Recent Spin-offs

On September 26, 2018, Fortive’s Automation and Specialty Business, completed its merger and split off. Fortive (FTV) shareholders who elected to exchange their shares received shares in Altra Industrial Motion (AIMC). Since the split off, AIMC shares have declined ~21%.  AIMC is currently trading at $32.87 and is trading at 8.9x pro forma EBITDA (including synergies). Over the past 5 years, AIMC has traded at an average EV/EBITDA multiple of 10.3x.

On October 1, 2018, Garrett Motion (GTX), a Honeywell (HON) spin-off, began trading. GRX’s primary business is selling turbochargers to automobile manufacturers. GTX has sold off 28% since the spin-off. The company is a cyclical and faces secular headwinds due to increasing proliferation of electric vehicles. It also carries significant debt. With that being said, it does look cheap trading at 5.4x EBITDA and 4.6x 2018 earnings by my math. I posted additional analysis for members here.

On October 1, 2018, frontdoor, inc (FTDR), a ServiceMaster (SERV) spin-off, began trading. FTDR is the leader in the appliance warranty market. It’s a good business with ~20% EBITDA margins, an attractive ROIC profile and strong revenue growth. The negatives on FTDR are that it is exposed to the housing market and claims can be lumpy. Since the spin-off, FTDR has declined by 10%. It is currently trading at 16.5x 2018 EBITDA. For more information, check out our resource page.

Imminent Spin-offs

Industrial conglomerate Honeywell (HON) spin-off, Residio (REZI), will begin regular way trading on October 29. REZI has a distribution business (security, fire protection) and Home productions business (thermostats, smoke detectors, etc.). It is currently trading in the when-issued market under the ticker REZI-WI. It’s trading for $28.50 which implies a $3.5BN market cap and $4.7BN enterprise value. It’s current valuation is ~9.9x 2018 EBITDA, in-line with peers JCI and SBGSF. There is potential for for indiscriminate selling given the market cap difference between HON and REZI, but it’s hard to get too excited about REZI given recent negative headlines around housing.

Trinity Industries (TRN) spin-off, Arcosa (ACA), will begin regular way trading on November 2. After spinning off ACA, TRN will be a pure play Rail focused company. ACA consists of three segments: Inland Barge, Construction Products, and Energy Equipment. Revenue has been declining due to a cyclical downturn in the inland barge market. However, guidance implies EBITDA growth in 2019 due to a turn around in the Inland Barge business. With 12% EBITDA margins and a 10% return on invested capital, ACA is not a great business. It will be interesting to see how it trades come November.

Recently Announced Spin-offs

Since last month’s newsletter, there has been 1 new spin-off announcements. Remember to check our stock spin-off calendar for the latest information on spin-offs that have been announced.

On October 4, 2018, Madison Square Garden (MSG) announced that it has confidentially filed its Form 10 to spin-off a pure play sports company (New York Knicks, New York Rangers and some other assets). MSG will retain Madison Square Garden, Radio City Music Hall, MSG’s booking business, and a bunch of other assets (including a billion in cash). This spin-off is interesting because the MSG investment case is based on a sum of the parts analysis, and the spin-off will highlight the disconnect between MSG’s stock price and the value of its assets.

Spin-off News and Analysis

I posted a spin-off case study on Nuvectra (NVTR), a 2016 med tech spin-off that has increased over 400% since indiscriminate selling ended. If are interested in learning what to look for when analyzing a spin-off, you will enjoy this case study. You can also get a PDF version of the case study here.

A good article was published on Henry Schein on Seeking Alpha recently. Henry Schein will be spinning off its animal health business and then merging it with Vets First Choice, a private company. The author argues that the stock is worth $106, ~31% higher than it’s currently trading. The article is definitely worth a read but the author assumes a 25.0x 2020 EBITDA for the animal health division which seems a bit aggressive.

Non-Spin-off Stuff

Howard Mark’s Latest Memo: “The Seven Worst Words in the World”

Graham and Doddsville – Fall 2018 Edition

Greenblatt Thoughts on the Market

Horizon Kinetics Third Quarter Commentary

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