Please see the attached Hidden Opportunities Update on RCI Hospitality Holdings, Inc. (NASDAQ: RICK).

RICK tops consensus in 3Q F2022; sees “30%-plus” free cash flow growth in both F2022 and F2023; maintain $74 per share fair value estimate

• Yesterday evening, after the market close, RICK reported 3Q F2022 consolidated adj. EPS and EBITDA up 18% and ~20.5%, respectively, to $1.60 and $24.6 million (versus consensus of $1.33 and $22.3 million). Recall, in mid-June, the company had previously disclosed preliminary results indicating consolidated sales rose 23.7% to $70.1 million in 3Q F2022.
• By segment, revenue at the Nightclubs segment rose ~34%, including same store sales growth of ~5%, to $54.3 million with operating income up ~23% to $22.5 million (on a margin of 41.1%). At Bombshells, segment sales declined ~2%, reflecting a difficult year-over-year comparison versus a period when the concept was among the only bar & restaurants open in the state of Texas, to $15.8 million while operating income fell ~30.5% to $3.1 million (on a margin of 19.4% versus ~27.4% in the prior year period).
• Free cash flow grew 39% to $18 million in 3Q F2022 and on last night’s conference call management indicated that it expected free cash flow growth would exceed 30% in F2022 and that the company looked to be headed toward another year of “30%-plus” FCF growth in F2023.
• During 3Q F2022, the company repurchased ~168,000 shares (~1.8% of the shares) for $9.2 million or an average price of ~$54.80 per share, which, we note, represented a marked step up from the ~45,650 shares that were purchased at an average price of ~$62.35 per share in the first six months of F2022. So far in 4Q F2022, through August 5th, RICK has already repurchased an additional 42,250 shares for ~$2.25 million (or an average price of $53.35 per share). We expect the company will remain active at current levels (with the FCF yield still exceeding 10%, by our calculation) and become incrementally more aggressive if the stock pulled back into the low-to-mid $50’s.
• The company ended 3Q F2022 with net debt of $150.5 million, including debt of $188 million and cash of $37.5 million, with a leverage ratio less than 2.0x and an interest coverage ratio of more than 6.0x.
• Our fair value estimate remains $74 per share, reflecting a blended multiple of ~9.5x F2024E EV/EBITDA multiple, and accounting for ~$128.5 million of projected net debt (see Exhibit #1 on page 2).

XPO top consensus in 2Q 2022 and increases full-year adj. EBITDA, EPS and FCF guidance; leverage ratio falls to 1.8x; Mario Harik will take over as chief executive of XPO following the TB spin with Brad Jacobs remaining executive chairman    

• XPO Logistics posted consolidated sales growth of ~1.5% to $3.23 billion (versus consensus of $3.19 billion) with adjusted EBITDA growth of ~23% to $405 million (compared with consensus of $366 million) and adjusted EPS growth of ~48.5% to $1.81 (versus consensus of $1.51).
• The company ended 2Q 2022 with a net leverage ratio of 1.8x (compared with 2.0x at the end of 1Q 2022 and 2.7x at the end of 2021). We expect the company’s continued pursuit of a sale or listing of its European operations, along with on-going free cash flow generation, should help bring the company’s leverage ratio toward the lower end of its targeted leverage range of 1.0x-2.0x.
• In terms of guidance, XPO increased its full-year 2022 financial targets, which reflect the intermodal divestiture, and call for consolidated adjusted EBITDA of $1.40-$1.43 billion (previously $1.35-$1.39 billion) and adj. EPS of $5.55-$5.90 (previously $5.20-$5.60). Free cash flow is expected to be $425-$475 million (previously $400-$450 million; see Exhibit #1 on page 2).  Anecdotally, XPO still expects its core LTL business to generate adj. EBITDA of “at least $1 billion” in 2022, including $50 million of asset sales.
• On the leadership front, the company announced that current North American LTL president, Mario Harik, will succeed Brad Jacobs, who will remain executive chairman, as chief executive of XPO following the truck brokerage spin, which is still expected in 4Q 2022. As previously announced, Drew Wilkerson to lead the standalone North American Truck Brokerage business.
• Our fair value estimate remains $86 per share based on a blended multiple of ~9.0x, reflecting 8.5x for LTL, 10.5x for Truck Brokerage/Last Mile and 8x for the European operations, on 2023E adj. EBITDA of $1.405 billion, along with projected net debt of ~$2.46 billion (see Exhibit #1 on page 2).
• The company will hold a conference call this morning at 8:30 a.m. (ET); call-in at (877) 269-7756.

