Etalon INVESTMENT RESEARCH

Event-driven and value research. Author of Wall Street: Back To Basics

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Armstrong World Industries: Moderate Upside With Activist Onboard

By Alex Gavrish, Etalon Investment Research | Author of "Wall Street: Back To Basics"

Armstrong World Industries announces plans for spin-off On February 23rd, 2015, Armstrong World Industries announced that its Board of Directors has unanimously approved a plan to separate the company's Flooring business from its Ceilings (Building Products) business, creating two independent industry-leading publicly traded companies. The separation is intended to be a tax-free spin-off of the Flooring business to the company's shareholders, and is expected to be completed in the first quarter of 2016. Parent company Following the separation, Armstrong World Industries (AWI) will be made up of the Armstrong Building Products unit which is the global leader in providing suspended ceiling solutions for use in renovation and new construction, both in commercial and residential spaces, with diverse end-use applications. In 2014, Armstrong Building Products generated approximately $1.3 billion of revenue. The company will continue to strengthen its leadership position in key domestic and international end markets by leveraging recently completed investments in expanded sales and manufacturing capabilities. It is well-positioned to further consolidate the Ceilings market, with attractive opportunities for enhanced growth and margins. With 3,400 team members worldwide, the company will operate 22 manufacturing facilities in eight countries including the Worthington Armstrong Venture (WAVE JV). Vic Grizzle, currently CEO of Armstrong Building Products, will lead AWI as CEO. Spin-off company Armstrong Flooring will continue to lead in the design, manufacture and sales of high-quality flooring products in North American and Asian markets. In 2014, Armstrong Flooring generated approximately $1.2 billion of revenue. Armstrong Flooring's North American residential franchise is an innovation leader in vinyl, laminate and hardwood products. The North American and international commercial segments provide high performance resilient flooring products including vinyl sheet, linoleum, vinyl composition and luxury vinyl tile. Armstrong Flooring will pursue these markets under the same trusted brands - which include Armstrong and Bruce - with the continued strategy to be customers' preferred partner for flooring solutions. With 3,600 team members worldwide, the Company will operate 17 manufacturing facilities in three countries. Don Maier, currently CEO of Armstrong Flooring Products, will serve as the Chief Executive Officer of Armstrong Flooring. Activist investor In August of 2014, ValueAct Capital, an activist investment firm, disclosed that it acquired 9.2 million shares. The stake represents a 16.7% holding in the company. The shares were acquired during second quarter and during July of 2014. Based on a volume-weighted average daily price of company's shares, it can be estimated that activist investor acquired the shares at an average cost of approximately $53.02 per share. Shares of Armstrong World Industries are currently trading only 8% higher, and investors therefore have an opportunity to join activist investor in this investment at a similar cost. Valuation summary Based on a recent share price, Armstrong World Industries Inc had market capitalization of $3.15 billion, net debt of $0.9 billion and enterprise value of $4.01 billion. Company is currently valued at an EV/EBITDA multiples of x10.4, based on Adjusted EBITDA for 2014. On December 11th, 2014, company announced that it decided to exit its money-losing European flooring business. For the nine months period ended September 30, 2014, this segment (previously shown as part of the Resilient Flooring reporting segment) had sales of $144.7 million and an operating loss of $23.2 million. It is clear that both the decision to exit the European flooring business and recent announcement of the spin-off plan is the result of the pressure that activist investor puts on company and its management. In addition for 2015 company projects capital spending of approximately $138 million (midpoint of the range), which is by $85 million lower than in 2014. This means that more free cash flow will be available for return to shareholders. Conclusion

In my recently published book Wall Street Back To Basics, I discuss the topic of following and investing along activist investors and hedge funds. The key to make successful investments along activist investors is to evaluate the specific investment on its own merits, and not copy activists blindly.

Recently announced plans to spin-off the less profitable Flooring segment, exit the European Flooring business, lower capital expenditures in 2015 and presence of a well-known activist investor with a significant stake should provide long-term, conservative investors with a moderate, but meaningful upside potential. Spin-off from International Paper and merger with Unisource 

Event-Driven And Value Investment Digest

Event Driven And Value Investment Digest provides you, over the course of the year, timely and actionable investment ideas, as well as valuable insights into important company and market events. A broad event-driven and value investment focus provides a wide range of investment opportunities that are diversified by sources of risk and risk/return profiles. Some of the focus areas are activist investors, hedge funds, spin-offs, buybacks, special situations, M&A, merger arbitrage and other topics. Contact us for subscription

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Veritiv Corp: Classic Spin-Off With Famous Value Investor Onboard

By Alex Gavrish, Etalon Investment Research | Author of "Wall Street: Back To Basics"

Spin-off from International Paper and merger with Unisource 

On July 1, 2014, International Paper completed the previously announced spin-off of xpedx to the International Paper shareholders, forming a new public company called Veritiv. Immediately following the spin-off, UWWH (parent company of Unisource) merged with and into Veritiv. Immediately following the completion of these transactions, International Paper shareholders owned approximately 51%, and the UWWH owned approximately 49%, of the shares of Veritiv common stock on a fully-diluted basis. Veritiv's common stock began regular-way trading on the New York Stock Exchange on July 2, 2014 under the ticker symbol VRTV. Spin-off company profile Veritiv Corporation is a leading North American business-to-business distributor of print, publishing, packaging, facility and logistics solutions. Veritiv was established in 2014, following the merger of International Paper's xpedx distribution solutions business and UWW Holdings, Inc., the parent company of Unisource. Veritiv operates from more than 180 distribution centers primarily throughout the U.S., Canada and Mexico, serving customers across a broad range of industries. These customers include printers, publishers, commercial printing, data centers, manufacturers, higher education institutions, healthcare facilities, sporting and performance arenas, retail stores, government agencies, property managers and building service contractors. Seth Klarman of Baupost Group acquires a stake On August 8th, 2014, Baupost Group disclosed that as of July 31, 2014, it owned 2.25 million shares of Veritiv, or 14.06% of total shares outstanding. The stake was apparently acquired during the period since the trading in company's shares started on July 1st, 2014 till July 31st, 2014. Approximate cost could be estimated by calculating a volume-weighted daily average price for company's stock during this period, which equals $36.79. As of January 31st, 2014, Baupost Group owned 2.31 million shares, or 14.46% of total shares outstanding. Veritiv Corp's shares declined recently by about 19% to $43.56 from their January 2nd, 2015, high of $54.11 and we believe that current price provides a convenient entry point for a long-term, value investor. Valuation Based on a recent share price, Veritiv had market capitalization of $697 million, net debt of $1,027 million and enterprise value of $1,724 million. In the 2014 fiscal year company generated $154 million in EBITDA (adjusted, pro-forma) while in the fourth quarter of 2014 EBITDA was $40 million ($161 million on an annualized basis). This values the company at an EV/EBITDA multiples of x11.2 and x10.7, respectively. Company estimated that in 2015 EBITDA will reach $170 million (mid-point of the range) and overall, Veritiv plans to grow EBITDA by $100 million by 2017. Applying an EV/EBITDA multiple of x8, Adjusted EBITDA of $254 million and an average annual free cash flow of $150 million, at the end of the fiscal 2017, or three years from now, company can be valued at $91 per share. This provides a potential upside of 109% from current share price. In addition, Veritiv's working capital reflects the need to carry significant amounts of inventory in distribution centers and a significant accounts receivable balance. If company will be able to optimize its working capital and decrease the amount of capital that is locked-up currently in inventory and accounts receivable balances, the upside to share price could be even higher. Spin-off insights

In my recently published book Wall Street Back To Basics, I discuss decision framework for investing in spin-off companies. Separation of Veritiv Corp seems to offer some benefits that usually characterize spin-offs. In addition, due to merger transaction that was implemented immediately after the spin-off, the misunderstanding and under-appreciation of company's potential by the market is even higher. Reasonable valuation, significant opportunities for growth, synergies, and cost savings due to a large size of the the combined business, and presence of a famous value investor with a significant stake in the company make Veritiv an attractive investment target for a long-term, value investor.

