May Spin-Off Review

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Includes: BC, CTVA, DD, DVN, ENSG, GPS, KAR, KTB, MSG, NUAN, POST, PPG, TEN, TIVO, VFC
by: Spin-Off Insights
Summary

A stock spin-off is the formation of a new, independent company.

The Ensign Group and TiVo announced spin-offs during the month.

VP Corp closed the spin-off of Kontoor Brands on May 23rd and DowDuPont closed the spin-off of Corteva on June 1st.

Introduction

A stock spin-off is the formation of a new, independent company via the distribution of shares from the parent company. Corporations execute these transactions for many different reasons, including improving strategic focus, closing a valuation discount, removing conflicts of interest, evolving capital allocation priorities, and better-aligning investor bases. As a result, spin-offs have historically performed quite well and frequently represent some of the most compelling opportunities available for active investors.

May was a busy month for spin-offs. Two new transactions were announced (The Ensign Group and TiVo) and one spin-off closed (Kontoor Brands). This article not only reviews these transactions, but also discusses upcoming spin-offs, the spin-off pipeline, and potential spin-offs.

New Spin-Off Announcements

The Ensign Group: Pennant (Spin-Off)

The Ensign Group is a provider of post-acute health care services. This includes a broad spectrum of skilled nursing, assisted living, home health and hospice, and other ancillary services. Overall, they operate 188 skilled nursing care facilities for both short-stay and long-stay patients and 80 assisted and independent living facilities (24 are co-located with one of their skilled nursing care facilities).

On May 6, 2019, they announced the plan to separate the home health and hospice businesses, senior living operations, and mobile diagnostics and clinical laboratory businesses into a new company, to be named The Pennant Group, through a spin-off. Ensign will retain the skilled nursing facilities, rehab care services, and healthcare campuses. The transaction is expected to close in the fourth quarter of 2019.

TiVo Corporation: Product Business (Spin-Off)

TiVo Corporation is a leader in media and entertainment products that power consumer entertainment experiences. They provide software and intellectual property licenses to cable and satellite companies that enable consumers to navigate through content (search across live TV, on-demand, Netflix, Amazon, etc.) with a single interface, record shows, and recommend content. Only a small part of the business today is from the set-top box many consumers and investors associate with TiVo.

On May 9, 2019, TiVo announced the plan to spin-off the Product business as a stand-alone company. The remaining TiVo will be solely comprised of the Intellectual Property Licensing business.

Closed Spin-Off Transactions:

V.F. Corp: Kontoor Brands, Inc. (Spin-Off)

VF Corp is a large, U.S. based apparel company that has acquired numerous brands over the years and generates around $14 billion in revenue. In August 2018, they announced the plan to spin-off the slower growth Jeanswear segment into an independent, public company. This spin-off closed on May 23, 2019.

The new company, Kontoor Brands, owns two of the most popular denim brands in the U.S., Wrangler and Lee, and generates ~$2.7 billion in revenue. It is expected to be a much slower growing business than VF Corp and pay out a large percentage of its cash flow to shareholders in the form of dividends. While the Wrangler and Lee brands have been around for many decades and are very well known, they are not immune to the challenges facing many large apparel companies today.

Upcoming Spin-Off Transaction:

DowDuPont: Corteva, Inc. (Spin-Off)

DowDuPont is a large global chemical conglomerate formed in 2017 from the merger of Dow and DuPont. They completed the spin-off of the commodity chemical business Dow, on April 1, 2019, and the agriculture business, Corteva, on June 1, 2019 (first day of trading on June 3rd).

Corteva generates ~$14 billion in revenue and provides seeds (~56% of sales) and crop protection chemicals (~44% of sales), as well as a variety of software solutions to farmers. These products help improve crop yields and farmers’ profitability. The business faces challenges that are outside of their control on a year-to-year basis, such as crop prices impacting farmer income (very negative in recent years) and weather (flooding in the Midwest has created challenges in 2019). However, it is a decent business with significant technology and distribution capabilities. These advantages include one of the largest germplasm pools in the world and direct relationships with farmers through the Pioneer Brand.

KAR Auction Services: Insurance Auto Auctions (Spin-Off)

KAR Auction Services runs used and salvage car auctions in North America and Europe. They generate revenue from auction fees, as well as through ancillary services like transportation, reconditioning, inspections, marshaling, titling, and floorplan financing. In February 2018, they announced the plan to spin-off the Insurance Auto Auctions (IAA) segment. IAA is the salvage auction business that primarily sells total loss vehicles for insurance companies.

Management originally expected the spin-off to close at the end of Q1 2019 or early in Q2, but they didn’t receive a favorable private letter ruling from the IRS until April. With the private letter ruling and financing transactions completed (IAA will have $1.3 billion of debt), the spin-off looks like it will likely happen towards the end of June or in July.

Spin-Off Pipeline Updates:

Brunswick Corporation: Fitness Business (Spin-Off)

Brunswick designs and manufactures a variety of recreational products, including marine engines, boats, and fitness equipment. In March 2018, they announced the plan to spin-off the Fitness segment. This portfolio move is consistent with the company’s strategy of shifting the business more towards marine engines and boats (acquired Power Products Holdings, a marine electrical components business, for over $900 million in 2018 from Genstar Capital).

