Like Father Like Son? Covidien Pursues Spinoff Of Its Own

by: Spin Doctor - January 5th, 2012  

Tyco (TYC), a champion spinner with a set of twins of its own in the pipeline, is about to become a grandfather. Covidien (COV), a 2007 spinoff from Tyco, recently announced plansto spin off its pharmaceuticals business into a

Covidien corporate logo

standalone company. Five is truly a wonderful age to become a parent. Many had predicted some type of transaction related to the pharma group as the company has been more focused on its larger and higher growth medical devices and supplies businesses.

In addition to being a top 10 generic drug maker and a leading player in the bulk acetaminophen market, the pharma group has numerous other products in its portfolio such as opoids and contrast media. As impressive as that sounds, the group is still relatively small within Covidien, representing only ~17% of total sales ($2b) and an even smaller piece of the operating income.

Current President and CEO Jose Almeida provided plenty of reasons for the split including greater flexibility for both companies, differing operating characteristics and a better opportunity for the pharma unit to grow. Apparently, it was also the perfect time to spin out the division “because we have significantly improved [its] operations, performance and pipeline.” The truth is that Covidien had tried to sell the unit, but was unable to find a buyer. While there is opportunity to grow in the pain-management segment and with new drugs, the ‘growth’ argument is a bit suspect due to the fact that even after all of the ‘improvements’ to the business, according to a recent investor presentation, the group managed a whopping 0% CAGR from ’07-’11 (vs. 10+% for the medical devices unit). The pharma unit also has significantly lower margins than the medical devices unit and is more US focused, with 2/3 of its sales coming domestically. It is also worth mentioning that the pharma group has been without a permanent leader for some time now.

It sounds to me that the company has found a way to dump a business it wasn’t particularly interested in anymore. Analysts don’t seem too fond of it either, referring to it as a ‘drag’ and other downer terms. That isn’t bad from my perspective as strong negative sentiment can often present opportunities, so this situation bears watching. The move is expected to be tax free, but patience is required here as the transaction could take up to 18 months. I wouldn’t be surprised if the company continues to pursue a sale, but either way, we will keep you updated as more information is made available.

Disclosure: Author holds no position in any stock mentioned.

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Sears Is Ready To Harvest The Orchard

by: Spin Doctor - December 16th, 2011   1 Comment

Much like Halloween, the end of the year is also shaping up to be an extremely busy period for spinoffs. The latest to join the party is Sears Holding (SHLD) whose board of directors approved the spin offof Orchard Supply Hardware Stores

English: H. H. Franklin Manufacturing Company ...

earlier this week. The spinoff will take place on December 30 to shareholders as of today, so this is really your last chance to get in pre-spin. Shareholders will receive one common Class A share (yes, there are other classes) and one preferred share of Orchard for every 22.14177 shares of SHLD owned. The preferred shares do not pay any dividends and are not convertible into common. Ares Capital, a private equity firm which purchased a 20% stake in Orchard back in ’05, will own all of the Class C shares and have ~20% of the voting power. As a result of its holdings in SHLD, ESL Investments, Eddie Lampert’s fund, will control ~49% of the voting power so don’t expect too many changes. The new company will trade on the NASDAQ under the ticker OSH and the preferred will be quoted on the OTCQB. Check out the company’s most recent S-1 for additional information on the transaction and see our earlier post about the spin here.

I have not had a chance to research this spin in depth, but the preferred share is an interesting wrinkle. Investors may not be familiar with it and the market to trade it may not be as liquid. We will keep you updated.

Disclosure: Author holds no position in any company mentioned.

 

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Sunoco Looks To Finish SunCoke Separation

by: Spin Doctor - December 14th, 2011  

After successfully completing an IPO this past July, Sunoco (SUN) announced that it is ready to move on to the second stage of its planned spinoff of SunCoke Energy (SXC). On January 17th, 2012 Sunoco will issue a special stock dividend

Sunoco

distributing its remaining ~81% stake in SunCoke to shareholders as of January 5th. SUN shareholders will receive 0.53 of a share of SunCoke for every share of SUN owned. This is just another milestone in Sunoco’s broad transformation project which has seen the company unload its chemical operations and exit the refining business. For additional information on the companies and the transaction, please see our earlier posts here.

