nVent from Pentair
Summary
(04 Apr 2018) This large-cap separation may present a great investment opportunity. Leadership incentives are in place to align management team actions with investor interests. The announced distribution date is 30 Apr 2018. However, the dynamics of this spinoff may not present out sized returns compared to peers for the investor. Entering at approximately $25/share or less may limit downside while increasing the potential for adequate returns. This is not a domestic US company and may present additional risks to US based investors.
Parent Ticker: PNR
Announced Record Date: 17 Apr 2018
Announced Distribution Date: 30 Apr 2018
Anticipated Ticker: NVT
Business
eNvent will be a leading global provider of electrical connection and protection solutions. They sell electrical solutions designed to enable safer systems and ensure a more secure world.
Parent Child comparison
The parent company, Pentair, will continue with the water solutions business. eNvent will operate the electrical connection and protections solutions. Both companies sell industrial products. Both companies anticipate paying dividends in the future.
Spin Ratio
1 share NVT for every 1 share of PNR
Cash Flow
eNvent will have an approximate operating cash flow of at least $400 Million if the past three year's operating trends continue.
Cash Position
eNvent will have $50 Million cash upon separation according to the pro forma balance sheet.
Revenue Projections
Barring changes in the market, eNvent will most likely have revenues of just over 2 Billion next year. Past growth has been steady and runs between 5-10% annually.
Dividend Policy
eNvent is stating that they plan on paying a dividend post spinoff.
Management Actions
Beth Wozniak will be required as the CEO to maintain 6x her annual base salary in eNvent stock. Her prior stock ownership in Pentair was 2.5x her annual base salary essentially doubling her exposure to the company's share price. Although an incentive plan that includes Restricted Stock Units or options might better align interests in the first years with investors, this does seem to align management with investor positions. Of note, the other management team executives are required to own between 2x and 3x their base salaries going forward. Wozniak is the only one that had a previous requirement to do so.
Activist Investor Activity
Activist investor activity appears unreported.
Peer Comparison
Here are the claimed peers for eNvent: A. O. Smith Corporation, Actuant Corporation, Acuity Brands, Inc., Atkore International Group Inc., Belden Inc., Colfax Corporation, EnerSys, Generac Holdings Inc., General Cable Corporation, Hubbell Incorporated, IDEX Corporation, Lincoln Electric Holdings, Inc., Littelfuse, Inc., Regal Beloit Corporation, Snap-on Incorporated, The Timken Company, Valmont Industries, Inc., Woodward, Inc.
The typical Cash Flow to Enterprise Value for this group ranges between 3.72% and 8.20% with an average of 6.09% and a median of 5.97%. Compared to peers, eNvent should price somewhere between 25.40/share to 62.09/share and the more likely range to be around $36-37/share. This could adversely be affected by a change in the debt structure (pro forma balance sheet shows 991.5M), a change in the number of shares outstanding (this is based on 183.1M shares), cash upon separation (pro forma shows 50M), and finally free cash flows (this calculation used earnings + depreciation + amortization = 459.6M). The growth rate for NVT was around 34% annually over the past two years. This growth rate seems like it cannot be sustained. The company revenues rose 6.9% over the past two years meaning that the company has done a great job at improving operational returns. The company maintained gross margins of 37-40% between 2015-2017 indicating that more sales may continue to increase higher free cash flows as a percentage of enterprise value.
Opinion
The eNvent spinoff may make a great position in a portfolio seeking less risk and possible dividend income. The lack of differences between Pentair and eNvent in dividend policy, company size, and spinoff ratio may make it less likely to present a significant discount after the transaction. Investors seeking to place money in this company may find that $24-26/share to be a price that limits downside potential. This company is not based in the US, therefore it may present an additional amount of risk to US-based accounts.