Spin-off Links (November 2019)

Recent Members Only Research

Emmis Communications Spin-off Quick Summary

CNH Industrial Spin-off Quick Summary

IAC Group Spin-off (Match.com) Overview

Ensign Group Spin-off (Pennant) Deep Dive

Nuance Spin-off (Cerence) Deep Dive

Recently Announced Spin-offs

On October 31, 2019, Marathon Petroleum Corp (MPC) announced that it will spin off its retail gas station business, Speedway, and its CEO will retire. It will also review spinning off its midstream assets. This is a win for Elliott Management which published a presentation in September arguing the company should be broken up. The argument for spinning off Speedway is simple: pure play gas retail businesses trade significantly higher (~11x forward EBITDA) than where MPC is currently trading (8.5x forward EBITDA). Spinning of its midstream assets should also generate value. MPC has been strong since Elliott filed its 13F. If MPC eventually pulls back as spin-off euphoria fades, it might make an attractive investment.

On October 11, 2019, IAC Group (IAC) announced in an SEC filing that they have brought a proposal to the board of Match Group (MTCH) to separate IAC’s ~80% equity interest in the company. Since discussions appear to be in their preliminary stage, there is not yet a timetable for the transaction to be completed. In the filing, IAC made it clear that the transaction would be tax-free for both IAC and MTCH shareholders. IAC currently owns over 80% of MTCH and ANGI (Angie Homeservices). If you back out IAC’s ownership stake in these two businesses, the remaining IAC stub is trading at a negative $1.2BN value despite valuable ownership of companies such as Vimeo. As such, there is an opportunity to buy IAC while simultaneously shorting MTCH and ANGI to benefit as the discount closes. You can read my full analysis here (members only).

Recent Spin-offs

On October 1, 2019, Pennant Group (PNTG), a spin-off from Ensign Group (ESNG) began trading. The stock has performed well in initial trading. I believe this was driven by forced buying by index funds. It was announced last month that PNTG would be included in the S&P 600 Small Cap Index. PNTG is very well positioned as it is focused on home and hospice care as well as senior living. Both groups are benefiting from demographic tailwinds (aging US population). At its current price ($20.13), PNTG is trading at 15.4x 2020 EBITDA inline with peers. I think this is a little rich given that PNTG is a very small company. Longer term, I like the company and would want to own it in the low teens. Read my deep dive here (members only).

Cerence (CRNC), the auto focused speech recognition spin-off of Nuance (NUAN), began trading on October 2, 2019. The stock (at $15.98) is currently trading at a price to 2020 free cash flow multiple of 14.0x and an EV / ‘20 EBITDA multiple of 8.0x. This looks modestly cheap. CRNC initially sold off but has rallied recently to my surprise. Over time, I expect selling pressure to emerge and would not build a position unless we see a significant sell off. CRNC is focused on the auto business and is cyclical (it has zero recurring revenue) although it is benefiting from secular tailwinds. CRNC intended to issue $430MM of debt, but that was downsized to $300MM. The debt’s interest rate was expected to be L+450 (6.5%), but it priced at L+600 (8%). It’s yield to maturity is 9.8%, compared to expectations of 6.14%. I recently published my deep dive on Nuance here (members only).

Imminent Spin-offs

There are no imminent spin-offs. However, the spin-off that I’m most anticipating is Madison Square Garden’s (MSG) spin-off of its sports business which I expect to occur in Q1 2020. The sports spin-off will consist of the New York Knicks franchise and the New York Rangers, as well as some other less valuable assets. The remaining business will own Madison Square Garden (the arena) and focus on live entertainment. If you value the Knicks and Rangers at their Forbes valuations of $4.0BN and $1.6BN, it adds up to a value of $5.6BN, ahead of MSG’s current enterprise value of $5.2BN. However, Forbes valuations have historically been conservative (NBA franchises sell at a 38% median premium to the last Forbes valuation). Further, MSG owns the Madison Square Garden arena (and it’s air rights). the Christmas Spectacular, The Forum, and an ownership interest in the Tao Group. Click here to read my deep dive (members only).

More Spin-off Links

Bloomberg: Marathon Bows to Activist Pressure, Petroleum Plans to Spin off, CEO Exit

Seeking Alpha: Covetrus – Busted Spin-off Offers Tremendous Upside

Seeking Alpha: Marathon Oil – Remaking Marathon According to Elliott

Lightshed Partners: As MSG Circles Catalysts, $360 in View, Initiating with BUY Rating

Podcast Episode – Papyrus Capital – Minute 55 – Investment Thesis for Echostar (SATS)

Woodlock House Family Capital – Thoughts on Howard Hughes Corporation (HHC)

Barrons: Resideo Reduces Guidance….Again

Biz Journals: POST IPO’s Active Nutrition Business

Senior Housing News: Interview with Pennant CEO