Guest Speaker Joe Cornell, CFA Spin-Off Advisors, LLC Publishers of - - PowerPoint PPT Presentation

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Unlocking Value with Spin-Offs

CFA Society Chicago

October 24, 2016

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Guest Speaker

Joe Cornell, CFA Spin-Off Advisors, LLC Publishers of Spin-Off Research joe@spinoffadvisors.com 312-939-8900

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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.

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Spin-Offs Outperform S&P 500 (10 YTD)

• 100.00%
• 50.00%

0.00% 50.00% 100.00% 150.00% 200.00% 250.00% BNSPIN Index CSD US Equity SPX Index

10Y Total Return 12/29/2006-10/14/2016: Bloomberg Spin Index: 205.63% Guggenheim Spin-Off ETF: 92.33% S&P 500: 88.43%

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Spin-Offs Outperform S&P 500 (YTD)

• 20.00%
• 15.00%
• 10.00%
• 5.00%

0.00% 5.00% 10.00% 15.00% 20.00% BNSPIN Index CSD US Equity SPX Index

YTD Total Return 12/31/2015-10/14/2016: Bloomberg Spin Index: 11.64% Guggenheim Spin-Off ETF: 7.41% S&P 500: 6.17%

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Types Of Spin-Offs

Type of Spin-Off

Spin-Off Carve-Out Split-Off

Description Example

Parent firm distributes shares of the spun-off subsidiary to parent shareholders

• HERC Holdings/Hertz
• MSG Networks/Madison

Square Garden

• InterActiveCorp/Match

Group

• CBS/OutFront Media
• Motorola Solutions/

Motorola Mobility Sell a portion or all shares of subsidiary through an IPO in the equity market Parent company’s shareholders are offered shares of a subsidiary in exchange for the parents’ shares (exchange offer)

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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

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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)

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Equity Carve-Outs

Parent sells Equity in the New Firm to the Public (IPO) and creates a New Publicly Traded En=ty.

Parent 65% Carve-Out in an IPO 10% Subsidiary 25%

Parent 65% Subsidiary 35%

• 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

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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-

• ff.
• 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

• ffered 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

• ften oversubscribed.

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Selected Split-Off Transactions

Parent/Sub Date Size ($mm) % of Parent Shares Repurchased Initial Prem. Closing Prem. Over Sub. Factor Sub as % of Parent Market

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%

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Drivers for Spin-Offs

Lack of synergy De-conglomeration Focus in core business Legal / regulatory Undervalued assets Monetize value of subsidiary De-leverage balance sheet Riskiness of the subsidiary Avoid a takeover Tax avoidance Conflicts of interest

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Successful Spins

Easier for the markets to recognize underlying value Pursue compelling business opportunities Greater freedom to pursue new ventures, streamline production, and pare

• verhead

Accountability and direct incentives (stock & options) Eliminates competitive disadvantages Greater access to capital Increase corporate focus for the spin-off and parent

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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

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Number of Completed Spin-Offs by Year

2016 Es(mated Total

19 27 21 34 27 27 18 23 33 28 31 41 36 44 66 66 39 41 21 35 27 31 34 29 20 20 27 37 37 60 40 38

10 20 30 40 50 60 70 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

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2016 Completed Spin-Offs (25 YTD)

Key: SP = Spin-Off CO = Carve-Out SPLIT = Split-Off

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

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Q4-2016 Expected Spin-Offs (est. 13)

Key: SP = Spin-Off CO = Carve-Out SPLIT = Split-Off

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

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Case Study

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RR Donnelley & Sons (RRD) Spin-Off

On August 4, 2015 announced spin-off of 80.75% in:

• Donnelley Financial Solutions (financial communications services)
• LSC Communications (publishing & retail-centric print services)

RRD to retain 19.25% in each spun-off unit RRD to focus on customized multichannel communications Spin-Off Rationale: More focused approach, tailored business strategies, value unlocking, optimizing capital structures Spin-Off Ratio of 1:8; RRD reverse stock split in 1:3 ratio Started Regular-Way Trading on October 3, 2016

