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Hedge Funds Eying Delphi Automotive Spinoff

Stephen J. Errico of Locust Wood Capital Advisors, up 10% year to date, sees value in a forthcoming spin-off that Glenview Capital’s Larry Robbins also noticed. The New York-based Long / Short hedge fund, touting his investment ideas in an October 10 letter to investors reviewed by ValueWalk, also likes the “free option” in an energy stock and several forthcoming acquisitions.

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Delphi Automotive is unlocking value in its high-tech offering

In a market that “is not inexpensive,” Locust Wood Capital Advisors is looking for special situations that generate value, much of it based on mergers and acquisitions or other financial engineering tactics that unlock investor value.

There will be a spinoff occurring this March 2018 that is in some respects a tale of our times. When Delphi Automotive points its legacy powertrain production business from the forward-looking Electrical and Electronic Architecture division, it is the story of a rust-belt manufacturing operating and its transformation into the new world of autonomous driving and artificial intelligence.

This is on the mind of Errico as he eyes value in the spinoff.

While both are “worthy investments,” it is Aptiv, the technical engineering spinoff, that is involved in software and system used in autonomous cars, that is getting most of the attention. Here Locust Wood likes the profit margin expansion and expected “double-digit (earnings per share) growth” that is expected to continue for the next three to four years. Aptiv is expected to earn $5.50 per share next year and $6 in 2019, with the firm expected to trade at $105 in the next 18 months.

This doesn’t diminish the less sexy powertrain business that sells parts to the likes of General Motors. Errico thinks it could generate nearly $1.70 in earnings per share, which effectively translates into $15 additional added to the current share price. Currently, the combined company trades at $99 per share, but Errico thinks this could move to $120 when both parts of the company are differently valued, a process that could start with the spinoff.

That might seem like a “free option,” purchasing one company but getting two in a spinoff, but the freebie is from of activist investor Paul Singer.

Locust Wood Capital - Getting a "free option" in NRG Energy spinoff

With NRG Energy, a company under pressure by activist investors Paul Singer’s Elliott Management and John Wilder’s Bluecape, Errico sees a “free option” on the stock.

NRG made a third-quarter announcement that the company was spinning off 60% of the company’s owned commodity assets including its entire renewables portfolio. This will have multiple downstream effects. Among them, the move is expected to take out $800 million in cost out of the business over the next three years. Errico thinks if the company proceeds with its plan the stock is “worth $30 at a minimum over the next 12 months,” with upside to $40 in two years.

Other companies Errico likes include US-based payment processor Vantiv, who is in the midst of a “transformative merger” a British credit card processor. “This deal makes strong strategic sense as it brings together the best of both companies and creates the #`1 global merchant acquirer with close to 25% market share.”

Errico also likes to buy companies on a drawdown, which includes Dan Loeb's new favorite, Dover Corp, “a higher-quality multi-industrial company that has been pressured by the recent down cycle in oil prices.” He sees a number of catalysts driving the stock price higher in the next 12 months, including a switch in accounting systems and a spinoff of the energy business. This could lead to “more aggressive capital deployment.”

Locust Wood Capital had a big profit off of a SPAC called Silver Run Acqusition Corp II (SRUN), buying at $10 and selling at $17 a share.