Event-Driven And Value Investment Digest

Event Driven And Value Investment Digest provides you, over the course of the year, timely and actionable investment ideas, as well as valuable insights into important company and market events. A broad event-driven and value investment focus provides a wide range of investment opportunities that are diversified by sources of risk and risk/return profiles. Some of the focus areas are activist investors, hedge funds, spin-offs, buybacks, special situations, M&A, merger arbitrage and other topics. Contact us for subscription

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Dow Chemical Co: One Billion Dollar Investment By Daniel Loeb

By Alex Gavrish, Etalon Investment Research | Author of "Wall Street: Back To Basics"

Third Point holding As of December 31, 2014, Dow Chemical position was the third largest in Third Point's portfolio, after Amgen and Alibaba Group. The position was valued at about $1 billion dollars and represented 9.1% of the portfolio (according to February 13th, 2015, SEC filing). The initial investment in Dow Chemical Co was made in the fourth quarter of 2013 and in the second quarter of 2014 the position was increased to a total of 22 million shares. Using a daily average share price of Dow Chemical Co's stock during these periods, it can be estimated that the activist investor acquired the shares at an average cost of about $45.2 per share. In November 2014, Dow Chemical Co announced that it had reached an agreement with Third Point, and agreed to add four new, independent directors to Dow's Board. Two of the directors were nominated by Third Point. Dow shares significantly underperformed the broad market over the last ten years period, and currently trade at similar price to one paid by the activist investors about a year ago. We believe this provides one an attractive investment target and an opportunity to invest alongside a high-profile activist hedge fund manager. Company profile Dow combines the power of science and technology to passionately innovate what is essential to human progress. The Company is driving innovations that extract value from the intersection of chemical, physical and biological sciences to help address many of the world's most challenging problems such as the need for clean water, clean energy generation and conservation, and increasing agricultural productivity. Dow's integrated, market-driven, industry-leading portfolio of specialty chemical, advanced materials, agrosciences and plastics businesses delivers a broad range of technology-based products and solutions to customers in approximately 180 countries and in high growth sectors such as packaging, electronics, water, coatings and agricultural. In 2014, Dow had annual sales of more than $58 billion and employed approximately 53,000 people worldwide. The Company's more than 6,000 products are manufactured at 201 sites in 35 countries across the globe. The Company conducts its worldwide operations through global businesses, which are reported in five operating segments: Agricultural Sciences, Consumer Solutions, Infrastructure Solutions, Performance Materials & Chemicals and Performance Plastics Valuation summary Based on a recent share price, Dow Chemical Co had market capitalization of $56.2 billion, net debt of $14.1 billion and enterprise value of $70.3 billion. Company is currently valued at an EV/EBITDA multiples of x7.56, based on FY 2014 Adjusted EBITDA of $9.3 billion. Dow pays a regular quarterly dividend of $0.42 per share, which currently provides an annual dividend yield of 3.5%. More conservative investors can increase the income yield even more, by selling out-of-the-money put options on Dow. For example, a January 2016 Put option with an exercise price of $42 per share can be sold for a premium of $1.93. This would provide the investor with an extra downside protection of 17.4%, while earning a premium income of 4.8%, or a 6.2% annualized income yield. Restructuring efforts On March 27, 2015, Dow announced that it will separate a significant portion of its chlorine value chain and merge it with Olin Corporation. The merger will result in Dow shareholders receiving approximately 50.5% of the shares of Olin, while the existing Olin shareholders will own approximately 49.5%. Dow will also receive a cash payment of $2 billion as part of the transaction, and Olin will assume approximately $800 million in pension and other liabilities. Taken together and using the recent share price of Olin Corporation's stock, the value of the transaction to Dow is approximately $5.3 billion, or 9.5% of Dow's current market cap. In February of 2015, Dow completed divestiture of Angus Chemical Company to Golden Gate Capital and Sodium Borohydride business to Vertellus Performance Chemicals LLC. Together, these divestitures total more than $1.4 billion in gross proceeds to Dow. Company previously announced that it intends to divest $7 to $8.5 billion of non-strategic assets and businesses by mid-2016. Conclusion

In my recently published book Wall Street Back To Basics, I discuss the topic of following and investing along activist investors and hedge funds. The key to make successful investments along activist investors is to evaluate the specific investment on its own merits, and not copy activists blindly.

Conservative valuation, continuing restructuring efforts, attractive dividend yield, lower energy costs, and presence of high-profile activist hedge fund investor make Dow Chemical Co an attractive investment target for a long-term, value investor. Possible IPO of Strauss Coffee

Event-Driven And Value Investment Digest

Event Driven And Value Investment Digest provides you, over the course of the year, timely and actionable investment ideas, as well as valuable insights into important company and market events. A broad event-driven and value investment focus provides a wide range of investment opportunities that are diversified by sources of risk and risk/return profiles. Some of the focus areas are activist investors, hedge funds, spin-offs, buybacks, special situations, M&A, merger arbitrage and other topics. Contact us for subscription

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Strauss Group And Texas Pacific Group: Closer To Strauss Coffee IPO

By Alex Gavrish, Etalon Investment Research | Author of "Wall Street: Back To Basics"

Possible IPO of Strauss Coffee On March 23rd, 2015, Strauss Group reported fourth quarter and annual 2014 financial results. In addition, company disclosed that on March 20th, 2015, it filed a draft confidential prospectus with the SEC (currently non-public) in preparation for a possible IPO of its coffee business. With regards to possible IPO, Strauss Group reported that it reached an agreement with Texas Pacific Group on such issues as the IPO process and shareholders' rights. We highlighted Strauss Group as an attractive investment opportunity back in December of 2013, and believe that as conflict with TPG seems to be resolved, IPO of Strauss Coffee is closer (although not guaranteed), and an excellent investment opportunity is still available for long-term, value investors. Company profile Strauss Group is a Food and Beverage Company, focused on high value-add, branded products. The group is an international corporation with a strong home base in Israel, where it is the second-largest food and beverage group. Overall, Strauss operates 29 production sites in 22 countries around the world, including Brazil - where it is the largest coffee player; and the U.S. - where it leads the category of refrigerated fresh dips and spreads, including hummus. Strauss has strategic and financial collaborations with leading global players, such as Danone, PepsiCo, Haier, Virgin and the global private equity firm TPG Capital. Strauss Coffee business Private equity firm Texas Pacific Group owns a 25% stake in Strauss Coffee, in partnership with Strauss Group. TPG bought its stake in 2008 for $293 million while the controlling share is owned by Strauss Group. Perhaps a buyout by German consumer products conglomerate Joh. A. Benckiser in 2013 of DE Master Blenders 1753 NV, a European coffee and tea company, for about $10 billion has ignited a desire on part of Texas Pacific Group to exit the venture. Strauss Coffee value DE Master Blenders transaction was done at an EV/EBITDA multiple of x16.2. Considering that Strauss Coffee is the world's fourth largest coffee manufacturer after Nestle SA, Kraft Foods Group Inc/Modelez and DE Master Blenders 1753 NV, with strong presence in large emerging markets such as Brazil and Russia/CIS, a similar valuation multiple is justified and can even be higher due to attractive growth prospects. Applying a x16 EV/EBITDA valuation multiple for Strauss Coffee values the business at $2,176 million (based on a 2013 EBITDA of NIS 476 million and exchange rate of 3.5 NIS/USD); and $1,668 million (based on 2014 EBITDA of NIS 417 million and exchange rates of 4.0 NIS/USD). Due to significant volatility in currencies, for example in Russia and Ukraine, we believe that last year results do not reflect the real potential of the coffee business. Taking a midpoint of the values calculated above, Strauss Coffee can be valued at about $1,922 million. Strauss Group's stake of 75% can be therefore valued at $1,442 million. This amount represents 90% of company's current market capitalization. Valuation summary Based on a recent share price, Strauss Group had maket capitalization of NIS 6,437 million, non-GAAP net debt of NIS 1,688 million and enterprise value of NIS 8,125 million. Company is currently valued at an EV/EBITDA multiple of x8.4 based on non-GAAP 2014 EBITDA of NIS 964 million. Needless to say, this is a very attractive valuation for a food and beverage company. Conclusion

In my recently published book Wall Street Back To Basics, I discuss decision framework for investing in spin-off companies. Although not a classical IPO but a partial carve-out, the possible IPO of Strauss Coffee can help unlock value for Strauss Group shareholders. Once value of the coffee business will become clear, Strauss Group itself will be revalued by the market. At the same time, current valuation provides long-term, value investor an attractive investment target with an asymmetric risk-return profile.