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RRD Spin-Off Timeline

Aug 4, 2015 Mar 31, 2016 Sep 26, 2016 Sep 28, 2016 Oct 1, 2016 Oct 3, 2016

Announcement When-Issued trading (DFIN) Tax-free shares distribution and 1:3 reverse stock split Form 10 Filing When-Issued trading (LKSD) Regular-Way trading

Just over 15 months to complete

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Organization Structure: Pre and Post Spin

Pre-Spin Post-Spin

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RR Donnelley (RRD): Pre-Spin

Communications services company offering publishing and printing services Offerings include magazines, catalogs, books, directories, commercial and digital printing, logistics, office products and direct mail Employees (December 31, 2015): 68,400 2015 Revenue: $11.3 billion 2015 EBITDA: $1.0 billion

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RR Donnelley (RRD): Post-Spin

Integrated multichannel marketing and communications services company providing printing and publishing services Offerings include creative design services, forms, packaging, commercial printing, direct mail, logistics, data analytics and BPO & document management services Clients: 52,000; 90+% of Fortune 500 companies 1H16 Revenue: $3.3 billion 1H16 Adjusted EBITDA: $208 million

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Investment Case: RR Donnelley

Price Target: $24/share; Hold; Upside: 24% Broad range of offerings relative to competitors in business communication, sourcing and logistics and a strong customer base Wide valuation gap relative to peers (EV/EBITDA 2017E: 7.0x vs. ~9.9x peer median) due to low margins and high leverage Potential to monetize stakes in DFIN and LKSD to lower leverage could act as a catalyst

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Peer Group Multiples for Valuation

RR Donnelley Median: EV/EBITDA 2017E: 9.9x, EV/FCF: 19.3x Donnelley Financial Solutions Median: EV/EBITDA 2017E: 13.3x, EV/FCF: 21.4x LSC Communications Median: EV/EBITDA 2017E: 7.7x, EV/FCF: 11.8x

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Peer Group: RR Donnelley

Name Ticker Market Cap ($ billion) EV/EBITDA 2017E EV/FCF T12M 2016C Cap Gemini CAP FP 17.1 9.5 20.5 CGI Group Inc GIB/A CN 14.6 10.2 14.4 Samsung Sds Co Ltd 018260 KS 10.3 8.9 35.6 Eternal Asia Supply Chain 002183 CH 3.6 19.1 NA Syntel Inc SYNT US 3.4 7.9 14.1 Pitney Bowes Inc PBI US 3.3 6.4 18.8 Convergys Corp CVG US 2.8 7.1 18.1 Luxoft Holding Inc LXFT US 1.7 11.4 21.2 Mphasis Ltd MPHL IN 1.7 8.9 11.3 WNS Holdings Ltd WNS US 1.5 12.0 18.5 Teletech Holdings Inc TTEC US 1.4 7.5 20.9 Technopro Holdings Inc 6028 JP 1.3 13.1 14.7 Sykes Enterprises Inc SYKE US 1.2 6.6 16.2 Global Infotech Co Ltd 300465 CH 1.2 85.7 NA Internet Initiative Japan 3774 JP 0.9 5.5 93.8 FDM Group Holdings Plc FDM LN 0.9 15.6 19.9 Virtusa Corp VRTU US 0.7 12.6 38.5 Kainos Group Plc KNOS LN 0.3 12.5 24.8 Median 9.9 19.3

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Peer Group: Donnelley Financial Solutions

Name Ticker Market Cap ($ billion) EV/EBITDA 2017E EV/FCF T12M 2016C Thomson Reuters Corp TRI CN 30.5 11.7 20.2 Moody'S Corp MCO US 21.0 12.7 19.4 Experian Plc EXPN LN 19.2 13.6 15.3 Markit Ltd INFO US 16.2 13.0 15.5 Equifax Inc EFX US 15.7 14.9 24.1 Verisk Analytics Inc VRSK US 13.7 14.6 35.1 MSCI Inc MSCI US 8.1 15.2 30.5 Factset Research Systems Inc FDS US 7.2 16.8 22.7 Transunion TRU US 6.1 12.5 40.8 Dun & Bradstreet Corp DNB US 4.9 11.8 15.8 Fair Isaac Corp FICO US 3.9 16.8 29.2 Morningstar Inc MORN US 3.4 11.5 18.0 Median 13.3 21.4

