Medtronic Revives Physio-Control Spinoff

by: Spin Doctor - February 28th, 2011  
Image representing Medtronic as depicted in Cr...

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In an attempt to mimic the company’s lifesaving products, Medtronic (MDT) announced that plans to divest its Physio-Control subsidiary have been revived. While overshadowed by broader restructuring plans, the Physio announcement was made during the company’s Q3 earnings release and elaborated on (a bit) during the conference call by the company’s CFO, Gary Ellis (Q&A portion here). Unfortunately, very few details regarding Medtronics’ plans have been released. Not so surprising given Medtronic’s uncertain leadership – current CEO Bill Hawkins is retiring this April and no successor has been named as of today.

Medtronic first surfaced the idea of spinning out Physio-Control, which makes monitor/external defibrillator products, in 2006, but those plans were quickly shelved due to quality-systems issues (the unit has been hit with some recalls over the past few years). While those problems have been put to rest, Mr. Ellis noted  that Physio’s margins are “are probably some of the lower ones in company overall and clearly below the company’s average.” As a result he believes the company “can do much better with themselves.” Perhaps. Projects must compete for capital within a company, so not getting the green light doesn’t tell the whole story (could be others with higher growth or strategic reasons etc), but often it means the returns aren’t there.  Either way, focused management should be a positive for a division that comprises only a small piece of the pie. Physio-Control reported $104 million of revenue for the quarter, a fraction of the $3.961 billion generated by the overall company.

Without any details, a spin is hardly a guarantee at this point as Medtronic could opt for a different solution such as a sale. We will keep you posted as more information is released.

Disclosure: Author holds no position in any name mentioned.

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The End Is Nigh For Seahawk and Pride

by: Spin Doctor - February 28th, 2011  
Offshore platform located in the Gulf of Mexic...

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The final chapter of the Pride International (PDE)/Seahawk Drilling (HAWK) spinoff is nearly complete. Our earlier post noted that both companies were struggling and considering their respective strategic options. Two companies with the same goal, yet oh so different outcomes. Here is a quick update:

Pride, an offshore rig contractor with a deep-water focus and international exposure,  agreed to sell itself to Ensco (ESV), a combination which will create the world’s second largest offshore driller behind Transocean (RIG). The deal is a cash + stock combo with  shareholders receiving 0.4778 newly-issued shares of Ensco in addition to $15.60 cash for each share. Much of the rationale and details behind the transaction can be found in a recent investor presentation – here is Dealbook’s take on it. While there are still regulatory issues to be solved within the US and little guidance from the Dept Of Interior, there are many opportunities for deepwater drilling around the globe which only get more attractive as oil prices continue to climb. Safety will be an issue, but the company should benefit from a relatively newer fleet.

Unfortunately, more shallow focused companies are still suffering, especially those concentrated in the Gulf of Mexico such as Seahawk. As a result of the difficult operating environment and the debt burden from the spinoff, the company filed for Chapter 11 bankruptcy and agreed to a firesale of its assets to Hercules Offshore (HERO) for approximately $105 million. Not your typical ‘HERO’ to the rescue story (I’m sorry – I couldn’t resist). Seahawk was simply unable to cope with the oil spill fallout and the current challenging operating environment. Low gas prices didn’t help much either. Beaten down industries are often intriguing, but the outlook here remains cloudy. The dust will settle eventually, some new regulations will exist and a more consolidated marketplace should be able to succeed. Unfortunately, Seahawk won’t be there to participate.

With both companies ceasing to exist in the near future, it is time to close the book on this spin. Don’t fret though, there are plenty of new opportunities on the horizon to work on.

Disclosure: Author holds no position in any stock mentioned.

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Marriott Thinks Its Time(share) For A Spinoff

by: Spin Doctor - February 25th, 2011  
Marriott International

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Anyone else have this experience? A friend suggests a fantastic trip and the best part of all is that he ‘found’ a cheap stay at a nice hotel. The catch? Wasting half of a precious vacation day sitting through a hard sell for a timeshare. Ouch. While it’s fun to see how many freebies the company will throw in, all I really think of during these pitches is how I can possibly get rid of this guy and salvage my day. Apparently, even their owners feel the same way as Marriott International (MAR) chose to break up with (well, technically spin off) its timeshare business on Valentine’s Day. Heartless, I know.