Event-Driven And Value Investment Digest

Event Driven And Value Investment Digest provides you, over the course of the year, timely and actionable investment ideas, as well as valuable insights into important company and market events. A broad event-driven and value investment focus provides a wide range of investment opportunities that are diversified by sources of risk and risk/return profiles. Some of the focus areas are activist investors, hedge funds, spin-offs, buybacks, special situations, M&A, merger arbitrage and other topics. Contact us for subscription

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General Cable Corporation: Possible Acquisition Target

By Alex Gavrish, Etalon Investment Research | Author of "Wall Street: Back To Basics"

Buyout interest On March 17th, 2015, Bloomberg reported that, according to unnamed sources, Italian company Prysmian SpA, the world's largest cable maker, is evaluating a bid for General Cable Corp. to help increase its market share in North America. Shares of General Cable jumped 21.2% on huge volume and closed at $17.73. Over the past four days, 14.3 million shares changed hands at an average price of $17.30 per share, or a total value of $247 million. These amounts represent approximately 30% of company's market cap and shares outstanding. This might suggest two things: either that rumor has a sound basis to it and the bid by Prysmian SpA is indeed very possible, or that a meaningful number of shares is being pushed into the hands of activist investors or hedge funds, and they might increase the pressure on the company to sell itself or pursue some other strategic alternative. Company profile General Cable Corporation is a global leader in the development, design, manufacture, marketing and distribution of copper, aluminum and fiber optic wire and cable products for use in the energy, industrial, construction, specialty and communications markets. The company additionally engages in the design, integration, and installation on a turn-key basis for products such as high and extra-high voltage terrestrial and submarine systems. Valuation summary Based on a recent share price, General Cable had maket capitalization of $831 million, net debt of $1,106 million and enterprise value of $1,937 million. Company is currently valued at an EV/EBITDA multiples of x6.4 based on Adjusted EBITDA of $302 million for 2014. General Cable is also undergoing through a number of strategic initiatives and restructuring efforts. The main effort is focused on reducing organizational complexity by exiting operations in Africa and Asia Pacific. In addition, company aims to achieve annual cash cost savings of $60 million by the beginning of 2016. In 2014, company generated $44 million in free cash flow, while over the past three years annual free cash flow averaged $52 million. Assuming that company will generate a similar free cash flow going forward ($52 million annually) and, in addition, will achieve its cost saving targets, in three years company's shares could be valued at $34.87 per share or a potential upside of 105% from the current share price. This calculation assumes an EV/EBITDA valuation multiple of x7. Conclusion

In my recently published book Wall Street Back To Basics, I discuss the concept of "long optionality" in equity investments. The technique is widely used by the most successful professional investors and hedge funds. The main idea of the approach is to combine a fundamentally sound and attractive investment opportunity with a "lottery ticket". Joshua Friedman, co-chief at Canyon Partners, an investment management firm with which manages $23 billion in assets spoke at one of the investment conferences and mentioned optionality idea. He argued that investors need to not only buy cheap assets but also to invest in assets where you get optionality cheaply. In the case of General Cable corporation, reasonable valuation and restructuring efforts provide an attractive long-term investment opportunity (although with above average level of risk), while an "option-like" equity and possible merger or acquisition of the company provide a cheap "lottery ticket" to investors.

Event-Driven And Value Investment Digest

Event Driven And Value Investment Digest provides you, over the course of the year, timely and actionable investment ideas, as well as valuable insights into important company and market events. A broad event-driven and value investment focus provides a wide range of investment opportunities that are diversified by sources of risk and risk/return profiles. Some of the focus areas are activist investors, hedge funds, spin-offs, buybacks, special situations, M&A, merger arbitrage and other topics. Contact us for subscription

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OM Group Inc: Attractive Valuation With Activist Onboard

By Alex Gavrish, Etalon Investment Research | Author of "Wall Street: Back To Basics"

FrontFour Capital Group initiates a position On January 9th, 2015, FrontFour Capital Group disclosed a 5.8% stake in shares of OM Group Inc. Major part of the position was acquired at an average cost of $27.2 per share. FrontFour Capital sent a letter to company's management and board of directors, outlining its concerns for the company and its share price. The concerns discussed included, among others, such issues as missed financial targets, poor returns on capital, and excess cash trapped within working capital. In the letter, FrontFour Capital stated that it believes that the company is deeply undervalued and proposed a number of steps that are required to unlock shareholder's value. Specifically, activist fund believes that there exists, and that the company should pursue, a cost-cutting opportunity of at least $50 million, release $30 million of excess cash from working capital and implement $250 million stock buyback program. Company profile OM Group, Inc. is a technology-driven industrial company serving attractive global markets, including automotive systems, electronic devices, aerospace and defense, industrial and medical. Company uses innovative technologies to address customers' complex applications and demanding requirements. OM Group operates three strategic business platforms: Magnetic Technologies, Battery Technologies, and Specialty Chemicals. Restructuring efforts In February of 2015 company announced a wide-ranging set of competitive repositioning and cost optimization opportunities throughout the enterprise that are expected to improve its ability to serve customers, better compete in global markets and deliver stronger financial performance. The opportunities include headcount reductions across the enterprise; site consolidations; relocation of certain operations to improve cost structure and better serve customers; better alignment of various research and development, marketing and technical activities with customers’ next generation products and applications; and further corporate cost reductions. Over the next three years, OM Group expects to incur total cash expenses related to these opportunities of approximately $50 - $65 million. Company anticipates that these efforts will result in annualized cost savings of $30 - $40 million by the end of 2017, and are expected to ramp up starting in late 2015. Valuation summary Based on a recent share price, OM Group Inc had maket capitalization of $876 million, net cash of $79 million (no net debt) and enterprise value of $797 million. Company is currently valued at an EV/EBITDA multiples of x7.4, based on Adjusted EBITDA for 2014. Assuming that company will achieve its cost saving targets by the end of 2017, will release $30 million of cash through working capital optimization, will generate during 2015-2017 years annual free cash cash flow of $51 million and implement a $250 million share buyback program at an average price of $38 per share, in three years company's shares could be valued at $49.4 per share or a potential upside of 70% from the current share price. This calculation assumes an EV/EBITDA valuation multiple of x8.5. Also, it is worthy to note that company's six largest institutional shareholders (including FrontFour Capital Group) own a combined stake of 46% in the company. Due to this concentration of shareholders, the influence of a share buyback program or a tender offer, if implemented, on the stock price, could be significant. Conclusion

In my recently published book Wall Street Back To Basics, I discuss the topic of following and investing along activist investors and hedge funds. The key to make successful investments along activist investors is to evaluate the specific investment on its own merits, and not copy activists blindly.

