Attached, please see The Spin-Off Report on XPO Logistics, Inc. (NYSE: XPO).

On December 2, 2020, XPO Logistics, Inc. (NYSE: XPO), a global transportation and logistics company, announced plans to separate its contract logistics business from its freight transportation operations, which include both asset-based less-than-truckload (LTL) and non-asset-based freight brokerage services. The new standalone company, which is expected to be the second largest contract logistics provider globally with ~212 million sq. ft. of warehouse space in 27 countries, will adopt the corporate moniker GXO Logistics, Inc. (and it is expected to initially trade on the New York Stock Exchange but ultimately explore a dual listing on the London Stock Exchange). The transaction is expected to be tax-free to shareholders and is scheduled to be completed in 2H 2021 subject to conditions, including the effectiveness of a Form 10 registration statement, which has been confidentially filed with the SEC, and receipt of final Board approval. Post-spin, Brad Jacobs, XPO’s current chairman and chief executive, will retain those positions at RemainCo, which will maintain the current corporate moniker, XPO Logistics, while also serving as chairman of GXO Logistics, where Malcolm Wilson, the current head of XPO Logistics Europe, will take the helm as chief executive.

This separation follows a strategic review that was announced in January 2020 but terminated in March 2020, given market conditions amid the burgeoning COVID-19 pandemic. At the review’s inception, XPO indicated that the potential spin-off or sale of one or more of its business lines would be explored, with the exception of its North American less-than-truckload operation, which is markedly more asset intensive than its other business lines (and essentially represents the legacy operations of Con-Way Freight, which XPO purchased for ~$3 billion in 2015). At the time, the decision to both break up the business and increase the focus on its more asset-based operation (although the truck brokerage business is non-asset based) could have been viewed by some investors as a somewhat surprising tack for Mr. Jacobs. In part due to his previous ventures, United Waste and United Rentals (along with XPO), he is known for active acquisition strategies in fragmented industries, as well as for his initial focus on non-asset-based and asset-light transportation services after assuming control of XPO in 2011. That said, the impending transaction seems rooted in management’s frustration that, despite industry-leading scale and operating performance in terms of growth, profitability, and free cash flow generation, its myriad businesses trade at persistent discounts to their most relevant peers. In pursuit of narrowing this perceived discount, XPO is seeking both to simplify the company (hence the proposed spin-off, which essentially separates its freight-moving and warehousing businesses) and to achieve investment-grade credit ratings for both RemainCo and GXO. On the latter, although the company is still in discussions with rating agencies on how to optimally allocate debt, the most likely use of near-term free cash flow, which is projected to be $600-$700 million in 2021, will seemingly be toward leverage reduction. As well, the company sees potential commercial benefits from more focused management and capital allocation, particularly with regard to each business’s specialized technology requirements, as well as from having pure-play equity currencies that could facilitate longer-term M&A. With respect to potential dis-synergies, management anecdotally suggests that $10-$20 million of potential incremental costs will likely be offset by operating efficiencies, of which management sees, on a combined basis, $700 million-$1 billion looking toward 2023-2024.

Currently, XPO operates two segments: (1) Transportation, which is primarily comprised of asset-based less-than-truckload (LTL) and non-asset-based truck brokerage services, generated ~$10.2 billion in sales and $1.06 billion in adjusted EBITDA in 2020; and (2) Logistics, which designs, implements, and manages supply chains, generated 2020 sales and adjusted EBITDA of $6.2 billion and $518 million, respectively (see Exhibit 1). On a consolidated basis, XPO currently trades at about 9.1x 2022E EV/EBITDA, whereas its most applicable LTL and truck brokerage peers trade at ~15.5x and 12.5x, respectively. Valuations for public peers in the contract logistics business are less consistent, but average ~12.0x 2022E EV/EBITDA (albeit in a wide range of 6.5x-18.0x). In that context, based on solid underlying fundamentals, which we think could support incremental upside to our current forecasts, we see the opportunity for a re-rating across XPO’s portfolio of businesses, particularly the LTL operation, which has consistently posted profitability at the high end of its peer group. In that regard, even assuming XPO’s discount to peers narrows (but does not close), an initial pre-spin fair value estimate of $159 per share, comprised of $111 per share for XPO RemainCo, which will retain the current XPO Logistics moniker post-spin, and $48 per share for GXO Logistics, is derived. Given the implied upside of more than 25% to our fair value estimate, we rate the shares of pre-spin XPO as a BUY. While our initial bias is toward the post-spin Transportation company, XPO Logistics, we think the contract logistics business, GXO Logistics, will enjoy favorable secular tailwinds from growth in e-commerce fulfilment and could ultimately see more material upside, in terms of improvements in its operating performance and the magnitude of its potential multiple expansion, over the longer term.

