Please see the attached Hidden Opportunities Report on IDT Corporation (NYSE: IDT).

IDT Corporation (NYSE: IDT), a communications and payment services company, operates three distinct segments: (1) Fintech (5% of consolidated sales in July-ending F2021 but projected to be ~7% in F2023E), which is comprised of two businesses, BOSS Revolution Money Transfer, an international currency transfer service, and National Retail Solutions (NRS), a point-of-sale (POS) payment platform for independent retailers; (2) Net2phone/UCaaS (3% of revenue in F2021 but expected to be ~5% in F2023), a unified communications-as-a-service provider of cloud-based voice, messaging, & video services to primarily small-and-medium sized business (SMB) customers; and (3) Traditional Communications (92% of consolidated sales in F2021, trending to ~88% in F2023E), which itself is comprised of several businesses, Mobile Top-Up, an airtime bundling/transfer service, BOSS Revolution Calling, a pre-paid long-distance calling service, and Carrier Services, which is among the largest wholesale carriers of long-distance “minutes”.  In our estimation, IDT, a well-managed company operating in niche/underserved markets with no debt and significant insider ownership that attracts no sell-side research coverage, is undervalued relative to the sum value of its parts, which include both fast-growing and more mature (but cash-flow generative) businesses. Moreover, IDT has a long history of proactively spinning off/monetizing businesses, with at least eight transactions (i.e., Corbina, IDT Entertainment, IDW, GNE, Straight Path, ZDGE, and RFL) having been completed between 2006-2018, and we see a high likelihood of two additional value-unlocking transactions, specifically involving the Net2phone and National Retail Solutions (NRS) businesses, being announced in 2022-2023. All told, based on management commentary, which does not include any formal guidance, as well as peer and M&A valuations, IDT’s Fintech, Net2phone, and Traditional Communications businesses can be valued at $34 per share, $7 per share, and ~$17 per share, respectively. Accounting for corporate costs and projected net cash of ~$7 per share yields a base case sum-of-the-parts fair value of $65 per share (with bull/bear cases of $71.50 and $58 per share, respectively).  Potential catalysts could include asset sales or spin-offs, better than expected growth/margins, increased corporate visibility, share repurchases, and/or M&A. Risks include management execution, competition, technological obsolescence, cyberattacks, regulations, legal liability, currency fluctuations, and/or a recession.

On April 14, 2021, after the market close, Dell Technologies Inc. (NYSE: DELL) announced plans to spin off its 80.6% ownership stake in VMware Inc. (NYSE: VMW). The planned spin-off, which is expected to be completed on November 1, 2021, is subject to the customary closing conditions, including receipt of a favorable IRS private letter ruling and an opinion from counsel that the spin-off will qualify as tax-free to DELL shareholders. DELL shareholders of record are expected to receive 0.44 shares of VMware for each share of DELL owned. Following the separation, VMW will collapse its dual-class share structure to a single class; DELL’s multi-class equity structure will remain in place.

In conjunction with the separation, VMW and DELL will enter into agreements that preserve current technology co-development as well as sales and marketing activities in order to maintain the VMware sales that have historically been generated via DELL (approximately 31% of VMware’s sales in F2021, ended January 2021). Additionally, VMware will continue to use Dell Financial Services to help customers finance solutions. At the time of closing, VMware will issue a special cash dividend of $11.5 billion (or $25.46 per share based on current VMW shares outstanding) to all VMW shareholders, including DELL. It is estimated that DELL will receive approximately $9.3 billion, which management has stated will be used to pay down non-financial services debt with the aim of garnering an investment-grade credit rating. The record date for the special VMW dividend, which is taxable, is October 29, 2021, with the payment date set for November 1, 2021.

In terms of rationale, management notes that a full separation will be beneficial to both companies, as DELL will be able to improve its balance sheet and approach its goal of an investment-grade rating by reducing its outstanding leverage ratio (i.e., net debt/adjusted EBITDA) while retaining its strong collaborative relationship with VMW. For VMware, the spin-off and collapsing of the capital structure increases the available float and potential shareholder participation in terms of index inclusion. Additionally, DELL shareholders will continue to own their proportionate share of VMW, allowing for upside participation in VMware’s future.

