Report
Alexander Korda
EUR 447.85 For Business Accounts Only

3 Names in 2019 Prime for a Break-Up

We initially screened for three companies with potential for value creation through future break-ups, and have refreshed our views on these large-cap names. We believe they have the right ingredients for value creation but need activist involvement to help move things in the right direction, including through pushing the management to explore strategic alternatives.

The Edge Ingredients...
We believe identifying the ingredients for corporate change is crucial when evaluating if a given company can leverage on potential opportunities that may arise from corporate change. Continuing our previous search for companies ripe for such change, we have highlighted three names that satisfy our criteria. These include (but are not limited to):

Underperformance compared to peers and the market;
Visible road to change;
History of similar successful Spinoffs;
Reducing focus on non-core assets; and
Potential activist involvement;

In this report, we have looked at large companies that we believe have the right ingredients for value creation but need activist involvement to help move things in the right direction, including through pushing the management to explore strategic alternatives. Two of the below mentioned ideas (Merck and Roper) belong to sectors we highlighted in our report “3 Sectors to Watch for in 2018” (dated Jan. 9, 2018), as we expected to see traction for strategic change building in the Healthcare and Industrial spaces.

The Edge View...
Roper Technologies, Inc. (ROP):
Potential Spinoff candidates are its Industrial Technology and Energy System & Controls segments;
High focus on asset-light model with large recurring revenues;
Spinoff will increase transparency in the SaaS business;
Management intends to divest non-core assets;
Past record of activists breaking up industrial conglomerates;
Reducing focus on asset-heavy and cyclical businesses;

Merck & Company, Inc. (MRK):
Potential Spinoff candidate is its Animal Health segment;
Past split of Pfizer, Inc.'s (PFE) Animal Health business Zoetis, Inc. (ZTS) was a big hit;
Increasing strategic events in the animal healthcare space;
Divergent businesses with different growth potentials;
MRK's Animal Health unit is the second-largest after ZTS;
Total shareholder return performance is below peers and the index;

Oracle Corp. (ORCL):
Potential Spinoff candidates are its Hardware and Services segments;
Not currently able to build a competitive position in the cloud space;
Limited cloud metric disclosures add to investor concerns;
Underperformer on a total shareholder return basis;
Past successful track record of IT conglomerate break-ups;
Multiple expansion opportunities;
Underlyings
Merck & Co. Inc.

Merck & Co. is a global health care company that delivers health solutions through its prescription medicines, vaccines, biologic therapies and animal health products. The company's reportable segments are: Pharmaceutical, which includes human health pharmaceutical products that consist of therapeutic and preventive agents for the treatment of human disorders, and vaccine products that consist of preventive pediatric, adolescent and adult vaccines; and Animal Health, which discovers, develops, manufactures and markets animal health products, including pharmaceutical and vaccine products, for the prevention, treatment and control of disease in various main livestock and companion animal species.

Oracle Corp.

Oracle provides products and services that address enterprise information technology (IT) environments. The company's products and services include applications and infrastructure offerings. The company's cloud and license business engages in the sale, marketing and delivery of its applications and infrastructure technologies through cloud and on-premise deployment models including its cloud services and license support offerings; and its cloud license and on-premise license offerings. The company's hardware business provides Oracle Engineered Systems, servers, storage, industry-specific hardware, operating systems, virtualization, management and other hardware-related software to support diverse IT environments.

Roper Technologies

Roper Technologies designs and develops software (both license and software-as-a-service) and products and solutions for a variety of end markets. The company's operations are reported in four segments: Radio Frequency Technology, which provides radio frequency identification communication technology and software solutions; Medical and Scientific Imaging, which provides products and software in medical applications, and digital imaging products; Industrial Technology, which produces primarily water meter and meter reading technology, fluid handling pumps, and materials analysis solutions; and Energy Systems and Controls, which produces control systems, testing equipment, valves and sensors.

Provider
The Edge Group LLC
The Edge Group LLC

The Edge Group - Global Fundamental Catalyst Investing. The Edge provides investors with access to hidden corporate value from Global Special Situations using a pioneering approach to investments. Founded in 2005 by fund management and investment banking professionals to provide high quality, private equity-level research on Global Corporate Divestitures for the benefit of fundamental event-driven, growth and value-oriented investors in this difficult to track, but proven investment space.

The Edge will look to screen and analyze include Spinoffs; Reverse Morris Trusts; Squeeze Outs; Privatizations; Demutualization; Deep Discounted; Rights Issues; Rights Offering; Restructuring; Insider Purchases / Buying Change of Management / CEO Change; Deteriorating fundamentals; Post-Bankruptcy; Reorganization; Tender Offer; M&A Deals; Secondary Offering; Share Swap; Thrift Conversions; Share Buybacks; Activist; Mergers. All analyzed from a fundamental point of view.

 

 

Analysts
Alexander Korda

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