On December 22, 2020, IAC/InterActiveCorp. (NASDAQ: IAC) announced that its Board of Directors had approved a plan to spin off its Vimeo business. The transaction, which is expected to be tax-free to IAC and IAC shareholders, is targeted to be completed in May 2021, contingent on shareholder approval at a stockholder meeting to be held prior to the transaction’s completion, among other customary regulatory requirements.

Today, the company essentially operates as a holding company and reports under five segments: ANGI Homeservices, which owns a majority stake (83%) in ANGI Inc. (NASDAQ: ANGI); Vimeo, which operates the all-in-one video software platform of the same name; Dotdash, which encompasses a portfolio of digital publishing brands; Search, which operates Ask Media Group, primarily a provider of general search services; and Emerging & Other, which operates a variety of online platforms. On a consolidated basis, IAC reported revenue of $3.0 billion and adjusted EBITDA of $94 million in 2020. The majority of adjusted EBITDA was generated from the ANGI segment, with Dotdash representing a growing profit contribution. Additionally, IAC owns 59.0 million shares of MGM Resorts International (NYSE: MGM), representing approximately 12% of MGM shares outstanding, which are accounted for using the equity method.

On January 25, 2021, IAC announced that Vimeo had raised $300 million in equity from funds advised by T. Rowe Price Associates Inc. and Oberndorf Enterprises LLC, implying a valuation in excess of $5 billion. The $300 million was raised in two tranches, with $200 million raised at a $5.2 billion pre-money valuation, and $100 million at a $5.7 billion pre-money valuation. The $300 million equity raise followed the November 2020 equity raise of $150 million, which previously valued Vimeo at $2.75 billion. Given the equity investments made in Vimeo, following the spin-off transaction, IAC shareholders of record will own approximately 88% of outstanding Vimeo shares. It is currently expected that IAC shareholders of record will receive 1.6 shares of Vimeo for each share of IAC held at the record date.

Going forward, as a standalone entity, Vimeo looks to capitalize on its growing enterprise customer base. With over 38,000 enterprise customers, who at year-end 2020 paid fees of over $22,000 per year on average, management believes that the company is positioned to capitalize on large companies growing their accounts. Management cites that 60% of Fortune 500 companies have at least one paid Vimeo account, while less than 1% of subscribers pay more than $10,000 per year. Given its foothold within large enterprises, Vimeo’s ability to increase enterprise subscriptions appears to be the key to future growth and profitability. Vimeo highlights that the addressable market for its video solutions is expected to grow from $40 billion in 2021 to $70 billion in 2024. This includes both small- and mid-sized businesses using video for marketing as well as large enterprises using the platform for internal and external communications.

We value shares of Vimeo at 17x our 2022E revenue, a modest discount to the $5.2 billion raise valuation-implied multiple, and forecast a value of $8.1 billion, or $50 per share for post-spin Vimeo (based on 161.5 million post-spin shares outstanding). On a pre-spin basis, this implies Vimeo is worth $92 per IAC share (based on 88.8 million IAC shares outstanding).

Following the spin-off, IAC’s value will primarily be derived from the equity positions in ANGI and MGM, and its net cash position, and to a lesser degree from the operating businesses within the Dotdash, Search, and Emerging segments. Accounting for our fair value estimate for Vimeo, plus the current market prices of the publicly traded holdings in ANGI and MGM, along with an adjusted cash value of $2.5 billion (removing the $300 million attributed to Vimeo), we derive an adjusted value for the IAC stub that is negative, implying zero value for the operating businesses of Dotdash, Search, and Emerging & Other. While the ultimate value of the remaining stub’s operating businesses can certainly be debated, it is tough to reconcile a negative value being attributed to them at the current market prices of IAC and its public holdings. An argument can be made that the reconciliation would lie in our Vimeo valuation, which would have to be lowered by approximately $950 million to right the negative stub value in our exercise, requiring a two-turn decrease in our Vimeo multiple to 15x, which would still ascribe virtually zero value to the operating businesses.