ALERT: MDU Resources Group to Spin-Off Knife River

On August 4, 2022, before the market open, MDU Resources Group Inc. (NYSE: MDU) announced that the company plans to separate its aggregates-based, vertically integrated construction materials and contracting provider, Knife River Corp., into a standalone, publicly traded company via a tax-free spin-off. The separation is expected to be completed in 2023. The completion of the spin-off is subject to customary closing conditions such as final Board approval, an effectiveness declaration of the company’s Form 10 filing by the SEC, and a likely a private letter ruling regarding the tax-free status of the separation.

MDU, as it currently stands, operates two main businesses: Regulated Energy Delivery, and Construction Materials and Services. The company generated $5.7 billion in revenue and $860 million in EBITDA from continuing operations in 2021. Within the two businesses, MDU reports under five distinct segments: Electric, Natural Gas Distribution, Pipeline, Construction Materials and Contracting, and Construction Services.

Electric provides retail electric service to residential, commercial, industrial, and municipal customers located in Montana, North Dakota, Wyoming, and South Dakota via 15 electric generating units. The segment generated $349 million in revenue (6.1% of total revenue) and $66.3 million in operating income (12.3% of consolidate operating income) in 2021.

Natural Gas Distribution sells retail natural gas to residential, commercial, and industrial customers across eight north west and northern plains states including Washington, Oregon, Idaho, Montana, Wyoming, North and South Dakota, and Minnesota. The segment generated $971.4 million in revenue (17.1% of total revenue) and $89.2 million in operating income (16.5% of consolidate operating income) in 2021.

Pipeline owns and operates regulated and non-regulated pipelines and interconnecting pipelines across Montana, Wyoming, North and South Dakota, and Minnesota, as well as underground storage facilities. The segment generated $82.9 million in revenue (1.5% of total revenue) and $48.1 million in operating income (8.9% of consolidate operating income) in 2021.

Construction Materials and Contracting, operating as Knife River, mines, processes, and sells aggregates, such as crushed stone, sand, and gravel, used in construction. Additionally, the company produces and sells asphalt mix and ready-mix concrete. Knife River operates in 13 states, most of which MDU operates its regulated energy business in, as well as Alaska, California, and Texas. The segment generated $2.2 billion in revenue (39.2% of total revenue) and $191.1 million in operating income (35.4% of consolidate operating income) in 2021.

Construction Services operates in over 40 states and provides “a full spectrum of construction services through its electrical and mechanical and transmission and distribution specialty contracting services across the country.” Services are provided to a range of customers including utilities, manufacturing, transportation, and governments, amongst others. Services include construction and maintenance of electrical and communication wiring infrastructure, fire suppression systems, and overhead and underground electrical, gas and communications infrastructure. The segment generated $2.1 billion in revenue (36.1% of total revenue) and $145.8 million in operating income (27% of consolidate operating income) in 2021.

PRELIMINARY VALUATION

MDU currently trades at 8.7x its consensus 2023 EBITDA estimate. Following the separation, Knife River could more aptly be compared to cement and aggregate peer such as Vulcan Materials Co. (NYSE: VMC) and Martin Marietta Materials Inc. (NYSE: MLM), which each trade at 13.6x their respective 2023 EBITDA consensus The parent company will more apply be compared to regional electric and gas utilities, which trade at approximately 12x the average 2023 consensus estimate, transmission and distribution peers that trade at approximately 10.7x their 2023 consensus EBITDA estimate, and infrastructure construction peers, which trade in a wide range of 6x – 25x, yet on average trade at 13.2x.

On managements conference call, it was noted that the company expects the parent company to see revenue growth in the 5%-8% annual range on average moving forward, driven by increased rate base and growth in the customer base. Growth expectations for the spin company were not disclosed. Assuming modest growth of 2% at Knife River, and stable operating margins of 9.0% (roughly the average over the past three years), when incorporating historical depreciation and amortization, we estimate that the spin company would generate $314 million in EBITDA in 2023. Assuming 5% annual revenue growth for the parent company, and 9.5% operating margin (in line with 2021), the company would generate $560 million in EBITDA in 2023.

Applying 13x to the spin company EBITDA estimate and 11x to the parent company’s EBITDA estimate, incorporating current net debt of $3.0 billion and 203.4 million shares outstanding, we assign a preliminary, sum-of-the-parts, fair value estimate of $36 per share to MDU.

