BorgWarner Announces Spinoff of Fuel Systems and Aftermarket Businesses; $78 FVE Unchanged

Narrow-moat-rated BorgWarner intends to spin off its fuel systems and aftermarket businesses to shareholders by the end of 2023. Management expects the spinoff to be tax-free for U.S. federal income tax purposes. The firm did not provide specifics about NewCo capitalization, only saying the spinoff would have moderate leverage and solid liquidity. Management also said NewCo would have a double-digit operating margin profile enabling “solid free cash flow.” While the spinoff is contingent on board of directors approval, U.S. Securities and Exchange Commission filing, receipt of a tax opinion, and certain regulatory approvals among others, we think the transaction will be completed. Our unchanged $78 fair value estimate reflects the combined enterprise value of BorgWarner and NewCo. While we do not have definitive information regarding the spinoff, our initial rough standalone fair values are $60-$65 for BorgWarner and $13-$18 for NewCo, assuming shareholders receive one share of NewCo for every share of BorgWarner.