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Peer Group: LSC Communications

Name Ticker Market Cap ($ billion) EV/EBITDA 2017E EV/FCF T12M 2016C News Corp NWSA 8.1 7.7 7.7 TEGNA Inc TGNA 4.6 7.7 20.2 Wiley (John) & Sons JW/A 2.9 10.0 12.1 Meredith Corp MDP 2.3 8.3 14.8 New York Times Co NYT 2.0 5.8 11.8 Houghton Mifflin Harcourt Co HMHC 1.6 9.7 11.5 Scholastic Corp SCHL 1.3 7.0 NA Ew Scripps Co/The SSP 1.3 10.7 NA New Media Investment Group NEWM 0.7 5.8 10.4 Median 7.7 11.8

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Donnelley Financial Solutions (DFIN)

Leading financial communications services company serving both the investment and capital markets Tools for business content creation, storage and distribution (SEC filings, media campaigns etc.), multi-lingual translation services and conferencing facilities Employees (worldwide): 3,500 1H16 Revenue: $538.1 million 1H16 EBITDA: $107.2 million

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Investment Case: Donnelley Financial Solutions

Price Target: $38/share; Buy; Upside: 60% Strong recurring revenue stream with compelling industry position (leader in compliance-related communication) Valuations: 9.0x 2017E EBITDA on high margins, strong free cash flow generation and focus on cost reduction measures Potential consolidation in a competitive industry could act as a value driver

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LSC Communications (LKSD)

Print, fulfillment and supply chain solutions to publishers, merchandisers and retailers The retail-centric print offerings include magazines, catalogs, retail inserts, books & directories; the office products offerings include filing, note-taking, binders, tax and stock forms Employees (30 June, 2016): 22,162 1H16 Revenue: $1.8 billion 1H16 non-GAAP adjusted EBITDA: $188.0 million

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Investment Case: LSC Communications

Price Target: $35/share; Buy; Upside: 41% Falling revenues and pressure on margins; cost reduction initiatives and expansion into end-to-end supply chain management could drive multiples expansion Inorganic growth potential to expand offerings and generate synergies Valuations remain beaten-down; applying a conservative EV/ EBITDA 2017E multiple of 5.5x (peer median: 7.7x), the stock still

• ffers significant upside

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Valuation

LSC Communications Donnelley Financial Solutions

$ million EBITDA FCF 2017 Estimate 368 212 Multiple (x) 5.50 8.50 Enterprise Value 2,025 1,804 Average EV 1,915 Less: Net Debt 779 Equity Value 1,135 Shares (mn) 32.4 Target Price ($) 35.00 $ million EBITDA FCF 2017 Estimate 216 94 Multiple (x) 9.00 18 Enterprise Value 1,944 1,685 Average EV 1,814 Less: Net Debt 584 Equity Value 1,230 Shares (mn) 32.4 Target Price ($) 38.00

Source: Bloomberg, Spin-Off Research

RR Donnelley

$ million EBITDA 2017 Estimate 439 Multiple (x) 7.50 Enterprise Value 3,294 Less: Net Debt 2,066 Equity Value 1,228 Add: 19.25% stake in LKSD 219 Add: 19.25% stake in DFIN 237 Total Equity Value 1,683 Shares (mn) adj. for reverse split 69.8 Target Price ($) 24.00

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Financial Overview 1H16: RR Donnelley

The decline in net sales and cost of sales was by an identical 2% YOY to $5.4 billion and $4.2 billion, respectively. Operating income decreased 32% YOY to $186 million, with margins contracting by 153 bps YOY to 3.4% on noncash pension settlement charges ($96.9 million), spin-off expenses ($30.3 million) and higher bad debt & legal expenses 2016 Guidance: Net sales to the low end of its previous guidance

• f $11.3 - $11.5 billion; raised adjusted EBITDA margin to the

higher end of its previous guidance of 10.4%-10.6%

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Financial Overview 1H16: Donnelley Financial Solutions

Net sales declined by 7.1% YOY to $538.1 million as net sales from services and product eroded by 6.8% YOY and 7.5% YOY, respectively Cost of sales reduced by only 5.6% YOY to $326.1 million primarily on unfavorable mix and wage and other inflation increases in the Services segment Non-GAAP adjusted EBITDA reduced by 20.2%, leading to the corresponding margin declining by 317bps Net income dropped 22.7% YOY to $49.7 million, leading to margin contraction of 186bps

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Financial Overview 1H16: LSC Communications Net sales increased 3% YOY to $1.8 billion, primarily attributable to growth in the Print segment and acquisition of Courier in June 2015 Operating income increased significantly YOY to $91 million, leading to a 320 bps margin expansion to 5.1% on lower restructuring, impairment and other charges and synergies from the integration of Courier 2016 Guidance: Print segment net sales to decline between 1% and 4%; overall sales decline of 0% to 3%

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Competition: RR Donnelley

Company Ticker Market Cap ($ billion) Description Cap Gemini CAP FP 17.1 Develops software and offers information systems management, project management, and education and training services. CGI Group Inc GIB/A CN 14.6 Offers management of information technology and business functions, systems integration, consulting, and business solutions. Samsung Sds Co Ltd 018260 KS 10.3 Offers outsourcing services including application outsourcing, IT infrastructure outsourcing, and cloud computing. Eternal Asia Supply Chain 002183 CH 3.6 Offers supply chain outsourcing services and logistics, operation, settlement, information system and data processing services. Syntel Inc SYNT US 3.4 Supports entire systems and process lifecycles for clients in the Financial Services, Retail, Healthcare and Manufacturing/Automotive industries. Pitney Bowes Inc PBI US 3.3 Sells and finances, rents and services integrated mail and document management systems. Convergys Corp CVG US 2.8 Focuses on customer management providing business and operational support systems via agent assisted services, automated self-service. Luxoft Holding Inc LXFT US 1.7 Leading global provider of software development services and innovative IT solutions primarily to large MNCs. Mphasis Ltd MPHL IN 1.7 Assists its clients in innovating and streamlining their business processes by offering custom solutions for technology and operations

• utsourcing.

WNS Holdings Ltd WNS US 1.5 Provides business process outsourcing services including finance, accounting, customer relationship management. Teletech Holdings Inc TTEC US 1.4 Global provider of customer experience strategy, technology and business process outsourcing solutions. Technopro Holdings Inc 6028 JP 1.3 Offers services and solutions in mechanical and electronic design, IT and software development, and wide range of technological fields through outsourcing. Sykes Enterprises Inc SYKE US 1.2 Serves customers of companies in the financial services, communications, and technology/consumer markets. Sykes provides technical support and customer service and customer relationship management consulting. Global Infotech Co Ltd 300465 CH 1.2 Provides design, development, application, consulting, and outsourcing of application and systems software for the financial industry. Internet Initiative Japan 3774 JP 0.9 Provides system integration services and sells system equipments and offers a variety of services, including network consulting, security and Web hosting as well. FDM Group Holdings Plc FDM LN 0.9 FDM Group Holdings PLC offers IT services in the form of project management, business analysis, data operations, and product and employee support and development. Virtusa Corp VRTU US 0.7 Services include a broad range of information technology services, including IT consulting, technology implementation and application outsourcing. Kainos Group Plc KNOS LN 0.3 Provides IT services, consulting, and software solutions and specializes in development of digital technology solutions, software design and agile software development, third-party software integration and implementation services

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Competition: Donnelley Financial Solutions

