NN, Inc. (NASDAQ: NNBR), a diversified industrial/engineering conglomerate, operates three segments serving distinct end-markets: (1) Mobile Solutions (35% of 2019E consolidated sales and ~25.5% of adj. EBITDA); (2) Power Solutions (~22.5% of sales and 21.5% of adj. EBITDA); and (3) Life Sciences (42.5% of 2019E sales and 53% of adj. EBITDA).  On November 7^th, NNBR disclosed an operational, financial, and strategic review, which could result in, among other things, a sale of all or part of the company. To that end, we estimate value could be unlocked by the tax-efficient monetization of assets, specifically the Mobile Solutions division, which would improve the company’s leverage, growth, margin, and cash flow profiles while eliminating the company’s perceived over-exposure to the automotive market (and revealing its more prominent focus on the life sciences, medical, and aerospace markets). Notably, the company’s internal review comes amid significant deterioration in its stock price (down ~60% since September 2018 versus a 6.0% decline in the Russell 2000) as well as pressure from activist investor Legion Partners, which owns ~9% of the shares and whose involvement has precipitated the refreshment and declassification of NNBR’s Board, in addition to the appointment of a new chief executive (CEO) and chief financial officer (CFO). Considering financial commentary, peer valuations, and discounted cash flows, value of $6 per share, $7 per share, and $24 per share can be assigned to NNBR’s Mobile Solutions, Power Solutions, and Life Sciences businesses, respectively. Accounting for corporate costs and projected net debt of ~$26 per share yields a sum-of-the-parts value of $11.50 per share. Potential catalysts include the separation/monetization of assets, an improved capital structure, and/or a potential inflection in profitability and cash flow. Risks include management execution, leverage, a lack of financing availability, tariff escalation, competition, currency, and/or a recession.

On May 9, 2019, TiVo Corporation (NASDAQ: TIVO) announced plans to spin off its Product business from its IP Licensing business. Throughout the separation process, the Board of Directors will continue to be open to strategic transactions for each business that could create additional shareholder value, and the Board is actively engaged in discussions with parties interested in each of the businesses. The separation, which is expected to be completed in April 2020, is subject to final approval from TiVo’s Board of Directors.

TiVo, headquartered in San Jose, CA, is comprised of the September 2016 acquisition of legacy TiVo Inc., which has origins dating back to the development of the first digital video recorder (DVR) in the late 1990s, by Rovi Corporation, which at the time made technology used in electronic TV guides, DVRs, and video-on-demand services.

TiVo reports two distinct business segments: (1) Product, which offers its company-developed media navigation (or “discovery”) platform and component technologies, including interactive program guides and digital video recording, primarily to multi-channel video service providers (i.e., cable operators) and consumer electronics manufacturers; and (2) Intellectual Property Licensing, which licenses a portfolio of ~5,500 patents to pay-television and over-the-top (OTT) content providers as well as mobile phone and consumer electronics manufacturers. 

TiVo offers a suite of component technologies that can be integrated into customers’ internally developed platforms or deployed as integrated TiVo solutions for video service providers or retail markets. As of December 31, 2018, there were an estimated 23 million households worldwide utilizing TiVo’s Platform Solutions. For the full year 2018, TIVO’s Product segment generated $401 million in revenue, with a large component of recurring revenue. Product generated 58% and 51% of total revenue for the years ended December 31, 2018 and 2017, respectively.

TiVo’s IP Licensing business, which consists of Rovi’s and TiVo’s patent portfolios, encompasses approximately 5,500 issued patents and pending applications worldwide. Licensees include traditional and new media video providers across pay-TV, mobile, consumer electronics, and social media markets. For 2018, this business totaled $295 million, with a high percentage being recurring revenue.

Shares of TIVO currently trade at 8x 2019E consensus EBITDA, a discount to peers in similar industries and end-markets, which are generally trading, on average, at 11x 2019E consensus EBITDA. The discount is owing to a combination of factors, including a broad misconception of TiVo as a consumer-focused hardware company (as opposed to its actual software and IP focus) and transitory declines in financial performance (due, in part, to accounting changes and expected/planned declines in some legacy revenue streams). Additionally, the shares have been affected by concerns surrounding the company’s ongoing patent litigation with Comcast (NASDAQ: CMSCA), the second-largest pay-TV provider, whose IP and metadata license agreements expired in March 2016 and September 2017, respectively (TiVo claims numerous patent infringements). The ultimate resolution can be viewed as a source of upside optionality, as it would likely involve a sizeable catch-up payment and could result in approximately $60 million of incremental annual licensing revenue from CMSCA’s ~22 million subscriber base. Year to date, TIVO shares have declined approximately 22%, versus a 24% gain for the S&P 500 over the same period. 

