Liberty Media Spinoff Details

Here are the details of the Liberty Media (LMCA) spinoff of Starz:

  • The spinoff is actually all of Liberty’s assets except Starz.
  • January 14th is the ex-dividend date.
  • The spinco will trade temporarily under the symbols LMCAD and LMCBD on January 14th. It will trade under permanent symbols LMCA and LMCB on January 22.
  • Prior to the spinoff, Liberty will change its name to Starz. The spinco will change its name to Liberty Media Corporation.
  • Starz will trade under the symbol STRZA and STRZB on January 14th.
  • Starz will be interesting after the spinoff because it has put itself on the block for sale.

    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.

    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. 

    Buy Dean Foods

    Dean Foods LogoAs I mentioned yesterday, Dean Foods (DF) shot up 13% on the announced terms of its spin-off of WhiteWave Foods (WWAV). Based on the initial pricing for the IPO, Dean is still undervalued. 

     

    Business

    Dean operates three separate business segments:

    • “Fresh Dairy Direct is one of the nation’s largest processors and direct-to-store distributors of fluid milk marketed under more than 50 local and regional dairy brands and private labels. Fresh Dairy Direct also distributes ice cream, cultured products, juices, teas, bottled water and other products.”
    • “Morningstar Foods is a leading warehouse delivery dairy business that produces and sells traditional and specialty items, including cultured dairy products, ice cream mixes, coffee creamers, aerosol whipped toppings, traditional and value-added milks, and blended iced beverages to retailers and foodservice providers nationwide.”
    • WhiteWave-Alpro develops, manufactures, markets and sells a variety of nationally branded dairy and dairy-related products, such as Horizon Organic milk and other dairy products, International Delight coffee creamers and LAND O LAKES creamers and fluid dairy products, and Silk plant-based beverages, such as soy, almond and coconut milks, and cultured soy products. WhiteWave-Alpro also offers branded plant-based beverages, such as soy, almond and hazelnut drinks, and food products in Europe and markets its products under the Alproand Provamel brands.”

    Spin-off

    Dean is spinning-off its fastest growing unit, WhiteWave. It is expected to raise up to $320 million by selling 20 million Class A shares at about $14 to $16 each. The underwriters also have an option to purchase up to an additional 3 million Class A shares after the spin-off. Dean will still own 150 million Class B shares after the spin-off. The expected pricing date is October 25th.

    Class A and Class B are exactly the same except:

    • Class A has 1 vote per share. Class B has 10 vote per share.
    • Class B also can or will be converted into Class A shares under certain circumstances.

    After the spin-off, Dean will control WhiteWave because of its majority ownership and the fact it owns all the Class B shares.

    Valuation

    The value case for Dean Foods is pretty simple. The market capitalization for all of Dean is $3.13 billion. Based on the price range of $14 to $16 for WhiteWave, the range for its valuation is $2.38 billion to $2.72 billion.  That means the rest of Dean is worth between $410 million to $750 million.

    Even though the rest of Dean is having trouble growing revenue and maintaing margins, it still makes over 50% of net income. Dean’s 2012 net income will be around $200 million. If we allocate allocate around $95 million of it to WhiteWave, the rest of Dean will make up the other $105 million. After the spin-off, the rest of Dean would be worth at a P/E of 3.9 to 7.1. 

    WhiteWave

    WhiteWave has been growing thanks to its brands and its focus on healthy foods such as organic milk and plant based milks. Consumers are moving towards a healthier lifestyle and that includes healthy foods.

    Revenue for 9 months in 2012 increased 13% from $1.45 billion to $1.65 billion. Operating income has grown at more than 17% from $132 million to $155 million.

    The company had pro forma earnings of $.49/share in 2011. If WhiteWave’s earns around $.57 for 2012, it will trade with a P/E range of 24 to 28 based on the IPO price range. 

    Although, I would be hesitant to invest in WhiteWave at this type of valuation, it is somewhat in line with other health food competitors such as Hain Celestial Group, Inc. (HAIN), which trades at 25 times June 2013 earnings. It should be noted that Hain has a higher revenue and income growth rate, but their fiscal year ends in June 2013 where WhiteWave’s ends in December 2012. 

    Rest of Dean

    I went back and worth between valuing the rest of Dean separately or together. Initially, I valued it separately, but it became too complex because:

    • After the spin-off, Dean will have about $2.5 billion in debt. Assigning different amount of debt to each company has an impact on the valuation.
    • Dean does report operating income for each of the segments, but it has “Corporate and Other Expenses” of around $200 million for the whole company. Assigning different amount of expenses to each company has an impact on the valuation.

    So, instead I’m going to make it real simple. As aforementioned, the rest of the company should have over $105 million in net income in 2012 if you back out WhiteWale. However the net income does not take into account:

    • Increasing free cash flow for rest of Dean. In 2012, the rest of Dean is decreasing capital expenditure. Based on management’s 2012 projections their depreciation expense will exceed their capital expenditure by $60 million. That’s $60 million extra in cash.
    • Private sale of Morningstar. In late September, the company was put up for sale by Dean to increase shareholder value. A lot of analysts said that it could fetch $1 billion in a private sale. Morningstar’s business is better than Fresh Dairy Direct’s because customers are less likely to switch from a branded coffee creamer as opposed to a branded milk. However, the market is mature and it is still highly dependent on the cost of raw milk and bulk cream. So, a $1 billion price is hard to fathom. It will have $120 million in operating earnings in 2012. If you factor in some interest expense, taxes and other expenses, net income would probably drop down to $70 million. I could see it going for 12 times that or $840 million. Private equity would still have room to load it with debt and flip it for a profit.
    • Although Fresh Dairy Direct makes up a majority of revenue (over 70%) and is a declining business, it is still profitable (over $400 million in operating earnings expected in 2012) and management is focused on cutting cost to increase profitability. 
    Conservatively the rest of Dean’s free cash flow will exceed $150 million in 2012. 8 to 10 times that amount gives a valuation of $1.2 to $1.5 billion.
     
    Conclusion
     
    So, that gives us a valuation range of $3.58 billion to $4.22 billion or $20/share to $23/share. Of course, the final pricing and even post IPO pricing of WhiteWave has a huge effect on the valuation, but currently it is undervalued.
     
    I should note one thing I am scared about is the Fresh Dairy Direct business, but the fact that management is focused on increasing shareholder value gives me some reassurance.
     
    Nice to have the stock up $1 from when I recommended it yesterday!
     
    Disclosure: I am long DF.