unlocking value with spin-offs - wordpress.com · 10/24/2016 · unlocking value with spin-offs cfa...
TRANSCRIPT
Page | 1
Unlocking Value with Spin-Offs
CFA Society Chicago October 24, 2016
Page | 2
Guest Speaker Joe Cornell, CFA Spin-Off Advisors, LLC Publishers of Spin-Off Research [email protected] 312-939-8900
Page | 3
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 | 4
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%
Page | 5
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%
Page | 6
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)
Page | 7
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 | 8
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 | 9
Equity Carve-Outs ParentsellsEquityintheNewFirmtothePublic(IPO)andcreatesaNewPubliclyTradedEn=ty.
Parent65%Carve-Outin
anIPO10%
Subsidiary25%
Parent65%
Subsidiary35%
• Acarve-outbringscashintothefirm,whereasapurespin-offdoesnot• Carve-outsdisperseassetsandownershipintheassetstonon-ownersoftheoriginalfirm• Carve-outsareoIenanintermediatestepbeforeafullspin-off
Page | 10
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 | 11
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%
Page | 12
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
Page | 13
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 | 14
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 | 15
Number of Completed Spin-Offs by Year
2016Es(matedTotal
19
27
21
34
27 27
18
23
33
2831
41
36
44
66 66
3941
21
35
2731
34
29
20 20
27
37 37
60
4038
0
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
Page | 16
2016 Completed Spin-Offs (25 YTD)
Key: SP = Spin-Off CO = Carve-Out SPLIT = Split-Off
Announce Spin-Off TaxParent Symbol Spin-Off Symbol Date Date Exempt Ratio
1 Fiat Chrysler FCAU Ferrari N.V. RACE 10/29/2014 1/3/2016 Y 1:102 W.R. Grace GRA GCP Applied Technologies GCP 2/5/2015 2/3/2016 Y 1:13 Manitowoc MTW Manitowoc Foodservices MFS 1/29/2015 3/4/2016 Y 1:14 Integer Holdings ITGR Nuvectra NVTR 4/30/2015 3/14/2016 Y 1:35 Armstrong World Industries AWI Armstrong Flooring AFI 2/23/2015 4/1/2016 Y 1:26 MGM Resorts MGM MGM Growth Properties MGP 10/29/2015 4/20/2016 CO7 Community Health Systems CYH Quorum Health QHC 8/3/2015 4/29/2016 Y 1:48 Gaming & Leisure Prop GLPI Pinnacle Entertainment PNK 7/21/2015 4/28/2016 N 1:19 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 1:111 Philips PHG Philips Lighting N.V. LIGHT 6/30/2014 5/27/2016 CO12 IDT Corp IDT Zedge ZDGE 8/29/2013 6/1/2016 Y 1:313 Brookfield Asset Management BAM Brookfield Business Partners BBU 10/7/2015 6/20/2016 N 1:5014 HERC Holdings HRI Hertz Rental Car Holding Co HTZ 3/18/2014 6/30/2016 Y 1:515 Danaher DHR Fortive Corporation FTV 5/13/2015 7/2/2016 Y 1:216 Liberty Ventures LVNTA CommerceHub CHUBA/B 11/25/2015 7/22/2016 Y .1/0.2:117 Emergent BioSolutions EBS Aptevo Therapeutics APVO 8/6/2015 8/1/2016 Y 1:218 E.ON SE EONGY Uniper SE UN01 11/30/2014 9/12/2016 Y 1:1019 Noble Energy NBL Noble Midstream Partners LP NBLX 10/28/2014 9/15/2016 CO20 Ashland ASH Valvoline VVV 9/22/2015 9/23/2016 CO21 Air Products & Chemicals APD Versum Materials VSM 9/16/2015 10/1/2016 Y 1:222 Honeywell HON AdvanSix ASIX 5/12/2016 10/1/2016 Y 1:2523 RR Donnelley RRD LSC Communications LKSD 8/4/2015 10/1/2016 Y 1:824 RR Donnelley RRD Donnelley Financial Solutions DFIN 8/4/2015 10/1/2016 Y 1:825 Cousins Properties CUZ Parkway PKY 4/29/2016 10/7/2016 Y 1:8
Page | 17
Q4-2016 Expected Spin-Offs (est. 13)
Key: SP = Spin-Off CO = Carve-Out SPLIT = Split-Off
Announce Spin-Off TaxParent Symbol Spin-Off Symbol Date Date Exempt Ratio
1 Johnson Controls JCI Adient "ADNT" 7/24/2015 10/31/2016 N 1:102 HCP Inc. HCP Quality Care Properties "QCP" 5/9/2016 10/31/2016 N 1:53 Yum! Brands YUM Yum! China "YUMC" 10/20/2015 10/31/2016 Y 1:14 Alcoa (Arconic) AA ("ARNC") Alcoa "AA" 9/28/2015 11/1/2016 Y 1:35 Liberty Ventures LVNTA Liberty Expedia "LEXEA/B" 11/25/2015 11/4/2016 Y SPLIT6 ConAgra CAG Lamb Weston "LW" 11/18/2015 11/9/2016 Y SP7 Overseas Shipholding Group OSG OSG International "OIN" 3/1/2016 Nov/Dec-16 N SP8 IDT Corp IDT SpinCo 8/27/2015 Nov/Dec-16 Y SP9 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 SP11 Xerox XRX Conduent 1/29/2016 Dec-16 Y SP12 Varian Medical Systems VAR Varex Imaging Company "VREX" 10/23/2016 Dec-16 Y SP13 CBS Corp. CBS CBS Radio 3/15/2016 Q4-16/Q1-17 CO
Page | 18
Case Study
Page | 19
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
Page | 20
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
Page | 21
Organization Structure: Pre and Post Spin Pre-Spin Post-Spin
Page | 22
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
Page | 23
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
Page | 24