On a pre-spin, sum-of-the-parts basis, TiVo can be fairly valued at of $7.95. Post-spin, assuming a 1:1 distribution ratio, TiVo and IP Licensing can be fairly valued at $1.78 and $6.17, respectively. With the pre-spin sum-of-the-parts fair value estimate suggesting approximately 8% upside to TIVO’s current share price ($7 as of this writing), the shares appear to be approaching a full valuation for the transaction and as such, we are initiating coverage with a HOLD recommendation. We see several potential risks to the story—including litigation risk with Comcast, the nation’s largest cable operator, uncertainties regarding long term growth rates internationally, the secular risks associated with a declining addressable market of cable subscribers, and the company’s ability to successfully transition into an IP-based business model. Given that pro forma financials, capitalization details, and distribution ratios have not been announced as of this writing, we note that our fair value estimates are subject to change.

Online Spin-Off Tracker: Real-Time Tracking of All Spin-Off Announcements, Form-10 Filings, and Recently Completed Spin-Offs, with market prices compared against The-Spin-Off Report’s fair value estimates to highlight investment opportunities.

On March 14, 2018, Prudential plc (PRU LN) announced plans to demerge its U.K. and Europe business, M&G Prudential, from its international operations, resulting in two separately listed, publicly traded companies, both of which will be headquartered and listed in London. The international business, Prudential plc, a leading international insurance group focused on high-growth opportunities in Asia, the U.S., and Africa, will be led by current group Chief Executive Mike Wells. The U.K. business will be led by its current Chief Executive John Foley. Timing of the demerger is subject to a number of factors, including completion of the sale of £12 billion in U.K. annuities assets to Rothesay Life, as well as the transfer of the company’s Hong Kong insurance subsidiaries to Asia from Britain, the latter of which is subject to regulatory approval. 

On completion of the demerger, shareholders will hold interests in both Prudential plc and M&G plc. Shares of M&G are expected to begin trading on the LSE on October 21, 2019, under the symbol “MNG”. M&G will pay a 2019 ordinary dividend of £310 million and a one-time special dividend of £100 million, equivalent to 3.85 pence per share. Prudential expects to declare a second interim ordinary dividend of £510 million, equivalent to approximately 19.6 pence per share.

Prudential plc, with a market capitalization of £36.2 billion and £657 billion in total funds under management (as of December 31, 2018), provides a wide range of insurance investment products and services. The company reported consolidated 2018 operating profit (after-tax) of £3.0 billion. The separation of the company’s European operations has been under consideration for several years, as Prudential, like its insurance peers, has been struggling to reduce exposure to capital-intensive insurance products following the introduction of rigorous European solvency rules two years ago, while also seeking ways to deal with growing fee pressure. By spinning off savings- and investment-focused M&G Prudential, Prudential plc can turn its attention to its more profitable life insurance and asset management businesses in the rapidly expanding markets of Asia and Africa and the U.S., all of which are less tightly regulated than Europe. Notably, Prudential currently derives about a third of its consolidated earnings from Asia, which is benefiting from an expanding middle class and growing insurance coverage. Household wealth in Asia is predicted to rise from $53 trillion to $78 trillion over the next five years, creating a substantial growth opportunity for asset managers and insurers. By moving the legal entity for its Hong Kong insurance subsidiaries to Asia from Britain, the company will further reduce its exposure to more rigorous European capital rules.

Based on an analysis of projected earnings and dividend yield, a pre-spin sum-of-the-parts fair value estimate of £16 for Prudential plc can be derived. Post-spin, shares of Prudential plc and M&G plc can be fairly valued at £10 and £6 per share, respectively, based on approximately 2.6 billion post-spin shares outstanding, representing a 1:1 distribution ratio. With the pre-spin fair value estimate approaching the current share price (£14 as of this writing), the transaction does not appear likely to unlock meaningful near-term upside. Accordingly, we do not recommend the pre-spin shares for purchase and initiate coverage with a HOLD recommendation. In particular, we view the current declining interest rate environment as likely to pressure earnings in the near term, owing to reduced income from the company’s interest-bearing instruments, resulting in a potential negative impact on Prudential’s 12%-14% ROE guidance. For post-spin Prudential, new entrants in the pension risk transfer market are likely to result in price competition, which may impact the company’s market share. Equity and credit market fluctuations will also affect shareholders’ returns. Other key risks include the potential for lower growth and returns in the U.S. and international businesses, and higher than anticipated capital deployment.

Conduent Inc. (NYSE: CNDT), a provider of outsourced business process (BPO) services, operates 11 reportable business lines across three broader operating segments: (1) Commercial Industries (54% of consolidated continuing sales and 49% of adj. EBITDA in 1H 2019); (2) Government Services (29% of sales and 38% of adj. EBITDA in 1H 2019); and (3) Transportation (17% of continuing sales and 13% of adj. EBITDA in 1H 2019). Conduent, which was spun off from Xerox in January 2017, is in the early stages of a strategic and operational review amid pressure from activist investor Carl Icahn, who controls roughly 18% of the shares (and has designated 3 of CNDT’s 9 Board members). In our view, the potential strategic options presented to CNDT’s new interim CEO include the spin-off/sale of an entire segment (e.g., Transportation), the piecemeal monetization of individual business units (e.g., HR Services, Government Healthcare, Payments), as well as a sale of the entire enterprise. While the asset monetization option could potentially unlock the greatest value, we view a segment spin-off/sale as the most attractive when factoring in potential timing/execution risks. An outright sale of Conduent would also likely be a favorable outcome for shareholders, although we perceive a dearth of natural buyers given the diversity of CNDT’s business.  In any event, we think many of CNDT’s assets have significant strategic value, which, if unlocked, could offer attractive upside from current levels. Considering financial commentary as well as peer and M&A valuations, value of $15 per share, $11 per share, and $7 per share can be assigned to CNDT’s Commercial, Government, and Transportation businesses, respectively. Accounting for corporate costs and net debt of ~$25 per share yields a sum-of-the-parts value of $8 per share, reflecting a well-below-peer multiple of ~7.0x.  (For context, the bull and bear cases stand at $10 and $6 per share, respectively).  Potential catalysts include the spin-off/sale of assets, a go-private/LBO transaction and/or improved operational execution. Significant risks include incremental business deterioration, due to uncertainty, competition, execution or recession, and leverage.

On May 6, 2019, after the market close, The Ensign Group Inc. (NASDAQ: ENSG) announced that it planned to spin off its home health and hospice businesses. The spin entity, to be named The Pennant Group Inc., will include Ensign’s home health and hospice operations, substantially all of Ensign’s senior living operations, and Ensign’s mobile diagnostic and clinical laboratory business. Pennant has applied to list its shares on the NASDAQ stock market under the ticker symbol “PNTG”. The post-spin parent company, The Ensign Group Inc., will include transitional and skilled services, rehabilitative care services, healthcare campuses, post-acute-related new business ventures, and real estate investments.

The spin-off, which is tax-free to ENSG shareholders, is scheduled to be completed on October 1, 2019. Shareholders of record as of September 20, 2019 will receive one share of PNTG for every two shares of ENSG owned. Trading in the “when-issued” market is expected to begin on or about September 19, 2019, with shares of Pennant trading under the symbol “PNTGV” on the NASDAQ. The transaction is still subject to the receipt of a tax opinion from counsel, effectiveness declaration of the Form 10 filing by the SEC, and Pennant’s stock being accepted for listing on the NASDAQ. Regular-way trading is expected to begin on October 2, 2019.

The Ensign Group Inc. (NASDAQ: ENSG), incorporated in 1999, is the owner and operator of non-acute healthcare facilities in the U.S. that offer skilled nursing, assisted living, home health, hospice, home care, and ancillary services. Skilled nursing, assisted living, and rehabilitative care services are provided via 254 skilled nursing and assisted living facilities, with approximately 20,700 operational skilled nursing beds and 5,900 senior living units.

