Avoiding Crimson Wine Spinoff

Leucadia National Corporation (LUK) is spinning off its wine business, Crimson Wine Group. 

Here are the spinoff details:

  • For every 10 shares of LUK, investors will receive one share of Crimson.
  • The distribution date is expected to be February 25th. The shareholders of record or record date of distribution is February 11th.
  • Crimson will trade OTC and will not be listed on any exchanges.

Although, it might be tempting to buy the unloved, discarded, and small spinoff Crimson, I am avoiding it.

  • Wine industry is very competitive.
  • Crimson has not been profitable for years and is barely profitable this year.

Crimson is a very small part of Leucadia. So, it should not have much of an effect on Leucadia’s stock price either.

Here is the form 10 for Crimson Wine Group.

Disclosure: I do not own Leucadia. 

Abbott Spinoff Analyzed

I spent some time this weekend taking a deeper look at the spin-off of Abbott’s (ABT) pharmaceutical unit, AbbVie Inc. (ABBV). For every share of Abbott at the close of business on December 12, 2012, investors will receive one share of AbbVie common stock. Abbott expects that AbbVie stock will be distributed on Jan. 1, 2013. AbbVie will trade on a “when issued” basis this Monday, December 10, 2012 under the symbol ABBV.WI.

AbbVie

AbbVie generates most of Abbott’s profit. For 2012, it will have between $5 – $6 billion in FCF or around $3.50/share. Earnings and revenue are growing. However, they are highly dependent on one drug, Humira. The patent for Humira expires in late 2016. As a result, AbbVie is a bit risky. Future growth, after Humiras patent expires, will depend on it finding new drugs.

The company expects to pay an annual dividend of $1.60/share. I expect the stock to trade around 12 to 13 times earnings or around $45. At this price, it should give a nice dividend of 3.5%. I personally would not want to own this stock because of the dependent on Humira.

Abbott

Abbott looks interesting post spin-off. The company expects operating cash flow of $4 billion after spin-off. If you factor in depreciation, interest expense, taxes and other expenses, Abbott’s FCF should be around $2 billion.

Abbott has market leading products across their different segments. It expects to grow revenue in mid-to-high-single-digits in 2013. Earnings could grow faster due to margin improvements. I expect it to trade around 15 times earnings or $20/share+.

Conclusion

Once AbbVie trades on a “when issued” basis this Monday, we should find out what the market thinks of the value of AbbVie. I think new Abbott will be a steal at any significant discount to my $20 fair value.

Disclosure: I do not own Abbott.

Penn Up 30% On Spin-off Announcement.

Penn National Gaming LogoPenn National Gaming (PENN), the North American casino and racetrack operator, is up almost 30% or over $11 to $48.76 this afternoon after it announced to separate into two companies with a tax free spin-off. 

One company will the REIT which will own majority of PENN’s assets and lease them to the other operating company (PNG). PENN shareholders will receive one share of the REIT and $15.40/share of taxable dividend comprised of $5.40 cash dividend and additional REIT shares. The REIT expects to pay a $2.36 annual dividend based on 2013 guidance. 

The transaction is expected to occur in Q4 of 2013 and an S1 filing has not even occurred.

Here is the investor presentation below.

GDE Error: Unable to load profile settings

Disclosure: I do not own PENN

McGraw-Hill Spin-off

McGraw-Hill (MHP) is trying to separate its two companies, the financial unit (S&P Ratings) and the education unit, McGraw-Hill Education. It reported earnings last week and also updated investors on the timeline of the possible spin-off of McGraw-Hill Education. It expects to know within the “coming weeks” whether it will do the spin-off or sell the unit.

From a cursory look at the filing, and the fact the stock has had a quite a run, the stock looks fully priced. Check out the sec filing for the spin-off here.  

Disclosure: I do now own MHP.

Engility Holding Spin-off

Engility LogoEngility Holding (EGL) was spun-off defense contractor L-3 Communications Holdings (LLL) on July 17, 2012. It “provides government services in engineering, professional support and mission support to customers in the U.S. Department of Defense, numerous Federal civilian agencies as well as allied foreign governments.”

It has two business segments, Professional Support Services (PSS) and Mission Support Services (MSS)

  • “PSS provides SETA (System Engineering and Technical Services) services, program management support, software engineering life cycle sustainment and support services.” 
  • Through MSS, we provide defense-related training, education and support services. MSS also offers law enforcement training, national security infrastructure and international capacity development.

