Continuing from Part 1 of this article, I now examine a two additional potential upcoming spin-off opportunities.
Sara Lee (SLE)
Essentially, this year Sara Lee will IPO its coffee and tea business (Douwe Egberts, Senseo and Pickwick teas), leaving investors with a meat business (Jimmy Dean, Aidells, Hillshire Farms and Ball Park hotdogs). SLE will also pay $3/share special dividend. Here is a quick sum of the parts:
|Meatco valuation ($556M operating profit est. x 10.5)||$5,838M|
|CoffeeCo valuation ($489M operating profit est. x 10.5)||$5,134M|
|Australian Bakery 2x asset value||$124M|
|Corporate costs (-$115M x 8)||-$920M|
|Senseo payment to Phillips||-220M|
|Net cash (as of Dec '11)||$576M|
|Per share valuation||$17.70|
It is possible to be more bullish on Sara Lee than this, given the $3 special dividend increases leverage, which may cause greater tax efficiency. Corporate costs could fall substantially, though I still find it challenging to the current price of $21 even if those costs are eliminated entirely and 10.5x multiple is roughly equivalent to 15x on a post tax earnings multiple basis. Furthermore, the Sara Lee brands have a good but not stellar reputation and so even this market multiple for these assets may be aggressive.
I think to be bullish on the company you have to subscribe to the greater fool theory, in that someone will want to acquire these assets for more than they are worth post-split. However, it is not clear that the brand portfolio is sufficiently attractive to merit an acquisition.
By the end of 2012, Abbott intends to split itself into two companies, a medical devices company retaining the Abbott name with $22B in sales and a pharma company approaching $18B in sales.
Abbott's earnings per share were $3.03 in 2011 - good for 19x earnings and a 3.5% yield. Other pharma companies trade at 1.6-3.3x sales and other medical device companies trade at 1.5-2.7x sales.
|Entity||Bull case||Bear case|
Current Market Cap = $91B
Abbott appears fairly valued in the context of its upcoming spin-off, trading at a mid-point between the high and low expectations for valuation of its components on a price to sales basis.
|Company||Spin-off probability||Spin-off Timing||Valuation||Risk|
|CBB||Moderate||2012-13||Undervalued||High - leverage makes valuation volatile|
|HIG||Low||Unknown||Fairly valued||Low - even without a spin-out appears fairly valued|
|SLE||Very High||2012||Overvalued||High - need aggressive assumptions to see value in the stock|
CBB appears to offer upside potential now to investors who are comfortable with the high degree of risk its leverage and uncertainty around any spin-off represents. The one certainty seems to be that the stock will be volatile. Conversely, HIG is perhaps the lowest risk, though the chance of a spin-off appears unlikely given current management reaction to it. Moving on, SLE appears expensive and ABT appears to currently be priced at fair value. In both cases, it may be prudent to wait until the spin-off takes place to see if either of the successor entities trade at a lower multiple, based on investor reaction to the new companies.