Post-spin Pennant becomes a publicly traded pure-play home health and senior living company and will consist of 62 home health and hospice agencies, 51 senior living operations, and mobile diagnostics and lab operations located across 13 states. Pennant anticipates that 23 of the senior living assets will remain subject to leases with third-party landlords. In addition, Pennant will operate 28 senior living communities pursuant to long-term triple-net leases with Ensign subsidiaries. Daniel Walker, President of Ensign’s Cornerstone (home health) subsidiary, will become the Chairman, CEO, and President of Pennant following the spin-off. Ensign’s transitional and skilled services portfolio, as well as its rehabilitative care services, health care campuses, post-acute new business ventures, and the company’s existing owned real estate holdings, will continue to operate as The Ensign Group. One-time separation costs are expected to approximate $14 million. As an independent company, Pennant expects to issue $30 million of debt and have a cash balance of $5 million. Proceeds from the debt offering will be used to fund a dividend to Ensign in connection with the spin-off.

Over the course of ENSG’s history, the company has employed a growth-via-acquisition strategy. The company has completed numerous acquisitions in which the purchased properties are underperforming, with Ensign transforming the targets into market leaders, resulting in improved financial performance (revenue and profitability). Owing to these acquisitions, ENSG’s revenue has increased at a CAGR above 15% over the past ten years, with EBITDA more than doubling in the same period.

Going forward, both companies will continue the growth-via-acquisition strategy. Management has commented that they have purposely kept dry powder to aggressively make acquisitions in what they believe is an increasingly attractive buyers’ market. Pennant’s ability to find and complete attractive acquisitions and subsequently improve profitability will be the key driver for the spin company’s earnings growth prospects. As for ENSG, its management has a solid track record of acquiring properties and improving operational results to widen profitability at its properties.

Overall, the outlook for both post-spin companies appears to be positive, for two main reasons. First, the aging demographics of the U.S. and increasing focus on controlling health care costs suggest the existence of a steady supply of customers for the parent company. Second, the majority of independent operators of both skilled nursing facilities and home health and hospice operators continue to be small “mom and pop” operators, thus providing an ample pipeline for future acquisitions.

On a sum-of-the-parts basis, shares of ENSG are assigned a fair value estimate of $50 per share, incorporating current net debt of $246.6 million and 53.4 million shares outstanding (see Exhibit 16). The fair value estimate consists of $8 per share in value from PNTG’s operations and $47 per share in value from post-spin ENSG’s operations. On a post-spin basis, shares of Pennant are fairly valued at $15 per share based on the above valuation exercises and a one-for-two share distribution ratio. Post-spin ENSG shares are fairly valued at $47 per share. Given minimal upside to the current share price, shares of ENSG are not recommended for purchase prior to the spin-off of Pennant. Following the separation, we would look for a sell-off in the smaller spin company, offering opportunities to take positions in the fast-growing Pennant Group. Given our expectations that PNTG will be far smaller in market capitalization (under $500 million versus above $2.5 billion) it could be expected that holders may exit their positions, providing attractive entry points. We would anticipate that management’s history of smart acquisitions and ability to improve margins at acquired properties would continue at PNTG and offer a compelling earnings growth story going forward, however we would remain cautious in the event of interest rate increases as a reversion to the mean multiple may provide downside risk.

Verint Systems Inc. (NASDAQ: VRNT), a provider of primarily software solutions, operates two distinct business segments: (1) Customer Engagement Solutions (~65% of sales and ~77% of adjusted EBITDA in January-ending F2019), which allows clients to take an enterprise approach to improving customer service; and (2) Cyber Intelligence Solutions (~35% of revenue and ~23% of EBITDA), which helps organizations, primarily governments, increase security (i.e., prevent crime, terrorism and/or cyberattacks).  VRNT’s two businesses both broadly provide so-called “actionable intelligence” solutions, offering clients the ability to collect/capture large amounts of structured and unstructured data, analyze the information (utilizing, among other things, predictive analytics and artificial intelligence), and ultimately produce insights that can be readily digested/deployed by decision-makers. That said, the segments have little in terms of operational/financial synergies, serve distinct markets/customer bases, have divergent growth/margin profiles, require differing R&D priorities, and, based on their respective peer groups (and sector M&A), seemingly trade at discounted valuations. In fact, as part of an F2017 initiative, VRNT took steps to provide CES & CIS with additional autonomy and the “operational flexibility and agility” necessary to drive growth in their respective markets. In that context, while the CIS business is somewhat “lumpier,” we think it is gaining the scale/diversification needed to operate independently (or potentially be merged with a strategic competitor), which we estimate would unlock value. Notably, at a recent investor conference, VRNT’s CFO conceded that a separation could be “just a matter of time.”  Based on management commentary, peer and M&A valuations, as well as discounted cash flows, value of $56 per share and $15 per share can be assigned to VRNT’s CES and CIS businesses, respectively. Accounting for projected net debt of ~$2 per share yields a base case sum-of-the-parts fair value of roughly $70 per share. Potential catalysts include the separation/monetization of assets, better than expected growth/margins, FCF generation, share repurchases, and/or tuck-in acquisitions. Potential risks include execution, particularly on the cloud evolution, integration, competition, technological disruption, cost inflation, currency fluctuations, geopolitical instability, and/or budget constraints in a recession.

