Jefferies Completes Spin-Off of Vitesse Energy

• On January 17, 2023, before the market open, Jefferies Financial Group Inc. (NYSE: JEF) announced that has completed the spin-off of Vitesse Energy.
• The spin company expects now trades on the NYSE under the ticker “VTS”. JEF shareholders of record as of December 27, 2022, receive one share of VTS for every 8.49668 shares of JEF owned.
• Shares of VTS closed trading in the when-issued market on January 13, 2023, at a price of $15.29.
• We approach our valuation under the assumption that little to no value was being attributed to Vitesse Energy within the consolidated JEF stock price. Further, we view the current JEF institutional shareholder base as unlikely to have meaningful interest in holding shares of the oil and gas entity following the distribution, as their probable reason for owning Jefferies is for the financial market exposure.
• Notably, insiders own approximately 27.5% of JEF, which combined with the share distribution ratio implies a VTS float of just 19.5 million shares.
• Under these assumptions, we do not expect a significant move in JEF’s share price following the distribution, and we anticipate significant volatility in shares of Vitesse as JEF shareholders rotate out of the distributed shares, with little to no traditional sell-side coverage being assumed in the near term. That combination of factors may present an opportunity to buy VTS at a steeply discounted price relative to the assets that the company owns.

GE HealthCare Issues Preliminary 4Q and Full Year 2022 Revenue, 2023 Guidance; Revise FVE to $66 (from $73), Maintain BUY Rating

• On January 10, 2023, before the market open, GE HealthCare Technologies Inc. (NASDAQ: GEHC) issued a press release detailing 4Q and full year 2022 revenue and issued initial 2023 guidance.
• GEHC is expecting to report 4Q and full year 2022 revenue of approximately $4.9 billion and $18.3 billion, respectively, representing year-over-year growth of 7% and 4%. Notably organic growth was 12% in 4Q and 7% for full year 2022.
• The company’s initial 2023 outlook calls for organic revenue growth of 5% – 7%, adjusted EBIT margins of 15.0% – 15.5%, and free cash flow conversion of 85% or greater of adjusted net income.
• GEHC was spun off from General Electric Co. (NYSE: GE) after the market close on January 3, 2023. GE shareholders of record received one share of GEHC for every share of GE held. GE has retained a 19.9% ownership stake in GE HealthCare.
• For its part, GE will complete its transformation into an aerospace focused entity in early 2024 when the company is expected to spin-off its Renewable Energy and Power businesses into a standalone company.
• The choice to spin off the Healthcare segment first is likely an attempt to garner the higher multiple awarded to healthcare peers, with the hope of offsetting any multiple contraction at the parent company. Further, the 19.9% ownership retention of Healthcare at the higher multiple increases the parent’s financial flexibility.
• In our view, of the three businesses, the HealthCare company is best positioned in the current macro environment, as we believe the rebound of elective surgery trends post-COVID, combined with increased spending on hospital capacity and access, has allowed for mid-single-digit revenue growth and created a path for margins to return to pre-pandemic levels.
• We adjust our revenue and earnings estimates to reflect managements guidance and now forecast 2023 revenue and EBITDA of $19.2 billion and $3.5 billion, respectively.
• We maintain our BUY rating and adjust our fair value estimate to $66 per share (previously $73 per share) reflecting our lower EBITDA estimate while maintaining our 11.0x valuation multiple.
• For more details, please refer to The Spin Off Report dated December 5, 2022, and update dated January 4, 2023.

GFF to appoint Voss Capital’s CIO, Travis Cocke, to its Board (as well as allow the investor to select an additional independent director); indicates strategic review process continues to “progress”; maintain $46.50 per share fair value estimate

• This morning, before the market open, GFF announced a cooperation agreement with Voss Capital, a ~6% holder, that would see its chief investment officer, Travis Cocke, appointed to the company’s Board (as well as add him to the Nominating, Governance and Strategic Consideration committees).  Additionally, following the 2023 Annual Meeting, Voss will “select and appoint” an additional independent director (with the Board overall size not to exceed 13 members).
• As a result of the agreement, Voss will withdraw its proposed slate of nominees for election to GFF’s Board at the upcoming Annual Meeting (although recall that Voss’ previous proxy contest resulted in the addition of H.C. Charles Diao to GFF’s Board in 2022).
• Additionally, Griffon reaffirmed that is previously announced strategic review process continues to “progress” while adding that “Griffon and its businesses are undervalued by the public markets” and the company is “well positioned to generate compelling value for stockholders”.  Previously, in conjunction with F2022 results, GFF indicated that it was in active “discussions with potential counterparties” and that management was committed to closing “the value gap between the price of our stock and the value of our business through a sale, merger, recapitalization or strategic action”.
• On the fundamental front, GFF recently articulated F2023E financial guidance calling for full-year sales and adj. EBITDA, excluding ~$56 million of unallocated corporate costs of “at least $500 million”.  The company projected F2023E free cash flow (FCF), including ~$50 million of capital expenditures, to exceed net income. Depreciation & amortization (D&A) expense was expected to be ~$72 million, of which $22 million is amortization, and net interest expense is expected to be ~$92 million. The company expects that it will further improve its leverage ratio (from the current 2.9x level) in F2023.
• Our base case fair value estimate for Griffon Corp. (GFF) remains $46.50 per share, reflecting a blended multiple of 9.3x on F2023 adjusted EBITDA of $427.7 million along with projected net debt of ~$1.44 billion (see Exhibit #1 on page 2).