Overhang

Engility has two major overhangs:

  • The large military drawdown in Iraq and Afghanistan is shrinking revenue. However, most of it will be complete by end of fiscal 2012. See figure below.
  • Further defense budget cuts in the future. 

Engility Revenue BreakdownFigure 1: Engility Revenue Breakdown (Source Engility)

Financials

Here are key financials for the company:

  • ~$300 million market capitalization.
  • ~$18.5 stock price
  • ~16 million shares outstanding.
  • Management estimates revenue of $1.6 billion in 2012
  • Management estimates diluted EPS of $2.30 to $2.55 in 2012
  • Management estimates adjusted diluted EPS of $3.40 to $3.65 in 2012. Adjusted excludes one time costs such as spin-off transaction costs.
Positives
 
Investors are fearful of the decreasing revenue, but are missing out a lot of positives about this company:
 
  • Decent recurring revenue. The weighted average remaining period of service on contracts is over 4 years.
  • Funded backlog as of June 29, 2012 was $753 million.
  • Improving margins. The company recently made a huge organizational change that will significantly improve margins. The company is laying up to 4% of its total workforce of 8,000 people. “These reductions will come from the Company’s general and administrative employees, and will not affect the Company’s workforce of over 7,000 employees that provide direct contract services to the Company’s customers.” I estimate this could boost earnings by $1/share.
  • Spin-off benefits: improving margins, opportunity to tap previously constrained markets.
  • Afghan and Iraq drawdown largely complete in 2012.
  • Huge insider buying by hedge fund: Abrams Capital Management. 
  • Cheap on valuation metrics even when compared to others in industry.
Conclusion
 
 I am taking a wait and see approach on this stock. In the near term, I do not see a catalysts to move the stock price higher. However, there could be an opportunity to enter this stock once fiscal 2012 is complete. By then, the Afghan/Iraq drawdown will be complete, the Presidential race will be decided, and the organizational restructuring will be complete. 
 
If revenues stabilize around $1.5 billion, the company will easily be able to achieve operating margins of over 10%, which will result in earnings of over $5/share. 
 
Disclosure: I do not own EGL.
 

Murphy Oil Spin-Off

Murphy Oil LogoA couple weeks back, Murphy Oil announced it will spin-off its retail gasoline business, pay a special dividend and buy back shares. The news came after hedge fund manager Dan Loeb, of Third Point, amassed a significant stake in Murphy Oil and urged Murphy to spin-off its retail business. Here is Third Point’s case:

“Murphy Oil is a ~$10.4 billion energy company with three primary business segments: Exploration and Production; Refining, which it is in the process of exiting; and Retail and Marketing. Third Point owns a significant stake in Murphy and recently filed for Hart-Scott-Rodino approval to increase our position should we so desire. If Murphy pursues the steps outlined below, we believe its shares could be worth in excess of $90, an increase of about 60% from current levels.

We initiated our investment following a 3-year period in which Murphy’s share price declined by ~15% while the SPDR S&P Oil and Gas E&P Index appreciated by ~49%. We believe this lagging performance can be explained partially by Murphy’s disparate asset base, which makes the company complex and cumbersome to value. This issue has been exacerbated by management’s decision to repeatedly delay spinning off its retail business. Investors in Murphy have grown frustrated, particularly given the obvious merits of the spin due to the large multiple disparity between the retail business and the core E & P business.

We believe Murphy can take four easy steps to unlock the latent value in its lagging shares, and we have shared these proposals with Murphy’s management team previously:

1) Spin-Off Its Retail Business: Murphy’s retail business consists of a network of over 1,100 fuel stations, the majority of which are located on or near Wal-Mart store sites. The business generated EBITDA of $363 million in 2011 and has relatively low ongoing capital requirements, making it highly cash generative. On the company’s 2011 Third Quarter earnings call, management indicated they were evaluating a separation of the retail business. After 9 months of consideration, management recently said that they were not interested in pursuing a retail spin at this time on account of the unit’s “underperformance”.

We believe forgoing this accretive spin-off would be a major missed opportunity. Both public company comparables like Alimentation Couche-Tard, Casey’s General Stores, and Susser Holdings and a forecasted dividend yield analysis suggest the retail business would be worth $2.3 – $2.8 billion if separated into a standalone public company. A spin-off in this valuation range would be worth $12 – $14 per share.

At this point, it appears sentimental attachment by management and the Murphy family is driving a stubborn desire to hold onto these and other non-strategic assets, creating a significant drag on enterprise value. While we hope that reason and a desire to create shareholder value will prevail over sentimentality and inaction, we have filed HSR to keep our options open should our discussions with the board and management not bear fruit for Murphy’s owners.