We fairly value shares of VMW at $167 pre-dividend payment, and $139 per share post-dividend payment. We rate pre-dividend shares of VMW at NEUTRAL, as the share price approximates our fair value. That said, we acknowledge that the separation from DELL has several benefits for VMW, including, as noted above, increased float, a simplified capital structure due to collapsing of the dual-class equity structure, and potential inclusion in major indexes, from which it is currently excluded. If VMW were included in the S&P 500, for example, for which its market capitalization certainly would qualify, the shares could see multiple expansion on indiscriminate buying pressure from rules based indexed funds in the near term that could allow for upside potential to our fair value estimate.

In our view, the underlying DELL business trades at a discount to peers given the inclusion of VMW, and to a lesser degree the inclusion of SecureWorks Corp. (NASDAQ: SCWX), which should be corrected following the spin-off. If DELL’s current market capitalization is adjusted for ownership in VMW and SCWX, and the capital structure is adjusted for the dividend received, the shares trade at approximately 5.1x our F2023 EBITDA estimate. Post-spin, we expect multiple expansion to a level that more closely approximates its peers. We apply a 7.0x multiple to our F2023E EBITDA estimate of $10.2 billion to establish an enterprise value of $71.6 billion for the underlying DELL business. Accounting for post-spin net debt of $23.5 billion, which includes the $9.3 billion received from the VMW dividend, and adding in the current market value of the SCWX ownership, we can derive a post-spin market capitalization of $49.5 billion. Based on current shares outstanding, we fairly value post-spin DELL at $65 per share.

Incorporating the 0.44 share of VMW per DELL share received in the spin-off, we fairly value pre-spin shares of DELL at $125 per share. The pre-spin fair value estimate is based on the mid-point of VMW’s current share price and our VMW fair value estimate. While this represents implied upside of only about 11%, we rate pre-spin shares of DELL at BUY, based on the thesis that the spin-off of the VMW ownership position could result in a rerating of DELL shares in fairly short order as the story is simplified, and that the shares will appear in a more favorable light to potential investors. Additionally, purchase of DELL prior to the spin-off would allow investors to participate in any incremental buying of VMW shares if the company is included in a major index, without presenting significant downside given that the current VMW trading multiple appears appropriate based on historical and peer trading levels.

On May 12, 2021, before the market open, Alliance Data Systems Corp. (NYSE: ADS) announced plans to spin off 81% of its LoyaltyOne segment, which controls the company’s Canadian AIR MILES Reward Program and Netherlands-based BrandLoyalty business, into a separately traded, independent public company, to be called Loyalty Ventures Inc. The separation is expected to be completed on November 5, 2021, after the market close, to shareholders of record as of October 27, 2021. Shareholders of record will receive one share of Loyalty Ventures for every two and one-half shares of ADS held. On November 8, 2021, Loyalty Ventures is expected to begin trading regular way on the NASDAQ under the symbol “”LYLT.”” A when-issued market for Loyalty Ventures is expected to begin on or around October 26, 2021, with Loyalty trading under the symbol “”LYLTV,”” while Alliance Data common stock will trade “”ex-distribution”” under the symbol “”ADS WI.””

The separation of LoyaltyOne is likely one of the final stages of ADS’s plan, in progress since 2018, to streamline operations. Earlier steps included the 2019 sale of the company’s Epsilon business and the January 2020 sale of Precima, which was formerly included in the LoyaltyOne segment’s reporting. In conjunction with the separation, ADS will receive a dividend from LoyaltyOne that will be used to retire debt. Additionally, over time ADS expects to monetize the retained 19% LoyaltyOne ownership stake, with proceeds being applied to debt reduction. Removal of the historically lower-margin and slower-revenue-growth loyalty business should improve the parent company’s growth prospects, while the debt retirement should allow increased flexibility for pursuing additional growth opportunities.

Looking forward, both sides of ADS’s current business are still experiencing a negative impact from COVID-19, but trends appear to be improving. Management has highlighted improvements in the AIR MILES program through 2020, while acknowledging that sales are still below pre-pandemic levels. Further, for Card Services, year-over-year credit sales and in-store brand sales also improved throughout 2020, although remaining in the negative mid-single digits. Management has issued 2021 guidance that includes consolidated revenue declines in the low-single-digits, with the lower financing revenue (i.e., lower receivables balance) being partially offset by increases at LoyaltyOne, particularly for its “”buy now, pay later”” and installment lending platform (Bread). Management expects the Card Services business to begin to see receivables growth in 2022 as consumers rebuild credit balances from pandemic lows.