On a pre-spin, sum-of-the-parts basis, we fairly value IAC at $248 per share, consisting of approximately $92 per share in value from Vimeo and approximately $157 per share in value from post-spin IAC, of which $135 per share is attributable to public holdings and the company’s net cash position. We view the current valuation as attractive in light of the near-term catalyst of the Vimeo spin-off and the resultant negative stub valuation that has emerged due to IAC’s recent share price decline, and we rate the shares as a BUY ahead of the expected May spin-off of Vimeo.

The Liberty Braves Group (NASDAQ: BATRK), one of three so-called tracking stocks of Liberty Media Corp., consists of the assets of Braves Holdings, which include the Atlanta Braves Major League Baseball (MLB) team (along with some minor league teams) and associated facilities, including Truist Park and CoolToday Park, as well as a mixed-use development project dubbed The Battery Atlanta. In our view, BATRK is undervalued relative to the sum value of its parts and may benefit from the increasing likelihood of a value-unlocking event, including the tax-efficient monetization of assets, as Liberty Media’s other holdings, namely Sirius XM Holdings and Formula 1 racing, achieve “Active Trade or Business” (ATB) status, as defined by the Internal Revenue Service (IRS), which, in our estimation, will occur in 4Q 2021 and January 2022, respectively. Considering asset, M&A, and peer valuations, value of $40 per share can be assigned to BATRK’s sports assets and $9 per share to its real estate/development assets. Accounting for attributable net debt of ~$8 per share yields a base case sum-of-the-parts value of roughly $42 per share. (Notably, our bull case valuation envisions upside to $52 per share, while our bear case of ~$26.50 per share suggests relatively limited downside.) Potential catalysts include increased fan attendance at Truist Park and/or occupancy/traffic at The Battery Atlanta amid fewer COVID-related operating restrictions in a post-pandemic environment, better than expected team performance, rising ticket prices/in-game revenue opportunities, increased contributions from local/national media, legalized gambling, and/or the tax-efficient monetization of assets. Risks include renewed health-related restrictions on mass gatherings, a decline in consumer interest in sports generally and baseball specifically, leverage, cost inflation, labor disruptions, and/or a recession.

On August 26, 2019, TechnipFMC plc (NYSE: FTI) announced that the company would separate its engineering and construction (E&C) business from its services business. The new stand-alone company, which will be comprised mainly of the Technip Energies segment, will adopt the former segment name as its corporate moniker. The transaction, which will be treated as a taxable dividend in the U.S., is subject to general market conditions, regulatory approvals, consultation with employee representatives, where applicable, and final Board approval.

The separation will be completed on February 16, 2021, via a distribution of 50.1% of shares in Technip Energies to FTI shareholders. TechnipFMC will continue to be listed on both the NYSE and Euronext Paris exchange; Technip Energies will be listed on the Euronext Paris exchange under the symbol “TE” with American Depository Receipts. FTI will initially retain a 49.9% ownership stake in Technip Energies, with plans to conduct an orderly sale of the minority stake over time with a 60-day lockup period. In accordance with the goal of exiting the ownership position, FTI has entered into an agreement with FTI shareholder BPI France SA (current 5.5% owner) to purchase $200 million in Technip Energies shares from FTI following the separation based on a 6% discount to the initial 30-day VWAP.