On March 1, 2019, Eaton Corporation plc (NYSE: ETN) announced plans to spin off its lighting business, part of its Electrical Products segment. The transaction, which will be tax-free to shareholders, is expected to be completed by the end of 2019.

Eaton, headquartered in Dublin, Ireland,  is a diversified power management company that provides energy-efficient solutions for electrical, hydraulic, and mechanical power. It operates through five segments: Electrical Products; Electrical Systems and Services; Hydraulics; Aerospace; and Vehicle. (A sixth segment, eMobility, was added in 1Q 2018.) The company generated 2018 sales of $21.6 billion. The lighting business, a leading provider of LED lighting and control solutions serving customers in commercial, industrial, residential, and municipal markets, generated 2018 sales of $1.7 billion.

Despite a recent recovery in its Hydraulics business, Eaton’s organic revenue growth and margins have lagged industrial peers such as Honeywell International Inc. (NYSE: HON), Parker-Hannifin Corp. (NYSE: PH), Schneider National Inc. (NYSE: SNDR), and Emerson Inc. (NYSE: EMR). Over the past five years, the company has suffered from negative top-line growth, owing to weaker demand for its power management products, largely driven by a cyclical downturn in the industrial sector. ETN shares declined 13% in 2018, versus a 4% decline for the S&P 500 in the same period. For some time, investors have pondered whether the company would undertake a major restructuring such as a sale, spin-off, or large-scale acquisition.

Given the negative impact of cyclicality across its businesses, a key strategic priority for Eaton over the last several years has been the execution of a large, multiyear restructuring program intended to reduce costs and increase margins. Despite negative top-line trends, Eaton grew earnings by over 20% during the past five years. In 2018, the company experienced an improvement in demand and increased EPS by 16% year-over-year, owing primarily to a considerable tax reduction. At the same time, Eaton generated strong operating cash flow of $2.7 billion in 2018. The company expects 9% EPS growth in 2019 (midpoint of guidance). Historically, the company has achieved growth by combining organic growth with acquisitions.

The yet-to-be-named independent lighting company (to be called “Lighting Company” throughout this report), is a part of Eaton’s Electrical Products segment. It was formerly called Cooper Lighting—part of Eaton’s $11.2 billion acquisition of Cooper Industries in mid-2012. The company, which will include Eaton’s lighting business, its Airport Lighting business, and the Mains Lighting and Intrusion Systems businesses, generated 2018 revenue of approximately $1.7 billion, and management has commented that those businesses’ margins were dilutive to overall Eaton margins. In recent years, the business has been negatively affected by declines in average selling prices of LEDs. From a strategic perspective, the spin-off follows the recent trend of solid-state lighting (SSL) businesses separating from a parent, including GE’s recent divestiture of its Current unit and Philip Lighting’s name change to Signify.

On a pre-spin sum-of-the-parts basis, shares of ETN are fairly valued at $80 per share, implying approximately 3% upside from the current share price ($78 as of this writing). Note that pro forma estimates and capitalization information have not been announced as of this writing, and thus, our fair value estimates are subject to change as more information becomes available. With the fair value approximating the current stock price, we initiate coverage with a HOLD recommendation.

Shares of ETN currently trade at 10x 2019E consensus EBITDA, a discount to conglomerate peers in similar industries/end-markets, which are generally trading between 11x and 15x 2019E consensus EBITDA. Year to date, ETN shares are essentially flat, versus an 11% gain for the S&P 500 over the same period. While we expect ETN to deliver continued growth in 2019, we see limited opportunity for incremental multiple expansion, given a product mix of earlier-cycle segments (i.e., Vehicle and Hydraulics) and later-cycle segments (i.e., Electrical Products and Electrical Systems). Note that as of this writing, Eaton has not yet filed a Form-10 for the spin-off. As such, our estimates are largely preliminary and will be updated as more information becomes available.