UHAL posted a relatively flat quarter against a tough comparison in 1Q F2023 as demand remains strong, but maintenance & repair costs have continued to rise; on the conference call, management committed to “action” on a range of potential shareholder value creation measures in the coming months         

• UHAL reported 1Q F2023 sales up ~8.5% to $1.597 billion while operating income was roughly flat at $491.1 million (versus $494 million in the prior year period) and EPS fell ~3% to $17.03. By our calculation, EBITDA declined less than ~2% to $604.95 million.
• At the core-Moving & Storage segment, 1Q F2023 sales increased 9.35% to $1.52 billion, reflecting a 5.35% increase at Moving and a 26% rise at Storage. Operating income was roughly flat at $481.6 million (compared with $482.9 million in the prior year period).
• In terms of conference call commentary, management reiterated its cognizance of and intent to narrow the perceived valuation gap between its stock price and the economic value created by/intrinsic value of the businesses. To that end, in response to a long-time investor’s commentary calling for the company to unlock value from its self-storage assets as well as institute a regular dividend policy, buy back stock, enact a stock split and change the corporate moniker to U-Haul CEO, Joe Shoen (who, along with his family, owns ~54.5% of the outstanding shares) , responded, “I think you’ll get you’ll see over the next months input on every one of those, maybe not exactly what you recommend, but I think you’ll see action on all of those”.  Commenting further, “my entire net worth is connected to the value stock of this company” so “I’m very much interested” in the prospect of the share price advancing.
• The company will hold its annual shareholder meeting on August 18^th at 12 p.m. (ET) followed by its annual virtual investor event later that day at 2 p.m. (ET).
• Our fair value estimate remains $765 per share, reflecting a blended multiple of ~8.5x on F2023E Moving & Storage EBITDA of $2.06 billion, the insurance assets at 0.5x book value and net debt of ~$3.07 billion (see Exhibit #1 on page 2).

FTAI Completes Infrastructure Spin-Off; Rate FTAI BUY with $24 Fair Value Estimate; Rate FIP BUY with $5 fair Value Estimate

• On August 1, 2022, after the market close, Fortress Transportation and Infrastructure Investors LLC (NASDAQ: FTAI) completed the spin-off of its infrastructure business into a standalone public company. FTAI Infrastructure Inc. will begin trading on the NASDAQ on August 2, 2022, under the ticker “FIP”.
• FTAI shareholders of record as of July 21, 2022, received one share of “FTAI Infrastructure” for every share of FTAI owned.
• In conjunction with the spin-off, FIP will eliminate the K-1 filings, opening up the company to a wider investor base that includes index funds and ETFs. FTAI will begin a six-to-eight-week re-domiciling that will also eliminate K-1 filings for shareholders.
• We adjust our post-spin fair value estimates to account for updated management commentary, industry trading multiples, and our expectations for 2022 earnings.
• We now value the parent company Aviation business at 12x a reduced 2023 EBITDA estimate of $430 million (including corporate costs) and incorporate projected net debt of $1.4 billion. Notably the net debt projection accounts for the debt transferred to FTAI Infrastructure ($1.5 billion) and proceeds from asset sales and insurance adjustments ($500 million), which are expected over the next 6 months. Our post-spin fair value estimate for FTAI Aviation is now $24 per share.
• The Infrastructure spin company is now fairly valued at $5 per share. We arrive at our fair value estimate by applying 8.0x multiple to Jefferson, LRET, and Repano operations, and a 11.0x multiple to the Transtar business. Our 8.0x multiple on ports and terminals businesses is roughly inline with current trading of peers Cheniere Energy Inc. (NYSE: LNG), Plains GP Holdings LP (NASDAQ: PAGP), and Energy Transfer LP (NYSE: ET). The 11x applied to the rail business is roughly inline with Class I rail operators, and a slight discount to the approximate 13x multiple paid for pure short line operator Genesee & Wyoming Inc. in 2019.
• We view positively the Aviation company’s ability, post-separation, to receive a rerating to a higher multiple to more closely approximate those of other aircraft leasing companies, while noting that a growing services business could provide incremental upside. For Infrastructure, the company’s terminal assets appear to be uniquely positioned to capitalize on increased demand for NGLs in addition to oil-by-rail distribution. Further, the Transtar acquisition provides a sizeable and stable earnings base for an independent infrastructure company to grow from, given its relationship with and proximity to U.S. Steel production facilities.
• For more details, please refer to The Spin Off Report dated April 14, 2022, and UPDATE dated July 13, 2022.