As a standalone company, Technip Energies (referred to by the company as “T.EN”) has been a supporter of progressive ESG operations, with a focus on delivering low-carbon technologies to the energy and chemicals industries (including LNG). The company’s technology-driven, integrated model allows it to be “feedstock agnostic,” enabling it to undertake projects in the current traditional markets (LNG, downstream, and offshore) as well as entering growth markets (hydrogen, CO2 management) and potential future markets of carbon-free portfolio expansion (green hydrogen). The focus on the transformation away from traditional hydrocarbons to more environmentally friendly applications is viewed by the company as an opportunity. During management’s investor day it was stated that “the energy transition is perceived as a risk by many of our peers. However, for Technip Energies, the market shift towards hydrogen, sustainable chemistry and CO2 management plays to our strengths. This structural change in the market is an opportunity for us. It will leverage the pioneering mindset that we have ingrained in our culture.”

Excluding the contribution of Energies, post-spin TechnipFMC will generally exhibit higher margins than the current consolidated company, yet should be expected to experience more revenue volatility versus T.EN, as the exposure to E&P company capital expenditures and the fluctuation in oil prices may have a greater impact on results, in particular within the Surface Technologies segment.  The parent company will have increased financial flexibility due to its 49.9% ownership stake in Technip Energies, which the company expects to exit over time. However, current revenue and margin trends, which are negatively impacted by current depressed levels of drilling activity, may weigh on valuation, at least in the near term. The future regulatory environment and investor focus on ESG issues also present future hurdles for TechnipFMC’s potential share price appreciation over the longer term. As for Technip Energies, the company appears capable of capitalizing on its increased focus on decreasing carbon emissions and has had success in contract wins for large scale projects. Following the separation, we would expect investors to favor Technip Energies versus the parent company based on revenue and margin trends, as well as what could be viewed as a more environmentally friendly future outlook.

On a sum-of-the-parts basis, we fairly value shares of TechnipFMC at $11 per share, consisting of $8 in value from the parent company and $3 per share derived from the spin company. Given limited upside to the current share price ($9.91 as of this writing), we rate shares of TechnipFMC as NEUTRAL ahead of the T.EN spin-off. Post-spin we fairly value shares of Technip Energies at $7 per share and TechnipFMC at $10 per share.

On July 24, 2019, before the market open, Tenet Healthcare Corp. (NYSE: THC) announced that it had completed its strategic review of the Conifer business, which began in December 2017, and had decided to pursue a tax-free spin-off of the business. Following the distribution of Conifer shares to THC shareholders, Conifer will be an independent publicly traded company. The transaction is expected to be completed by the end of 2Q 2021, and is subject to the customary closing measures, including assurance on the tax-free nature of the transaction to THC shareholders, enactment of a services agreement between THC and Conifer, the effectiveness of filings with the SEC, and final THC Board approval, among others.

Tenet Healthcare Corp. is the owner and operator of general hospitals and related facilities in about 10 states within the U.S. As of September 30, 2020, the company operated 65 hospitals, and approximately 550 outpatient centers throughout the U.S. Additionally, the company operates a subsidiary, Conifer Health Solutions, which provides “healthcare business process services in the areas of hospital and physician revenue cycle management and value-based care solutions”—essentially debt collection services via software that registers patients, authorizes insurance, and bills patients and payers for care.

THC currently operates under three reportable segments: Hospital Operations and Other, which generated $15.5 billion in revenue and $1.4 billion in adjusted EBITDA in 2019; Ambulatory Care, which generated $2.2 billion in revenue and $895 million in adjusted EBITDA; and Conifer, which contributed $1.4 billion in revenue and $386 million in adjusted EBITDA. It should be noted that Catholic Health Initiatives, a nonprofit, faith-based healthcare provider, currently owns 23.8% of Conifer.

The previously announced strategic review and subsequent spin-off announcement are part of THC’s larger restructuring plan. Announced in December 2017, the plan initially outlined cost savings of $150 million to $250 million, which were to be realized by the end of 2018. At the time of the announcement, and throughout 2018, it was suggested that THC was close to selling the Conifer business, as it was posited that hospitals that currently outsource their revenue cycle management (RCM) process would look to improve the process by bringing a software solution in-house. However, revenue growth at Conifer has been fairly stagnant, at 1.7% in 2017 and a decline of 4.0% in 2018, which likely resulted in lower than anticipated bids for the business. Management states that three companies ultimately did bid, but the terms of the offers included equity considerations rather than all-cash bids, which was the company’s preference. The planned spin-off, along with the recent acquisition of a portfolio of surgical centers from SurgCenter Development, keys on the parent company’s focus away from larger hospital operations to the higher-margin specialty care offered by its Ambulatory Care segment.

