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This Spin-off Has Proven Lucrative for Shareholders, Icahn Enterprises LP (IEP)

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In mid-January this year, CVR Energy, Inc. (NYSE:CVI) completed the spin-off of its refining subsidiary. Known as CVR Refining LP (NYSE:CVRR), the spun-off firm consisted primarily of CVR Energy, Inc. (NYSE:CVI)’s downstream refining and marketing assets. Although the spin-off was widely viewed as a success, only 16% of CVR Refining LP (NYSE:CVRR)’s shares exchanged hands during the process.

CVR Energy retained the bulk of the company’s float and recently closed a secondary offering that saw the offloading of another 10% of its shares. In the wake of these two transactions, CVR Energy, Inc. (NYSE:CVI) owns about 73% of CVR Refining and has reserved the right to execute further offerings or distributions as the market permits.

CVR Energy, Inc. (NYSE:CVI)

This situation is interesting in several ways. First, it should be noted that these companies operate as subsidiaries of buyout giant Icahn Enterprises LP (NASDAQ:IEP), and have garnered considerable favor with activist investor Carl Icahn. Moreover, these companies have performed admirably since the spin-off. These, and other factors should entice investors to look more closely at these two firms.

For clarity, the remainder of this article will refer to CVR Refining LP (NYSE:CVRR) as “Refining” and CVR Energy as “Energy.”

Quick comparison: CVR Refining, CVR Energy, and Icahn Enterprises

Refining and Energy operate in clear niches within the broader energy sector. Refining owns and manages the Coffeyville and Wynnewood refineries in the mid-continent region of the United States and maintains several hundred miles of distribution pipelines to bring raw materials to these facilities. Energy engages in the production and distribution of a variety of petroleum-based fertilizer products as well as volatile organic compounds that have a range of industrial applications. Meanwhile, Icahn Enterprises LP (NASDAQ:IEP) owns both of these firms and specializes in leveraging minority and majority stakes in publicly traded companies.

Refining and Energy are nearly identical in size. The former company has a market capitalization of $4.5 billion and had gross 2012 revenue of $8.5 billion. The latter enjoys a market capitalization of just under $6 billion and saw gross 2012 revenue of about $9 billion. Meanwhile, Icahn Enterprises LP (NASDAQ:IEP) has a market capitalization of $8.5 billion and total revenue of $18.3 billion.

These companies are all profitable. In 2012, Refining and Energy posted respective profit margins of 10.5% and 6.4%. Icahn had a somewhat narrower buffer of around 3.3%. As a leveraged buyout specialist, it should be no surprise that Icahn Enterprises LP (NASDAQ:IEP) has about $4 in debt for every $1 in cash on hand. In comparison, Energy has $679 million in debt and about $1 billion in cash. Refining has a debt load of just over $550 million and a cash hoard of around $525 million.

How the spin-off happened

Due to unexpected demand from the investment community, the size of this spin-off was increased shortly before its execution. In the end, Energy distributed about 24 million Refining shares at an offer price of $25 per share. The new company’s shares opened at $25.50 and provided investors who had secured part of the original IPO with a 2% premium for their troubles.

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