Spin-off Links – October 2022

There has been a TON of spin-off activity.

And valuations generally look quite attractive. I don’t know when the bear market will end, but I do know I’m seeing a ton of value from a bottom up perspective.

Before we get into the spin-off news, I want to share some news. On Friday, I will launch my newest advisory: SSI: Ultra Options Advisory.

The idea is to pair options with special sits to create compelling absolute return trades.

And I’ve recruited Bruce Harper to lead the advisory.

You can get more details here.

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

New Spin-off Announcements

Worthington Industries (WOR) announced on September 29, 2022 that its plans to spin-off its steel processing business with the expectations that the separation will be completed by early 2024.

As of 8/31/2022, on a TTM basis, “New Worthington” (the RemainCo) generated $1.39BN of sales (25% of total) and $347MM of adjusted EBITDA (64% of total). It will retain and focus on the Consumer Products, Building Products and Sustainable Energy Solutions.

The spin-off (Worthington Steel) is a steel processor and serves the Automotive, Construction, Agriculture, and Heavy Truck markets. On a TTM basis, the spin-off generated $4.1BN of sales (75% of total) and $192MM of adjusted EBITDA (36% of total).

Both businesses look quite decent but are cyclical. On a consolidated basis, the stock looks attractively valued at 6.7x forward EBITDA and 6.0x forward free cash flow. I will dig in more, but I imagine this transaction will unlock value.

Total Energies (TTE) announced on September 28th that it is planning to spin-off its oil sands operations. Management announced that the segment and assets do not align with the company’s energy transition goals.

The spin-off would include TTE’s 24.6% stake in Suncor Energy’s Fort Hills oil sands mining project, as well as its 50% stake in ConocoPhillips’ Surmont thermal project, midstream, and trading-related activities. In 2022, these assets are expected to generate $1.5 billion in cash flow.

The spin-off proposal requires shareholder approval and will likely take place in 2023. The spin-off will trade on the Toronto Stock Exchange. Total plans to maintain a temporary minority stake to help with the transition.

Recent Spin-offs

Pfizer Biohaven Pharmaceutical (BHVN) completed its process of being acquired by Pfizer (PFE) for $148.50 in cash. Prior to the completion of the acquisition, Biohaven Pharma shareholders received 0.5 shares of Biohaven Inc for every share owned.

Biohaven Inc (the spin-off) has performed well in initial trading. The reason? This tweet lays out the investment case. At the time of trading, BHVN was trading at net cash levels ($235MM) on its balance sheet. However, the company has a phase 3 drug focused on therapy resistant OCD which will read out in Q1. Assuming positive data, BHVN could be a $1BN market cap company given that Relmada (RLMD) is a similar company (phase 3 drug focused on OCD) and has a market cap of $1BN.

BHVN currently has a market cap of $540MM. Arguably, the company has more upside. I’m not ready to recommend this one, but I’m watching it closely.

ABB Ltd. (ABB) spun-off Accelleron this week, its turbocharging business. The stock began trading on the SIX Swiss Exchange on October 3, 2022. ABB shareholders received one share of Accelleron for every 20 shares owned of ABB.

Acelleron specializes in heavy-duty turbocharging for the large engine industry where the company is known as the market leader. It has an extensive installed base of over 180,000 turbochargers globally and delivers around 10,000 turbochargers every year, with diverse end markets all over the globe. For 2021, the company generated revenues of $756 million and free cash flow of $126MM. The business is performing well and management expects 6% organic growth in 2022.

Accelleron plans to pay a $75MM dividend in 2022 and up to 100% of net income in 2023 and beyond if net debt is less than 1.0x (should be 0.6x at time of spin-off). In 2021, Acceleron generated net income of $144MM. The stock initially sold off on the Switzerland exchange but has partially recovered. This price implies a 2022 dividend yield (half year) of 4.7% and a P/E multiple of 11x. ADR trading began recently in the US. It hasn’t sold off as hard as I had hoped, but I continue to watch it.

Xperi Holding Corp. (XPER) completed its spin-off of Xperi Inc. on October 1, 2022, and began regular way trading on October 3rd. The spin-off retained the ticker XPER, and the remainCo was renamed Adeia Inc. (ADEA). Xperi Holdings shareholders received 4 shares of Xperi Inc for every 10 shares of Experi Holding. Here is the slide deck from the investor day that covers both companies.

The spin-off is the “products” business. After spending a lot of time looking at the spin-off, I’m still having a hard time understanding how they make money. My understanding is they actually provide TV manufacturers with product and IP that is included in smart TVs which enable the TVs to be “powered by TiVo.” Growth in 2020 and 2021 was good but has disappeared in 2022 (revenue is +0.4% y/y through June). Further, the company burns cash. The company has net cash of $125MM and has an enterprise value of $410MM. It expects revenue of $500MM in 2022 (+2% growth). Thus it’s trading at 0.8x revenue and doesn’t seem that attractive for a slow growing, low margin, cash burning company.