Recently announced restructuring efforts position OM Group well for the future. In due course, results of these efforts should be reflected in company's valuation and share price. Presence of an activist shareholder will put additional pressure on company's management and should guarantee accountability. Additionally, conservative valuation and meaningful upside potential make OM Group Inc an attractive investment target for a long-term, value-oriented investor. Weak share price performance

Event-Driven And Value Investment Digest

Event Driven And Value Investment Digest provides you, over the course of the year, timely and actionable investment ideas, as well as valuable insights into important company and market events. A broad event-driven and value investment focus provides a wide range of investment opportunities that are diversified by sources of risk and risk/return profiles. Some of the focus areas are activist investors, hedge funds, spin-offs, buybacks, special situations, M&A, merger arbitrage and other topics. Contact us for subscription

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Kennametal: Weak Stock Provides Classic Value Investment Opportunity

By Alex Gavrish, Etalon Investment Research | Author of "Wall Street: Back To Basics"

Weak share price performance Shares of Kennametal declined by about 32% from their high of $48.5 back in May of 2014. Company is going through a restructuring process, changes in executive management, and a period of declining sales. Despite this, we believe that shares of Kennametal provide a classic value investment opportunity for a long-term oriented investor. Company profile Kennametal Inc. is a leading global manufacturer and supplier of tooling, engineered components and advanced materials consumed in production processes. End users of company's products include metalworking and machinery manufacturers and suppliers across a diverse array of industries, including the aerospace, defense, transportation, machine tool, light machinery and heavy machinery, as well as producers and suppliers in a number of equipment-intensive industries such as coal mining, road construction and quarrying, as well as oil and gas exploration, refining, production and supply. End users' applications range from airframes to mining operations, engines to oil wells and turbochargers to processing. Kennametal operates two global business segments consisting of Industrial and Infrastructure divisions. Valuation summary Based on a recent share price, Kennametal had market capitalization of $2.6 billion, net debt of $0.8 billion and enterprise value of $3.42 billion. In the 2014 fiscal year ended June 2014, company generated $415 million in EBITDA (adjusted for stock-based compensation and restructuring charges) while in the first six months of 2015 (ended December 2014) the EBITDA was $192 million ($383 million on an annualized basis). This values the company at an EV/EBITDA multiples of x8.3 and x8.9, respectively. Assuming a successful implementation of a two-part restructuring program, EBITDA can grow in fiscal 2017 by $98 million (mid-point of company's estimates) to $513 million (using 2014 Adjusted EBITDA). Company estimates that it will generate approximately $170 million in free cash flow during fiscal 2015 year. Applying an EV/EBITDA multiple of x10, and an average annual free cash flow of $200 million, at the end of the fiscal 2017, or two and a half years from now, company can be valued at $60.8 per share. This provides a potential upside of 85% from current share price. Conclusion

Kennametal shares declined during 2014 from a high of $48.5 to current $32.9 per share, a decline of 32%. Also, company's shares significantly underperformed S&P 500 Index by 36% and 70% over the past 12 months and last 5 year periods. Current valuation discount reflects, of course, weak sales outlook, but considering the strength of company's business model, restructuring efforts and long-term potential, the discount provides an excellent entry point for long-term, value investors.

Event-Driven And Value Investment Digest

Event Driven And Value Investment Digest provides you, over the course of the year, timely and actionable investment ideas, as well as valuable insights into important company and market events. A broad event-driven and value investment focus provides a wide range of investment opportunities that are diversified by sources of risk and risk/return profiles. Some of the focus areas are activist investors, hedge funds, spin-offs, buybacks, special situations, M&A, merger arbitrage and other topics. Contact us for subscription

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Travelport: Recent IPO and Debt Restructuring Could Unlock Value

By Alex Gavrish, Etalon Investment Research | Author of "Wall Street: Back To Basics"

Travelport Worldwide IPO In September of 2014, Travelport Worldwide Inc completed an IPO. Company sold 30 million shares at a price of $16 per share. To put things into historical perspective, Travelport was acquired in 2006 by affiliates of The Blackstone Group, affiliates of Technology Crossover Ventures and certain existing and former members of company's management. In 2007, Travelport expanded and diversified its geographic and commercial footprint by acquiring Worldspan. During 2014, Travelport completed several deleveraging transactions. Company sold its stake in Orbitz Worldwide Inc for $366 million, undertook few debt-for-equity exchange transactions by issuing 28.8 million shares for a total amount of $571 million (which implies an average cost of $19.83 per share for debt holders), and consummated a refinancing of the remaining debt with a new senior secured credit agreement comprised of a single tranche of first lien term loans. Proceeds from IPO were also used to repay debt. Company profile Travelport is a Travel Commerce Platform providing distribution, technology, payment and other solutions for the $7 trillion global travel and tourism industry. With a presence in over 170 countries, over 3,400 employees and 2014 net revenue of $2.1 billion, Travelport is comprised of: a Travel Commerce Platform and Technology Services divisions. Through Travel Commerce Platform, Travelport facilitates travel commerce by connecting the world's leading travel providers with online and offline travel buyers in a proprietary business to business ("B2B") travel marketplace. In addition, Travelport has leveraged its domain expertise in the travel industry to design a pioneering B2B payment solution that addresses the needs of travel intermediaries to efficiently and securely settle travel transactions. In the Technology Services segment, Travelport provides critical IT services to airlines, such as shopping, ticketing, departure control and other solutions, enabling them to focus on their core business competencies and reduce costs. Travelport is headquartered in Langley, UK. The Company is listed on the New York Stock Exchange and trades under the symbol "TVPT". Valuation summary Based on a recent share price, Travelport had market capitalization of $1.86 billion, net debt of $2.28 billion and enterprise value of $4.14 billion. Adjusted EBITDA for 2014 was $540 million, which values the company at an EV/EBITDA multiple of x7.7. After recent refinancing and debt restructuring, interest and debt payments will be lower, and more free cash flow should be available. According to company's annual report, debt and interest payments will total $208 in 2015. According to company's guidance for 2015, Adjusted EBITDA will equal $533 million (high end) and adjusted free cash flow will be $150 million (high end). Using, as estimate, same numbers for 2015-2019 years and specified debt and interest payments, during the next five years Travelport could generate a total free cash flow of about $861 million and repay $204 million of debt. This would decrease total net debt to $1,210 million and would subsequently significantly increase company's free cash flow. Using an EV/EBITDA valuation multiple of x8, 2015 projected adjusted EBITDA of $533 million, and net debt of $1,210 million, could value company's equity, in five years from now, at $3.05 billion or $25.15 per share. This provides a potential upside of 64% from current share price. Conclusion

Recent refinancing and debt restructuring transactions position company well for the future. In due course, results of these efforts should be reflected in company's valuation and share price. Reasonable valuation and meaningful upside potential make Travelport an attractive investment candidate for a long-term, value-oriented investor.

Event-Driven And Value Investment Digest

Event Driven And Value Investment Digest provides you, over the course of the year, timely and actionable investment ideas, as well as valuable insights into important company and market events. A broad event-driven and value investment focus provides a wide range of investment opportunities that are diversified by sources of risk and risk/return profiles. Some of the focus areas are activist investors, hedge funds, spin-offs, buybacks, special situations, M&A, merger arbitrage and other topics. Contact us for subscription

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Pinnacle Entertainment: Gaming and Leisure Offer Helps Unlock Value

By Alex Gavrish, Etalon Investment Research | Author of "Wall Street: Back To Basics"

