Tuesday, 30 June 2015

Emerson Electric's interesting proposed spin-off

Regular readers will know I am a great fan of spin-offs, recently commenting on Symantec's upcoming one (here), the Citizen's Bank spin-out from RBS (here), Voya (here) and NN Group (here) out of ING Groep and Indivior (here) via Reckitts.  So when I read earlier that Emerson Electric were joining the spin-out party...it piqued my interest.

So what is going on?  Well Emerson are spinning-off their Network Power business as well as considering 'strategic alternatives' for other businesses.

The former is obviously more tangible.  So what price the Network Power business?  Well it is an international profitable business generating over US$0.55bn in ebit.  By the sound of the company's conference call they will carry some debt but given a reasonable geographic spread and sensible divisional focus suggests to me a c. US$6bn potential spin-out valuation.  

Now given this is all happening in the future, what about the rest of the business?  Usefully Emerson provided some further insights on this and not the proliferation of #1 industry positions.  

Additionally the focusing of the business on these core areas will heighten margins and efficiency.  Using the numbers below 'core' Emerson generated US$3.2bn of ebit.  Prospectively I could see this being a US$40bn worth business.  Now add on the above noted Network Power profit and the other businesses to be spun-out/evolved/applied with 'strategic alternatives' generated only around US$0.3bn in ebit.  US$3bn worth of value?

So add up all three areas and my rough sum-of-the-parts (SOTP) is around US$50bn.  And the prevailing EV of Emerson Electric at the moment?  US$41bn.  Hmm.  Even if my numbers are a bit prospective centric / you worry about the global economy and energy sector demand / US$ translation etc. and you take a 10% haircut I could see the shares to the early US$60s at worst (let alone my rough SOTP value nearer the 52 week high in the mid US$60s.  

Another potentially interesting spin-out?  Yes, I think so. 

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