Company Ticker Market Cap ($ billion) Description Thomson Reuters Corp TRI CN 30.5 Serves the global business and professional marketplace and provides proprietary online systems and CD-ROM products in information sectors. Moody'S Corp MCO US 21.0 Provides credit ratings and related research, data and analytical tools, quantitative credit risk measures, risk scoring software, and credit portfolio management solutions. Experian Plc EXPN LN 19.2 Manages large databases that enable credit granting and monitoring, and help minimize fraud and credit risk and offers specialist analytical solutions for credit scoring, risk management. Markit Ltd INFO US 16.2 Provides pricing and reference data, indices, valuation and trading services, trade processing, enterprise software and managed services. Equifax Inc EFX US 15.7 Brings buyers and sellers together through its information management, transaction processing, direct marketing, and customer relationship management businesses. Verisk Analytics Inc VRSK US 13.7 Offers data, statistical, and actuarial services, as well as standardized insurance policy programs, underwriting information, and rating-integrity tools. MSCI Inc MSCI US 8.1 Produces indices and risk and return portfolio analytics for use in managing investment portfolios. Factset Research Systems Inc FDS US 7.2 Supplies global economic and financial data to analysts, investment bankers, and other financial professionals. Transunion TRU US 6.1 Offers consumer reports, risk scores, analytical services, and decisioning capabilities to businesses. TransUnion provides risk and information solutions to businesses and consumers. Dun & Bradstreet Corp DNB US 4.9 Provides business information and technology solutions. Its database contains information on public and private companies around the world. Fair Isaac Corp FICO US 3.9 Helps companies in countries around the world acquire customers more efficiently, increase customer value, reduce fraud, lower operating expenses and enter new markets more profitably. Morningstar Inc MORN US 3.4 An investment information and services company providing data, research, and analysis of mutual funds, stocks, and variable annuities.

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Competition: LSC Communications

Company Ticker Market Cap ($ billion) Description News Corp NWSA 8.1 Provides publications consisting of newspapers, magazines, books and promotional inserts. TEGNA Inc TGNA 4.6 Owns and operates TV and radio stations, delivering news and informative content and also provides digital marketing solutions in the automotive and digital marketing industries. Wiley (John) & Sons JW/A 2.9 Specializes in scientific, technical, and medical books and journals, professional and consumer books and subscription services. Meredith Corp MDP 2.3 Includes magazine and book publishing, integrated marketing, interactive media and brand licensing and operates network-affiliated TV stations. New York Times Co NYT 2.0 Publishes daily newspapers and operates Internet websites. The newspapers and websites distribute news and entertainment. Houghton Mifflin Harcourt Co HMHC 1.6 Operates as a global education and learning company, which provides print and electronic textbook curriculum, learning content, and assessment tools and services. Scholastic Corp SCHL 1.3 Produces and distributes educational materials for use in school and at home and also provides children’s books, textbooks, magazines, technology- based products. Ew Scripps Co/ The SSP 1.3 The E.W. Scripps Company has interests in television stations, newspapers and digital products and services. New Media Investment Group NEWM 0.7 Provides advertising services in local newspapers/shoppers/yellow pages. Tribune Publishing Co TPUB US 0.2 Tribune Publishing Company is a diversified media and marketing-solutions company. It offers customized market solutions as a Spanish- language publisher.

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Top 5 Shareholders: RR Donnelley

Capital Group Co: 14.44% BlackRock: 10.09% Vanguard Group: 9.04% Epoch Investment Partners: 4.70% LSV Asset Management: 3.86%

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Market Coverage on RR Donnelley

# Firm Analyst Recommendation Target Price ($) Date 1 CJS Securities Charles Strauzer Market Outperform 30 10/14/2016 2 Macquarie James Clement Outperform 27 10/6/2016 3 WhiteSand Research Team Coverage Undervalued 27 10/6/2016 4 Spin-Off Research Team Coverage Hold 24 10/4/2016 5 Morningstar Rj Hottovy Hold NA 5/27/2016

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Market Coverage on Donnelley Financial Solutions

# Firm Analyst Recommendation Target Price ($) Date 1 CJS Securities Charles Strauzer Market Outperform 35 10/14/2016 2 Spin-Off Research Team Coverage Buy 38 10/4/2016 3 WhiteSand Research Team Coverage Undervalued 32 10/6/2016

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Market Coverage on LSC Communications

# Firm Analyst Recommendation Target Price ($) Date 1 WhiteSand Research Team Coverage Hold 26 10/6/2016 2 Spin-Off Research Team Coverage Buy 35 10/4/2016