The announcement was made during the company’s Q4 conference call this week and the company expects to execute the spinoff via a tax free dividend. The new company will focus on the development of properties under both the Ritz and Marriott brands while MAR will become a pure lodging play. The companies will obviously maintain some type of relationship (franchise fees from spin to parent) and a more detailed  breakout of those fees should be available when the Form 10 is released next quarter.

According to J W Marriott, longtime Chairman and CEO of MAR, “The transaction will permit both companies to tailor their business strategies to best address market opportunities in their respective industries. The new timeshare company will be positioned to expand faster over time while Marriott International will further advance its longstanding strategy of separating real estate from management and franchise operations.” Of course it will. One underlying reason for the spin might be the customer base – timeshares are typically sold to consumers, many of whom are still suffering while the hotels have rebounded from a resurgence of the business/corporate traveler. Another likely motivating factor is that the timeshare business features volatile earnings and is more capital intensive. Not exactly investor friendly traits.

The timeshare segment reported roughly $1.5b of revenue in 2010 and at year-end operated 71 timeshare and fractional resorts with more than 400,000 owners and approximately 10,000 employees. Stephen Weisz, currently President of the timeshare segment, will become CEO of the new company with Mr. Marriott remaining with the parent. Bear in mind that the Marriott family will still own approximately 21% of each company after the spin.

The market has been reacting rather favorably to recent spinoffs and MAR was no exception with the stock experiencing a nice post-announcement pop. A better understanding of the expected financial relationship between the two companies will be necessary in order to come up with a proper valuation. Although the Four Seasons was bought out and is now private (can use historical info), I was able to find at least one other pure lodging play for comparison, Choice Hotels International (CHH). Marriott might be a better brand though.

We will keep you updated as more information is released.

Disclosure: Author holds no position in any stock mentioned.

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Nobody Does It Like Sara Lee?

by: Spin Doctor - February 4th, 2011  

What an exciting month January was for Sara Lee (SLE). To recap: Brazilian meat processor JBS SA’s bid of $17.50/share is rejected by the board as too low. Rumors of a spinoff begin to surface, but private equity buyers begin to circle and JBS SA plans on increasing their offer. A short while later, the board rejects the PE group’s bid (rumored at $19/share) as too low (shocker) and ultimately, JBS SA is unable to raise the necessary financing in order to up their bid.

The end result? A spinoff of course, and one which was approved by the board of directors late last week in a day that was full of SLE corporate updates. Well…it should not be too surprising as this is just another milestone in the company’s rich history of corporate transactions (detailed in our previous post here). The spin will create two separate public companies: one containing the North American (“NA”) Retail and Foodservice businesses (excl. NA beverage business) which will retain the ‘Sara Lee’ name and one (unnamed as of now)  containing the International Beverage and Bakery businesses, as well as the NA beverage business. The spin is expected to be completed in 2012. A recently released presentation about the spin, contains some basic financial projections for the new companies (SLE often breaks out each segment’s performance in SEC filings which should make it easy to put something together):

($ in millions) New Sara Lee Coffee              Company
Net Sales $                    4,200 $                4,850
Adjusted Operating Income $                       420 $                   500
Adjusted Op Income + D&A $                       580 $                   660

In addition to the spinoff, the company will pay out a special dividend of $3.00/share mainly funded by the sale of its NA fresh bakery business. The company also filled its leadership void by naming Marcel Smits (currently interim CEO) as CEO and Jan Bennink as Director and Executive Chairman. CJ Fraleigh, currently CEO of Sara Lee NA will become CEO of the spin. These important positions have been vacant (filled by ‘interims’) since ex-CEO Brenda Barnes stepped down due to medical reasons and should serve as a lesson to those who scoff at the recent ‘hot topic’ of succession planning.

Both companies expect to continue paying out dividends and to retain their investment grade credit ratings. Guidance was lowered for the coming year as rising coffee and protein prices further eat into their margins and it is important to note that commodity pressures will remain a risk for the new company.

Each company contains several well-known brands and the coffee company’s international exposure might command a premium multiple due to its growth potential. The split might also make the new companies more easily digestible for potential acquirers. The spin will be tax free to investors although tax issues related to recent asset sales were frequently brought up during the recent conference call. Essentially, there is close to a billion dollars overseas which has yet to be repatriated.  It is also worth noting that there is still some possibility, albeit slight at this point, that the company will sell itself. We will keep you updated on the situation.

PS: Yes, I do know that the headline is not the company’s real slogan which is actually ‘Nobody Doesn’t Like Sara Lee’. I will admit that I didn’t always know that though…

Disclosure: Author holds no position in any stock mentioned

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