Tiptree withdraws Fortegra IPO “due to prevailing market conditions and the high value” Tiptree and Warburg place on the business; both players remain committed to supporting/executing on Fortegra’s growth strategy.

This morning, Tiptree announced that it had withdrawn the initial public offering (IPO) registration statement for its specialty insurance business, Fortegra, which was announced in November 2023 and formally launched in late-January 2024, due to “prevailing market conditions and the high value Tiptree and Warburg Pincus place on Fortegra and its growth prospects”.

Both TIPT and Warburg “remain committed to supporting Fortegra as it continues to execute its growth strategy”, which we note has produced 20%-plus compound annual growth in sales and net income since 2017.

For additional context, a previous attempt at an IPO of Fortegra was scuttled in April 2021, similarly citing “market conditions”. Subsequently, in October 2021, the company secured a minority investment from Warburg Pincus at a post-money valuation of ~$725 million or 13.5x trailing 12-month net income. (Anecdotally, by our calculation, Warburg’s investment, on its face, came in slightly above the high-end of the company’s initial IPO range although assuming the warrants awarded in the deal are ultimately exercised the investment came in at the lower end of the initial IPO range.)

The more recent offering, per its now withdrawn S-1 filing, planned to offer 18 million shares (or 21.3%) of the business (excluding an over-allotment of an additional 2.7 million shares) in a range of $15-$18 per share, implying a valuation range of $1.267-$1.521 billion (compared with our initial valuation of $1.314 billion; see Exhibit #1 on page 2).

Clearly, this is a disappointing development with the shares down ~17% this morning (essentially re-tracing the bulk of the gains since our initial recommendation in July 2023 at $14.79 per share); that said, we continue to see substantial value in TIPT on a sum of the parts basis although we acknowledge the timing/mechanism to unlock that value has now been pushed out/obscured. To that end, we will seek improved clarity from management on its potential alternatives moving forward, which we assume could include the seeking of additional private growth capital.

Our base case fair value for TIPT remains $24.50 per share based on a 12.5x multiple of projected 2024E net income at Fortegra (pro-rated for TIPT’s ~68.6% ownership as well as a ~$41 million deferred tax liability) and a 0.5x multiple of book value, ex-NCI, at Tiptree Capital (see Exhibit #1 on page 2).

On February 7, 2023, Berry Global Group Inc. (NYSE: BERY) announced its intention to spin-off its Health, Hygiene and Specialties Global Nonwovens (“HH&S”) and Films businesses, which will immediately merge with Glatfelter Corp. (NYSE: GLT). The transaction, which will be structured as a Reverse Morris Trust (RMT), is expected to be tax-free to BERY and GLT shareholders and is targeted to be completed in 2H 2024. Following the transaction, BERY shareholders of record will control 90% of the combined company’s shares, with GLT shareholders owning the remaining 10%. BERY is expected to receive net cash proceeds of $1 billion at closing, which will be used to retire existing BERY debt. Per today’s announcement, GLT will complete a reverse stock split prior to the transaction close, at an as yet to be determined ratio.

Berry Global is a “leading global supplier of a broad range of innovative rigid, flexible and non-woven products”. BERY products include tapes, tubes, bottles, drink cups and lids, trash bags and medical specialties, amongst others. In the September-ending F2023, BERY generated $12.7 billion in revenue and operating EBITDA of $2.05 billion. The company currently operates four segments: Consumer Packaging International (31.8% of revenue and 32.1% of EBITDA), Consumer Packaging North America (24.7% of revenue and 29.1% of EBITDA), Engineered Materials (22.8% of revenue and 22.6% of EBITDA), and Health, Hygiene & Specialties (20.7% of revenue and 16.3% of EBITDA). The decision to spin-off the HH&S and films business, which follows a strategic review by BERY that began in September 2023, will transform BERY into a pure-play packaging company, with a particular focus on innovative and sustainable solutions.

Glatfelter is an engineered materials company that produces a variety of products, which include tea bags, single-serve coffee pods, feminine hygiene products, and adult incontinence solutions, amongst others. In 2023, GLT generated $1.5 billion in sales and $98.9 million in adjusted EBITDA, and reports under three segments: Airlaid Materials (40.3% of revenue and 87.8% of operating income), Composite Fibers (35.1 % of revenue, and 27.1% of operating income), and Spunlace (24.5% of revenue and operated at a loss). GLT initiated a turnaround strategy in 2022 under the leadership of a new CEO, which focused on portfolio optimization, margin improvement, fixed asset reduction, debt paydown, and a goal of returning the Spunlace segment to profitability.

