Here's an article from Barrons. I haven't been following VAR but got curious after reading it.
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March 8, 1999
Top Spin?
By Rhonda Brammer
One plus one equals three -- or a whole lot more. At least in the new math of spinoffs. A case in point: AT&T's 1996 spinoff of Bell Labs, rechristened Lucent Technologies. AT&T has appreciated some 50% since then, while Lucent has quintupled.
Little wonder, then, that investors warmly responded to Hewlett-Packard's disclosure last week that it planned to spin off its $7 billion-a-year test-and-measurement-equipment operation.
Which brings us to Varian Associates. The company, with a stock-market value of $1 billion, in April will split itself into three parts. Each of which obviously will be our cup of tea -- a small cap.
The breakup was first announced last August -- and the stock popped as high as 43. Since then, however, earnings have been disappointing and so has the action of the stock. At 34, Varian languishes near its five-year low. Painful to current shareholders, the depressed stock price might just prove an opportunity for potential ones.
Enough opportunity to merit plowing through a 700-page proxy?
You bet, insists Tim Curro, who runs a New York City-based hedge fund called Value Holdings.
He believes Varian's three parts are worth at least $50.
Based in Palo Alto, California, Varian
Associates is a high-tech firm that has
routinely spent $100 million a year on
research and development. Its three
businesses -- medical systems, instruments
and semiconductor equipment -- are all
leaders in their industries.
Varian Medical, which will trade under the stock symbol VAR, is one of the world's major suppliers of equipment for treating cancer with high-energy radiation. Products also include X-ray tubes and imaging subsystems.
For the fiscal year ending September, Curro expects sales of about $570 million and earnings per share around $1.35. At roughly one times revenues and 15 times earnings, Varian Medical would be worth $20 a share.
Varian Instruments, to trade under the symbol VARI, is a global supplier of state-of-the-art analytical and research equipment, ranging from optical spectroscopy to nuclear magnetic resonance instruments. Last fiscal year, pro forma, on sales of $558 million, it earned $21 million, or 70 cents a share. This fiscal year, Curro is conservatively looking for 75 cents, then 90 cents in fiscal 2000.
Varian Instruments is worth at least $14 a share, or 18.5 times his '99 number, he figures. "These guys have been showing significantly increasing profit margins."
The controversial part of Varian -- at least currently, since earnings are in the tank -- is Varian Semiconductor Equipment, which will trade as VSEA. Yet this division is No. 1 in ion implanters, which are used by virtually every major chipmaker in the world.
Pro forma, in the fiscal year just ended, on sales of $343 million, VSEA earned $11 million, or 38 cents a share. That's a very nasty drop from fiscal '96, when on revenues of $668 million it netted $79 million, or $2.56 a share.
Though Curro projects a small loss for this fiscal year, he believes the worst is over and forecasts 45 cents for fiscal 2000, 90 cents in 2001. And he stresses that this is a world-class company.
While Varian's medical and instrument divisions will start their new lives with decent balance sheets, VSEA will have virtually no debt and $3 a share in cash. The bottom line: VSEA is worth at least $16, Curro says.
Which gets us, yes, to $50 a share for all three pieces. |
