Unlocking Value with Spin-Offs CFA Society Chicago October 24, 2016 Page | 1
Guest Speaker Joe Cornell, CFA Spin-Off Advisors, LLC Publishers of Spin-Off Research joe@spinoffadvisors.com 312-939-8900 Page | 2
Why Spin-Off? � Spin-Offs are a source of significant market outperformance for investors. � Spin-Offs often result in a higher aggregate value for the constituent pieces. � Studies conducted by a range of researchers, from Penn State to McKinsey have documented that spin-offs, on average, outperform market indexes. Page | 3
Spin-Offs Outperform S&P 500 (10 YTD) 250.00% 10Y Total Return 12/29/2006-10/14/2016: Bloomberg Spin Index: 205.63% Guggenheim Spin-Off ETF: 92.33% 200.00% S&P 500: 88.43% 150.00% 100.00% 50.00% 0.00% -50.00% -100.00% BNSPIN Index CSD US Equity SPX Index Page | 4
Spin-Offs Outperform S&P 500 (YTD) 20.00% YTD Total Return 12/31/2015-10/14/2016: Bloomberg Spin Index: 11.64% Guggenheim Spin-Off ETF: 7.41% 15.00% S&P 500: 6.17% 10.00% 5.00% 0.00% -5.00% -10.00% -15.00% -20.00% BNSPIN Index CSD US Equity SPX Index Page | 5
Types Of Spin-Offs Type of Spin-Off Description Example Parent firm distributes • HERC Holdings/Hertz shares of the spun-off • MSG Networks/Madison Spin-Off subsidiary to parent Square Garden shareholders Sell a portion or all shares of • InterActiveCorp/Match subsidiary through an IPO in Carve-Out Group the equity market Parent company’s shareholders • CBS/OutFront Media are offered shares of a subsidiary • Motorola Solutions/ Split-Off in exchange for the parents’ Motorola Mobility shares (exchange offer) Page | 6
Spin-Off � A parent distributes the stock of a subsidiary in the form of a dividend � Following the distribution, the stockholders hold stock of the parent and the stock of the company that was spun-off � Two independent companies exist where before there was only one � A spin-off effectively removes the parent from management and control of the subsidiary � Pure spins are tax efficient Page | 7
Carve-Out � Parent company sells some or all of the stock of a subsidiary to the public in an IPO � The carve-out may pay a portion of the IPO proceeds to its parent � Parent companies sometimes link subsidiary IPOs and Spin-Offs (two step spin) � Parent would typically sell less than 20% of subsidiary to the public and then distribute the balance of the stock to their shareholders in a tax-free distribution (Example: Bristol-Myers Squibb / Mead Johnson Nutrition) Page | 8
Equity Carve-Outs Parent sells Equity in the New Firm to the Public (IPO) and creates a New Publicly Traded En=ty. Subsidiary 25% Subsidiary 35% Parent Parent 65% 65% Carve-Out in an IPO 10% • A carve-out brings cash into the firm, whereas a pure spin-off does not • Carve-outs disperse assets and ownership in the assets to non-owners of the original firm • Carve-outs are oIen an intermediate step before a full spin-off Page | 9
Split-Offs � In a split-off, the investor must decide between the new company and the parent. � Holders of the parent company stock must choose to continue owning stock in the parent or, instead, exchange some or all of the parent stock for stock in the spin- off. � The parent offers its existing shareholders stock in the subsidiary in exchange for shares in the parent company. � If the parent distributes 80% of the subsidiary stock, the split is tax-free. What’s more, in an effort to induce enough shareholders to swap stock, investors are offered shares in the subsidiary that are worth more than the shares being returned to the parent company. This offered “premium” explains why split-offs are often oversubscribed. Page | 10
Selected Split-Off Transactions % of Parent Over Sub as % of Shares Sub. Parent Size Initial Closing Repurchased Factor Market Parent/Sub Date ($mm) Prem. Prem. AT&T / AWE 5/21/01 $7.8 B 10% 7% 1% .87x 22% Sara Lee / Coach 4/4/01 $998 M 5% 12.90% 6.90% 2.1x 6% General Motors / Hughes Electronics 5/19/00 $8.27 B 14% 17.70% 10.10% 3.9x 70% DuPont / Conoco 8/6/99 $11.7 B 13% 17.90% 3.30% 2.4x 20% Lockheed Martin / Martin Marietta 10/18/96 $906 M 4% 17.50% 5.20% 5.4x 6% Eli Lilly / Guidant 9/18/95 $1.55 B 6% 13.10% 8.80% 2.9x 9% Page | 11
Drivers for Spin-Offs � Lack of synergy � De-leverage balance sheet � De-conglomeration � Riskiness of the subsidiary � Focus in core business � Avoid a takeover � Legal / regulatory � Tax avoidance � Undervalued assets � Conflicts of interest � Monetize value of subsidiary Page | 12