The merged company, currently being referred to as NewCo, would have generated pro forma revenue and adjusted EBITDA of approximately $3.6 billion and $455 million in the trailing 12-month period, and is expected to realize ~$50 million in cost synergies and $25 million in pro forma adjustments by year three. Additionally, the combination of the two businesses will drastically improve GLT’s net leverage from the current 8x to approximately 4x post-merger as EBITDA growth more than offsets the added $1 billion in debt.

On a preliminary basis, we estimate that NewCo will see a slight decline in F2024 sales with F2025 sales remaining roughly flat. Further, we expect NewCo will operate with a 12.6% EBITDA margin, roughly in line with management’s pro forma trailing operating performance, resulting in EBITDA of $449.1 million. For BERY, absent the spun-off businesses, the company would have generated $10.5 billion in revenue in F2023. Assuming flat revenue in F2024 and low single-digit growth in F2025, we estimate that post-spin BERY would generate $10.7 billion in revenue. If the post-spin company can maintain margins of approximately 19%, BERY would earn $2.0 billion before interest, taxes, depreciation, and amortization.

Assuming both post-spin companies trade at multiples roughly in line with their current respective multiples, 6.8x for GLT/NewCo and 7.4x for BERY, accounting for post-spin and merger net debts (including $1 billion payment from GLT to BERY), and expected shares outstanding (including 405.8 million new shares of NewCo), we assign fair value estimates of $2.77 per share to NewCo and $71 per share to post-spin BERY. Including the value of the 90% ownership of NewCo that will be owned by BERY shareholders, which approximates $10 per share, the value of pre-spin BERY shares totals approximately $81 per share.

On February 1, 2024, Sodexo SA (SW FP) completed the previously announced spin-off of its benefits and rewards services business into a standalone, publicly traded company, which has adopted the corporate moniker Pluxee SA (PLX FP). Shares of Pluxee were distributed to Sodexo shareholders of record on a one-for-one basis.

Management’s rationale for undertaking the separation is seemingly rooted in an attempt to unlock shareholder value. For its part, shares of SW FP have significantly underperformed the broader market over the prior five- and ten-year periods. This underperformance can be attributable to the company’s rather stagnant topline growth and margin profile; however, obscured within the consolidated results is that the Pluxee business is actually growing and presents sizeable upside potential in terms of both revenue and earnings. As a standalone company, Pluxee will be able to attract a more focused investor base that may appreciate its growth potential and tech enabled solutions, which provide cash flow generation on leverageable assets that will expand margins. In that frame of mind, it could be posited that as a standalone entity, Pluxee would be awarded a higher valuation multiple, and the spin-off would create shareholder value.

Over the past five years, shares of Sodexo have traded on average at 9.3x forward EBITDA estimates. (Shares have performed well over the past year and now trade at 10.5x forward consensus EBITDA.) Following the separation, Sodexo will continue to be compared to the two main food service provider competitors, which are valued roughly in line with where Sodexo currently trades. Following the spin-off of Pluxee, Sodexo’s single-digit growth and EBITDA margins appear to be below current expectations for both ARMK and CPG, which would appear to argue for a multiple that is roughly in line with the current SW FP multiple.

As for Pluxee, the post-spin peer set is challenged by the company’s unique business given the large-scale employee benefits program. Instead, we look to companies providing similar technology enabled payment solutions that do not necessarily include employee benefits yet exhibit similar underlying fundamentals. To that end, Pluxee’s peer set trades at a premium to the valuations of the food service providers that SW FP has historically been compared to.

In initial trading, shares of Pluxee are currently trading at EUR 28.09 and shares of New Sodexo are trading at EUR 76.96. We forecast that Pluxee will increase revenue by 13% in F2024, followed by a more normalized 8% in F2025. We expect that following the initial year as a standalone company, margins will expand to 37% in F2026, resulting in EUR 475 million in EBITDA. Valuing shares at 11.0x our F2026 EBITDA estimate, we assign a EUR 41 per share fair value estimate to Pluxee. We forecast that Sodexo (ex-Pluxee) will generate annual revenue growth of 6%, and operate with EBITDA margins of 5.5%, resulting in F2026 EBITDA of EUR 1.4 billion. Valuing shares at 10.0x our F2026 EBITDA estimate, we fairly value shares of post-spin Sodexo at EUR 75 per share.

On January 29, 2024, Holcim Ltd (HOLN SW) announced the company intends to list its North American business in the US with a “full capital market separation”. The separation is intended to be executed as a spin-off, with a final structure to be announced in 2H 2024. The US listing of the spin company is expected to be completed in 1H 2025, with an Extraordinary General Meeting being held to approve the transaction to be held in 1Q 2025.