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Management Compensation: Donnelley Financial Solutions

• Mr. Daniel Leib was named the Director and CEO after the Spin-Off

Package

• Mr. Leib’s compensation included base salary of $600 thousand and

bonus of $300 thousand Stock Options: Stock award of $1.4 million, Non-Equity Incentive Plan Compensation of $170 thousand and all other compensations

• f $25 thousand

Total compensation: $2.5 million

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Management Compensation: DFIN

Outstanding Stock Awards

Vesting Date Outstanding unvested RRD restricted stock units Market Value of stocks or unit not vested ($) Number of unearned shares, units or other rights not vested Market or payout value of number

• f unearned shares, units or other

rights not vested ($) 3/2/2016 46,250 NA NA NA 3/2/2017 36,250 NA NA NA 3/2/2018 52,440 NA NA NA TOTAL 134,940 1,986,317* 82,440 1,213,517*

* Assuming RRD price per share of $14.72 on December 31, 2015

Outstanding Option Awards: Nil RRD option exercises and stocks vested ― Number of shares acquired on vesting: 87,500 ― Value realized on vesting ($): 1,515,451 ― Option awards: NA

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Management Compensation: LSC Communications

Thomas J. Quinlan III was named the Chairman of the Board and CEO post the Spin-Off Package: Base salary of $1.2 million Stock Options: Stock awards of $6.4 million, Non-Equity Incentive Plan Compensation of $340 thousand and all

• ther compensation of $32 thousand

Total compensation: $8 million

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Management Compensation: LKSD

Outstanding Option Awards Option expiration date Outstanding unvested RRD restricted stock units Number of securities unexercisable Option exercise price ($) 3/1/2022 267,000 89,000 13.23 2/27/2021 200,000

• 18.62

2/25/2020 300,000

• 19.89

3/1/2019 950,000

• 7.09

2/28/2018 413,000

• 32.07

3/20/2017 260,000

• 36.22

Outstanding Stock Awards Vesting Date Number of shares of stock not vested Market Value of stocks or unit not vested ($) Number of unearned shares, units or other rights not vested Market or payout value of number

• f unearned shares, units or other

rights not vested ($) NA NA NA 371,875 5,474,000 3/2/2016 142,750 NA NA NA 3/2/2017 120,000 NA NA NA 3/2/2018 236,875 NA NA NA TOTAL 499,625 7,354,480* NA NA RRD option exercises and stocks vested ― Number of shares acquired on vesting: 467,750 ― Value realized on vesting ($): 7,612,138 ― Option awards: NA

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Stock Performance: Post Spin*

* As of 10/19/2016

80 85 90 95 100 105

Price Performance: RRD (reconstituted) v/s S&P 500 since Spin Listing (rebased)

RRD (Reconstituted) S&P 500 RRD: (17)% S&P 500: (1)% 80 90 100 110

Price Performance (rebased)

RRD LKSD DFIN S&P 500 RRD: (19)% LKSD: (13)% DFIN: 3% S&P 500: (1)%

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Stock Performance

Prior to the spin-off, RRD was excluded from the S&P MidCap 400 Index and included in the S&P SmallCap 600 Index RRD has dropped 19% since the spin-off; would have lost 17% if the spin-offs were not to happen DFIN has outperformed S&P 500 Index since listing; RRD and LKSD still under pressure

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Summary

Company CMP ($) Target Price ($) Difference (%) RR Donnelley 19.39 24.00 24% Donnelley Financial Solutions 23.68 38.00 60% LSC Communications 24.87 35.00 41%

Donnelley Financial Solutions is amongst the leaders in compliance- related communication and boasts of a strong recurring revenue stream Valuations (9.0x 2017E EBITDA) look compelling on potential margin growth, strong free cash flows and focus on cost cuts Consolidation in a competitive industry could act as a value driver

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Joe Cornell, CFA Spin-Off Advisors, LLC Publishers of Spin-Off Research

trial@spinoffadvisors.com spinoffresearch.com/trial

1327 W. Washington Blvd., Suite 4G, Chicago IL, 60607 | joe@spinoffadvisors.com | 312-939-8900

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