Gaming and Leisure offers to acquire Pinnacle's real estate assets On march 10th, 2015, Gaming and Leisure Properties Inc, a real estate investment trust focused on gaming operators' properties, disclosed its proposal to acquire real estate assets of Pinnacle Entertainment. The proposed transaction reflects an enterprise value of $4.1 billion, including assumption of debt. The offer is essentially an alternative to Pinnacle Entertainment's plan. According to company's plan, which was announced in November of 2014, Pinnacle intended to separate its operating business and real estate assets through a spin-off of real estate into a separate company. Although the plan calls for a share-based transaction, according to GLPI, its offer values Pinnacle Entertainment at $36 per share. So far, Pinnacle's management and board of directors refused to enter into negotiations with GLPI. Shares of both companies reacted positively to the news, with GLPI's shares rising 12.5% and Pinnacle Entertainment shares closing 15% higher at $31.61. Activist investor and REIT spin-off plan In April of 2014, activist investor Orange Capital LLC disclosed a 4.5% stake in the company. Orange Capital LLC proposed to create a property company which will qualify as REIT and to spin-off its shares to Pinnacle Entertainment shareholders on a tax-free basis. The idea of separation is a standard financial engineering practice of creating a REIT that will provide interested investors with an attractive dividend yield and would therefore command a higher valuation multiple, unlocking value for current shareholders. Penn National Gaming executed such transaction during 2013 and listed its real estate owner, Gaming & Leisure Properties. Pinnacle Entertainment announced in November of 2014 that it intends to pursue the separation of real estate assets. Conclusion

We wrote about Pinnacle Entertainment in April of 2014 and highlighted it as an attractive investment opportunity. We also included it into our model High Impact Equities Portfolio. Since our recommendation the share price returned 37% and after yesterday's announcement we decided to take profits and close the position.

Event-Driven And Value Investment Digest

Event Driven And Value Investment Digest provides you, over the course of the year, timely and actionable investment ideas, as well as valuable insights into important company and market events. A broad event-driven and value investment focus provides a wide range of investment opportunities that are diversified by sources of risk and risk/return profiles. Some of the focus areas are activist investors, hedge funds, spin-offs, buybacks, special situations, M&A, merger arbitrage and other topics. Contact us for subscription

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Visteon Corp: Restructuring Process Might Provide An Opportunity

By Alex Gavrish, Etalon Investment Research | Author of "Wall Street: Back To Basics"

HVCC transaction During the fourth quarter, Visteon announced it reached an agreement to sell its approximately 70 percent ownership interest in Halla Visteon Climate Control Corp. (HVCC) to an affiliate of Hahn & Company and Hankook Tire Co. Ltd. for approximately $3.6 billion. The transaction represents an enterprise value for HVCC of approximately 10.1 times EBITDA for the 12 months ended Sept. 30, 2014. The sale is subject to regulatory reviews, shareholder approval and other conditions, and is expected to be completed in the first half of 2015. Following the sale of HVCC shares, Visteon will continue to be a public company and its revenues will be generated by remaining businesses, including the cockpit electronics and connected car business. Company profile Visteon is a global automotive supplier that designs, engineers and manufactures innovative products for nearly every vehicle manufacturer worldwide. Visteon delivers value for its customers and stockholders through two technology-focused core businesses: vehicle cockpit electronics and thermal energy management. Visteon, through its wholly owned subsidiary VIHI, owns approximately seventy percent (70%) of HVCC, one of only two global full-line automotive thermal management suppliers. With corporate offices in Van Buren Township, Mich. (U.S.); Shanghai, China; and Chelmsford, UK; Visteon has approximately 26,000 employees at facilities in 29 countries.. Expected return of capital to shareholders After completion of the transaction, company plans to return approximately $2,500 million to shareholders through share buybacks and special dividend. Remaining part of the proceeds will be used for general corporate purposes. According to company's presentation, after accounting for tax liability and transaction fees, net proceeds to the company will be between $3,010 and $3,160 million. The midpoint of this range, or $3,085 million, represents 69% of company's current market cap. On February 26th, 2015, Visteon reported fourth quarter results and announced a $500 million accelerated share repurchase program. Valuation summary Based on a recent share price, Visteon Corporation had maket capitalization of $4.45 billion, net debt of about $159 million and enterprise value of $4.61 billion. Adjusting for $3.09 billion in proceeds from HVCC transaction, enterprise value equals $1.53 billion. Visteon projects, that remaining business, Electronics and Other Product Group, will have 2015 sales in the range of $3.2 to $3.4 billion. Adjusted EBITDA for the Electronics Product Group and Corporate Segment is projected to be in the range of $225 million to $255 million. A midpoint of the projected EBITDA range implies an EV/EBITDA ratio of x6.4. Company will continue the restructuring process and plans, by 2018, to achieve a 40% growth in EBITDA to $335 million, while Adjusted Free Cash Flow is estimated to grow to $105 million. Using these estimates, the remaining business is currently valued at an EV/EBITDA of x4.55 valuation multiple, and excludes cash generated during the four year period of 2015-2018. Conclusion

Recent transaction, once completed, should provide a strong support for the stock price in the medium-term. Attractive valuation of the remaining business and ongoing restructuring and improvements create a convenient entry point for conservative and long-term investors. At the same time, the return of capital to shareholders and possible special dividend might create a significant inefficiency in company's stock price, which can provide an attractive return in the shorter time period.

Event-Driven And Value Investment Digest

Event Driven And Value Investment Digest provides you, over the course of the year, timely and actionable investment ideas, as well as valuable insights into important company and market events. A broad event-driven and value investment focus provides a wide range of investment opportunities that are diversified by sources of risk and risk/return profiles. Some of the focus areas are activist investors, hedge funds, spin-offs, buybacks, special situations, M&A, merger arbitrage and other topics. Contact us for subscription

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50 Shades of Merger And Acquisition Rumors

By Alex Gavrish, Etalon Investment Research | Author of "Wall Street: Back To Basics"

New Year, New Deals Beginning of the New Year brought with it a flood of merger related rumors and speculations. Many investors are being tempted to act impulsively and trade on media and news reports. Overall, this approach is not working. One should not gamble on market rumors and speculations. The majority of buyout rumors are not followed by actual transactions. According to data compiled byBloomberg, brokerages and newspapers reported at least 1,875 rumors about potential buyouts of 717 companies between 2005 and 2010. A total of 104, or only 14.5 percent, were acquired. We believe, however, that with an extra effort and support in the form of a sound fundamental valuation and logic, one can greatly improve his chances of identifying profitable trades and investment opportunities. World Duty Free SpA According to media reports, World Duty Free SpA attracted interest of potential buyers, including strategic partners as well as private equity firms. Dufry AG is one of the companies that evaluate possibility of World Duty Free SpA acquisition. Also according to media, French media group Lagardere is interested too, and is working with Societe Generale on the deal and is in talks with private equity firms to help it fund the transaction. Reuters also reported that Benetton family which owns a 50.1% stake in the company is willing to forgo its controlling stake and remain with a small shareholding of 15-20 percent in exchange for joining forces with a strategic partner who will help company achieve more cost savings and pursue growth opportunities. We think that reasonable valuation, strong free cash flow generation ability and a relative transparency and visibility into the company's future provide a fundamentally sound and attractive investment opportunity while a possible buyout or other strategic alternative can be a catalyst to unlock value in a shorter period. Rexam Plc On February 5th, 2015, Rexam Plc confirmed that it is in talks with Ball Corporation to be acquired. Company confirmed that an indicative offer of GBP 6.10 is on the negotiation table and the transaction is expected to be financed with two thirds in cash and one third in Ball Corporation's stock. According to takeover code rules, Ball Corporation had to announce, by March 5th, 2015, a firm intention to make an offer or announce that it does not intend to make one.

In a recently published book Wall Street: Back To Basics, the topic of an opportunistic approach to merger arbitrage situations is discussed. Some of the options available to investors include taking positions before the deal is announced and investing in the announced deals that have potential for price improvements. The approach is used by the most successful professional investors and hedge funds, among them John Paulson and his firm.