On May 6, 2019, management announced that they will sell the Fitness business to KPS Capital Partners for ~$490 million in cash rather than pursuing the spin-off. They believe this is a better outcome for the company and shareholders than spinning off the segment.

The Madison Square Garden Company: Sports Business (Spin-Off)

The Madison Square Garden Company owns a variety of sports teams and venues (Madison Square Garden, Radio City Music Hall, etc.). In June 2018, they announced the plan to spin-off the Sports business into a separate, publicly traded company. Its primary assets will be the professional sports franchises of the New York Knicks and Rangers.

On May 8, 2019, Madison Square Garden reported fiscal third quarter results and provided an update on the spin-off. Management is working to get league approvals for the transaction and expects the spin-off will close sometime in the second half of 2019. This is similar to the process they executed with the previous spin-off from Cablevision.

Tenneco: Aftermarket & Ride Performance (Spin-Off)

Tenneco is a global automotive supplier that recently merged with Federal-Mogul. The plan is to integrate these two companies, generate significant cost synergies, and then spin-off the Aftermarket and Ride Performance Company. The new company, to be named DriV, will be comprised of Federal-Mogul’s legacy Motorparts segment and Tenneco’s legacy Ride Performance segment.

On May 9, 2019, Tenneco reported first quarter 2019 results and provided an update on the spin-off. They pushed back the expected timing for the spin-off to mid-2020. Management believes this extra time will allow the newly merged company to stabilize its business processes and systems, solidify margin and cash flow performance, and strengthen the balance sheet.

Post Holdings: Active Nutrition Segment (Carve-Out)

Post Holdings is a consumer packaged goods company that has brands in a variety of different categories. In November 2018, they announced the plan to carve-out the Active Nutrition segment, which includes brands such as PowerBar, Dymatize, and Premier Protein, through an IPO of just under 20% of the business.

On May 2, 2019, Post reported fiscal second quarter results and provided an update on the carve-out transaction. The Active Nutrition segment’s revenue grew by over 5% and segment EBITDA increased significantly (over 50%) due to lower advertising and marketing expenses. In terms of the timing of the carve-out, they expect the transaction to close in September or October.

Nuance Communications: Automotive Segment (Carve-Out)

Nuance Communications is a leading provider of voice recognition and natural language understanding solutions (their technology is behind Apple’s Siri). In November 2018, they announced the plan to spin-off the Automotive segment. This business provides auto manufacturers and suppliers with virtual assistants and connected services for cars.

On May 8, 2019, Nuance reported fiscal second quarter results and provided an update on the spin-off transaction. The Auto business had a good quarter with new design wins with existing customers such as Toyota, Ford, Chrysler, Volkswagen, and Garmin, as well as in new BMW and Daimler electric vehicles. In terms of the automotive segment spin-off, they made significant progress. They hired a CEO for the business and are in the process of recruiting board members. Overall, they are currently on-track for an October 1st spin-off.

The Gap, Inc: Old Navy (Spin-Off)

The Gap, Inc. is a U.S. based retailer offering clothes, accessories, and personal care products for men, women, and children. In February 2019, they announced the plan to split the company into two. One company will be comprised of the Old Navy Brand and the remaining company will consist of the Gap, Banana Republic, and other (mainly Athleta and Intermix) brands.

On May 30, 2019, they announced first quarter results and provided an update on the spin-off transaction. Comparable sales were weak across all the brands with Old Navy down 1%, Gap down 10%, and Banana Republic down 3%. Management reiterated that the decision to separate off Old Navy is not in response to short-term trends but rather to set the company up for long-term success.

Potential Spin-Off Updates:

Devon Energy (Strategic Review)

Devon Energy is an independent exploration and production oil & gas company. In February 2019, they announced the plan to separate off the Canadian and Barnett Shale assets through a sale or spin-off and focus on the U.S. oil business. On May 31, 2019, they announced the sale of the Canadian assets to Canadian Natural Resources for CAD $3.8 billion. While they still plan on exiting the Barnett assets, it increasingly looks like the transaction structure will be through an asset sale rather than spin-off.

PPG Industries, Inc. (Strategic Review)

In October 2018, the activist investment firm Trian Partners release a white paper outlining their investment thesis for PPG. Trian believes the business has significantly underperformed under the current CEO and Chairman and it could be better off as two separate companies, an Architectural Coatings company and an OEM/Industrial Coatings company.

Not long after Trian released their white paper, PPG underwent a strategic review of the business portfolio where they assessed the relative value associated with the combination or separation of the architectural and industrial coatings businesses. On May 21, 2019, PPG completed the strategic review and concluded that the current business portfolio composition represents the best opportunity to create long-term shareholder value. As a result, the company will not break-up.

Conclusion

There was a lot of activity in May with two new spin-off announcements, one transaction closing, and a handful of companies making progress towards executing spin-offs in the coming months (including Corteva spinning-off on June 1st). Many of these companies have interesting characteristics, so it could pay-off for investors to understand these businesses.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.