EnPro Industries (NYSE: NPO) is a diversified industrial conglomerate operating six divisions and 32 business units across three distinct operating segments: (1) Sealing Products (62% of 2018 consolidated sales and 63% of adj. EBITDA); (2) Engineered Products (21% of sales and 22% of adj. EBITDA); and (3) Power Systems (17% of sales and 15% of adj. EBITDA). Following a reconsolidation of previously asbestos-liability impaired assets in July 2017, EnPro, which has a history of both acquisitions and divestitures (e.g., GRT, Franken Plastik), could look to potentially unlock value via the separation/monetization of portions of its portfolio, either by individual business unit/division (e.g., CPI, GGB, Stemco) or by operating segment (e.g., Power Systems). Notably, at NPO’s 2019 Investor Day, the incoming chief executive, Marvin Riley, indicated that he considered the perceived undervaluation of Fairbanks Morse, the engine business that is the primary component of the Power Systems segment, a “serious issue” and indicated a willingness to “look at its options” if the current situation persists. (Anecdotally, the company is also in the process of developing and ultimately bringing to market a new, “game-changing” engine, Trident OP, which could result in a partnership or joint venture with a larger engine concern.) In that context, it is our view that at less than ~7x 2021E EV/EBITDA and a ~7% free cash flow yield, NPO is undervalued relative to the sum of its parts (as well as the potential optionality presented by its engine development efforts).Considering financial commentary, peer valuations, and discounted cash flows, value of $63 per share, $20 per share, and $21 per share can be assigned to NPO’s Sealing Products, Engineered Products, and Power Systems businesses, respectively. Accounting for corporate costs and projected net debt of ~$23 per share yields a sum-of-the-parts value of roughly $81 per share, implying near 30% of potential upside.  Risks include a lack of management execution, variabilities in U.S. military spending, license/patent expirations, of which the most material is not until 2029, labor disputes associated with negotiations scheduled to take place in August 2020-November 2021, warranty reserves/charges for product liability, raw material pricing, currency fluctuations, competition, technological disruption as well as weakening end-market demand, particularly associated with downturns in industrial production.

Nuance Communications to Spin-Off Automotive Business 

On November 19, 2018, Nuance Communications Inc. (NASDAQ: NUAN) announced the separation of its Automotive business (“Nuance Auto”) in a tax-free spin-off to shareholders. The transaction is targeted for October 1, 2019, subject to several conditions, including Form 10 effectiveness and the approved listing of Nuance Auto’s common stock on a national securities exchange selected by Nuance. Nuance intends to appoint an independent management team and nominate members to a separate Board of Directors for Nuance Auto before the transaction is completed.

Nuance Auto (approximately 13% of consolidated revenue) will be headquartered in Boston and maintain a significant presence in Montreal and in Aachen, Germany, among other global locations. The company will become a pure-play, next-generation automotive software company specializing in conversational AI (artificial intelligence) technologies that help automotive manufacturers deliver connected and personalized experiences for drivers and passengers. Nuance’s deeply integrated and customizable solutions enable automotive assistants to be seamlessly integrated into the in-vehicle connected ecosystem. Nuance’s Automotive business claims virtually every automobile manufacturer as a customer, including Audi, BMW, Daimler, Fiat, Ford, GM, Hyundai, SAIC, and Toyota, as well as virtually every major tier-one automotive supplier. Nuance Auto’s technology can be found today in more than 200 million cars, with voice commands recognized in more than 40 languages. The business generated F2018 (Sep) sales of $279 million, with 8% organic growth and a 39% segment margin.

Nuance Communications, based in Burlington, MA, with a current market capitalization of $4.8 billion and revenue of approximately $2 billion, is a pioneer and leader in speech recognition and conversational AI innovation. The company, which has grown substantially through acquisitions, reports four operating segments: Healthcare, Automotive, Enterprise, and Imaging. In February 2019, Nuance sold its Imaging business to Kofax Inc. for $400 million as part of a broader reorganization effort to streamline its business and focus on the Healthcare and Enterprise segments.