ALERT: Enhabit Reports 2Q 2022 Results Including Declines in Revenue and Profitability, Revises 2022 Guidance Lower

• On August 1, 2022, after the market close, Enhabit Inc. (NYSE: EHAB) released 2Q 2022 earnings, which included a revenue decline of 6.3% versus 2Q 2021 to $268 million, and EBITDA of $40.3 million versus $57.8 million in the prior year period.
• The lower year-over-year revenue was attributable to lower volumes in both the Home Health, and Hospice segments. Volumes were constrained due to continued labor challenges, including employee paid-days-off and a decrease in admissions from acute care hospitals.
• Labor continues to be the largest overhang on the company’s operations, with Home Health cost per visit increasing 10% year-over-year despite “generally flat” revenue per episode. Hospice costs per day increased 6.2% year-over-year while revenue per day decreased by less than 1%.
• EHAB revised its full-year 2022 guidance to include net service revenue between $1.075 and $1.11 billion (previously $1.080 and $1.120 billion), adjusted EBITDA between $155 and $170 million (previously between $165 and $185 million), and adjusted EPS between $1.47 and $1.75 (previously between $1.64 and $2.01 per share).
• We adjust our 2022 and 2023 earnings estimates to more accurately reflect the current operating environment; this change comes despite our view that our prior 2023 earnings estimates were conservative in and of that they were approximately at the high end of the 2022 guidance range and implied minimal growth in the out year.
• Notably, our revised 2023 EBITDA estimate is now below the low end of management’s revised 2022 guidance, which we view as a base case for the company in the current operating environment.
• We also lowered our valuation multiple to reflect investor concerns that EHAB’s leverage profile, at 2.9x at the end of 2Q 2022, exceeds those of its peers.
• To that end, we now assign a $29 fair value estimate to shares of EHAB, which is derived by applying a 13.0x multiple to our 2023 EBITDA estimate of $150 million.
• Based on today’s opening price, shares are trading at 8.7x our 2023 EBITDA estimate. The closest peer, Amedisys Inc. (NASDAQ: AMED) currently trades at 15.0x its 2023 consensus EBITDA estimate.
• Given the discount to peers, despite operating challenges and leverage levels, we view the risk/reward profile as attractive at these levels and still see the company’s long-term prospects as being intact amid favorable demographic trends. As such, we maintain our BUY rating on EHAB.
• For more details, please refer to The Spin Off Report dated June 13, 2022, and UPDATE dated July 1, 2022.

GTX maintains full-year 2022 guidance as a modestly higher production outlook is offset by FX headwinds; leverage profile/capital structure continued to improve/normalize with the redemption of all remaining Series B stock during 2Q 2022

• This morning, GTX posted a 2Q 2022 net sales decline of ~8% (albeit flat on a constant currency basis) to $859 million, reflecting a ~6% decline in unit volume to 3.2 million. (Notably, overall industry production, which continues to be impacted by the on-going chip shortage, fell~12% in the quarter suggesting GTX continues to gain significant share). Adjusted EBITDA declined ~18% to $138 million, reflecting a 160-basis point deterioration in the margin to 16.1%. Free cash flow (FCF) was $23 million (versus $138 million in the prior year period).
• The company ended 2Q 2022 with a net leverage ratio of 1.87x, including $146 million in cash and $1.18 billion of debt (versus 1.95x at the end of 2021 and 2.33x at the end of 2Q 2021). To that end, in late-June 2022 GTX redeemed the remaining $212 million of Series B preferred stock as the company continues to make solid progress toward the de-leveraging and simplification of its balance sheet and capital structure (i.e., into just debt and equity), which is a process that we expect will be completed by April 2023 (i.e., the Series A preferred conversion). In the meantime, the company also has ~$78 million remaining on a Series A repurchase authorization.
• In terms of guidance, reflecting a modestly improved outlook for global light vehicle production to 78 million units (previously 77 million) as well as a dollar/euro exchange rate of 1.04 (previously 1.08), GTX maintained its full-year 2022E net sales, adjusted EBITDA and adj. FCF guidance at $3.5-$3.7 billion, $530-$590 million and $330-$430 million, respectively. The company’s GAAP net income projection was increased to $290-$335 million (from $250-$295 million; see Exhibit #1 on page 2).
• Our fair value estimate remains $11 per share, which reflects an 8.0x multiple on our 2023E adjusted net income forecast of $428 million and a diluted share count of ~321.5 million. For context, on an EV/EBITDA basis, our valuation implies a ~6.0x multiple (see Exhibit #2 on page 2).

