Seeking Alpha

June Spin-Off Review

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Includes: ACM, CTVA, DD, DHR, HHC, KAR, MSG, POST, TCO, UTX
by: Spin-Off Insights
Summary

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

AECOM announced the plan to spin-off one of their segments during the month.

DowDuPont closed the spin-off of Corteva on June 1st and KAR Auction Services closed the spin-off of IAA, Inc. on June 28th.

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.

June was a busy month for spin-offs. One new transaction was announced (AECOM) and two spin-offs closed (Corteva and IAA, Inc.). This article not only reviews these transactions, but also discusses upcoming spin-offs (click here to find the complete list), the spin-off pipeline, and potential spin-offs.

New Spin-Off Announcements

AECOM: Management Services Segment (Spin-Off)

AECOM provides planning, design, engineering, and construction services for governments and private sector clients in transportation, facilities, environmental, energy, water, and government end markets. On June 17, 2019, they announced the plan to separate the Management Services segment through a spin-off. AECOM will retain the engineering & construction and planning businesses.

The Management Services segment is a major contractor to the U.S. federal government, particularly the departments of Defense and Energy. They manage a wide variety of projects, spanning from the operation and maintenance of military bases and the deactivation and disposal of nuclear waste to logistics and training programs. The transaction is expected to close in 2020.

Soon after management announced the spin-off, Starboard Value released an open letter to the board. The letter discusses AECOM’s operational shortfalls relative to peers, discounted valuation, and pushes the company to pursue a strategic review.

Closed Spin-Off Transactions:

DowDuPont: Corteva, Inc. (Spin-Off)

DowDuPont is a large 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 was 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 (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: IAA, Inc. (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, inspection, marshaling, titling, and floorplan financing. On June 28, 2019, they completed the spin-off of IAA, Inc.

IAA facilitates the purchase and sale of salvage vehicles by providing processing, storage, and auction services through 179 sites across the U.S. and Canada, 14 sites in the U.K., and multiple digital venues. Their marketplaces bring together vehicle sellers and vehicle buyers, which maximizes the value of vehicles sold, lowers administrative costs, shortens the selling cycle and increases the predictability of return to vehicle sellers. In fiscal 2018, they facilitated the sale of ~2.5 million salvage vehicles and generated ~$1.3 billion of revenue.

Upcoming Spin-Off Transactions:

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 April 5th, they confidentially submitted the Form S-1 with the SEC. Management expects the transaction to close in September or October 2019.

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 New York Knicks and Rangers professional sports franchises.

Management filed an initial Form 10 with the SEC in 2018 and expects the transaction to close sometime in the second half of 2019.

Spin-Off Pipeline Updates:

Danaher Corporation: Dental Segment (Carve-Out)

Danaher produces a wide variety of medical, industrial, and commercial products. In July 2018, they announced the plan to separate off the dental segment. The dental business produces products used to diagnose, treat, and prevent disease and ailments of the teeth, gums, and supporting bones. While management initially expected the separation to be structured as a spin-off with a pro forma distribution to shareholders, they now expect to carve-out the business through an IPO to raise capital to help finance the acquisition of the BioPharma business from GE Life Sciences.

Management recently presented at the Stanford Bernstein Strategic Decisions Conference where they provided an update on the carve-out. They plan on standing up the Dental segment as a 100% independent company sometime later this year. They will initially IPO 19.9% of the shares and then either do secondary offerings to sell the remaining shares or distribute the ownership to shareholders through a split-off or spin-off transaction.

United Technologies: Otis and Carrier (Spin-Offs)

United Technologies is an industrial conglomerate that provides products and services to the building systems and aerospace industries across the world. In November 2018, they announced the plan to separate into three different companies through the spin-offs of Otis (Elevators) and Carrier (HVAC, Fire & Security, and Refrigeration). This move was to better align management incentives, allow them to pursue independent capital allocation strategies, and to close the sum-of-the-parts discount and broaden the shareholder base.

While the UTX investment thesis appeared to be getting simpler with the spin-offs, it was complicated in June when management announced the all-stock merger with Raytheon. The merger is expected to be completed after the spin-offs close next year and UTX shareholders are expected to own 57% of the combined company (UTX Aerospace + Raytheon) with Raytheon shareholders owning the balance.

Both shareholder bases are questioning the rationale behind the deal. UTX shareholders are upset because they are giving away a large percentage the upside from owning the next-generation geared turbofan (“GTF”) engine program as it scales (currently generates losses). At the same time, Raytheon shareholders didn’t receive a premium and UTX’s aerospace exposure makes the combined company more cyclical. Two vocal activists, Pershing Square and Third Point, are UTX shareholders and oppose the deal.

This merger is further complicated as Raytheon shareholders will receive shares in United Technologies Aerospace (the RemainCo), a company that doesn’t exist yet. Overall, this creates considerable uncertainty (will the deal get approved or not?) and complexity at a time when UTX appeared to be getting simpler. This uncertainty and complexity could create an opportunity for investors.

Potential Spin-Off Updates:

DuPont (Management Team)

DuPont is a global industrial and specialty chemical conglomerate that manufacturers everything from enzymes for yogurt and adhesives for cars to Kevlar bulletproof vests and Tyvek home wrap. Ed Breen is the Executive Chairman and leads the portfolio and capital allocation strategy. He famously turned around Tyco and executed numerous spin-offs over the years. DuPont’s four segments operate independently of each other and have very limited R&D, sales, and operational synergies. As a result, Breen could be looking to spin-off various DuPont businesses in the future.

“But I’m a big believer and I’ve talked to the Board about this optionality thing. If there really is a path that creates significant value for shareholders by doing some other transaction or so, we would definitely look at it. I’m not going to let ego stand in the way. We’re going to do the right thing. [Emphasis Added]

Ed Breen, Executive Chairman, Sanford Bernstein Strategic Decisions Conference

Taubman Centers, Inc. (Activist Investor)

Taubman Centers is a real estate investment trust whose sole asset is a 71% general partnership interest in The Taubman Realty Group Limited Partnership (TRG), which owns direct or indirect interests in all the real estate properties. Their main assets are 20 U.S. shopping centers, 3 Asia shopping centers, and the entities that manage properties in the U.S. and Asia.

On June 11, 2019, Land & Buildings Investment Management released a letter to Taubman shareholders pushing the company to exit the businesses in Asia and sell or spin-off the “Jewel Box” assets. Land & Buildings Investment Management has been involved with Taubman for a few years and has been critical of the company’s performance and the family’s governance. To learn more about their investment thesis, please see their website: savetaubman2020.com.

The Howard Hughes Corporation (Strategic Review)

Howard Hughes is a hodgepodge of various real estate assets assembled by a group of investors and spun off from General Growth Properties in 2010. Their assets include master planned communities (The Woodlands, Summerlin, etc.), various operating assets (retail, office, multi-family, etc.), and strategic developments (South Street Seaport, Ward Village, etc.).

On June 27, 2019, they announced that the Board of Directors retained Centerview Partners to assist in the review of strategic alternatives to maximize value. These options include a sale, JV or spin-off of certain assets, recapitalization, changes in corporate structure, or a sale of the company. As a reminder, David Weinreb, the CEO, paid $50 million in September 2017 to acquire nearly 2 million warrants with a strike price of $124.64 and a term of six years. Prior to this announcement, the stock was trading in the $90s, materially below the strike price.

Conclusion

There was a lot of activity in June with a new spin-off announcement, two transaction closing, and a handful of companies making progress towards executing spin-offs in the coming months. Many of these companies have interesting characteristics, so it could pay-off for investors to understand these businesses (click here to find the complete list of recent spin-offs).

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.