Despite a cautious view investors should take when dealing with takeover rumors and media reports, we believed that for a relatively aggressive investor, current situation in shares of Rexam Plc provides enough reasons to initiate a position and earn attractive return if the transaction will take place. On February 19th, 2015, Ball Corporation officially announced the proposed acquisition of Rexam Plc. Under the terms of the offer, for each Rexam share, Rexam shareholders will receive 407p in cash and 0.04568 new Ball Corp shares. Transaction is expected to receive regulatory approvals and be completed in the second half of 2016. In addition to cash and stock, Rexam Plc shareholders will be entitled to receive a final dividend for 2014 of 11.9p and additional regular dividends, provided they will not exceed the corresponding dividends paid for 2014 (17.7p per share). This means that in addition to 11.9p per share final dividend for 2014, before the merger is completed, Rexam Plc shareholder might receive additional 17.7p per share in dividends for 2015. Since our recommendation on February 10th, 2015, shares returned 8.8%. Based on the closing price of Ball Corporation shares on February 19th, 2015, and including the 2014 and potential 2015 dividends, the offer values Rexam at 655.4p per share, or an additional 16.8% upside from the current share price. Chico's FAS On February 10th, 2015, a number of financial and media publications reported that according to unnamed sources, private equity firm Sycamore Partners is in talks with Chico's FAS to be acquired. Rumors and speculation that company is an attractive LBO target have circulated in the past, and so there is no guarantee that an LBO will actually take place. Putting takeover rumors and speculations aside, we believe that company's debt-free balance sheet, strong free cash flow generation ability and attractive growth prospects provide an excellent opportunity to make a sound long-term investment and a chance to invest alongside Clifton Robbins of Blue Harbour Group, an experienced activist investor. If, on the other hand, company will be acquired, investors will reap the rewards in a shorter time period. Hedge fund manager discloses position

Event-Driven And Value Investment Digest

Event Driven And Value Investment Digest provides you, over the course of the year, timely and actionable investment ideas, as well as valuable insights into important company and market events. A broad event-driven and value investment focus provides a wide range of investment opportunities that are diversified by sources of risk and risk/return profiles. Some of the focus areas are activist investors, hedge funds, spin-offs, buybacks, special situations, M&A, merger arbitrage and other topics. Contact us for subscription

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Halyard Health: David Einhorn Acquires A Stake In Recent Spin-Off

By Alex Gavrish, Etalon Investment Research | Author of "Wall Street: Back To Basics"

Hedge fund manager discloses position On February 13th, 2015, famous hedge fund manager David Einhorn and his funds disclosed a 5.06% holding in shares of Halyard Health Inc, a healthcare products company which was recently spun-off from Kimberly-Clark Corporation. Kimberly-Clark Corporation distributed 100% of Halyard Health Inc's shares to its shareholders and listed the shares under the symbol "HYH" on The New York Stock Exchange ("NYSE"). Spin-off was completed in October of 2014 and shares started trading on October 21st, 2014. Since start of trading, share price rose Spin-off company profile Halyard Health is a global company which seeks to advance health and healthcare by preventing infection, eliminating pain and speeding recovery. Its products and solutions are designed to address some of today's most important healthcare needs, namely, preventing infection and reducing the use of narcotics while helping patients move from surgery to recovery. Halyard has two business segments: Surgical and Infection Prevention S&IP and Medical Devices. Surgical and Infection Prevention segment provides products that address the prevention of healthcare-acquired infections and provide protection for both healthcare workers and patients. The product portfolio includes such products as sterilization wrap, surgical drapes and gowns, facial protection, protective apparel and medical exam gloves. Medical Devices segment is comprised of a diverse set of medical device solutions focused on improving patient outcomes, patient safety and reducing the cost of care. Products portfolio includes post-operative pain management solutions, minimally invasive interventional or chronic pain therapies, closed airway suction systems and enteral feeding tubes. Valuation Based on a recent share price of $44.5 per share, company has a market cap of $2,071 million, net debt of approximately $633 million (after distribution of $680 million to the parent company as part of separation), and enterprise value of $2,703 million. Company generated $295 million in adjusted EBITDA in 2013. However, when presented on a pro-forma basis to give effect to additional annual expenses expected to be incurred in order to operate as stand-alone company, adjusted EBITDA is lower and equals approximately $226 million. Based on this amount, company's EV/EBITDA multiple is approximately x12. Free cash flow also looks less attractive after this adjustment, and in 2013 would equal $106 million instead of $175 million. It would still provide a nice free cash flow yield of 5.1% but it is definitely not something extraordinary. On the bright side, company has relatively low capex expenditures, and once it goes through a transitional period post-separation, it might be able to deliver value to shareholders. Also, it can become a takeover candidate at some stage for a larger company due to potential synergies and costs savings that could be achieved by minimizing corporate expenses. Spin-off insights In my recently published book Wall Street Back To Basics, I discuss decision making framework for investing in spin-off companies. It seems that Halyard Health Inc seems to have some characteristics that usually characterize successful spin-offs. At present stage, however, valuation is not especially attractive, and investors might do better if they wait until company goes through the transitional period related to separation and until market offers a more attractive valuation.

Event-Driven And Value Investment Digest

Event Driven And Value Investment Digest provides you, over the course of the year, timely and actionable investment ideas, as well as valuable insights into important company and market events. A broad event-driven and value investment focus provides a wide range of investment opportunities that are diversified by sources of risk and risk/return profiles. Some of the focus areas are activist investors, hedge funds, spin-offs, buybacks, special situations, M&A, merger arbitrage and other topics. Contact us for subscription

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Chico's FAS: Still Misunderstood By Mr. Market, Still An Opportunity

By Alex Gavrish, Etalon Investment Research | Author of "Wall Street: Back To Basics"

On February 10th, 2015, a number of financial and media publications reported that according to unnamed sources, private equity firm Sycamore Partners is in talks with Chico's FAS to be acquired. Rumors and speculation that company is an attractive LBO target have circulated in the past, and so there is no guarantee that an LBO will actually take place. We believe that these news again highlight a high-quality investment opportunity investors should look at. Blue Harbour Group's stake In September of 2013, Blue Harbour Group disclosed a 5.6% stake in company. According to the latest SEC filing, the firm owned 10.5 million shares of Chico’s FAS which currently represents a stake of 6.9%. Blue Harbour Group is known for its activist investments, while working in a collaborative and supportive manner with companies and management (as opposed to more “active” activist investors who might engage in proxy fights, etc.). Clifton Robbins, CEO of Blue Harbour Group called Chico’s FAS a “growth stock being valued as a value stock”. Chico’s FAS is also seen as a potential buyout candidate because it has no debt and provides attractive growth prospects. The recent M&A wave in the apparel retail sector clearly makes this a reasonably probable scenario. Company profile Chico’s FAS is a specialty retailer of women’s private branded, sophisticated, casual-to-dressy clothing, intimates, complementary accessories, and other items. The company operates through Chico’s, White House Black Market, Soma Intimates and Boston Proper brand names. While each of its brands has a distinct customer base, the overall portfolio caters to a broad age and economic demographic, with customer ages from 35 and older and household incomes ranging from $50,000 to well over $100,000. Chico’s FAS operates 1,472 stores across 48 states, and also mails catalogs and operates e-commerce websites and call centers which sell merchandise nationally and internationally. Takeover gambles Overall, one should not gamble on such market speculations. The majority of buyout rumors are not followed by actual transactions. According to data compiled by Bloomberg, brokerages and newspapers reported at least 1,875 rumors about potential buyouts of 717 companies between 2005 and 2010. A total of 104, or only 14.5 percent, were acquired. We believe that case of Chico's FAS is different, if the investors will look at it not as a gamble on takeover but as a long-term, value investment. Current valuation As of February 11th, 2015 close, Chico’s FAS, Inc. had a market capitalization of $2,496 $2,791 million and an enterprise value of $2,600 million. To arrive at the fair value estimate of Chico's FAS share price, we use average financial results over the past four years 2011-2014 (including annualized nine month results for the current year). We believe that this approach better reflect company's true potential. We also think that this approach is relatively conservative, as the company opened 376 new store during this period, and this expansion will bear fruits over the coming years. Average annual EBITDA (adjusted for stock-based compensation expense) during this period is $367 million, which values the company at an EV/EBITDA multiple of x7.1. Average annual cash flow from operations (CFO) is $275 million, capital expenditures $141 million, and free cash flow is $134 million. However, a major part of capital expenditures is related to new store opening expenses, which are estimated to be $101 million annually. The actual cash generation ability of Chico's FAS is closer to $235 million annually. Such cash flow reflects a free cash flow yield of 8.4% based on the recent share price and market capitalization. Assuming an EV/EBITDA multiple of x10 would value the company's equity at $3,865 million, or $25.27 per share. This price reflects an upside of 38.5% to the current share price. We think that debt-free balance sheet, strong free cash flow generation ability and attractive growth prospects should value the company at an even higher multiple, and the calculation made above is reasonable and conservative. Conclusion In my recently published book Wall Street Back To Basics, I discuss the topic of following and investing along activist investors and hedge funds. Putting takeover rumors and speculations aside, investors still have a very attractive investment opportunity before them and a chance to invest alongside an experienced activist investor. If, on the other hand, company will be acquired, investors will reap the rewards in a shorter time period.

