an interesting dynamic, Vimeo has actually traded down sharply from where it was trading in the when issued market (mid $50 range).

If Vimeo were IPO’d instead of spun off, I’m sure the stock would have traded up sharply (artificial buying pressure vs. artificial selling pressure).

I think the downward pressure is driven by “value” IAC investors who can’t quite get themselves to own a stock that is trading at 15x 2022 sales.

Currently, VMEO has 186.1MM diluted shares outstanding implying a current market cap of $8.2BN and an enterprise value of $7.9BN.

Vimeo believes it can grow 30% over the long term and consensus expects revenue of $521MM by 2022. As such, it’s trading at 15.1x ‘22 sales.

It’s comped against other high growth SaaS names (TWLO, ROKU, CRWD, DDOG, COUP and others) that trade at 20x ‘22 sales.

So you could argue that it’s cheap.

Want more details?

I published a deep dive on the company here (paywall).

Upcoming Spin-offs

Merck (MRK) announced that its spin-off, Organon (OGN), will begin trading in the when issued market on May 17, 2021 with regular way trading beginning on June 3, 2021

Organon will be a global healthcare company formed through a spinoff from Merck to focus on improving the health of women throughout their lives. It will have a portfolio of more than 60 trusted medicines that address an entire spectrum of conditions women face and other medical needs. The spinoff is expected to have a global footprint with significant scale and geographic reach, world-class commercial capabilities, and approximately 10,0000 employees with headquarters in Jersey City, New Jersey.

I think it’s going to be an interesting situation because the spin-off represents about 15% of Merck sales and will likely be sold indiscriminately. I think the best comps are VTRS and TEVA. I published a deep dive here (paywall) and would buy at the right price.

SolarWinds (SWI) recently filed its Form 10 registration statement with the U.S. Securities and Exchange Commission for its spin-off of its managed service provider (MSP) business into a standalone, separately-traded public company to be named N-able, Inc.

A managed service provider (MSP) delivers services, such as network, application, infrastructure and security, via ongoing and regular support and active administration on customers’ premises, in their MSP’s data center (hosting), or in a third-party data center.

N-able provides cloud-based software solutions for MSPs, enabling them to support digital transformation and growth within small and mid-size enterprises. It partners with over 25,000 MSP partners, empowering them to deliver best-in-class managed services in a scalable and repeatable way. The spin-off represents 30% of total revenue and is growing faster (+15%) than the Remainco (+4%) The Remainco will be focused on providing software solutions to help companies manage all IT needs (network utilization and performance analytics, etc.).

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 6.6x forward revenue. The spin-off’s closest peer (Datto Holdings) is trading at the same multiple. Thus, it doesn’t appear that this transaction will unlock value.

Spin-off Links

Spin-offs with Insider Buying (May 2021)

Conversation with Vistra (VST) Investor Relations

Notes from Call with ADS Investor Relations

The ‘Dark Side’ of Dual Directors in Corporate Spin-offs

GTX Is a Cheap Stock

GTX Pitch Podcast Episode

CVR Energy Declares Special Dividend

Graham and Doddsville Spring Edition