Successful Spins � Easier for the markets to recognize underlying value � Pursue compelling business opportunities � Greater freedom to pursue new ventures, streamline production, and pare overhead � Accountability and direct incentives (stock & options) � Eliminates competitive disadvantages � Greater access to capital � Increase corporate focus for the spin-off and parent Page | 13
Shift from Conglomeration to Pure Play � Era of conglomerate (1960s - 1980s) - Firms diversify holdings to “smooth” earnings - Market rewards empire building � Conglomerates fall out of favor - Focus on cost - Difficult to value all businesses in diversified companies - Market discounts conglomerate stocks � Rise of the Pure Play (1990s - Current) - Market rewards firms that concentrate on core business - Competitive landscape pressures management to improve operating efficiency and clarify strategic decision making Page | 14
Number of Completed Spin-Offs by Year 70 66 66 60 2016 60 Es(mated Total 50 44 41 39 41 40 38 37 37 40 36 35 34 34 33 31 31 29 28 27 27 27 27 27 30 23 21 21 20 20 19 18 20 10 0 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Page | 15
2016 Completed Spin-Offs (25 YTD) Announce Spin-Off Tax Parent Symbol Spin-Off Symbol Date Date Exempt Ratio 1 Fiat Chrysler FCAU Ferrari N.V. RACE 10/29/2014 1/3/2016 Y 1:10 2 W.R. Grace GRA GCP Applied Technologies GCP 2/5/2015 2/3/2016 Y 1:1 3 Manitowoc MTW Manitowoc Foodservices MFS 1/29/2015 3/4/2016 Y 1:1 4 Integer Holdings ITGR Nuvectra NVTR 4/30/2015 3/14/2016 Y 1:3 5 Armstrong World Industries AWI Armstrong Flooring AFI 2/23/2015 4/1/2016 Y 1:2 6 MGM Resorts MGM MGM Growth Properties MGP 10/29/2015 4/20/2016 CO 7 Community Health Systems CYH Quorum Health QHC 8/3/2015 4/29/2016 Y 1:4 8 Gaming & Leisure Prop GLPI Pinnacle Entertainment PNK 7/21/2015 4/28/2016 N 1:1 9 WestRock WRK Ingevity NGVT 1/8/2015 5/15/2016 Y 1:6 10 Starwood Hotels & Resorts HOT Vistana/Merger: Interval Leisure Group IILG 2/10/2015 5/12/2016 Y 1:1 11 Philips PHG Philips Lighting N.V. LIGHT 6/30/2014 5/27/2016 CO 12 IDT Corp IDT Zedge ZDGE 8/29/2013 6/1/2016 Y 1:3 13 Brookfield Asset Management BAM Brookfield Business Partners BBU 10/7/2015 6/20/2016 N 1:50 14 HERC Holdings HRI Hertz Rental Car Holding Co HTZ 3/18/2014 6/30/2016 Y 1:5 15 Danaher DHR Fortive Corporation FTV 5/13/2015 7/2/2016 Y 1:2 16 Liberty Ventures LVNTA CommerceHub CHUBA/B 11/25/2015 7/22/2016 Y .1/0.2:1 17 Emergent BioSolutions EBS Aptevo Therapeutics APVO 8/6/2015 8/1/2016 Y 1:2 18 E.ON SE EONGY Uniper SE UN01 11/30/2014 9/12/2016 Y 1:10 19 Noble Energy NBL Noble Midstream Partners LP NBLX 10/28/2014 9/15/2016 CO 20 Ashland ASH Valvoline VVV 9/22/2015 9/23/2016 CO 21 Air Products & Chemicals APD Versum Materials VSM 9/16/2015 10/1/2016 Y 1:2 22 Honeywell HON AdvanSix ASIX 5/12/2016 10/1/2016 Y 1:25 23 RR Donnelley RRD LSC Communications LKSD 8/4/2015 10/1/2016 Y 1:8 24 RR Donnelley RRD Donnelley Financial Solutions DFIN 8/4/2015 10/1/2016 Y 1:8 25 Cousins Properties CUZ Parkway PKY 4/29/2016 10/7/2016 Y 1:8 Key: SP = Spin-Off CO = Carve-Out SPLIT = Split-Off Page | 16
Q4-2016 Expected Spin-Offs (est. 13) Announce Spin-Off Tax Parent Symbol Spin-Off Symbol Date Date Exempt Ratio 1 Johnson Controls JCI Adient "ADNT" 7/24/2015 10/31/2016 N 1:10 2 HCP Inc. HCP Quality Care Properties "QCP" 5/9/2016 10/31/2016 N 1:5 3 Yum! Brands YUM Yum! China "YUMC" 10/20/2015 10/31/2016 Y 1:1 4 Alcoa (Arconic) AA ("ARNC") Alcoa "AA" 9/28/2015 11/1/2016 Y 1:3 5 Liberty Ventures LVNTA Liberty Expedia "LEXEA/B" 11/25/2015 11/4/2016 Y SPLIT 6 ConAgra CAG Lamb Weston "LW" 11/18/2015 11/9/2016 Y SP 7 Overseas Shipholding Group OSG OSG International "OIN" 3/1/2016 Nov/Dec-16 N SP 8 IDT Corp IDT SpinCo 8/27/2015 Nov/Dec-16 Y SP 9 Hilton Worldwide HLT Hilton Grand Vacations "HGV" 2/26/2016 Dec-16 Y SP 10 Hilton Worldwide HLT Hilton Park Hotels & Resorts "PK" 12/16/2015 Dec-16 Y SP 11 Xerox XRX Conduent 1/29/2016 Dec-16 Y SP 12 Varian Medical Systems VAR Varex Imaging Company "VREX" 10/23/2016 Dec-16 Y SP 13 CBS Corp. CBS CBS Radio 3/15/2016 Q4-16/Q1-17 CO Key: SP = Spin-Off CO = Carve-Out SPLIT = Split-Off Page | 17
Case Study Page | 18
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