2) Sell Its Canadian Natural Gas Assets: Murphy owns ~145,000 net acres in the Montney play in British Columbia. Investors may recall our description of the Montney opportunity in our Second Quarter 2012 Investor Letter’s discussion of our profitable investment in Progress Energy Resources. Western Canadian gas assets have become strategically valuable given the large arbitrage opportunity between LNG prices in Asia in excess of $15/mmbtu, and $1/mmbtu F&D costs in Western Canada. Encana recently sold 164,000 nearby acres in the Montney to Mitsubishi for C$2.9 billion, or ~C$16,000 per acre (adjusting for the present value of drilling carry). Applying this metric to Murphy’s acreage and attributing ~$4k per flowing mcfe/d for existing production would result in a value of ~$3.0 billion, contributing an additional $15 per share. Management has told investors previously that they would require $4.50 gas in order to resume drilling the asset, which may occur in late 2018 based on the current futures curve and assuming a $0.40 AECO/NYMEX basis differential.

3) Sell Its 5% stake in the Syncrude Oil Sands Project: In April 2010, ConocoPhillips sold its 9% stake in Syncrude for $4.65 billion. In April 2010, WTI crude prices were $84/bbl vs. $92/bbl currently. Assuming a similar purchase price, we believe Murphy’s Syncrude stake would be worth $2.6 billion, or an additional $13 per share.

4) Complete UK Refining Business Exit: According to management, this exit is currently tying up about $500 million in working capital.

These four transactions could generate pre-tax proceeds of $8.4 – $8.9 billion. Assuming 20% tax leakage on the two Canadian asset sales, we arrive at $7.3 – $7.8 billion in after-tax proceeds, or roughly $37 – $40 per share. Third Point estimates that the associated EBITDA with the assets sales is $750 million or ~20% of our 2013 EBITDA forecast for Murphy. Based on a current enterprise valuation of $10.4 billion, our analysis suggests investors are paying only $2.6 – 3.1 billion for the balance of Murphy’s assets, which we estimate could generate $2.9 billion in EBITDA in 2013.

This “new”, slimmed-down Murphy has tremendous upside. Based on May 2012 company guidance, new Murphy could grow production at a 14% CAGR from 2012 to 2015, with oil and oil-indexed gas making up over 85% of the production mix. This strong, “oily” growth profile is bolstered by an industry-leading Eagleford shale position, where Murphy has over 220,000 net acres, the majority of which are located in the oil and wet gas windows of Karnes, Dimmitt, McMullen, LaSalle, Atascosa and Webb Counties. Murphy also has a collection of cash-generative Malaysian assets comprised of high-margin oil and oil-linked natural gas production with several development opportunities.

Assuming new Murphy trades at an extremely conservative 3.5x EBITDA multiple, we estimate total value of $91 – $94 per share after these four steps are completed. We hope that management ultimately decides to take up our suggestions, and act on its own to benefit all shareholders. In any event, as mentioned above, HSR approval, once obtained, will provide us maximum flexibility with the position.”

Murphy plans to pay the special dividend of $2.50, or about, December 3, to shareholders of record as of November 16. The dividend is worth $500 million. It also plans to spend $1 billion on buying back shares. At the current market capitalization of almost $12 billion, the company is returning more than 10% to shareholders.

Murphy will spin-off its downstream business, Murphy Oil USA, sometime in 2013 in a tax free transaction.

If anybody has any thoughts on this transaction, feel free to comment. I will have more analysis in the next couple of days. 

Disclosure: I do not own MUR. 

Dean Worth $20 to $23

I have been playing around with Dean Food’s (DF) valuation numbers in my head the last 3 days. My valuation range comes out to around $19.6/share to $23.04/share based on sum of parts valuation.

WhiteWave

WhiteWave (WWAV) is worth $2.5 billion or $13.50/share based on that fact that Dean holds 150 million Class B shares. Dean will use the $390 IPO million proceeds to pay down debt. That will be reflected in the lower interest expense in Fresh Dairy Direct Segment. Company has stated that it will distribute the shares “no earlier than 180 days following the closing of the IPO.” 

Morningstar

Morningstar is on the selling block. There was a Reuters report this past Thursday that there are multiple suitors for the company and the price tag is $1 billion to $1.5 billion. Let’s assume it gets sold for $1 billion in the worst case and $1.25 billion in the best case. In both cases, let’s assume Dean uses $500 million of the proceeds to pay off debt and the rest to distribute to shareholders. So, shareholders get $500 million or 2.70/share to $750 million or $4.05/share.