Shares of Alliance Data Systems currently trade at 7.6x the consensus 2022 EBITDA estimate and 7.0x the consensus 2022 EPS estimate. Historically, the shares have averaged approximately 11x forward EBITDA estimates over the past five years. Following the separation, as a loyalty rewards-focused company, the purest play competitor is likely Points International ltd. (NASDAQ: PCOM), which currently trades at 8.2x the consensus 2022 EBITDA estimate and 32.6x 2022 consensus EPS. While this provides a limited peer set, it’s worthy to note other media marketing and analytic companies such as Nielsen Holdings PLC (NYSE: NLSN), and Quotent Technology Inc. (NYSE: QUOT) trade at approximately 8.3x and 7.9x their respective consensus 2022 EBITDA estimate. Notably, PCOM is far smaller in size than Loyalty will be in terms of revenue, with approximately $220 million annually and operates with EBITDA margins below 6% versus estimated margins of 24% for Loyalty. For its part, the parent company, post-spin, will be a much cleaner comparison to other financial services companies such as Synchrony Financial (NYSE: SYF) and Discover Financial Services (NYSE: DFS), which trade at 7.1x and 6.5 x 2022 EBITDA estimates, respectively.

Given the post-spin comparables, it would appear in the near term, the separation would not unlock significant value via multiple rerating alone. However, longer term with the entrance into the buy now, pay later market and a cleaner balance sheet, given the $750 million distribution, ADS would appear to be set up to increase its valuation multiple moving forward given the assumption of significant growth at Bread, however it is unlikely to be viewed in the same light as “”high flyers”” in the buy now, pay later space, such as Affirm Holdings Inc. (NASDAQ: AFRM) which trades at 36x 2022 estimated revenue, until a significant portion of revenue would be generated from that business.

On a pre-spin basis, we fairly value shares of Alliance Data Systems Corp. at $112 per share, consisting of approximately $16 per share in value attributable to Loyalty Ventures Inc. and approximately $97 per share in value from the post-spin parent company. Given our view that the separation in itself will not unlock value in terms of a multiple rerating, and considering the proximity of the current share price to our fair value estimate, we rate pre-spin shares of Alliance Data Systems at NEUTRAL. Following the spin-off, we would favor the parent company over the Loyalty business, as we see hurdles to a return to revenue growth at Loyalty, which may pressure margins going forward. Post-spin ADS appears better positioned to capitalize on increasing consumer spending as the economy emerges from COVID restrictions, which should result in higher receivables balances, revenue growth, and margin expansion. If post-spin ADS gains significant traction with Bread, its buy now, pay later and installment lending platform, the stock could see a rerating to a higher valuation multiple than we currently forecast.

On October 8, 2020, IBM announced a plan to separate the managed infrastructure services unit of its Global Technology Services division into a new public company via a tax-free spin-off. The separation, which is expected to be completed on November 3, 2021, is subject to the customary closing conditions, including an effective declaration of the company’s Form 10 registration with the U.S. Securities and Exchange Commission, receipt of a tax opinion from counsel, and final approval by IBM’s Board of Directors.

Shareholders of record as of October 25, 2021, will receive one share of Kyndryl Holdings Inc. for every five shares of IBM owned. IBM will retain a 19.9% ownership stake in Kyndryl, with the expectation that within 12 months of the spin-off, the company will exchange those shares for outstanding IBM debt securities. Kyndryl is expected to begin regular-way trading on November 4, 2021 on the NYSE under the symbol “”KD.””

In conjunction with the separation, Kyndryl will issue $2.9 billion in new debt, with approximately $900 million of proceeds to be transferred to IBM prior to the spin-off. KD is expecting to carry a $2 billion cash balance at the time of the transaction. Both post-spin entities are expected to pay a regular quarterly dividend, with the combined entities’ payment at least be equal to the current IBM dividend ($6.56 per share annually).