The spin-off of Conifer appears rooted in management’s attempt to unlock the value of the high-multiple Conifer business that is currently unrecognized within the larger, lower-multiple hospital/ambulatory care business. For its part, THC has largely underperformed both the S&P 500 and the S&P Health Care Index over the past five years. In general, the company has historically been compared to Community Health Systems Inc. (NYSE: CYH), HCA Healthcare Inc. (NYSE: HCA), and Universal Health Services (NYSE: UHS), which currently trade at 7.5x the consensus 2022 EBITDA estimate. Conversely, as a standalone company, Conifer would be more aptly compared to the likes of Cerner Corp. (NASDAQ: CERN), R1 RCM Inc. (NASDAQ: RCM), and other companies that provide revenue cycle management products. Conifer’s peers currently trade at nearly 11.5x the 2022 consensus EBITDA estimate. For its part, THC currently trades at 6.5x 2022E consensus EBITDA. Notably, the discount has narrowed since the announcement of the acquisition of SurgCenter Development’s portfolio of surgical centers.

Given THC’s current trading multiple below peers, it could be expected that following the separation, shares of Conifer would be awarded a higher multiple, while THC should experience slight multiple expansion as the benefits of shifting revenue sources to a higher-margin business from the Ambulatory Care segment drives company margins higher. Additionally, we would expect that as the COVID-19 vaccine rollout continues, investor interest in THC-type companies will grow in an attempt to benefit from the rebound in patient visits from the current depressed levels. For Conifer, investor interest may be high, as was seen with the spin-off of Covetrus Inc. (NASDAQ: CVET) from Henry Schein Inc. (NASDAQ: HSIC) in early 2019. If this is the case, we would be cautious on initial high trading levels beyond our fair value estimate.

Our initial, preliminary, post-spin fair value estimate for Tenet Healthcare is $29 per share. On a pre-spin basis, we fairly value THC at $57 per share. Given the implied upside to our fair value estimate, we rate shares of pre-spin THC as a BUY. It is our opinion that widening margins at the parent company, and what could be increased demand for a new application software company in the field of revenue cycle management, may result in near-term capture of the price appreciation.

Arko Corp. (NASDAQ: ARKO), an operator of U.S. convenience stores (or C-stores), reports three segments: (1) Retail, which operates ~1,335 C-stores selling both fuel and merchandise to individual customers; (2) Wholesale, which supplies fuel to ~1,600 independent dealers and agents; and (3) GPM Petroleum LP (or GPMP), which supplies fuel to Arko’s Retail and Wholesale locations (as well as other bulk purchasers, to a lesser degree).  ARKO, currently the seventh largest operator of convenience stores in the U.S., was a publicly traded company on the Israeli stock exchange for the last decade but became a U.S.-listed concern via a merger with Haymaker Acquisition Corp. II, a s0-called special-purpose acquisition company (or SPAC), in late December 2020. In our view, at ~7.5x 2022E EV/EBITDA, the shares are undervalued relative to peers/recent M&A (e.g., CASY trades at ~11x, and the average deal multiple over the last several years has been ~12.5x), as well as its organic and acquisitive growth prospects within a large, fragmented, and resilient C-store industry where the top 10 players control less than 20% of the 150,000-plus retail locations in the U.S.  In that context, even after Arko more than doubled its earnings base in 2020E, we project compound annual EBITDA growth of nearly 25% in 2021E-2022E (and suggest that growth of ~15% or more is sustainable over the longer term).  Considering financial guidance/commentary as well as peer and M&A valuations, value of $24 per share, $3 per share, and $6 per share can be assigned to ARKO’s Retail, Wholesale, and GPMP businesses, respectively, based on a blended multiple of less than 10.5x. Accounting for corporate costs and projected net debt of ~$20 per share yields a base case sum-of-the-parts value of $13 per share. Potential catalysts include better than expected growth, driven by organic initiatives as well as acquisitions, multiple expansion, a potential IPO of GPMP, and/or a takeover overture. Risks include management execution on, among other things, integration, competition/changes in consumption patterns, leverage/dilution, cost inflation, and/or economic or supply chain