Alert: Baxter to Spin Off Renal Care and Acute Therapies Businesses

On January 6, 2023, before the market open, Baxter International Inc. (NYSE: BAX) announced its intention to spin-off the company’s Renal Care and Acute Therapies businesses into an independent, standalone, publicly traded company, which is currently being referred to as KidneyCo. The transaction, which is expected to qualify as tax-free to U.S. investors, is expected to be completed in 1H 2024 and is subject to customary closing conditions including an effectiveness declaration of a Form 10 filing with the SEC and final approval from the company’s Board of Directors, amongst others.

In addition to the KidneyCo spin announcement, BAX announced that it is implementing a new operating model that has the goal of streamlining and simplifying the business. While details were scarce, management commented that it intends to “create a more resilient supply chain and greater alignment with the company’s manufacturing footprint.” Additionally, the company stated that it has begun pursuing strategic alternatives for its BioPharma Solutions business, which may include a sale or other separation options.

As the company stands today, it describes itself as providing “a broad portfolio of essential healthcare products, including acute and chronic dialysis therapies; sterile intravenous (IV) solutions; infusion systems and devices; parenteral nutrition therapies; inhaled anesthetics; generic injectable pharmaceuticals; surgical hemostat and sealant products, advanced surgical equipment; smart bed systems; patient monitoring and diagnostic technologies; and respiratory health devices.” In 2021, the company generated $12.7 billion in revenue and operated with an 18.8% adjusted operating margin.

While the company does not disclose operating margins by business unit, sales from the Renal Care and Acute Therapies totaled $4.7 billion in 2021 and represented 36.6% of BAX’s total revenue. Excluding KidneyCo’s contribution, BAX would have generated $8.1 billion in revenue. It should be noted that BAX acquired Hilrom in mid-December 2021, which would have increased pro-forma 2021 revenue of approximately $11 billion, ex KidneyCo., if the acquisition had occurred on January 1, 2021. Additionally, the BioPharma business contributes approximately $670 million in revenue. In terms of margins, on managements conference call it stated the KidneyCo’s operating margin is “well below” that of the current company and remain co.’s operating margin will be above that of the current company’s.

In approaching valuation, we compare KidneyCo to other dialysis focused medical companies, which currently trade at approximately 10x forward EBITDA, while the parent remain co would largely trade compared to medical device and supplies companies, which trade at approximately 17x forward EBITDA (~12x – 21x range). For its part, BAX currently trades at 15.6x forward EBIT and 11.7x forward EBITDA.

Management is targeting ~3% revenue growth for the parent company and 3-4% growth at Kidney Co. Based on 2021 pro-forma revenues of $11 billion for the parent, and $5 billion for KidneyCo, we forecast 2023 revenue of $11.7 billion and $5.7 billion for BAX and KidneyCo, respectively. Based on managements respective post-spin margin commentary, and allocating depreciation and amortization based on sales, we estimate post-spin EBITDA of $3.3 billion for BAX and $874 million for KidneyCo. Applying an 8x multiple to KindneyCo and 12x to the parent, we derive post-spin enterprise values of $7.0 billion and $39.8 billion, respectively. Incorporating current net debt and shares outstanding, on a preliminary, pre-spin, sum-of-the-parts basis we assign a fair value estimate of $63 per share to Baxter.

Drop Coverage of Enovis Corp. and Enhabit Inc. Effective Immediately

• On April 4, 2022, after the market close, Enovis Corp. (formerly Colfax Corp.) (NYSE: ENOV) completed the separation of ESAB Corp. (NYSE: ESAB).
• Given the transactions have now passed our coverage mandate of 90 days post-spin, we DROP coverage of Enovis Corp. and ESAB Corp. effective immediately.
• Our prior estimates and fair values for ENOV, and ESAB should no longer be relied on.

Drop Coverage of Encompass Health Corp. and Enhabit Inc. Effective Immediately

• On July 1, 2022, before the market open, Encompass Health Corp. (NYSE: EHC) completed the spin-off of its Home Health & Hospice (“HH&H”) business into Enhabit Inc (NYSE: EHAB). EHC maintained its Inpatient Rehabilitation (“IR”) business.
• Given the transactions have now passed our coverage mandate of 90 days post-spin, we DROP coverage of Encompass Health Corp. and Enhabit Inc. effective immediately.
• Our prior estimates and fair values for EHC, and EHAB should no longer be relied on.

