Spin-Off Research In the News

Plan for TriMas spinoff: Eye small acquisitions

Posted by Joe Cornell on Thu, Jul 23, 2015 @ 14:07 PM


By Chad Halcom & Tom Henderson | Crain's Detriot Business | July 5, 2015

Even in its first few hours as a public company last week, the new Horizon Global Corp. spinoff from Bloomfield Hills-based TriMas Corp. was already chasing several acquisitions.

Mark Zeffiro, president, CEO and co-chairman of the newly spun-off Horizon (NYSE: HZN), said the new company could hold a secondary offering as early as the third quarter for acquisition capital.

Zeffiro, who was in New York last week to open the New York Stock Exchange and see Horizon open for trading, said the company is looking for small manufacturers in various industries both here and abroad — but has an expansion focus on China and South America. And, he said, it is considering joint ventures with other companies.

"This is basically going to be a private-equity firm that trades as a public company," said Sam Valenti III, the executive chairman at TriMas and co-chair with Zeffiro at Horizon.

"You want to add dry powder to the balance sheet," he said of a secondary offering. "It gives you the flexibility to do big acquisitions. For now, we can fund acquisitions through cash flow."

Zeffiro said current deals being looked at include several small family businesses and several that would be carve-outs from larger companies looking to generate cash.

He expects the company to close its first acquisition "in the next quarter or so."

"The first bite of the apple could be a deal as small as $50 million. Deals at the opposite end could be triple that," Zeffiro said. "What I like about the opportunity is these are fragmented and regional markets where we have the opportunity to deploy capital very efficiently."

Wednesday's IPO didn't raise any capital for Horizon. The stock was distributed to current TriMas shareholders at the rate of two shares of Horizon stock for every five shares of TriMas stock they held — 18 million total.

Company holdings

Horizon Global officially shares headquarters space with TriMas in the Bloomfield Hills office of Valenti Capital LLC, a wealth-management firm, although 300 employees work in Plymouth Township at what is the operational headquarters for the company.

Horizon Global has two business units, Cequent Americas and Cequent Asia Pacific, Europe and Africa. The two dominate the towing, trailer and cargo management industries, operating under such brand names as Draw-Tite, Bulldog, Reese, Fulton and Hayman Reese.

Horizon Global accounted for just under $612 million of TriMas' revenue of more than $1.49 billion in 2014.

The spinoff company reports 2,800 employees in more than 20 cities around the world. Foreign operations include Canada, Mexico, Brazil, South Africa, Australia, New Zealand, Thailand, Germany, Finland and the United Kingdom.

TriMas retains about 4,000 employees in 16 countries and keeps the packaging, aerospace, energy and engineered components segments of the company.

Valenti said that while growth won't be as dramatic as it was when he headed Taylor-based Masco Corp.'s M&A activities, he will use that as a model for Horizon. When he joined Masco in 1968, it had revenue of about $10 million and a limited product line. It eventually grew to revenue of $12 billion with a vast array of products.

"The advantage we have over private equity is we don't have to sell companies in five years to return money to limited partners. We can keep good companies as long as we want," said Valenti.

Shares slide

To alert institutional investors to Wednesday's IPO and the follow-on secondary offering, Zeffiro embarked in late June on a road trip to meet with institutional investors in Detroit, New York, Boston, Philadelphia, Chicago and Denver. He said he met with representatives of almost 60 firms.

Even so, shares of Horizon fell after the opening of markets Wednesday. When Horizon stock was issued to TriMas shareholders on Tuesday, it was valued at $16.25. It began its first day of trading at $15.05, fell to $13.75 by the end of the day and was back above $14 in early trading Thursday.

TriMas (NYSE: TRS) opened Wednesday at $24.99, ended the day at $24.95 and opened Thursday at $25.05.

Sherry Lauderback, vice president of investor relations at TriMas, said in an email to Crain's that share prices for Horizon were expected to be volatile over the first few weeks of trading.

Chicago-based Spin-Off Advisors LLC gave Horizon Global stock a "sell" rating. Based on a multiple of 6.2 times Horizon's EBITDA earnings (earnings before interest, taxes, depreciation and amortization), less a deduction for debt or service payments the new company is expected to make, Spin-Off gave Horizon Global an "implied value" of about $157 million and projected a target price of $9 for Horizon and target for TriMas of $28.

But Spin-Off's founding principal, Joe Cornell, said spinoffs often outperform the market over time.

"There are people who bought the parent because they wanted the parent, then suddenly they get a small-market-cap stock of a company that no (analysts) cover, and the knee-jerk reaction is often to sell and find a stock they do know a little better," he said.

"And several of the top holders (of TriMas) are money management funds. Some of these investors, because of the charter of the fund, might have a rule that they can't hold anything with under a $500 million market (capitalization) or something."

At the open of markets Thursday, Horizon Global's market cap was about $250 million.

Rudy Hokanson, a managing director at Barrington Research Associates in Chicago, sets the price target at closer to $27 for TriMas by year's end. He doesn't have a target for Horizon Global, but he expects TriMas to outperform the market as a whole, with Horizon Global moving with the market.

Scott Eisenberg, managing partner of Birmingham-based Amherst Partners LLC, an investment banking firm, said Horizon Global should be able to bring about operational efficiencies by rolling up small companies.

"The key is to drive value in the integration, where one and one equals three. There will be operational improvements you can drive through common ownership," he said.

He praised Valenti's track record. "Sam has a very solid reputation. He understands what drives value. He's very well suited to this," he said.

In 2012, Valenti was given a lifetime achievement award at the annual M&A awards night hosted by Crain's and the Detroit chapter of the Association for Corporate Growth.

Eisenberg said Horizon Global gains flexibility over private-equity companies by not having to return profits in a fixed-time horizon to limited partners. But it will have to keep analysts and investors happy on a quarterly basis through required earnings reports, which PE firms do have to file.