Meredith Corp. (NYSE: MDP), a diversified media company with both publishing and broadcasting assets, reports two operating segments: (1) National Media (73% of June-ending F2020 sales and 64% of adj. EBITDA), which owns/operates a portfolio of media brands, including People and Better Homes & Gardens; and (2) Local Media (27% of F2020 sales and 36% of adj. EBITDA), which owns 17 local television stations in 13 U.S. states. On November 11, 2020, MDP announced that shareholders had approved a “technical” amendment to the company’s charter, which would facilitate an eventual separation of its publishing and broadcasting assets (by preserving the current rights of its dual-class shareholders). Importantly, management indicated that the measure was not in response to any specific conversation or plan, nor is there any timeline for or assurance of an ultimate transaction; rather, this was simply a prudent step to help maintain its long-term options. That said, MDP remains among the last diversified media concerns in an industry where there have been clear trends toward the separation of publishing and broadcasting assets, including transactions at Belo Corp. (NYSE: BLC), News Corp. (NASDAQ: NWSA), Time Warner (formerly NYSE: TWX), Tribune Co. (OTC: TRBAA), E.W. Scripps (NASDAQ: SSP)/Journal Communications (NYSE: JRN), and Gannett (NYSE: GCI), as well as toward consolidation. However, we do not think any transaction is likely in the next couple of years, in part due to the company’s substantial debt load, which, on a net basis, currently stands at ~$2.8 billion. Moreover, we do not discern that such a transaction would unlock any obvious incremental value from the current trading level; indeed, our estimates suggest that MDP shares could be overvalued (or at least at risk of entering a period of underperformance.) Considering industry trends and management commentary as well as peer and M&A valuations, value of $30 per share and $48 per share can be assigned to MDP’s National and Local Media businesses. Accounting for corporate costs and projected net debt of ~$63 per share yields a base case sum-of-the-parts value of roughly $15 per share (with bull/bear cases of ~$24-$7 per share).

On August 21, 2020, Allgeier SE (AEIN GR) announced that the company intends to spin off its global technology consulting and software development business into a new independent standalone publicly traded company. The new company, which is to adopt the corporate moniker Nagarro Group, is expected to begin trading in mid-December 2020. Shareholders of record will receive one share of Nagarro for each share of Allgeier held.

Allgeier SE, is an Information Technology (IT) solutions and services company based in Munich, Germany. The company was early in identifying the need for IT services, and was a first-mover in combining IT Services and IT Recruiting. By employing an aggressive acquisition strategy, having completed 20 acquisitions since the beginning of 2015, Allgeier has been able to scale quickly to become both the second largest mid-sized IT service provider in Germany and the second largest German IT recruiting company. The company’s competitive position in the German IT services market is underscored by its presence in 20 of the top 30 and 52 of the top 100 German companies.

Allgeier reported consolidated sales of €784.2 million in 2019, with EBITDA of €73.4 million, representing a 9.4% EBITDA margin. Over the past five years, Allgeier has increased revenue at a 15.2% CAGR while driving wider margins, resulting in a 30.1% EBITDA growth CAGR. 65% of revenue in 2019 was derived from Germany, 18% from the United States, and the remainder from mostly northern Europe.

The company reports revenue in four business segments: Enterprise Services (€122.6 million in 2019 revenue, €7.3 million in EBIT), Experts (€261.3 million in 2019 revenue, -€0.7 million in EBIT), Technology (€402.2 million in 2019 revenue, €47.8 million in EBIT), and New Business Areas (€7.8 million in 2019 revenue, -€3.8 million in EBIT). The Enterprise Services segment provides software products for the storage and management of company data, with a focus on data and document management, security software and business management software. The Experts segment provides flexible personnel services in Germany. The Technology segment develops software solutions for management and IT consulting, business process consulting, and SAP consulting. New Business Areas includes: 1) The Allgeier CORE Group, a specialized business unit focused on investment in organic growth and targeted acquisitions in the areas of IT and data security; 2) the Allgeier Education Group, focused on the recruitment and training of foreign specialists for the German market; and 3) Oxygen Consultancy, a Human Resources management services company with three locations in Turkey. Companies in the segment span eight locations in total, five of which are in Germany and three in Turkey.

