VVV announced it is looking at a separation of its Retail Services (Valvoline Instant Oil Change-VIOC) and its Global Products business. We were long VVV in 2019 at $17.45 for about a 30% return making the call that VIOC should be spun off into its own entity that would unlock value. VIOC is a quality growth asset, while the old Core NA (plus international now = Global Products) was faltering scaring away incremental buyers of the better asset that would soon become the majority of company EBITDA. We got lots of pushback. The company changed its tune often, citing it used cash from Core NA to grow VIOC (even though capital markets would happily do that), then citing an internal accounting benefit, then the power of vertical integration. Investors were worried about the lower upside given the internal transaction of oil sold at cost to VIOC, plus the risk of Core NA continuing to weaken, and surprisingly thinking nobody would want to own that cash cow. Well now Global Products has recovered some of its losses (as we thought it would), while VIOC has continued its powerful growth trajectory, and the company is now ready to pursue the separation to drive valuation upside.
Below is our take on valuation. The question marks are how much incremental corporate is needed, and how will the internal transaction be handled? It could mean some EBITDA shift, or perhaps a structure could be put in place where both entities share production capabilities. We are assuming a $50mm shift in the “With Shift” scenario and we are assuming $40mm in incremental corporate costs with the total evenly split between the two companies in both scenarios. We think VIOC deserves a high multiple, at least high teens and likely around 20x given the long term growth trajectory and retail investor boxes it checks. How many retail names are growing stores, should be growing stores, still has significant unit growth runway, comping up (in this case +HSD to +LDD), is sheltered from Amazon disruption, has low macro cyclical risk, with franchising optionality? Not many. Retail names that can do all of that often trade higher than 20x EBITDA. On Global Products business, we think something around 8x is probably right, the business could be moderately over-earning after cost cutting and some share claw-back after the 2018/19 strategic changes. So we’ll give it a discount to other chemicals CPG peers that tend to be in the 10x-12x range.
All in that gives us about 22% upside to $42.26 to our fair value, with upwards of 40% upside on bull case multiples.