Unfortunately, life as an independent company hasn’t been so pleasant for SXC as its share price has plummeted ~35% since its debut. One bit of news that negatively affected its price was the recent release of its 2012 outlook which came in below Wall Street’s forecasts. In fact, it came in significantly below the company’s own forecasts from a June 2010 analyst day presentation (which can be found in our earlier posts). Shows just how much forecasting even 1-2 years in advance is worth. For 2012, the company is expecting coke production to grow to ~4-4.2m tons and coal production to increase by 400K to ~1.8m tons. EBITDA is forecasted to be between $250 and $280 million while EPS is expected to be between $1.30 and $1.65 (based on 70m shares outstanding). Based on those numbers, the stock is currently trading at a P/E of between 6.4 and 8.2x ’12 earnings. Bear in mind that much of the growth is due to the recent completion of the company’s Middletown, OH plant. Another interesting note from that publication is that the company is planning to invest $30m, roughly ~20% of its CapEx budget, in India.

The operating environment remains challenging for the business though and it is tough to feel real good about steel production quickly ramping up. Keep an eye on pricing though. Another thing to watch for is whether or not the stock dividend creates an overhang on the stock. Sunoco’s top holders are the big ETF guys – SSGA, Vanguard and Blackrock – who own ~18% of its shares. That translates into ~14.5% of SunCoke, a nice chunk considering their current stakes are very low.

Disclosure: Author holds no position in any company mentioned.

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Ring In The New Year With WPX Energy

by: Spin Doctor - December 12th, 2011   1 Comment

New Year’s Eve is one of those ‘big events’ that rarely lives up to its hype and often ends up pretty anti-climactic. Doesn’t bode well for this ensemble flick(actually, I am sure it will suck for a host of other reasons). The board of directors at

Tower for drilling horizontally into the Marce...

Williams Companies (WMB) believes they have found the solution for a great NYE though as the company recently approved plans to spin off WPX Energy, its E&P unit, on December 31st to shareholders as of December 14th. Surely a more exciting event than watching a big ball drop 77 feet, no? Well…maybe not.

The original proposal, similar to Sunoco’s execution of the SunCoke spinoff, called for an IPO of WPX Energy this year followed by a distribution of the remaining stake to shareholders in 2012. Alas, the equity markets markets didn’t behave and the weak IPO environment caused the company to shelve the IPO and to pursue a pure spinoff instead. Even though the parent will not be able to pay down debt with the IPO proceedings, it is still expecting to maintain its credit rating. For additional background information on the transaction, see our earlier post here.

WPX Energy owns and is developing various oil & gas assets throughout the United States in locations such as the Piceance Basin (Rockies), the Bakken Shale (North Dakota) and the Marcellus Shale (Pennsylvania). The company also has a 69% ownership stake in Apco Oil and Gas International (APAGF) which holds oil and gas concessions in Argentina and Colombia. Apco only represents a small portion (~5%) of its reserves though. Here is a snapshot of the company’s proven reserves (as of Dec 31, 2010):

Basin/Shale Estimated Net Proven Reserves
Bcfe % Proved Developed
Piceance Basin 2,927 53%
Bakken Shale 136 11%
Marcellus Shale 28 71%
Powder River Basin 348 75%
San Juan Basin 554 79%
Apco 190 60%
Other 290 72%
Total 4,473 59%

Currently, the Piceance basin represents the bulk of the company’s production, however I would expect that to change as the company has recently acquired significant chunks of acreage in the Bakken and Marcellus shales. I would expect those areas to grow significantly as they are expected to consume about 35% of the company’s 2011 drilling budget and 47% of 2012′s budget. While these shale assets are some of the more exciting energy projects in the US (you may have heard something about a shale ‘boom’) and a boon to the company, they are obviously not without risks.

For additional information on the company, both financial and asset-wise, check out its Form 10. The filing lists the usual list of reasons for the spin, including increased management focus and competition for assets. One of the differences between the two companies will be dividend payments. While the parent company, WMB, plans on growing its dividends by 10-15%, WPX does not intend to pay anything out. Not a surprising decision given the constant capital intensity of the E&P business, but it might disappoint some investors.