The separation makes strategic sense given the diverging needs for application and infrastructure services. In recent years, IBM has deemphasized its legacy businesses to focus on the growing cloud opportunity, in an effort to offset slowing software sales and more seasonal demand for its mainframe servers (notably, this strategy was enhanced by the $34 billion acquisition of Red Hat Inc. in July 2019). Following the separation, IBM will continue to focus on its open, hybrid cloud platform and AI (artificial intelligence) capabilities—a $1 trillion market opportunity. Given IBM’s historical position in enterprise IT infrastructure, the company’s hybrid solution offers customers the ability to leverage their existing infrastructure and mix and match private and public cloud-based offerings. In addition, the separation will allow IBM to streamline its operating model and consolidate shared services. Post-spin IBM, which will generate annual revenue of approximately $59 billion, will also transition from generating roughly half its revenue from services to generating more than 50% of sales from recurring revenue.

On a pre-spin basis, shares of IBM are fairly valued at $142 per share, consisting of $39 per share in value from Kyndryl and $103 per share in value attributable to post-spin IBM. Our fair value estimate approximates the current share price, and as such we rate shares of pre-spin IBM at NEUTRAL. Post-spin, we would favor the parent company, given its increasing exposure to higher-margin consulting services and software sales, with a growing yet still relatively small portion being derived from Red Hat. However, we have reservations about IBM’s ability to significantly grow earnings in an increasingly competitive market while retaining approximately 75% of its business in terms of revenue. Given the large revenue base, post-spin top-line growth approaching that of smaller, more nimble peers may be difficult to achieve absent further portfolio changes.

On April 19, 2021, after the market close, J2 Global Inc. (NASDAQ: JCOM) announced plans to spin off its secure data exchange business (“”Consensus””), which is primarily focused on the healthcare sector, creating an end-to-end solution for healthcare interoperability. The separation will be accomplished via a distribution of at 80.1% of the shares in the new company, which will adopt the corporate moniker Consensus Cloud Solutions Inc. The distribution is expected to be completed after the market close on October 7, 2021. The new company will trade on the NASDAQ under the ticker “”CCSI.”” Shareholders of record as of October 1, 2021, are expected to receive one share of CCSI for every three shares of JCOM held. J2 expects to retain a 19.9% ownership stake in Consensus, which the company plans to divest over time in a “”tax-efficient manner.”” Following the distribution, J2 Global will be renamed Ziff Davis Inc. and is expected to trade on the NASDAQ under the symbol “”ZD.”” When-issued trading in Consensus will begin on or about September 30, 2021, under the symbol “”CCSIV,”” with regular-way trading in CCSI and ZD beginning on October 8, 2021.

In terms of rationale, the separation will allow Consensus to adopt a differentiated growth strategy of expanding its healthcare business, while the transaction will reduce leverage at what will become Ziff Davis, as Consensus is expected to be capitalized with $800 million in new debt, with the proceeds being paid as a dividend to the parent company. Consensus is expected to have cash balance of $30 million at the time of separation. With dedicated management and industry expertise, Consensus will attempt to capture market share in the healthcare industry, while for ZD it can be expected that the enhanced financial flexibility will allow it to continue its growth-via-acquisition strategy, which has proven successful historically.

J2 Global, which describes itself as “”a leading provider of internet information and services,”” generated $1.5 billion in revenue and $616 million in EBITDA in 2020. The company operates under two main businesses: Digital Media and Cloud Services. Digital Media, which accounted for ~54% of 2020 revenue and ~49% of 2020 adjusted EBITDA, operates a portfolio of web properties focused on the technology, shopping, gaming, and healthcare markets. The digital properties generate revenue primarily from advertising and sponsorship. Well-known websites owned by JCOM include IGN, Speedtest, and Mashable, among others; altogether, Digital Media generated approximately 9.1 billion visits and 31.5 billion page views in 2020. Cloud Services, which accounted for 46% of 2020 revenue and 51% of 2020 adjusted EBITDA, provides cloud-based subscription services that include fax, cybersecurity, privacy, and marketing technology. Services include eFax, IPVanish, and eVoice, among others.

The standalone Consensus business will be comprised of the Cloud Fax business, which is currently operating within the Cloud Services segment. Cloud Fax is a leading secure data exchange platform that is increasingly focused on secure interoperability among differing systems within the healthcare industry via the company’s scalable SaaS platform. On a pro forma basis, it is expected that Consensus will generate $333-$342 million in revenue, which represents approximately 2% year-over-year sales growth, in line with the business’s five-year CAGR, and operate with an EBITDA margin of 55%. Given the high-margin profile and resultant free cash flow conversion, Consensus will carry net debt to EBITDA of up to 4x, with free cash flow being used to de-lever the balance sheet.