Investment Case: RR Donnelley ! Price Target: $24/share; Hold; Upside: 24% ! Broad range of offerings relative to competitors in business
communication, sourcing and logistics and a strong customer base
! Wide valuation gap relative to peers (EV/EBITDA 2017E: 7.0x vs. ~9.9x peer median) due to low margins and high leverage
! Potential to monetize stakes in DFIN and LKSD to lower leverage could act as a catalyst
Page | 25
Peer Group Multiples for Valuation ! RR Donnelley
Median: EV/EBITDA 2017E: 9.9x, EV/FCF: 19.3x
! Donnelley Financial Solutions Median: EV/EBITDA 2017E: 13.3x, EV/FCF: 21.4x
! LSC Communications Median: EV/EBITDA 2017E: 7.7x, EV/FCF: 11.8x
Page | 26
Peer Group: RR Donnelley Name Ticker Market Cap ($ 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
Page | 27
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
Page | 28
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
Page | 29
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
Page | 30
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
Page | 31
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
Page | 32
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 offers significant upside
Page | 33
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
Page | 34
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 of $11.3 - $11.5 billion; raised adjusted EBITDA margin to the higher end of its previous guidance of 10.4%-10.6%
Page | 35
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
Page | 36
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 $91 million, leading to a 320 bps margin expansion to 5.1% on lower restructuring, impairment and other charges and synergies from the integration of Courier
! 2016 Guidance: Print segment net sales to decline between 1% and 4%; overall sales decline of 0% to 3%
Page | 37
Competition: RR Donnelley Company Ticker Market Cap
($ 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 outsourcing.
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
Page | 38
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.
Page | 39
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.
Page | 40
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%
Page | 41
Market Coverage on RR Donnelley # Firm Analyst Recommendation Target Price ($) Date
1 CJS Securities Charles Strauzer Market Outperform 30 10/14/2016
2 Macquarie James Clement Outperform 27 10/6/2016
3 WhiteSand Research Team Coverage Undervalued 27 10/6/2016
4 Spin-Off Research Team Coverage Hold 24 10/4/2016
5 Morningstar Rj Hottovy Hold NA 5/27/2016
Page | 42
Market Coverage on Donnelley Financial Solutions
# Firm Analyst Recommendation Target Price ($) 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
Page | 43
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
Page | 44
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 of $25 thousand
! Total compensation: $2.5 million
Page | 45
Management Compensation: DFIN Outstanding Stock Awards
Vesting Date Outstanding unvested RRD restricted stock units
Market Value of stocks or unit not vested ($)
Number of unearned shares, units or other rights not vested
Market or payout value of number of 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
Page | 46
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 other compensation of $32 thousand
! Total compensation: $8 million
Page | 47
Management Compensation: LKSD Outstanding Option Awards
Option expiration date Outstanding unvested RRD restricted stock units Number of securities unexercisable Option exercise price ($)
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 ($)
Number of unearned shares, units or other rights not vested
Market or payout value of number of unearned shares, units or other rights not vested ($)
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 ($):
7,612,138 ― Option awards: NA
Page | 48
Stock Performance: Post Spin*
* As of 10/19/2016
80
85
90
95
100
105
Price Performance: RRD (reconstituted) v/s S&P 500 since Spin Listing (rebased)
RRD (Reconstituted) S&P 500
RRD: (17)% S&P 500: (1)%
80
90
100
110
Price Performance (rebased)
RRD LKSD DFIN S&P 500
RRD: (19)% LKSD: (13)% DFIN: 3% S&P 500: (1)%
Page | 49
Stock Performance ! Prior to the spin-off, RRD was excluded from the S&P MidCap
400 Index and included in the S&P SmallCap 600 Index ! RRD has dropped 19% since the spin-off; would have lost 17% if
the spin-offs were not to happen ! DFIN has outperformed S&P 500 Index since listing; RRD and
LKSD still under pressure
Page | 50
Summary Company CMP ($) 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
Page | 51
Joe Cornell, CFA Spin-Off Advisors, LLC Publishers of Spin-Off Research
spinoffresearch.com/trial
1327 W. Washington Blvd., Suite 4G, Chicago IL, 60607 | [email protected] | 312-939-8900
To get a copy of our research: