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 UnisourceÂ
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