I think the RemainCo is more interesting. It licenses its IP portfolio to Pay TV and streaming companies and generates strong free cash flow. Revenue is growing (guidance calls for 12% growth in 2022). The valuation looks compelling (4.4x FCF and 6.4x on EV/EBIT). The one caveat is ADEA has $90MM of mandatory debt payments and interest payments of (L+3.50%). As interest rates keep going up, interest payments will grow. Nonetheless, I think ADEA is probably fine given it expects to generate ~$250MM of free cash flow this year. However, there is a small probability that the company cuts the dividend to preserve cash. I have been communicating with investor relations and continue to dig into this opportunity.

Bluerock Residential (BRG) spin-off, Bluestone Home Trust (BHM), began regular way trading October 6th.

The stock is trading for $24.49 per share which translates to a market cap of $91MM. Management estimates NAV at $171MM so the stock looks cheap. BHOM will own interests in approximately 3,400 homes, including 2,000 through preferred/mezzanine investments, located in fast growing, high quality of life and knowledge economy markets across the United States.

In the current environment, single family rental properties seem like a good place to be. With mortgage rates so high, buying a home is even less affordable now which will probably lead to more people renting. Further, rents will probably trend up. Nonetheless, I’m having trouble wrapping my hands around BHM. It’s externally managed so there is a 1.5% management fee as well as an incentive fee.

I will continue to dig in, but it doesn’t seem like an obvious opportunity to me.

The LGL Group, Inc. (LGL) spun off its aerospace division, M-Tron (MPTI), last week.

M-Tron was originally founded in 1965. Mtron designs, manufactures and markets highly-engineered, high reliability frequency and spectrum control products. These component-level devices are used extensively in electronic systems for applications in defense, aerospace, earth-orbiting satellites, and other related industries.

LGL is a company that consists of a bunch of cash and marketable securities and M-Tron, its avionics business. Mario Gabelli, his brother, and his funds own ~38% of the stock.

M-Tron is trading at a market cap of $30MM. On an annualized basis, MPTI is generating $1.9MM of net income. As such, MPTI is trading at a ~15x EPS. This doesn’t strike me as a compelling opportunity yet. I will continue to monitor.

RemainCo (LGL) looks more interesting to me. It is trading at a negative enterprise value with a market cap of $26MM and net cash and marketable securities of $38.4MM. Historically, LGL has generated cash from sponsoring SPACs. That option is likely closed for the foreseeable future. Nonetheless, Mario Gabelli, his brother, and his fund own 36% of the stock. This reduces the risk that management does something dumb with the cash.

Upcoming Spin-offs

XPO Logistics, Inc. (XPO) announced on Monday that they are set to complete their spin-off of RXO by the end of the month, with distribution expected to take place on November 1st.

RXO is a tech-enabled brokered transportation platform, that after the spin is set to become the fourth largest broker of full truckload freight transportation in the US, with XPO retaining the less-than-truckload (LTL) business. XPO over the last 11 years has grown largely through a roll-up strategy. Using strategic M&A to build up its core business, but as the business has gotten more complex, they have started to streamline operations by selling off segments that didn’t fit their strategy.

Last year, for example they successfully spun-off GXO Logistics, its former contract logistics arm. GXO did well post spin-off, and we could possibly see a similar story with RXO.

XPO looks cheap. I expect RXO to trade at 10.2x EBITDA (inline with CHRW) and RemainCo to trade at 8.2x EBITDA (inline with SAIA). In this scenario, XPO (pre-spin-off) is worth $64, implying about 40% upside.

Ligand Pharmaceuticals (LGND) will spin off OmniAb, its drug discovery business, into a SPAC (Avista Public Acquisition Corp II (AHPA)) that will be distributed to shareholders. I’m bearish on the spin-off. My understanding is OmniAb is generating annualized revenue of ~$40MM yet is being valued at an equity valuation of $850MM (21x revenue).

The merging of the SPAC with OmniAb is expected to take place on November 1, 2022, and then shares are expected to be distributed to shareholders. The new company will trade under the ticker OABI. LGND shareholders will receive 4.9 shares of the SPAC for each share of LGND owned.

The RemainCo (drug royalty business) looks more interesting. Backing out the spin-offs implied valuation (via the SPAC), RemainCo is trading at 20x earnings, a discount to its historical PE of ~35x. While RemainCo looks modestly attractive at that valuation, I have more conviction in the overvaluation of the spin-off.

Spin-off Links

Podcast Interview Where I Discuss IDT Corp

– I walk through the investment case ‘

Third Point Wants Colgate to Spin-off Pet Food Biz

– I think the idea probably makes sense, but it’s hard for me to get too excited about Colgate when it’s trading at 15x EBITDA and a 5% free cash flow yield.

Intel to IPO Mobile Eye

– Good idea to highlight SOTP value, but I think it will do little to close the valuation gap until Mobile Eye is actually spun off (not just IPO’d). There are plenty of companies that trade at big discounts to SOTP values.

Seeking Alpha – Companhia Brasileira de Distribuição: Exito Spinoff To Catalyze Value Unlocking

– Looks really interesting. Lots of layers but the company is going to spin off a business that is worth almost 100% of current market cap.

Did I miss anything?