In recent years, Allgeier has grown primarily through acquisitions, having built a broad portfolio of differentiated and specialized companies. While its Technology and Enterprise Services businesses are more similar in the areas of consulting, software development and software services, the Experts segment, with its specialized personnel services business in German-speaking regions, is a very different business model. Accordingly, the separation allows Nagarro, as an independent, full-service, global leader in software engineering and technology solutions, to capitalize on the growing demand for specialized IT services.

A major rationale for the planned separation is management’s claims that Nagarro has outgrown the need to remain under the group’s current structure. In particular we view Nagarro’s faster revenue growth rate and wider margin profile as being under appreciated within the context of the larger conglomerate (Nagarro represents over 50% of revenue and EBITDA). We would expect that, following the separation, Nagarro would experience a degree of multiple expansion to more closely resemble peers with similar growth and margin profiles, while the parent company would see multiple compression closer to historic AEIN levels, as the combined multiple has expanded in recent months (AEIN currently trades in excess of 12x forward EBITDA, above its five-year average of 9.2x).

On a preliminary, pre-spin sum-of-the-parts basis, shares of AEIN can be fairly valued at €83 per share, consisting of €23 per share in value from Allgeier, and €61 per share in value from Navarro.

With the pre-spin sum-of-the-parts fair value estimate suggesting approximately less than 5% upside from the shares’ current consolidated price (€79.80 as of this writing), the transaction appears to be priced in. It should be noted that shares of AEIN have increased in value by over 50% since the beginning of November; the S&P 500 index, for reference, has increased just over 10% during the same time period.

We note that shares may experience volatility in the near-term, given the company’s limited presence among institutional investors and very small float (6.4 million float; 11 million shares outstanding, with approximately 25% held by Carl Georg Dorschmid, the company’s Chairman of the Board and CEO). 

OneSpan (NASDAQ: OSPN), a provider of identity authentication/cybersecurity solutions, reports sales across five sub-categories that we think for all intents and purposes can be grouped under two broad headings: (1) hardware (50% of consolidated sales in 2019 but projected to be ~40% in 2020E), which provides two-factor authentication devices; and (2) software & services  (50% of revenue in 2019 but expected to be ~60% in 2020E), which provides software-based identity authentication, mobile security, and risk analytics as well as e-signature and agreement automation solutions. OSPN is in the midst of what we view as an underappreciated transition from being a provider of legacy identity authentication hardware, commonly referred to as “tokens”, which are in secular decline, toward providing a broader array of mobile and cloud identity security and fraud prevention software & services, including e-signature and agreement automation capabilities, which are growing rapidly in a vastly expanded addressable market and are largely recurring in nature.  In that context, OSPN has come under pressure from activist investor Legion Partners, currently a ~5.6% holder, which has prompted some incremental improvements in management and governance as well as in its financial disclosures. That said, OSPN has not yet acquiesced to some of the investor’s wider recommendations, which include the separation/monetization of assets: specifically, that of the hardware business, which Legion contends would accelerate OSPN’s “re-rating” toward the level of its more highly valued, pure-play software peers, as well as its e-signature asset, OneSpan Sign, which is growing at a 20%-plus annual clip and seemingly undervalued in the current corporate structure. Based on management commentary and peer and M&A valuations, OSPN’s hardware and software & services businesses can be valued at $1 per share and $32 per share, respectively. Accounting for projected net cash of $3 per share yields a base case sum-of-the-parts fair value of ~$36 per share (with bull/bear cases of $41 and $31 per share). Risks include management execution, competition, technological obsolescence, customer concentration, currency fluctuations, cyberattacks and/or prolonged recession, particularly one involving a banking/financial crisis.

Also, note that OSPN will report 3Q 2020 results on November 2^nd after the market close with a conference call at 4:30 p.m. (ET).