The company describes itself as “a global leader in innovative and sustainable building solutions”, and is a leading global player in the cement, aggregates, and construction solutions and products (roofing, etc.). As it stands today, the company generated CHF 29.1 billion in revenue and adjusted EBITDA of CHF 4.5 billion in 2022. Following the separation, the spin company will be a leading pure-play building solutions company, with revenue in excess of $11 billion and estimated 2023 EBITDA margins in excess of 27%. The company has exhibited annual sales growth of over 20% and EBIT growth over 26% over the prior four years. North American growth has been a priority for management, with the region now representing 35% of the group’s sales, as compared to 24% in 2019. Management is targeting $20 billion in sales and EBIT in excess of $5 billion by 2030 for the North American focused company.

Following the spin-off, Holcim will focus its operations on “advancing leadership in innovative and sustainable building solutions” in its European, EMEA, and Latin American end markets. Excluding the North American business, the parent company would have generated sales in excess of CHF 19 billion in 2022, and management estimates would have operated with an EBITDA margin of more than 23%. For the parent company, Holcim is targeting 2030 revenue, EBIT, and free cash flow of CHF 22 billion, more than CHF 4 billion, and more than CHF 3 billion, respectively.

In terms of valuation, shares of Holcim trade at a discount to similar sized aggregate, cement, and building products companies. The separation is likely an attempt to highlight the significant growth that the company has been able to achieve in the North American market, with the end result likely to be a re-rating higher for the spin company. Shares of HOLN currently trade at 7.4x forward EBITDA, where aggregate based peer such as Vulcan Materials Co. and Martin Marietta Materials Inc. trade at slightly above 15x forward EBITDA, while smaller Eagle Materials Inc. trades at almost 10x forward EBITDA.

Our forward earnings estimates are based on 2022 historical results, trends through 1H 2023, and managements 2025 targets for revenue and profitability. We expect that the North American business continues to exhibit strength, while the remain co struggles with tighter spending across Europe and Asia. We forecast annual revenue growth of 10% for the North American spin company, and EBITDA margins of 27%, resulting in 2025 EBITDA of CHF 3.3 billion. For the parent company, we forecast 16% and 5% revenue declines in 2023 and 2024, respectively, while margins approximate 23%, resulting in 2025 parent company EBITDA of CHF 3.5 billion. Applying a 9.0x multiple to the North American business, and a 7.0x multiple to the remaining parent company, we estimate post-spin enterprise values of CHF 29.4 billion and CHF 24.7 billion, respectively.

Accounting for current net debt of CHF 12.1 billion and 579.1 million shares outstanding, on a preliminary, sum-of-the-parts basis, we assign a fair value estimate of CHF 72.50 per share to Holcim Ltd. Risks to our preliminary fair value estimate include a sharp pullback in construction spending in the United States market and a prolonged recession across the company’s geographical end markets.

Tiptree launches Fortegra IPO; midpoint of expected range, excluding the over- allotment, is essentially in-line with our initial valuation; maintain our base case fair value of $24.50 per share 

• This morning, before the market open, Tiptree announced the launch of its previously announced initial public offering (IPO) of its specialty insurance business, Fortegra, which is expected to ultimately be listed on the NYSE under the ticker “TFG”.
• The company, per its most recent S-1 filing, plans to offer 18 million shares (or 21.3%) of the business (excluding an over-allotment of an additional 2.7 million shares) in a range of $15-$18 per share, implying a valuation range of $1.267-$1.521 billion (compared with our initial valuation of $1.314 billion; see Exhibit #1 on page 2).
• Following the offering, if successfully completed, TIPT expects to own ~57.6% with management owning ~2.2% and Warburg Pincus (who made a minority investment in October 2021) controlling ~18.9%.
• The lead managers of the offering are Goldman Sachs, J.P. Morgan, Jefferies and Barclays with co-mangers including JMP, KBW, Piper Sandler, Raymond James, Fifth Third, and Independence Point.

Our base case fair value for TIPT remains $24.50 per share based on a 12.5x multiple of projected 2024E net income at Fortegra (pro-rated for TIPT’s ~68.6% ownership as well as a ~$41 million deferred tax liability) and a 0.5x multiple of book value, ex-NCI, at Tiptree Capital (see Exhibit #1 on page 2).

MASI provides preliminary 4Q 2023E (and full-year 2023E) top-line results as well as initial 2024E guidance, which excludes all APPL litigation expenses (not just ITC suit), that is roughly in-line with expectations; maintain $124 fair value estimate

This morning, before the market open, MASI provided preliminary 4Q 2023E guidance, which calls for consolidated sales of $541- $551 million (compared with consensus of $537 million and its initial guide of $526-$576 million). By segment, Healthcare and Non-Healthcare sales are expected to be $336-$341 million and $205-$206 million (compared with initial guides of $320-$345 million and $206-$231 million), respectively (see Exhibit# 2 on page 3).