Event-Driven And Value Investment Digest

Event Driven And Value Investment Digest provides you, over the course of the year, timely and actionable investment ideas, as well as valuable insights into important company and market events. A broad event-driven and value investment focus provides a wide range of investment opportunities that are diversified by sources of risk and risk/return profiles. Some of the focus areas are activist investors, hedge funds, spin-offs, buybacks, special situations, M&A, merger arbitrage and other topics. Contact us for subscription

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Vista Outdoor Inc: Attractive Spin-Off Investment Opportunity

By Alex Gavrish, Etalon Investment Research | Author of "Wall Street: Back To Basics"

Alliant Techsystems completes spin-off of Vista Outdoor Inc On February 9th, 2015, Alliant Techsystems Inc completed the spin-off of Vista Outdoor Inc, an outdoor sports and recreational products manufacturer. Alliant Techsystms distributed 100% of Vista Outdoor's shares to its shareholders and listed the Vista Outdoor shares under the symbol "VSTO" on The New York Stock Exchange ("NYSE"). Spin-off was part of the merger with Orbital Sciences Corporation, which Alliant Techsystems also completed February 9th, 2015. Spin-off company profile Vista Outdoor is a leading global designer, manufacturer and marketer of consumer products in the growing outdoor sports and recreation markets. Company serves these markets through a diverse portfolio of over 30 well-recognized brands that provide consumers with a range of affordable, performance-driven, high-quality and innovative products, including sporting ammunition and firearms, outdoor accessories, outdoor sports optics, golf rangefinders and performance eyewear. Vista Outdoor serves a broad range of end consumers, including outdoor enthusiasts, hunters and recreational shooters, professional athletes, as well as law enforcement and military professionals. Its products are sold through a wide variety of mass, specialty and independent retailers, such as Walmart, Cabela's, Gander Mountain, Bass Pro Shops, Dick's Sporting Goods, Sportsman's Warehouse and Recreational Equipment, Inc. Valuation Vista Outdoor shares started to trade on February 10th, 2015 at a price of about $37.5 per share. Based on this price, company has a market cap of $2,420 million. According to pro-forma balance sheet, Vista Outdoor has almost no net debt, and its enterprise value equals approximately $2,636 million. Company generated $370 million in adjusted EBITDA in 2014 (based on pro-forma financials). Based on these numbers and the enterprise value estimated above, company is currently valued at an EV/EBITDA multiple of x7.0. Spin-off insights In my recently published book Wall Street Back To Basics, I discuss decision framework for investing in spin-off companies. Separation of Vista Outdoor Inc seems to offer some benefits that usually characterize spin-offs. Strategic rationale is clear as company's business is unrelated to aerospace and defense focus of its parent company. This is a very important characteristic as it increases potential for revaluation of company's shares by a different base of investors. In addition, immediately with the start of trading, the company will be included in the S&P MidCap 400 Index. Clean balance sheet with almost no debt and attractive valuation make Vista Outdoor an interesting opportunity for a long-term, value investor. Ball Corporation In Talks To Acquire Rexam Plc

Event-Driven And Value Investment Digest 

Event Driven And Value Investment Digest provides you, over the course of the year, timely and actionable investment ideas, as well as valuable insights into important company and market events. A broad event-driven and value investment focus provides a wide range of investment opportunities that are diversified by sources of risk and risk/return profiles. Some of the focus areas are activist investors, hedge funds, spin-offs, buybacks, special situations, M&A, merger arbitrage and other topics. Contact us for subscription

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Ball Corp In Talks To Acquire Rexam Plc: Should You Gamble On This?

By Alex Gavrish, Etalon Investment Research | Author of "Wall Street: Back To Basics"

Ball Corporation In Talks To Acquire Rexam Plc On February 5th, 2015, Rexam Plc confirmed that it is in talks with Ball Corporation to be acquired. Company confirmed that an indicative offer of GBP 6.10 is on the negotiation table and the transaction is expected to be financed with two thirds in cash and one third in Ball Corporation's stock. According to takeover code rules, Ball Corporation has, by March 5th, 2015, to announce a firm intention to make an offer or announce that it does not intend to make one. Company profile Rexam is a global manufacturer of beverage cans, the vast majority of which are made of aluminium. Company manufactures a broad range of can sizes for products such as carbonated soft drinks, beer, energy drinks and other drinks categories. Rexam makes approximately 62 billion cans a year at 55 plants on five continents and employs around 8,000 people. Rexam is a business partner to some of the world's most famous and successful consumer brands. In 2013 sales were GBP 3.9 billion. Rexam is a member of the FTSE 100 Index. Takeover gambles Overall, one should not gamble on such market speculations. The majority of buyout rumors are not followed by actual transactions. According to data compiled by Bloomberg, brokerages and newspapers reported at least 1,875 rumors about potential buyouts of 717 companies between 2005 and 2010. A total of 104, or only 14.5 percent, were acquired. However, the case of Rexam Plc is a little different, as the companies confirmed that negotiations are taking place. In addition, indicative price and terms of the transaction were disclosed. There is also a sound strategic reason for the transaction as companies serve the same markets and have highly similar and almost commoditized products. The merger should therefore allow them to achieve substantial synergies and cost savings. Such transaction brings to memory last year's acquisition of Jos. A. Bank by Men's Wearhouse. That transaction also involved companies with highly similar businesses and was justified mostly by the possibility to achieve synergies and cost savings. Valuation As of February 10th, 2015, Rexam Plc's market capitalization was GBP 3,707 million and enterprise value equaled GBP 4,850 million. Company is currently valued at an EV/EBITDA multiple of x9.1 (based on annualized H1 2014 results). Indicative offer price of GBP 6.10 by Ball Corporation values Rexam Plc at an EV/EBITDA multiple of x10.2. However, assuming synergies of GBP 113 million (about 3% of Rexam's annual sales), the offer values the company at an EV/EBITDA valuation multiple of x8.5 only. We believe that this estimate is conservative, and much higher cost savings could be achieved. Taking into account the fact that Ball Corporation currently trades at a more expensive valuation and its share price significantly outperformed Rexam Plc's over the past 5 years, we think that Ball Corporation has an extra motivation to use its stock to pay for acquisition, and final offer price could be even higher. Conclusion In my recently published book Wall Street Back To Basics, I discuss the topic of an opportunistic approach to merger arbitrage investments. Some of the options available to investors include taking positions before the deal is announced and investing in the announced deals that have potential for price improvements. The approach is used by the most successful professional investors and hedge funds, among them John Paulson and his firm. Despite a cautious view investors should take when dealing with takeover rumors and media reports, we believe that for a relatively aggressive investor, the current situation in shares of Rexam Plc provides enough reasons to initiate a position and earn attractive return if the transaction will take place.