Following the separation, J2 Global will be focused on its vertically integrated internet platforms (tech and gaming, health, shopping, and cybersecurity) and will be able to achieve greater top-line growth, with lower margins than Consensus. On a pro forma basis, post-spin J2 is expected to generate $1.29-$1.33 billion in revenue and approximately 35% EBITDA margins in 2021. The revenue growth guidance implies ~20% year-over-year growth, fueled by both organic growth and the benefits of past acquisitions. For reference, on a pro forma basis, J2 ex Consensus has exhibited a revenue CAGR of approximately 29% since 2013. The parent company has invested $2.4 billion in more than 70 acquisitions since 2013, and it can be expected to continue an acquisition strategy following the separation.

On a pre-spin basis, we fairly value shares of J2 Global at $180 per share, consisting of $16 in value for the Consensus business and $164 in value from the Ziff Davis business. On a post-spin basis, we fairly value shares of Consensus at $38 per share, which accounts for the one-for-three share distribution ratio, and we fairly value shares of Ziff Davis at $167 per share, which incorporates the 19.9% ownership stake in CCSI valued at our fair value estimate. Given the implied upside to our fair value estimate, we rate pre-spin shares of JCOM at BUY. Post-spin, we find the investment case for Ziff Davis more compelling than that for Consensus, as the programmatic acquisition strategy ZD employs has shown successful returns over the years, a trend we expect to continue to drive mid-teens-plus revenue growth over time, at stable margins. For Consensus, on the other hand, growth will be primarily predicated on its Consensus Unite platform’s ability to capture market share in the healthcare industry, which if successful could change the perception of the company as a legacy online fax provider into more of a healthcare SaaS platform. If successful in making that shift, Consensus could prove over time to be a highly successful spin-off; however, in the near term we would expect the shares to trade at a relatively low multiple (versus JCOM and ZD) until a clearer path to market share gains emerges.

On May 27, 2021, Sulzer AG (SUN SW) announced that the company intended to spin off its Applicator Systems business into a new independent standalone publicly traded company. The new company, which is to adopt the corporate moniker medmix, is expected to begin trading on September 30, 2021. Shareholders of record will receive one share of medmix for each share of Sulzer held. In conjunction with the planned separation, medmix will look to raise CHF 200-300 million to shore up its capital structure and fund growth. The separation has already been unanimously approved by Sulzer’s Board of Directors and shareholders.

As it stands today, Sulzer operates as a leader in fluid engineering. The company specializes in manufacturing various pumps, agitators, mixing solutions, and separation and application technologies. In 2020, the company generated sales of CHF 3.3 billion, an 11% year-over-year decline, as the pandemic resulted in site, supply chain, and customer disruptions. SUN earned CHF 407 million in adjusted EBITDA, representing a 12.3% margin (a decline of 60 basis points from the prior year). In recent years the company has employed a bolt-on acquisition growth strategy, with a focus on expanding medical, water, and sustainable solutions.

The company currently operates under four segments: Pumps, Rotating Equipment Services, Chemtech, and Applicator Systems. Recently, in addition to the impact of COVID-related restrictions, the company’s sales and margins have been negatively affected by a variety of other issues. Among these, we note that the company’s profitability is largely driven by the Pumps segment, which carries lower margins, and also has experienced increased competition in the Applicator division, where beauty applicators in particular have seen increased competition resulting from social media influencers taking share from SUN’s traditional customers. Beauty is about 36% of Applicator sales.

In the company’s spin-off announcement, management cited growth in the Applicator business, which will now operate as a more focused standalone entity, as a motivation for the transaction. Given the growth-by-acquisition strategy that SUN employs, continuing to operate as a conglomerate would likely result in capital allocation decisions being made that could stifle either side of the business. In our view, the growing percentage of Applicator sales to the healthcare industry will likely allow for valuation-multiple expansion for the spin company, medmix, as a standalone company. At the same time, we view a more focused flow-control parent company as having opportunities to grow via acquisition on the back of worldwide infrastructure buildouts.

SUN currently trades at 10x the consensus 2022 EBITDA estimate. For reference, flow-control-focused peers trade at ~12x on average, albeit in a wide range, while healthcare/medical devices peers trade closer to 15x.