For full-year 2023E, the company projects consolidated sales of $2.041-$2.051 billion (compared with consensus of $2.036 billion, our $2.03 billion forecast and its previous guidance of $2.025-$2.075 billion). Healthcare sales are expected to be $1.272-$1.277 billion (versus our $1.262 billion forecast and initial guidance of $1.255-$1.28 billion) while Non-Healthcare sales are projected to be $769-$774 million (compared with our $768.5 million forecast and initial guidance of $770-$795 million). For context, while not specifically updated this morning, MASI has previously guided to full-year 2023E non-GAAP operating income and EPS of $256-$270 million and $2.85-$3.05, respectively (see Exhibit #1 on page 2).

For 2024E, the company also provided initial guidance, which we note now excludes all expenses related to its on-going litigation with Apple (NASDAQ: APPL) as opposed to just those related to the International Trade Commission (ITC) proceedings. To that end, the company forecasts consolidated GAAP and non-GAAP sales of $2.045-$2.165 billion (compared with consensus of $2.089 billion and our $2.133 billion projection), including Healthcare and Non-Healthcare revenue of $1.345-$1.385 billion and $700-$800 million (compared with our forecasts of $1.356 billion and $776 million), respectively. Non-GAAP operating income and EPS are expected to be $307-$322 million and $3.44-$3.60 (versus $275-$290 and $3.00-$3.15 based on management’s prior calculation), respectively (see Exhibit #3 on page 3).

By our calculation, MASI’s initial 2024E guidance, at the midpoint, implies a ~3% year-over-year increase in consolidated sales, driven by ~7% growth at Healthcare and a ~3% decline at the Non-Healthcare segment.

The company expects to formally report 4Q 2023E (and full year 2023E) results on Tuesday, February 27th, after the market close.

Our fair value estimate for MASI remains $124 per share, reflecting multiples of 19.0x and 7.0x, respectively, to our 2024E forecasts for the core Healthcare and Non-Healthcare segments and incorporates projected net debt (see Exhibit #4 on page 4).

Alert:  Select Medical Announces Plan to Spin-Off Concentra Business

Select Medical Holdings Corp. (NYSE: SEM) has announced that its board of directors “has approved a plan to pursue the separation” of “Concentra Group Holdings”, which controls SEM’s wholly-owned occupational health services business. If completed the separation is expected to be accomplished via a tax-free spin-off of Concentra shares to SEM shareholders in late 2024. SEM has requested a private letter ruling from the IRS in relation to the tax-free status of the potential spin-off.

SEM is an operator of hospitals and facilities focused on recovery, rehabilitation, and occupational health. As of 3Q 2023 the company operated 107 critical illness recovery hospitals, 33 rehabilitation hospitals, 1,946 outpatient rehabilitation clinics, and 539 occupational health centers.

Select Medical currently reports operations under four segments: Critical Illness Recovery Hospital (35% of company revenue. And 14.9% of adjusted EBITDA), Rehabilitation Hospital (14% of revenue, 26.6% of adjusted EBITDA), Outpatient Rehabilitation (18% of revenue, 13.7% of adjusted EBITDA), and Concentra (27% of revenue, and 44.8% of adjusted EBITDA). In 2022 the company generated $6.3 billion in revenue, representing a year-over-year increase of 2.1%, and adjusted EBITDA of $646.9 million, compared to $947 million in the prior year. Through 3Q 2023 revenue has increased by 5.3% and adjusted EBITDA has increased by 26.0% versus the prior year period. Notably 2022 results were significantly impacted by higher staffing costs at the company’s Critical Illness segment as staffing shortages resulted in higher than typical usage of agency staffing. Management has attempted to offset the higher costs by increased recruiting that led to higher sign-on and incentive bonuses as the company ramped up full time staff through the year. Through the first nine months of 2023, SEM’s efforts to curb agency staffing has resulted in lower labor costs and has benefited company EBITDA margins, which were 12.5% during the period, versus 10.5% for the first nine months of 2022. Notably, company EBITDA margins were 14.5% in 2020 and 15.3% in 2021. Management has issued full year 2023 guidance calling for revenue of $6.55 billion to $6.7 billion, with adjusted EBITDA of $795.0 million to $825.0 million, and adjusted EPS of $1.85 to $2.02.