On December 4, 2019, after the market close, Verint Systems Inc. (NASDAQ: VRNT) announced its intention to separate its customer engagement (CES) business from its cyber intelligence (CIS) business via a tax-free separation, through a pro rata distribution of common stock of a new entity that will hold the cyber intelligence business. Verint expects to complete the separation shortly after the conclusion of its current fiscal year, which ends on January 31, 2021. The transaction is subject to certain customary conditions, including final approval of the Verint Board of Directors, receipt of tax opinions, and rulings from the Internal Revenue Service and the Israeli Tax Authority. The separation is not expected to require a shareholder vote.

In addition to the spin-off announcement, VRNT announced a new share repurchase program for up to $300 million of common stock over the period ending February 1, 2021. Repurchases are expected to be funded with the proceeds of a financing agreement with Apax Partners, a global private equity advisory firm, which has agreed to invest up to $400 million in Verint, subject to customary closing conditions. The investment will be made in the form of convertible preferred stock in two tranches of $200 million each. The first tranche closed in May 2020. The second tranche, which is expected to close following the separation (anticipated shortly after the end of Verint’s current fiscal year, ending January 31, 2021), will be made into Verint, the entity holding the customer engagement business.

Founded in 2002 and based in Melville, NY, Verint Systems Inc., with a current market capitalization of $3.5 billion, is a software analytics company specializing in customer engagement management, security, surveillance, and business intelligence applications. The company, which generated $1.3 billion in consolidated revenue in F2020, consists of two business segments: (1) Customer Engagement Solutions, i.e., call center software, which is approaching $1 billion in annual revenue (~78% of adjusted EBITDA in F2019); and (2) Cyber Intelligence Solutions, which helps organizations, primarily governments, increase security (i.e., prevent crime, terrorism, and/or cyberattacks) and is currently approaching $500 million in annual revenue (~23% of EBITDA).

In recent years, Verint’s Customer Engagement business shifted from primarily on-premises solutions to a cloud-based architecture that has resulted in significant new competition. Previously, the company enjoyed a virtual duopoly shared with Nice Systems Inc. (NASDAQ: NICE). Given the profitability disparity between Verint’s two businesses, the separation may allow investors to more easily evaluate and make investment decisions with respect to each business. To this end, the transaction represents the culmination of a long process during which Verint had already substantially separated the sales, services, marketing, product management, and R&D organizations of the two businesses. Additionally, Verint previously explored a possible strategic separation. Notably, in July 2018, the company ended takeover discussions with Israel-based NSO Group, which, based on various reports, valued the security business at approximately $1 billion. 

On a pre-spin basis, VRNT can be fairly valued at $62 per share. Post-spin, shares of VRNT and the Cyber Intelligence Business can be fairly valued at $46 and $16, respectively. Note that as of this writing, Verint has not filed a Form-10 with the SEC and has not yet disclosed pro forma financials or post-spin capitalization information. Thus, our estimates are preliminary and subject to revision as more information becomes available. For the purposes of this analysis, we assume the SpinCo (the Cyber Intelligence Business) is capitalized at approximately 3x estimated F20202 EBITDA ($280 million in net debt).

With the pre-spin sum-of-the-parts estimate implying 18% upside to VRNT’s current consolidated share price ($53 as of this writing), the transaction appears poised to unlock value. Thus, we initiate coverage with a BUY rating. For post-spin VRNT, we expect the company to maintain its leadership position in customer engagement, which provides customer interaction and workforce optimization solutions to enterprises. Additionally, we expect post-spin Verint to continue to shift to a cloud-based business model, which should result in margin expansion, generate a more stable business via a recurring revenue base, and lead to incremental valuation expansion over time. The post-spin Cyber Intelligence Business, as an independent company, will be well-positioned in a rapidly growing market poised for continued consolidation. We view both post-spin entities as attractive companies in growing markets. Shares of VRNT have declined approximately 8% year to date, versus a 6% increase in the S&P 500 over the same period. It is important to note that two institutional investors, The Vanguard Group and BlackRock Fund Advisors, own approximately 10% and 7% of the outstanding shares of Verint, respectively. If the SpinCo is excluded from those funds, the shares would likely be systematically sold without any fundamental reason (which leads to the classic source of spin-off returns), potentially resulting in near-term volatility in the post-spin shares.