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Early Analysis Ahead of Lighting Spinoff Prospectus

With Eaton Corp’s (ETN) pursuit to Spinoff its Lighting business by the end of this year, analyzing previous deals, we anticipate this transaction to show similar dynamics to other S&P 500 listed break-ups. This gives investors a helpful blueprint of how both the Parent and the SpinCo can react in the initial stages of the Spinoff. Having made certain assumptions ahead of the prospectus release (as debt transfer will be a key factor), we add ETN to our current watchlist.

The Edge Intelligence...
Announced in March 2019, Eaton Corp. Plc (ETN) is on track for its planned LED Lighting business Spinoff by the end of this year. This is based on the company’s intent to remove the lower-margin lighting business, in a pursuit for higher margins and along the way, opening up the potential for further sub-segment divestitures down the line.

Previous Spins With Similar Dynamics: At the moment, the dynamics around ETN’s Spinoff share similar characteristics with last year’s Honeywell International’s (HON) Spinoff of Garrett Motion, Inc. (GTX) and Resideo Technology, Inc. (REZI) as well as VF Corp.’s (VFC) Spinoff of Kontoor Brands, Inc. (KTB). In both of these recent cases, the Parent companies were listed (and still are) on the S&P 500 and both Parents Spun off relatively small segments within their business (leading to index pressure) as well as lower-margin businesses. Likewise, on the flipside in the first-month post-Spin, the Parent companies showed a slight outperformance versus the index.

We believe the reaction of both Parent and Spinoff from HON’s and VFC’s splits provides context for how ETN (Parent) and the Lighting Business (SpinCo) may perform once the Spinoff is complete. The Lighting business is anticipated to leave the S&P 500 and list on the S&P SmallCap 600 Index, and this pressure coupled with the undisclosed transfer of debt (estimated at $250m) will result in an initial sell-off on the Spinoff.

Post-Spin, ETN will be left with its stronger higher-margin businesses (FY18 EBITDA margin of 19.1% compared to the pre-Spin level of 18.7%), which we believe will gradually increase to 20.7% by FY20E.