Shareholders of Williams will receive one share of WPX Energy for every 3 shares owned of WMB and the new company will trade on the NYSE under the ticker ‘WPX’. Given the nature (and recent popularity) of the business, it should be relatively easy to put together a list of comparable companies for a relative valuation comparison. We will keep you updated.

Disclosure: Author holds no position in any stock mentioned.

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Medtronic And Others Think Twice Before Spinning

by: Spin Doctor - November 23rd, 2011  

Spinoffs take a lot of time. It really isn’t so surprising considering the plethora of regulatory and logistical issues that arise from splitting up a business. While often overlooked as one time charges, companies spend millions upon millions planning and executing these transactions. As a result, at least 6 months usually pass between the date of announcement and the actual spin, with the process more often than not taking a year (or more). As we have noted before, the cycle has even been extended to include speculation about potential spins. For the patient investor, the lengthy process provides ample time to perform in depth due diligence and get a firm handle on the situation however, it also gives management time to evaluate other options for their neglected/unstrategic/overlooked unit.

So while the current year has seen an explosion in spinoff transactions, we have also witnessed some potential spins fall by the wayside for varying reasons. Most recently, instead of pursuing a spinoff, Medtronic (MDT) is selling its Physio-Control unit to Bain Capital for $487 million. As we noted in an earlier post, the company had long discussed shedding the ‘non-core’ unit, but various struggles have delayed any movement of the business. The sales price is a little more than 1x sales which reflects some of the margin issues the unit has had (which we also discussed in our earlier post – shameless plugging). For the most recent quarter, Physio-Control had sales of $109m.

Bain should be somewhat familiar with the business having previously bought it from Eli Lilly in 1994. The private equity firm then took it public the following year and Medtronic purchased Physio in ’98 for roughly $535m. Whooops. The current deal with Bain is expected to close in Q1 2012.

While the Medtronic/Physio-Control spin was probably more speculation, it isn’t the only spin to be scrapped this year. Here is a brief recap on a few other situations that have occurred:

  1. It only cost the CEO (Leo Apotheker) his job, but the highest profile cancelled spin (at least recently) is probably Hewlett-Packard’s (HPQ) PC unit. Shortly after taking the helm, new CEO Meg Whitman announced that the company would retain the PC unit because unloading it would potentially damage the HP brand and hurt relationships with customers. Apparently margins aren’t everything.
  2. IDT (IDT) cancelled its planned spin off of Innovative Communications Technologies Inc (ICTI) due to risk concerns related to unloading its patent portfolio. Keeping IP in house makes sense.
  3. El Paso (EP) sold itself, thereby killing plans to spin off its E&P business. The acquirer plans on selling the potentially spun-off assets and using the proceeds to fund the transaction.
  4. CompuCredit’s (CCRT) planned spin of Purpose Financial Holding was shelved earlier this year and the Form 10 withdrawn.

While it was sad to see them go (especially HP – what drama!), it is worth remembering some of these names because in non-sale situations there is always the chance the spinoff will be revisited. Luckily there are plenty of other special situations going on right now to keep one occupied. As always, we will keep you updated.

Have a Happy Thanksgiving!

Disclosure: Author holds no position in any stock mentioned.

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No Vacation Club At Marriott International

by: Spin Doctor - November 1st, 2011  

After a busy Halloween, it is time to look ahead to the next spinoff opportunities.  Luckily we won’t have to wait long as Marriott International’s (MAR) board of directors recently approved the spinoff of its vacation club, Marriott Vacations

Marriott International

Image via Wikipedia

Worldwide. The distribution is expected to take place on November 21st (to shareholders as of Nov 10th) and shareholders will receive 1 share of VAC for every 10 shares of MAR owned. For some background on the planned move, please see our earlier piece on Marriott here and a copy of the Form 10 is available here.

As a very brief recap, Marriott plans on separating its timeshare business, which has somehow been rebranded into the ‘Vacation Ownership’ business, into a standalone company. I guess people would rather own a vacation than a timeshare? The new company has 64 resorts throughout the world and ~400K ‘owners’ as of 12/31/10. The new company will pay licensing fees of ~$50m/year to Marriott International for using the name (and the Ritz-Carlton name). The Form 10 lists five reasons for pursuing the spinoff, namely:

  1. Enhanced strategic and management focus for each company
  2. More efficient capital allocation, direct access to capital and expanded growth opportunities for each company
  3. The ability to implement a tailored approach to recruiting and retaining employees at each company
  4. Improved investor understanding of the business strategy and operating results of each company
  5. Investor choice.