Following the spin-off, medmix will be a leading supplier of high-precision delivery devices across healthcare and consumer/industrial end-markets. In healthcare, the company’s products include dental mixing devices, bone cement mixing devices, and proprietary injection pens. On the consumer/industrial side, the company provides microbrushes and mixing and dispensing systems, which include application solutions for adhesives and silicone for transportation, construction, shipbuilding, and other industries. Management expects significant 2021 revenue growth on a rebound from COVID, with a longer-term target of high-single-digit revenue growth. As for profitability, 2021 EBITDA margins approximating 25% are forecast, with a return to historical >26% margins in 2022; the medium-term goal is to achieve margins of approximately 30%.

As for the parent company, post-spin SUN will continue a transition away from energy end-markets into more sustainable growth industries, including the water, biopolymers, and recycling industries. Continued sector diversification via organic and inorganic growth should result in higher revenue and margin expansion opportunities. Management has cited the potential to achieve pro forma 2021 revenue of about CHF 3 billion and operational profitability of around 9%, with a medium-term profitability target of 10%-11%.

We view both post-spin entities favorably, as we think the successful cost-containment measures (structural in nature) taken early in the pandemic left the divisions in a better position to leverage the post-pandemic sales rebound into enhanced profitability via wider margins. For the parent company, diversification away from oil & gas and into more ESG-friendly end-market applications will likely be a positive for investors.

On a pre-spin basis, we fairly value shares of Sulzer AG at CHF 151 per share, consisting of CHF 47 per share in value from the medmix business and CHF 103 per share from the post-spin parent company.

On February 16, 2021, Rexnord Corp. (NYSE: RXN) announced that it intended to separate its Process & Motion Control (P&MC) segment via a tax-free spin-off to RXN shareholders. Immediately following the distribution, the P&MC business will merge with Regal Beloit Corp. (NYSE: RBC) in a Reverse Morris Trust (“”RMT””) transaction. Following the merger, RXN shareholders will continue to own RXN, which will own 100% of the Water Management (“”WM””) segment, as well as approximately 38.6% of the new Regal Rexnord, with current Regal Beloit shareholders controlling the remaining 61.4%. The transaction is expected to be completed on October 4, 2021. Prior to the spin-off of P&MC, the segment will incur $486.8 million in debt, with the proceeds of the issuance being kept by Rexnord, and the liability ultimately transferred to Regal Rexnord upon merger consummation.

In conjunction with the transaction, RBC will issue a special dividend to pre-merger RBC shareholders to maintain the tax-free status of the RMT. The special dividend is currently expected to approximate $7 per share based on the current post-spin ownership. The dividend is needed given a significant overlap in current RXN and RBC shareholders and the SEC and IRS requirements ruling post-RMT ownership percentages. The dividend will ultimately be calculated to ensure that the transaction meets the tax-free requirements.

Following the transaction, Rexnord will change its corporate moniker to Zurn Water Solutions Corp. and is expected to trade on the NYSE under the ticker “”ZWS””, while Regal Beloit will change its name to Regal Rexnord Corp. and its symbol to “”RRX””, while remaining on the NYSE.

The potential for a transaction between the two companies was reported by Bloomberg in early January 2020 and, from a strategic point of view, appears to make sense in that the P&MC business competes directly with RBC’s motion control business, and thus the merger of the two competitors will allow the resulting company to benefit from increased scale. RBC management cites reduced cyclicality of its post-merger portfolio and $120 million in annualized cost synergies by year three ($70 million in year one) as the main benefits of the merger. As for RXN, the company will retain the higher-margin WM business (~26% EBITDA margin versus ~23% EBITDA margin for the P&MC segment) and will likely receive a rerating to trade higher as a pure-play entity.

We fairly value shares of Regal Rexnord, post-merger, at $176 per share. On a pre-merger basis, when incorporating the estimated $7 per share special dividend, we fairly value pre-merger Regal Beloit at $183 per share. With this fair value representing approximately 33% upside from the current share price, it is our opinion that investors could purchase the shares pre-merger to capture the special dividend, while we expect the trading price of RRX to increase from RBC’s current levels due to multiple expansion, to more closely approximate peers. We believe that multiple expansion is warranted based on the improved margin profile of RRX when incorporating the earnings contribution of P&MC, combined with the expectation of expanding end-markets driving sustainable mid- to- high single-digit revenue growth in the coming years. Post-merger RRX should see increased demand, which combined with an improved cost structure is expected to result in sustainable margin improvement. Factoring in cost synergies to be realized from the merger with P&MC, RBC’s earnings outlook should be viewed in a positive light. We acknowledge that cost pressures for raw materials and transportation may temper some of the margin expansion, but we expect the benefits of the merger to mostly offset inflationary pressures. As such, we rate pre-merger shares of RBC at BUY.