Event-Driven And Value Investment Digest 

Event Driven And Value Investment Digest provides you, over the course of the year, timely and actionable investment ideas, as well as valuable insights into important company and market events. A broad event-driven and value investment focus provides a wide range of investment opportunities that are diversified by sources of risk and risk/return profiles. Some of the focus areas are activist investors, hedge funds, spin-offs, buybacks, special situations, M&A, merger arbitrage and other topics. Contact us for subscription

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World Duty Free SpA: Value Spin-Off Idea With Cheap Optionality

By Alex Gavrish, Etalon Investment Research | Author of "Wall Street: Back To Basics"

World Duty Free attracts interest According to media reports, World Duty Free SpA attracted interest of potential buyers, including strategic partners as well as private equity firms. Dufry AG is one of the companies that evaluates possibility of World Duty Free SpA acquisition. Also according to media, french media group Lagardere is also interested, is working with Societe Generale on the deal and is in talks with private equity firms to help it fund the transaction. Reuters also reported that Benetton family which owns a 50.1% stake in the company is willing to forgo its controlling stake and remain with a small shareholding of 15-20 percent in exchange for joining forces with a strategic partner which will help company achieve more cost savings and pursue growth opportunities. Company profile World Duty Free S.p.A., is the holding company of World Duty Free Group, one of the world's leading travel retailers, operating mainly in airports and with a broad geographical reach. It has operations in 19 countries through 102 locations with over 490 stores, from its heartland in Western Europe, to the Americas, the Middle East and Asia. In 2013, the company posted a turnover of more than 2,078 million Euros. World Duty Free Group's core business is tax and duty free shopping and its product range covers the complete spectrum of airport shopping including Beauty, Wines & Spirits, Food & Confectionery, Tobacco, Sunglasses, Watches & Jewelry, Souvenirs, Newsstands and Bookstores. Spin-Off from Autogrill SpA World Duty Free was spun-off from Autogrill SpA in October of 2013. Autogrill SpA remained with food and beverage sector operations, while duty free store operations were separated into World Duty Free SpA. Company remained under control of the Benetton family, which owns 50.1% of the duty-free retailer. Transaction was motivated by the desire to give both companies more flexibility to pursue their own strategies. As a separate company, World Duty Free SpA is better positioned for merger and acquisition opportunities. Since spin-off, shares of World Duty Free SpA performed reasonably well, rising 23.2% compared to a decline of -6.4% in shares of Italian companies during the same period (iShares MSCI Italy Index ETF). Valuation Based on a recent share price, World Duty Free SpA had market capitalization of EUR 2,454 million, net debt of EUR 888 million and an enterprise value of EUR 3,342 million. EBITDA for the first nine months of 2014 equaled EUR 255 million and the company is currently valued at an EV/EBITDA multiple of x13.1 (based on annualized 9M 2014 results). World Duty Free SpA generates a strong free cash flow: EBITDA to free cash flow conversion rate is about 80%. During first nine months of 2014 company generated EUR 153 million in free cash flow (Cash Flow from Operations less Capital Expenditures). This provides shareholders with a 8.3% Free Cash Flow yield (based on annualized 9M 2014 results). In a three year plan that was published recently, company expects to generate EUR 335 million in Adjusted EBITDA in 2017, and to generate, during three year period of 2015-2017, a cumulative free cash flow of EUR 587 million. Assuming a similar growth rate in EBITDA and free cash flow for two more years, in a 5-year period company could achieve a EUR 375 million in EBITDA and approximately EUR 304 million in free cash flow. Assuming an EV/EBITDA multiple of x11 and a free cash flow yield of 7%, in five years shares of World Duty Free SpA could be valued at EUR 17.09 per share, or a potential upside if 77% from the current share price. Long optionality concept In my recently published book Wall Street Back To Basics, I discuss the concept of "long optionality" in equity investments. The technique is widely used by the most successful professional investors and hedge funds. The main idea of the approach is to combine a fundamentally sound and attractive investment opportunity with a "lottery ticket". Joshua Friedman, co-chief at Canyon Partners, an investment management firm with which manages $23 billion in assets spoke at one of the investment conferences and mentioned optionality idea. He argued that investors need to not only buy cheap assets but also to invest in assets where you get optionality cheaply. In the case of World Duty Free SpA, reasonable valuation, strong free cash flow generation ability and a relative transparency and visibility into the company's future provide a fundamentally sound and attractive investment opportunity while a possible buyout or other strategic alternative provide a cheap "lottery ticket" to investors. Event-Driven And Value Investment Digest Event Driven And Value Investment Digest provides you, over the course of the year, timely and actionable investment ideas, as well as valuable insights into important company and market events. A broad event-driven and value investment focus provides a wide range of investment opportunities that are diversified by sources of risk and risk/return profiles. Some of the focus areas are activist investors, hedge funds, spin-offs, buybacks, special situations, M&A, merger arbitrage and other topics. Contact us for subscription

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Darling Ingredients: Eminence Capital Acquires A Stake

By Alex Gavrish, Etalon Investment Research | Author of "Wall Street: Back To Basics"

Eminence Capital initiates a position On December 29, 2014, Eminence Capital disclosed a 5% stake in shares of Darling Ingredients, a global developer and producer of sustainable natural ingredients. Darling Ingredients position is new for Eminence Capital, and is one of the largest holdings in its portfolio. In addition to Eminence Capital, another hedge fund - Gates Capital Management, disclosed that it recently increased its position and as of January 12th, 2015, it owned a 10.4% stake in the company. For Gates Capital Management, the Darling Ingredients position is the largest one and accounted for about 8.8% of the fund's portfolio. Company profile Darling Ingredients is a global developer and producer of sustainable natural ingredients from edible and inedible bio-nutrients, creating a wide range of ingredients and customized specialty solutions for customers in the pharmaceutical, food, pet food, feed, technical, fuel, bioenergy and fertilizer industries. With operations on five continents, the company collects and transforms all aspects of animal by-product streams into useable and specialty ingredients, such as gelatin, edible fats, feed-grade fats, animal proteins and meals, plasma, pet food ingredients, organic fertilizers, yellow grease, fuel feedstocks, green energy, natural casings and hides. The company also recovers and converts used cooking oil and commercial bakery residuals into valuable feed and fuel ingredients. In addition, Darling Ingredients provides grease trap services to food service establishments, environmental services to food processors and sells restaurant cooking oil delivery and collection equipment. Valuation Darling Ingredients went through a period of transformation in the past two years. In 2013 the company acquired the VION Ingredients business division of VION Holding (completed in January of 2014) and also in 2013 completed the acquisition of assets of Rothsay, a division of Maple Leaf Foods Inc, a Canadian company. Consequently, company changed its name and its business operations were reorganized into three new reportable operating segments: Feed Ingredients, Food Ingredients and Fuel Ingredients. Based on a recent share price, Darling Ingredients Inc. had maket capitalization of $2,814 million, net debt of $2,100 million and enterprise value of $4,914. Company is currently valued at an EV/EBITDA multiple of x11.3 and x8.6, based on annualized 9M 2014 EBITDA and LTM Q3 2014 adjusted EBITDA results. Conclusion

Company's operations are highly dependent on costs of natural gas and diesel fuel. Darling Ingredients consumes significant volumes of natural gas to operate plants, and large volumes of diesel fuel to operate its fleet of tractors and trucks used to collect raw materials. The prices of natural gas and diesel fuel declined significantly over the past year. These developments should positively impact Darling's bottom line in the upcoming quarters. It is safe to assume that it is one of the reasons that Eminence Capital initiated a position in Darling shares while Gates Capital Management increased its holding. Conservative valuation, presence of two well-known hedge funds, end of the transformation period and decline of energy prices make Darling Ingredients an interesting investment target for a long-term, value investor.

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