La Quinta’s (LQ) upcoming spin of their owned hotels (in combination with the sale of their franchised business) into a REIT presents investors with all the hallmarks of a classic undervalued / underestimated spin: the spun-off business will be completely different than the current one, management is going to the spinco, the trailing financials are messy, a quirk in the deal structure incentivizes management to sandbag numbers / valuation heading into the spin, and the spinco will be a juicy acquisition target for a variety of strategic acquirers. I believe the entire company is worth more than $23/share today, which presents solid upside from today’s price of $18.60/share. However, I also think that upside undersells the opportunity, as $8.40/share will be returned in cash in the near term (sometime in Q2). Looking through that cash distribution, you’re creating the REIT business, CorePoint (NYSE:CPLG), for ~$10 against my valuation of >$15, presenting over 50% upside.
Disclosure: I am/we are long LQ, CPLG.
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