Healthcare, which generated F2018 revenue of $985 million, focuses on clinical speech and clinical language-understanding solutions for increasing productivity – including transcription, clinical document improvement (CDI), and coding solutions. The Enterprise business, which generated F2018 revenue of approximately $483 million, provides software that is leveraged to implement automated customer service solutions that are integrated with a wide range of on-premise third-party IVR (integrated voice response) and contact center platforms. The company’s technologies include speech recognition, voice biometrics, transcription, text-to-speech, dialog, and analytics. In the mobile segment, Nuance is perhaps best known for its relationship with Apple Inc. (NASDAQ: AAPL) and involvement with Apple’s Siri application, which combines speech recognition with advanced natural-language processing. The Imaging business, which was sold to Kofax Inc. for $380 million, net of fees and taxes (closed in February 2019), is essentially a legacy business that provides software for document and information processes.

While guidance for F2019 (updated in the most recently reported FQ2 in May), calls for very modest 2-4% organic revenue growth on a consolidated basis, Nuance Communications remains on a path to transform into a global AI leader, and is well under way with a multi-year plan to simplify the business, invest in innovation where appropriate, and cut costs. With artificial intelligence opening up new addressable markets, in our view the spin-off should help Nuance simplify its operations and focus its voice recognition and natural language computing technology on core growth opportunities in its Healthcare and Enterprise businesses. In addition, the company will wind down its subscription revenue services and consumer devices businesses.

On a pre-spin sum-of-the-parts basis, shares of NUAN are fairly valued at $18 per share, implying minimal upside from the current share price ($17 as of this writing). Post-spin, based on capitalization assumptions of $700 million in debt for Nuance Automotive, Nuance Communications and Nuance Automotive can be fairly valued at $15 and $3, respectively. Note that pro forma estimates and capitalization information has not been announced as of this writing, and thus, our fair value estimates are subject to change as more information becomes available. With the fair value approximating the current stock price, we initiate coverage with a HOLD recommendation. While we view favorably management’s efforts to streamline the business, accelerate share buybacks, and repay debt, we remain concerned about near-term operational performance. Specifically, near-term revenue growth may be offset by more rapid declines in non-core businesses. In addition, competition from larger technology companies remains a concern. While Nuance’s Healthcare and Enterprise businesses tend to be subject to stricter regulatory requirements, which may provide some insulation from competition, we think that unlocking this value may take time. NUAN shares have appreciated 26% year-to-date (nearing a 52-week high of $18), versus 14% for the S&P 500 over the same period.

Landec Corporation (NASDAQ: LNDC) operates two business segments: (1) Curation Foods (formerly Apio; ~87.5% of sales and ~48% of EBITDA in F2018), which primarily sells a range of natural foods, including fresh vegetables, salads, guacamole, specialty olive oil & vinegar, as well as plant-based soups; and (2) Lifecore Biomedical (formerly Biomaterials; ~12.5% of revenue and ~52% of EBITDA), which produces sodium hyaluronate (HA) and provides contract development & manufacturing (CDMO) services, primarily focused on FDA-regulated pharmaceutical products. In our view, recent acquisitions, particularly the purchase of Yucatan Foods in December 2018, have increased Curation Foods’ exposure to several higher-growth/higher-margin verticals in the natural foods market as well as increased the scale (and stability) of the business, which we think has markedly improved LNDC’s flexibility to evaluate potential value-unlocking alternatives. To that end, we discern optionality in LNDC’s Lifecore subsidiary, which operates in a sector that is likely to see ongoing consolidation and is forecasted to post 10%-15% top-line growth and a consistent 30%-plus EBITDA margin profile over the next five years. (Anecdotally, LNDC indicates it constantly evaluates all options to maximize value, particularly as Lifecore scales toward a revenue base of ~$100 million.)  As well, the company has a minority investment in privately-held Windset Farms, which could potentially be monetized.  Based on management commentary, peer and M&A valuations, as well as discounted cash flows, value of $7 per share and $13 per share can be assigned to LNDC’s Curation Foods and Lifecore Biomedical businesses. Accounting for corporate costs, projected net debt and other investments of $6 per share yields a base case sum-of-the-parts fair value of roughly $14 per share (with bull and bear cases of $15.50 and $12.50 per share, respectively). Potential catalysts include the monetization/separation of assets, better than expected sales growth/margins, improved free cash flow generation and/or tuck-in acquisitions. Potential risks include execution, particularly on integrations and project ramp-ups, competition, weather/supply-chain volatility, cost inflation, currency fluctuations, shifting consumer preferences and/or a recession.