And Eisenberg said that while continued near-record-low interest rates and the ready availability of bank lending make this a good time to get deals done, it is also a frothy M&A market with too much money chasing too few deals, driving up purchase prices.

In June, another Birmingham-based investment capital company, Quarton Partners LLC, said in its quarterly report on market conditions that in the first quarter, middle-market transactions in the U.S., those between $10 million and $250 million, hit an average multiple — the ratio of sale price to EBITDA — of 8.3, compared to a market low of 5.8 in 2009 and the pre-recession high of 8.2 in 2007.

Valenti believes Horizon Global will escape some of that volatility. He said it will avoid deals brought by investment banks that require a bid process, and that its deal flow will largely come from industry friends and sources.

His targets are generally small companies that are below the radar screens of private equity companies, and will generally involve healthy companies where current owners and management would rather sell at less than top of the market provided they can remain with the company.

He said Horizon Global can offer those businesses capital for expansion, better logistics and distribution channels, a broad range of engineering support, better marketing and, perhaps more importantly, access to foreign markets where Horizon Global already operates or plans to enter.

Zeffiro joined TriMas, a diversified global manufacturer of products for commercial, industrial and consumer markets, as CFO in June 2008 and was promoted to executive vice president in May 2013.

Before that, he was a vice president of finance at Black & Decker Corp. Zeffiro talked to Crain's while on his way to the airport Wednesday after leaving the exchange floor in New York.

"It was spectacular seeing another Michigan company go up on the screen. My face hurts from smiling so much," he said.

View the article on Crain's Detriot: Plan for TriMas spinoff: Eye small acquisitions



Spin-Off Research is published by Spin-Off Advisors, LLC. Spin-Off Research is a subscription-based service for Professional and Institutional Investors.  Blog entries are delayed.  Spin-Off Research subscriber-base receive the spinoff report at time of press via Email Bulletins.  To learn more about becoming a subscriber, please contact us. Spin-Off Advisors, LLC provides coverage on all US and major Global spinoffs, carve-outs and split-offs; Spin-Off Research published since March 1997.

Upcoming Spin-Offs Worth Investing In

Posted by Joe Cornell on Thu, Jul 09, 2015 @ 11:07 AM


We name three attractively priced companies that are heading for splitsville.

By Nellie S. Huang, From Kiplinger's Personal Finance, August 2015

In matters of romance, breaking up may be hard to do. But when it comes to business, corporate chieftains suffer little separation anxiety. Last year, 65 publicly traded firms broke up or spun off some of their units (the most since 2000), and as many as 55 firms may do so this year, says Joe Cornell, editor of the Spin-Off Research newsletter.

Investing in spin-offs has been rewarding. Over the past five years, the Bloomberg U.S. Spin-Off index returned an annualized 25.1%, compared with 16.9% for Standard & Poor’s 500-stock index. The index tracks the prices of shares in newly spun-off companies, from the first trading day to the end of their third year of independence. Over the same period, Guggenheim Spin-Off ETF (symbol CSD), an exchange-traded fund that tracks up to 40 spin-off stocks, earned 20.3% annualized. (Returns and share prices are as of June 5.)

To make money, look for a breakup that makes strategic sense. In a sound deal, a sprightlier parent company can focus on its core business, and the jettisoned firm can escape the shadow of its parent and grow on its own merit. Of course, not every breakup is a winner. “Some can create shareholder value, and others are just rearranging the deck chairs on the Titanic,” says David Berkowitz, co-chief investment officer of the RiverPark Funds. Plus, the price has to be right. You can buy before the split or after, but “valuation always matters,” says William Mitchell, a hedge fund manager who specializes in spin-offs.

One promising breakup is the plan by eBay (EBAY, $63) to spin off its PayPal unit later this year. Though details aren’t out yet, the two businesses may be better off apart. By spinning off fast-growing PayPal, eBay can focus on its struggling online-auction business. We’re not endorsing eBay because we think the stock, which has jumped 32% since mid October, is too pricey. Using a “sum of the parts” calculation, newsletter editor Cornell thinks eBay is worth $60 a share.

Danaher (DHR, $86) is a better bet. Arguably one of America’s least-known industrial giants (its market value is $61 billion), the Washington, D.C.–based conglomerate announced plans in May to split in two. One firm will retain the Danaher name and focus on the rapidly growing science and technology businesses (including Pall, a maker of filtration and purification systems, which Danaher is buying in a deal expected to close before year-end). The other firm, whose name has yet to be determined, will hold Danaher’s steady, highly profitable industrial businesses, including the unit that makes testing and measurement instruments. The breakup, which is likely to occur in late 2016, will allow both sides to rev up acquisitions and spur growth, says UBS analyst Shannon O’Callaghan, who pegs Danaher’s worth today at $94 per share.

Cornell favors two other upcoming breakups: Barnes & Noble (BKS, $25) and SPX Corp. (SPW, $74). B&N plans to spin off its college stores as Barnes & Noble Education in August. Cornell thinks the book-retailing and campus-bookstore businesses combined are worth $27 a share. After the split, the ailing bookseller will be able to focus on reviving its stores and its ho-hum Nook e-reader. And the Education division, which the firm says reaches 24% of students in the U.S. with its 714 campus stores, is one of the largest contract operators of campus bookstores in the U.S.

SPX, a conglomerate that makes, among other things, processing systems for the food industry and cooling systems for power-generation plants, plans to spin off its flow-control business this year. That unit, which accounted for 55% of SPX’s sales in 2014, makes products that are used to process, blend and transport fluids for various industries. Cornell thinks SPX’s parts are worth $86 a share in total.

Tags: Spin-Off, 2015 Spin-Offs