We fairly value shares of Zurn Water Solutions at $26 per share on a post-spin basis Incorporating the 38.6% ownership position of Regal Rexnord that will be distributed to RXN shareholders, on a pre-spin basis we fairly value shares of Rexnord Corp. at $63 per share. Given that the shares currently approximate our fair value estimate, we rate shares of Rexnord Corp. at NEUTRAL prior to the spin-off of the P&MC segment.

Please see the attached Hidden Opportunities Report on Vonage Holdings Corp. (NASDAQ: VG).

Vonage Holdings Corp. (NASDAQ: VG), a provider of communications services, operates two distinct segments: (1) Consumer (26.5% of consolidated sales in 2020 but projected to be ~12.5% in 2023E), which provides Voice over Internet Protocol (VoIP) call services to ~800,000 residential subscribers; and (2) Vonage Communications Platform or VCP (73.5% of revenue in 2020 but expected to be ~87.5% in 2023E), which is a commercially-focused provider of cloud-based communications solutions, including Application Program Interfaces (API) as well as Unified Communication (UCaaS) and Contact Centers (CCaaS) services. In our view, the market is currently underappreciating Vonage’s transition from a provider of legacy residential VoIP services, which are cash-flow generative but in secular decline, toward a fast-growing, cloud-based communications platform (CPaaS), offering video, voice, messaging, e-mail, verification and artificial intelligence (AI) solutions business customers. Moreover, while the company concluded a strategic review that maintained its current operating structure in February 2021, we think the recent involvement of sometimes-activist investor, Jana Partners, which disclosed a 2.3% (or 5.8 million share) stake in May 2021 that it has subsequently increased to almost 4% (or ~9.8 million shares), could provide an incremental catalyst for the company on a range of corporate issues, including governance and disclosure, and/or an ultimate re-evaluation of strategic alternatives, including a separation or outright take-out transaction. As well, we would note that in addition to Jana Partners, Legion Partners also holds a ~2.2% stake in VG and, per a March 2019 cooperation agreement, controls one of the company’s eight Board seats. Based on management commentary and peer and M&A valuations, VG’s VCP and legacy-Consumer businesses can be valued at $21 per share and ~$1 per share, respectively. Accounting for projected net debt of ~$2 per share yields a base case sum-of-the-parts fair value of ~$20 per share (with bull/bear cases of $27 and $13 per share, respectively).

On December 3, 2020, International Paper (NYSE: IP) announced plans to spin off its Printing Papers business. The spin-off, which is expected to be tax-free to shareholders, is targeted to be completed late in the third quarter of 2021, subject to customary conditions including the declaration of effectiveness of the company’s Form 10 filing with the SEC. IP intends to retain a 19.9% stake in the spun-off company, with the expectation that IP will ultimately monetize its ownership position to provide incremental capital to the parent company. In conjunction with the spin-off, IP expects to reduce its current dividend ($2.05 per share) by 15%-20%, while the spin company is not expected to pay a dividend.

The spin company will adopt the corporate moniker Sylvamo Corp., which is derived from the Latin words “silva” and “amo”, being defined as “forest” and “love”, respectively. Sylvamo intends to list on the NYSE under the ticker “SLVM” and is expected to complete the separation on October 1, 2021, to shareholders of record as of September 15, 2021. When-issued trading in Sylvamo is expected to develop on or shortly before the record date.

IP shareholders of record will receive one share of SLVM for every 11 shares of IP held as of the record date. In conjunction with the spin-off, it is expected that Sylvamo will incur $1.5 billion in new debt, with net proceeds being distributed to IP.

As a standalone company, SLVM will derive almost 90% of its revenue from uncoated papers, including cut size printing, copy, and writing paper, as well as offset, envelope, and forms, among others. The remaining product revenue will be derived from Market Pulp (8% of 2020 revenue), used in making tissue, printing, writing, and specialty paper, and Coated Paperboard (3% of 2020 revenue), which is used in packaging for liquids and beverage containers.