In other words – the usual stuff (now that would make for a fun SEC filing). The final slides of this presentation by COO Arne Sorenson offer a little insight as well into the spinoff.

The timeshare business has historically been volatile and can struggle during periods of economic malaise. As JW Marriott and Arne Sorenson, the company’s Chairman, CEO and COO, put it in their Annual Report’s Executive Letter, “timeshare demand correlates highly with consumer confidence.” So…’perfect’ timing based on this past month’s consumer confidence numbers. For additional analysis on the transaction, check out Long Term Value’s take here.

Disclosure: Author holds no position in any stock mentioned.

 

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To Wire Or Not Wire – That Is Ntelos’ Question

by: Spin Doctor - October 24th, 2011  

Avoid trading on certain days? Superstitious at all? Management at Ntelos Holding (NTLS) certainly are not as the company plans on separating its wireline and wireless businesses this coming Halloween (October 31st). Maybe it was just time to close the transaction after first announcing it last December. For those who are unclear about the differences between the two companies, a wireline company utilizes actual ‘wires’ or fibers through which it offers its services.

The wireless business will retain the Ntelos name while the new wireline company will be named Lumos Networks. Lumos, which will also include the recently acquired FiberNet business, focuses on the ‘Mid-Atlantic’ region which includes areas such as the Virginias and Pennsylvania. Lumos reports under two segments: Competitive, a network service provider, and RLEC, a traditional rural incumbent local exchange carrier. The company is more focused on its ‘Competitive’ bucket because it believes that its highest growth customers include businesses, government and carrier customers. The RLEC segment is expected to contribute steady cash flow to the operation.

Lumos’ customer base is one of the underlying reasons for the split as the wireless business is mainly focused on individual, retail consumers. Revenues for the wireless business have grown over the past 5 years although year to year has been rocky. The same can be said for the subscriber base as the company currently has ~430K subscribers or roughly the same amount as when the spin was announced. A big chunk of its business is based on an agreement with Sprint, to which it is the exclusive provider in the region. The high level of concentration could be a concern although the agreement is in place until 2015.

For additional details on the new companies – including financials, details on executive compensation (it appears the executives will be receiving nice amounts of stock) and in depth descriptions of the businesses (and respective strategies) – take a look at Lumos’ Form 10 and at some of Ntelos’ investor presentations about the transaction here (when the transaction was first announced) and here (more recent – September 2011). Analysts seem to like the move with the usual ‘new companies will make better acquisition targets’ argument being tossed about.

As a result of the spin, Lumos will incur ~$340m in new debt, most of which will go to Ntelos in order to pay down debt. Immediately prior to the spin, the company plans on executing a 1 for 2 reverse stock split after which shareholders will receive one share of Lumos for every share of Ntelos owned. Lumos will trade on the Nasdaq under the ticker LMOS.

Disclosure: Author holds no position in any stock mentioned.

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Tyco Does It Again

by: Spin Doctor - September 19th, 2011   1 Comment

In stark contrast to the American people’s  growing heft, American conglomerates appear to be on a steady diet, often slimming down via spinoffs. Break up expert and Swiss-conglomerate Tyco International (TYC) is the latest fad follower as the company announced plans to split itself into three separate companies. The new businesses will be:

  • ADT North America (residential security): Provides security and fire alarm systems. The unit will have revenues of ~$3 billion and ~16,000 employees
  • Flow control products and services: Designs, sells and services highly engineered valves and controls for the energy markets, general process industries, mining and water markets. The unit will have revenues of ~$4 billion and ~15,000 employees.
  • Commercial Fire and Security: Designs, manufactures, sells, installs and services security, fire detection and fire suppression systems. The company will have revenues of ~$10 billion and ~69,000 employees.

According to current CEO and Chairman Ed Breen, each company will “have industry-leading positions in large and fragmented industries and…have greater flexibility to pursue their own focused strategies.” As is always the case with these breakups, several analysts have predicted that the new, more easily digestible companies are likely to become takeover targets.