Fresh Dairy Direct

Fresh Dairy Direct Income

  • Operating Income will be over $400 million in 2012 even with higher commodity prices in 2012. They earned $226 million for the first half of 2012
  • Interest Expense. They will have $1.6 billion in debt. $1.13 billion of that will be senior notes and the rest of it will be the senior credit facility.
  • Corporate Expense includes things such as non cash share based expense. The company had $210 million corporate expense for the whole company in 2011. So, $150 million is a conservative estimate.
  • One time expenses includes such things as litigation expense, facility closing and reorganization costs that they seem to have every year.
  • Added $60 million to net income for FCF because they will have less capital expenditure compared to depreciation.

If Fresh Dairy Direct gets a multiple of 5 to 8 based time FCF, the value is $635 million to $1,016 million or $3.4 to $5.49.

Conclusion

 Adding all that up, I get a valuation range of $19.6 to $23.04. Obviously there are risks:

  • Whitewave share prices could go down. Right now the float is less than 25 million. Once the 150 million Class B Shares come into the market, there could be downward pressure on the price. Also, it is highly valued just like every other healthy food company. However, it does have the good growth.
  • Morningstar may not be sold or it may not distribute any of the proceeds if sold. However, there is considerable interest in the company based on the latest reports. The company has a history of increasing shareholder value. Besides the latest spin-off, the company in 2007 gave a $2 billion or $15/share dividend. Also, what else would they do with the proceeds? They will not pay off the senior credit facility fully. It does not make any financial sense. 
  • Fresh Dairy Direct is a low margin business and is dependent on commodity and fuel prices. However, the company is focused on cutting cost and lowering capital expenditures to increase FCF, and I have valued it conservatively. 
At the current price of $16.74 and my conservative valuation, Dean is severely undervalued. I would love to hear from everybody on this stock.

Disclosure: I am long Dean.

Whitewave Spin-off Prices at $17

WhiteWave (WWAV), the spin-off of Dean Foods (DF), based on strong investor interest increased the size, from 20 million share to 23 million shares, and price, from $14-$16/share to $17/share of their IPO.

At $17/share, the company is worth about $2.9 billion. Given that Dean is worth $3.5 billion, there should be a pop in Dean’s shares tomorrow. 

When the initial pricing was announced, I wrote that Dean was undervalued and urged investors to buy. I initiated a position at $16.96. Read the article here.

WhiteWave starts trading tomorrow. 

Disclosure: I am long Dean. 

Pfizer Spin-off, Zoetis

Zoetis LogoOne spin-off that I am keeping a track of is the Pfizer spin-off of its animal unit, Zoetis.

“Zoetis is a global leader in the discovery, development, manufacture and commercialization of animal health medicines and vaccines, with a focus on both livestock and companion animals.” The company had revenues of $4.2 billion and $245 million in fiscal year 2011. In the first six months of 2012, the company had revenue of $2.14 billion and net income of $284 million.

The pricing and terms are not set, but based on the most recent S1 filing, the company is offering Class A shares (one vote per share on all matters) to the public. Class B shares, which have ten votes per share for election of directors and one vote per share for all other matters, will be held by Pfizer.

Pfizer “may make a tax-free distribution to its stockholders of all or a portion of its remaining equity interest in us, which may include a distribution effected as a dividend to all Pfizer stockholders or a distribution in exchange for Pfizer shares or other securities (or another similar transaction).”

Analysts are valuing Zoetis at over $15 billion. Once the terms come out, I will have more analysis.

Check out the S1 analysis here.

Disclosure: I do not own PFE. 

Dean Foods Spin-off

Dean Foods (DF) announced its WhiteWave-Alpro division has filed to spin-off into a separate company called WhiteWave. The IPO is expected to raise up to $320 million by selling 20 million Class A shares at about $14 to $16 each. Dean will still own 150 million Class B shares after the spin-off.

Dean is spinning-off WhiteWave to unlock the value of the company. WhiteWave has experienced strong growth over the last 5 years, but it has been hidden underneath Dean. WhiteWave makes Silk soy milk, Land O’Lakes and Horizon Organic.

I did a quick read of the filing, and it seems like Dean is undervalued even though it is up 13% today. 

I have initiated a position at $16.97, but will do more due diligence today and break down the analysis tomorrow.

Disclosure: I am long Dean Foods (DF)