RICK acquires its 52^nd nightclub in Hallandale Beach, South Florida for $25 million; full 3Q F2022 results expected Aug. 9^th; maintain $74 per share fair value estimate

• This morning, RICK announced it had acquired the Cheetah nightclub in Hallandale Beach (between Miami and Hollywood, FL) for $10 million in cash and $15 million in 10-year seller financing (at 6% interest). The transaction includes a 14,000 sq. ft. facility on 2.2 acres of land at 100 Ansin Boulevard.  For context, the purchase expands RICK’s portfolio to 52 clubs in 13 states.
• Management estimates the new club, which has been recently remodeled (to, among other things, include a full kitchen), will generate ~$4 million of annual adj. EBITDA, implying a purchase multiple of ~6.25x (which is modestly higher than the company’s traditional 3x-5x target).  In our view, the modest premium likely reflects the location’s strategic attractiveness in terms of both its ability to increase RICK’s overall exposure to the Miami-area as well its ability to complement the company’s existing footprint in South Florida, which includes Tootsie’s in Miami Gardens, Scarlett’s in Pembroke Park and the Playmates Club in Coral Gables.
• Recall, last week, RICK preliminarily reported 3Q F2022 consolidated sales up ~24% to $70.1 million, suggesting full-year results at the high-end of management’s anecdotal guidance of ~$260-$280 million.
• As well, the company disclosed that it repurchased ~168,000 shares (roughly 1.8% of the total) for $9.2 million or an average price of ~$54.80 per share in 3Q F2022, which represented a notable acceleration from the ~45,650 shares that were repurchased (at an average price of $62.35 per share) in the first six months of F2022. At the time, we estimated that RICK still had ~$19.5 million remaining on its repurchase authorization (and we highlight management commentary suggesting RICK will continue to be active at current stock prices and be “aggressive” if stock ever falls under $50 per share.)
• Despite the increased repurchase activity (and a ~$5 million club acquisition) during the quarter, RICK ended 3Q F2022 with cash of ~$37.5 million (compared with ~$38 million in 2Q F2022 and ~$36 million at the end of F2021).
• RICK expects to release its full/audited quarterly results on August 9^th.
• Our fair value estimate remains $74 per share, reflecting a blended multiple of ~9.5x F2024E EV/EBITDA multiple, and accounting for ~$128 million of projected net debt (see Exhibit #1 on page 2).

ALERT: Labcorp. to Spin-Off Clinical Development Business

On July 28, 2022, before the market open, Laboratory Corporation of America Holdings (NYSE: LH) (“Labcorp”) announced that the company plans to separate its clinical development business into a standalone, publicly traded company via a tax-free spin-off. The separation is expected to be completed in 2H 2023. The completion of the spin-off is subject to customary closing conditions such as final Board approval, an effectiveness declaration of the company’s Form 10 filing by the SEC, and “appropriate assurances” in regard to the tax-free status of the separation.

LH is life sciences company that focuses on helping “doctors, hospitals, pharmaceutical companies, researchers, and patients make clear and confident decisions.” The company operates two segments: 1) Labcorp Diagnostics (Dx); and 2) Labcorp Drug Development (DD), which was recently rebranded and previously referred to as Covance Drug Development. In 2021, LH generated $16.1 billion in revenue and approximately $1.9 billion in operating income, representing a 23.8% margin.

Dx operates as a independent clinical laboratory business. The company offers comprehensive suite of testing including core and specialty, via a network of primary and specialty laboratories located in the U.S. Dx also has patient access points, and customer specific testing solutions including employment and occupational testing, DNA testing, environmental testing, and medical drug monitoring, amongst others. Dx accounted for $10.4 billion in revenue and $3.2 billion in operating income during 2021. Dx revenue increased by 10.9% versus 2020, which was driven by organic volume increases of 10.5%, and modestly benefited by 1.1% of price/mix, and was partially offset by lower COVID-19 testing.

DD “provides end-to-end drug development, medical device and companion diagnostic development solutions from early-stage research to clinical development and commercial market access.” Labcorp provides customers, which include pharmaceutical, biotechnology, medical device, and diagnostic companies, expertise in early development and clinical trials across a range of therapeutic areas. DD generated $5.8 billion in revenue and $547.7 million in operating income in 2021. 2021 revenue growth of 19.8% over 2020 on organic business growth of 19.2%, and 0.7% from acquisitions, which were partially offset by currency rate headwinds and lower COVID-19 testing sales.