Following the separation, Concentra will be the largest provider of occupational health services in the U.S. The company will provide a range of occupational and consumer health services through its occupational health centers and onsite clinics. Services include occupational medicine, consumer health, physical therapy, and wellness services. The parent company will become an increasingly focused outpatient facility operator, with widening margins giving the current labor cost improvements at the critical illness hospitals.

Shares of SEM currently trade at 8.0x the consensus 2024 EBITDA estimate, which is at the low end of a peer group of health care facility operators, which trade in a wide range depending on services, size of operations, and margins. As for peers to individual segments, outpatient rehab peers generally trade at the higher end of the group, with US Physical Therapy Inc. (USPH), and ATI Physical Therapy Inc. (ATIP) currently trading at 18.4x and 14.0x their respective 2024 consensus EBITDA estimate. Encompass Healthcare Corp. (EHC), a provider of inpatient rehabilitation services, currently trades at 9.7x the company’s 2024 consensus estimate.

We base our preliminary forward estimates on current operational trends, and management commentary. We forecast that in 2024 a standalone Concentra would generate segment EBITDA of $384 million, while the remain co.’s segments would generate $629 million in EBITDA. It appears reasonable that following the separation, the parent company’s increased level of earnings contribution from critical illness and rehabilitation segments would result in a multiple rerating higher to more closely resemble that of peers, while the spin company may not see a significant movement in its trading multiple. Valuing the spin company at 7.5x and the parent company at 10x our 2024 EBITDA estimates, we estimate the enterprise value of the respective post-spin company’s segments at $2.9 billion and $6.3 billion. Incorporating approximately $100 million in corporate costs, capitalized at 9.1x (weighted average of the post-spin companies ), net debt of approximately $4.0 billion, and current shares outstanding, we assign a preliminary, pre-spin, sum-of-the-parts fair value estimate of $33.50 to Select Medical.

Following KLG’s Recent Share Price Rise, Downgrade WK Kellogg (KLG) to NEUTRAL, Maintain $15 FVE

• Following WK Kellogg Co.’s (NYSE: KLG) recent share price increase we now view the risk reward scenario to be more balanced. As such, with approximately 10% upside to our $15 fair value estimate, we downgrade shares of KLG to NEUTRAL (from BUY).
• Recall, KLG was spun off from Kellanova (formerly Kellogg Co.; NYSE: K) on October 2, 2023. Following the distribution, shares of KLG were sold off to levels we viewed as unreasonable due to several factors, including KLG not being included in the S&P 500 and company specific operational issues.  To that end, following the initial sell-off we upgraded KLG to a BUY rating.
• Subsequently, WK Kellogg’s share price has rebounded 32.6% versus a 11.4% increase in the S&P 500 over the same period.
• For more details, please refer to The Spin-Off Report dated August 16, 2023, and UPDATEs dated September 11, 2023, October 2, 2023, and October 6, 2023.

Close coverage of Post-Spin XPO along with SpinCo, RXO, as of today’s close   

• For context, since our pre-spin recommendation in February 2022, shares of XPO and RXO, which were distributed to shareholders on a one-for one-basis in November 2022, have appreciated ~60.5% (compared with a 9.05% gain in the S&P 500 and ~2% rise in the Russell 2000).
• That said, given the strong post-spin appreciation and the relatively limited avenues of incremental optionality (following the RXO and GXO spin-off transactions, which created three pure play transportation concerns) we prefer to maintain a disciplined approach and focus our attention/resources on names that currently better fit our “value plus catalyst” approach.
• Nevertheless, we will continue to monitor the shares of each entity for an opportunity to re-recommend if valuation shifts or additional strategic opportunities emerge (e.g., a sale/spin-off of XPO’s European transportation business).
• We wish you all a safe, happy and healthy New Year as well as a prosperous 2024!

Drop Coverage of Lions Gate Entertainment Effective Immediately

• On December 22, 2023, Lions Gate Entertainment (NYSE: LGF/A, LGF/B) announced that the company has agreed to merge its Studio business with SPAC Screaming Eagle Acquisition Corp. (NASDAQ: SCRM) to form Lionsgate Studios Corp.
• Following the merger, LGF will control 87.3% of the new entity, while equity owners of SCRM will control the remaining 12.7%. The transaction values the Studio business at approximately $4.6 billion on an enterprise basis and does not include the Starz business.
• The SPAC merger is expected to be completed in the Spring of 2024.
• Given the SPAC merger will result in a new publicly traded company, the plan to spin-off the Studio business will not be consummated as previously planned. As such we DROP coverage of LGF/B effective immediately.
• Our prior estimates and fair values for LGF/B should no longer be relied on.