With respect to rationale, the spin-off mainly accomplishes the separation of the structurally declining paper business from the more growth-oriented packaging and cellulose fibers business. Additionally, the lower debt leverage ratios at the parent company will give IP flexibility in pursuing both internal and non-organic growth opportunities that might have been more difficult to achieve with a more levered balance sheet. However, given the relative valuations of post-spin peers, the ultimate ability to unlock value will be derived from post-spin performance over the longer term, rather than realizing more immediate value via a rerating of shares. Thus, we do not view the separation of the two businesses as a catalyst to unlock near-term value and suggest, instead, that the post-spin parent company’s ability to drive revenue and earnings is the larger opportunity for shareholders.

We fairly value post-spin shares of Sylvamo at $67 per share. In our view, the secular trends in the paper market make investing in standalone Sylvamo a difficult proposition without a significant margin of safety to our fair value estimate. It can be expected that upon distribution, historical shareholders of IP would exit the position in Sylvamo and would favor holding the parent company in view of the growing market for the parent’s remaining business. Additionally, the impact of Sylvamo’s lack of a dividend should not be overlooked, as investment mandates may result in indiscriminate selling. According to Bloomberg, approximately 39% of IP shares outstanding are held within portfolios related to dividends. Further, at its estimated market capitalization, Sylvamo is not likely to be included in the S&P 500. Given IP’s retained 19.9% ownership stake in Sylvamo, and taking an average of valuation exercises, we fairly value shares of post-spin IP at $63 per share.

On a pre-spin basis, shares of International Paper Co. are fairly valued at $69 per share, consisting of approximately $61.50 in value from post-spin IP and approximately $7.50 in value from Sylvamo. Although our fair value estimate represents roughly 16% potential upside from the current share price, we assign a NEUTRAL rating to pre-spin IP. Our hesitancy to recommend pre-spin IP shares is rooted in the belief that shares of Sylvamo will likely come under selling pressure in initial trading, which would likely erase any near-term upside potential implied by our fair value estimate. Post-spin, we would favor the parent company’s prospects given the current demand dynamics and its ability to pass through price increases that are expected to largely offset higher costs for raw materials and transportation.

Please see the attached Hidden Opportunities Report on Encompass Health Corp. (NYSE: EHC).

Encompass Health Corp. (NYSE: EHC), a healthcare services provider, operates two distinct business segments: (1) Inpatient Rehabilitation (~77% of sales and ~83.5% of adjusted EBITDA in 2020), which operates 138 inpatient rehabilitation hospitals; and (2) Home Health & Hospice (~23% of revenue and ~16.5% of EBITDA), which operates a network of 323 home health and hospice agencies/locations. In December 2020, shortly after JANA Partners disclosed a ~1.8% passive stake in the company, EHC announced it was exploring strategic alternatives for its Home Health & Hospice (HH&H) business, including a full or partial separation via initial public offering (IPO), spin-off, merger, sale or other transaction. We sense that, at least initially, most investors presumed a sale was in the offing, given the announced retirement of the HH&H segment’s chief executive in April 2021 as well as other anecdotal indications. That said, we think that recent executive appointments, among other things, suggest the Board’s inclination has shifted toward a spin-off, which, with the stock trading at 9.5x 2023E EV/EBITDA, we estimate could unlock significant value. Besides a spin-off (or perhaps in conjunction with one), we see an interesting opportunity for EHC’s HH&H assets to potentially be teamed with those of Humana, via a merger or joint venture. To that end, HUM recently consolidated its ownership of Kindred at Home and indicated that it intends to maintain only a minority interest in its hospice & community care operations. (Notably, we expect an update after the market close on July 27, when EHC reports 2Q 2021 earnings). Longer term, we think a standalone IR unit’s significant real estate ownership could potentially provide fodder for an ancillary sale-leaseback transaction.   Based on management commentary as well as peer and M&A valuations, value of $104.50 per share and $39.50 per share can be assigned to EHC’s Inpatient Rehabilitation and Home Health & Hospice businesses, respectively. Accounting for projected net debt, including minority interest, of ~$43 per share yields a base case sum-of-the-parts fair value of ~$101 per share (with bull and bear cases of $126 and $75). Potential catalysts include a spin-off and/or merger, better than expected growth/margins/FCF, buybacks, or acquisitions. Potential risks include execution, including patient mistreatment, competition, regulation, cost inflation, and/or budget constraints in a recession.