Mr. Breen (who took over the reigns from epic partier and currently imprisoned Dennis Kozlowsky) will have roles at all three companies, but none appear to be direct management responsibilities. Instead, the current president of each segment will become CEO of their respective companies. Additionally, only the ADT business is expected to be incorporated in the US.

Tyco has been no stranger to spinoffs under Mr. Breen’s leadership as the company spun out two entities (Covidian [COV] and TE Connectivity) in 2007. Tyco also holds a soft spot in our hearts at StockSpinoffs because the company was the subject of our inaugural post -  that spin was never consummated though as the company sold off the division instead.

The spins are expected to occur in about a year and will be subject to a shareholder vote. A lot can change in the meantime and we will keep you updated as more information is released.

Disclosure: Author holds no position in any stock mentioned.

 

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The Naming Of ITT’s Spins

by: Spin Doctor - July 18th, 2011   5 Comments

One of my favorite and often overlooked parts of examining spinoffs is the choice of name for the new entity. Generally, this decision requires zero thought as there is a division or some well known product making the choice obvious, such as in the case of Madison Square Garden or Babcock & Wilcox (well…maybe that one isn’t the best example). However, occasionally management needs to flex its creative muscles (by which I mean hire some pricey ‘brand strategy’ consultants) in order to come up with a splashy new name that evokes confidence, pride and numerous other adjectives within a single word. This is how we end up with WPX Energy and QEP Resources. Yikes. Overall, I would say I am unimpressed, but every now and then I am surprised by a unique or clever name such as the recent Howard Hughes Corporation. How random was that one?

Well, you can add ITT’s (ITT) new names for its two upcoming spinoffs to that list, as ITT announced that its water technology company will be renamed Xylem and the defense business will be called ITT Exelis. The core industrials unit will retain the ITT moniker and ticker. Apparently, somebody at ITT really loves the letter ‘X’.

Xylem is expected to trade with the ticker XYL and in case your high school biology is a bit rusty, the xylem is the tissue that transports water in plants. How fitting. Exelis, on the other hand, is completely made up and was chosen because it “is an energetic name…[which] signifies the expeditionary spirit, exceptional foresight and strong commitment to proactively anticipating and adapting solutions to our customers’ most critical problems.” All of that packed into just six letters – amazing. Exelis will trade under the ticker XLS and the company is rumored to be staying put in its current location in McLean.

Form 10′s for the new companies have also been released and a wealth of information, including the aforementioned SEC filings, related company presentations and news releases can be found here. Or you can just click here for Exelis’ Form 10 and here for Xylem’s. The spin appears to be on track for completion by the end of the year and we will keep you updated as more information is released. For our earlier post on ITT, click here and here are some articles from Dealbook and the Deal Journal discussing the move and mourning the loss of the corporate conglomerate.

Readers – any company names that you love or hate?

Disclosure: Author holds no position in any stock mentioned.

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Another Stainless Spinoff – ThyssenKrupp’s Turn

by: Spin Doctor - June 6th, 2011  
ThyssenKrupp Steel AG

Image via Wikipedia

Not enough interest in silverware these days? Sure seems that way as German conglomerate ThyssenKrupp AG (TYEKF – US Pink Sheets) announced plans to spin off its stainless steel operations. The move comes  just a few months after ArcelorMittal (MT) did the same exact thing with its stainless division, Aperam (APEMY). [See our earlier posts on Aperam here and here] The motivation appears to be a company wide shift away from steel dependent businesses, however the stainless sector is facing its own structural challenges including overcapacity and a slowdown. Additionally, many believe that the move will promote some much needed industry consolidation.

The spinoff was just one of several bold moves announced by new CEO Heinrich Hiesinger in order “to focus the portfolio and discard business activities for which alternative strategic options are more suitable in order to strengthen the financial base of the Group and to provide additional flexibility for the expansion into strategically promising business activities.” The company also plans on reducing its debt load after expanding operations in the Americas over the past few years. ThyssenKrupp’s stock popped post-announcement and the restructuring moves were generally regarded favorably. For a summary, can read the articles in Bloomberg and the WSJ.

Aperam hasn’t done much as an independent company so the most recent comp isn’t that inspring however, the operating environment has remained challenging. Few details about ThyssenKrupp’s plans have been released, but we will keep you updated as more information is made available.

Disclosure: Author holds no position in any stock mentioned.

 

 

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