Spin-off Links – October 2021

Before we get into this month’s spin-off news I just wanted to highlight that I will be raising prices on my premium newsletter at the end of the month (October 31 at midnight).

The annual subscription will increase by 51% from $419/year to $635/year.

The monthly subscription will increase by 42% from $44/month to $67/month.

Why the price hike?

  • Good returns: +25.7% on average beating S&P500 by 11.1% (average holding period 12 months).
  • Monthly Live Calls with commentary on spin-off market.
  • Newly launched member chat so you can ask me questions and share ideas with other subscribers.
  • Deep dives on upcoming spin-offs (just published one on Sylvamo)

And from my perspective, $635 is still cheap. If you had invested $5,000 in Thungela when I said to….

To be clear, if you are an existing subscriber or subscribe before month end, this price hike will not impact you.

So sign up now!

Alright, let’s get into the spin-off news.

New Spin-off Announcements

A company that had plans to break up, Brooks Automation (BRKS), recently changed its mind.

Brooks Automation announced that it is selling its semiconductor automation business for $3BN to private equity for a valuation of 19x LTM EBITDA. The transaction is expected to close in the first half of 2021.

It is unclear what will be done with the proceeds, but it appears the proceeds will be used for M&A for the bioscience business. This is a little worrisome as $3BN is a lot of cash to deploy. I would be happier if we saw a big special dividend with at least some of the proceeds.

Assuming 15% leakage (transaction costs and taxes) on the $3BN sale, the New Life Science Co is trading at 7.4x 2023 revenue. This seems to be a reasonable to slightly cheap multiple for a company with secular growth.

I’m not tempted to chase the stock here though as I think it will be in purgatory for a while until the deal closes.

Recent Spin-offs

UK Insurer, Prudential PLC (PUK), not to be confused with US insurer, Prudential (PRU), spun off Jackson Financial (JXN), its US life insurance/annuity business, recently. It is a classic “Greenblatt” spin-off set up. In other words, it’s a set up for indiscriminate selling and a mispriced security. First, there is a massive difference between the market cap of the parent ($55BN) and spin-off ($2.4BN). Second, the distribution ratio is extreme (1:40). Third, the parent co is an international company and the spin-off is a US company.

I think it looks interesting. On a relative and absolute basis, JXN looks cheap, and I think there is significant upside ahead as a dividend is initiated and index funds start to buy the stock.

Read my full investment case here (paywall).

International Paper (IP) spun off its Printing Papers segment on October 1, 2021.The new publicly traded company is named Sylvamo (SLVM).

At first glance, I thought Sylvamo was a business that I didn’t want to own at any price. I have learned that it usually doesn’t pay to invest in highly leveraged companies in secular decline. After further analysis, I think it could be attractive at the right price, especially because I expect the company to initiate a dividend in the second half of 2022.

The stock is being sold indiscriminately and is trading at a discount to peers. Read my deep dive (paywall) to get my full thoughts on the stock including my valuation analysis.

Upcoming Spin-offs

J2 Global (JCOM) will spin off its eFax business (to be named Consensus) on October 8. I’m not interested in the company ahead of the spin-off. It appears reasonably cheap at 15x free cash flow, but they made hundreds of acquisitions and adjusting for those acquisitions, free cash flow is minimal.

The spin-off is trading in the when issued market at an implied valuation of 9.5x 2021 EBITDA which seems reasonable. On a free cash flow multiple, it looks really cheap at 5.5x annualized free cash flow. However, if you include acquisitions (every year they make acquisitions), it’s trading at 15x annualized free cash flow.

I don’t like the business strategy. It’s basically to use free cash flow to make acquisitions to diversify the business. It’s unclear whether acquisitions have been successful in the past, but from JCOM’s long term stock chart, it appears they haven’t.

Here is the Form 10 for the spin-off.

I will publish a deep dive for subscribers shortly.

Spin-off Links

Clark Street Value: Thoughts on Consensus Cloud Solutions

– Some good thoughts on Consensus spin-off from Clark Street. He’s cautious as am I.

Clark Street Value: Likes Jackson Financial

– Good update on Jackson Financial. He likes the stock.

China and India send coal prices soaring amid green-energy push

– Bullish for Thungela. Great article explaining how ESG concerns have limited new investment in coal, but demand will remain strong for at least a decade.

A Big Pharma CEO Is Battling Wall Street’s Most Feared Fund

– I like GSK and here’s how I’m playing it.

Exor VIC Write Up

– I like the thesis but don’t own it.

Did I miss anything?

Comment below!