Jefferies to Complete Vitesse Energy Spin-Off on January 13, 2023

• On January 5, 2023, before the market open, Jefferies Financial Group Inc. (NYSE: JEF) announced that it will compete the previously announced spin-off of Vitesse Energy after the market close on January 13, 2023.• The spin company expects to trade on the NYSE under the ticker “VTS”. JEF shareholders of record as of December 27, 2022, will receive one share of VTS for every 8.49668 shares of JEF owned.
• When-issued trading for Vitesse is expected to begin on or about January 10, 2023, under the symbol “VTS WI”. Shares of Jefferies will trade ex-distribution under the ticker “JEF WI” on or about the same date.
• We approach our valuation under the assumption that little to no value is currently being attributed to Vitesse Energy within the current JEF stock price.

General Electric Completes Spin-Off of GE HealthCare Technologies Inc.; Rate GEHC at BUY with a $73 FVE; Rate GE at NEUTRAL

• On January 3, 2023, after the market close, General Electric Co. (NYSE: GE) completed the spin off of its Healthcare business into GE HealthCare Technologies.
• GE shareholders of record as of December 16, 2022, received one share of GE HealthCare for every three shares of GE owned. GE HealthCare now trades on the NASDAQ under the symbol “GEHC.”
• GE has retained a 19.9% ownership stake in GE HealthCare.
• GE will complete its transformation into an aerospace focused entity in early 2024 when the company is expected to spin-off its Renewable Energy and Power businesses into a standalone company.

Close coverage of RICK with shares trading roughly in-line with our fair value estimate; we will look to re-recommend if/when valuation shifts or incremental steps toward strategic alternatives emerge. 

• For context, RICK has returned ~95.5% (compared with a ~1% increase in the S&P 500 and a ~2.75% rise in the Russell 2000) since our initial recommendation in June 2022.
• That said, with shares trading roughly in-line with our fair value estimate (see Exhibit #1 on page 2), we prefer to maintain a disciplined approach and close coverage/withdraw our recommendation, as of tomorrow’s close.

Fortune Completes MasterBrand Spin-Off; Rate MBC at BUY, FBIN at NEUTRAL

• On December 14, 2022, after the market close, Fortune Brands Home & Security Inc. (previously NYSE: FBHS) completed the spin-off of its cabinets business into a standalone, publicly traded company. The spin company adopt the corporate moniker MasterBrand Inc. and now trades on the NYSE under the ticker “MBC”.
• FBHS shareholders of record as of December 2, 2022, received one share of MBC for each share of FBHS owned.
• As previously announced, following the separation, the parent company has changed its name to Fortune Brands Innovations Inc., and now trades under the symbol “FBIN” on the NYSE.
• Fortune Brands has been removed from the S&P 500 and is now indexed in the S&P MidCap 400. MasterBrand is now included in the S&P SmallCap 600.
• Regarding the rationale for the separation, it appears that FBHS is looking to shed the slower-growth and lower-margin Cabinets business to allow for a better growth and margin profile at the remaining parent company. The Cabinets segment has experienced several hundred basis points lower growth in sales, albeit partially from acquisitions in other segments, than Water Innovations and Outdoors & Security, and it operates with margins approximating 10%, while Outdoors & Security and Water Innovations operate with margins of approximately 15% and 23%, respectively.
• Following the separation, the parent company should see a higher revenue growth rate and overall margin profile, which we would expect to allow for a rerating of FBIN to more closely resemble its peer group’s multiples. For reference, FBHS was trading at 8.7x the 2023 consensus EBITDA estimate, while its best comparison for the Cabinets business traded at about 6.5x the comparable measure, and the parent company comparables traded, on average, at 10.0x 2023E consensus EBITDA. Given the relative trading ranges, we would expect MasterBrand to trade down in terms of multiple and the parent company to experience multiple expansion.
• We adjust our FBIN fair value estimate to reflect managements recently issued financial outlook, and now model 2023E EBITDA of $912 million, and value shares at 10x, implying a fair value estimate of $54 per share. Given the current, post-spin share price of $54.18, we rate shares of FBIN at NEUTRAL.
• We assign a fair value estimate of $12 per share to MasterBrand and rate shares at BUY. Our fair value estimate is derived by applying a 7.0x multiple to our 2023 EBITDA estimate of $350 million. For reference, our 7.0x multiple is a discount to AMWD’s historical five-year average of 8.5x. AMWD is currently trading at 5.7x forward EBITDA.
• For more details, please refer to The Spin Off Report dated November 21, 2022, and UPDATE dated November 22, 2022.