For full-year 2022E, management has guided to adjusted EPS of $18.25-$21.00 and free cash flow (FCF) of $1.7-$1.9 billion (compared with $28.52 per share and $2.65 billion, respectively, in 2021). Total Diagnostics business revenue is expected to decline 9%-13%, reflecting growth of 4%-6% in the “base business” and a 50%-60% drop in COVID-19 testing, while total Drug Development sales are projected to advance1.5%-3.5% (with base business growth of 2%-4%).

PRELIMINARY VALUATION

Lab Corp. (NYSE: LH) had previously stated that it was potentially evaluating strategic alternatives, particularly for its Covance clinical-research business (CRO). To that end, in 2021, Jana Partners disclosed an ~812K share (or ~0.83%) passive stake in the company (currently ~452K shares or ~0.49%). While Jana has not publicly articulated any specific actions/demands it has, more recently, been reported in the business press that the investor may nominate directors, including Mr. Mac Crawford, the former chairman of CVS Caremark (NYSE: CVS), to the company’s Board. [Notably, Mr. Crawford was one of Jana’s nominees to the board of TeamHealth (formerly NYSE: TMH), which was subsequently purchased by Blackstone (NYSE: BX).] On March 23^rd, 2021, the company disclosed that it had retained advisors to undertake a review of its “structure and capital allocation strategy” reflecting its view that “value is not being appropriately reflected” in the current stock price.

Following the separation, the Clinical Development spin company will have a revenue base of $3.0 billion, and has exhibited an 8.0% revenue CAGR over the prior three years. In terms of the parent company, new Labcorp will have a trailing twelve month revenue base of $10.5 billion, which excludes COVID-19 testing revenues of approximately $2.2 billion in sales. Management has not given granular details on the Clinical Development business’s margin profile, however the business was described as having “the greatest potential for margin improvement” and it was stated that approximately 20% of the business’s revenue was derived from “pass through revenue”, which constrains margins. The spin company is currently part of the DD segment, which has operated at approximately 8.5% operating margin over the past five year period (excluding COVID impacted 2020). Given managements margin commentary we expect the spin company to operate at a lower margin than the segment as a whole.

Assuming historical growth and margin for both post spin companies, we estimate that the spin company would earn $357 million in EBITDA in 2023 and the parent company would generate $2.3 billion in EBITDA. The spin company could be compared to CRO peers, including Icon Plc (NASDAQ: ICLR) and Charles River Laboratories (NYS: CRL), trade at 13.6x. Applying the peer multiple to spin company 2023E EBITDA implies a segment value of $4.8 billion. Applying a 10x multiple, which is roughly in-line peers, such as Quest Diagnostics’ (NYSE: DGX), to the remaining parent company 2023E EBITDA implies a segment value of $23.4 billion. Incorporating current net debt of $4.4 billion and 93.2 million shares outstanding, we assign a preliminary, sum-of-the-parts fair value estimate of $256 per share to LH.

ALERT: 3M to Spin-Off Health Care Business

On July 26, 2022, before the market open, 3M Co. (NYSE: MMM) announced that the company plans to separate its health care business into a standalone, publicly traded company via a tax-free spin-off. The separation is expected to be completed prior to year end 2023. The completion of the spin-off is subject to customary closing conditions such as final Board approval, an effectiveness declaration of the company’s Form 10 filing by the SEC, and receipt of a private letter ruling from the IRS in regard to the tax-free status of the separation.

3M as it stands today is a diversified industrial technology conglomerate that operates four business segments: Safety and Industrial (34% of revenue and 33% of operating income in 2021), Transportation and Electronics (26% of revenue and 27% of operating income in 2021), Health Care (24% of revenue and 25% of operating income in 2021), and Consumer (16% of revenue and 15% of operating income).

• Safety and Industrial generated $12.0 billion in revenue and $2.5 billion in operating income in 2021. The division manufactures industrial abrasives, closure and masking systems, structural adhesives and tape, and mineral granules for shingles, amongst other products.

• Transportation and Electronics (“T&E”) accounted for $9.3 billion of the company’s revenue and $1.9 billion in operating income. Product offerings include advanced ceramic solutions, large format graphic films for advertising and fleet signage, packaging and intercom solutions, and reflective signage for highway and vehicle safety, amongst others

• Health Care (“HC”) sales totaled $8.6 billion in 2021, and operated with a 23.7% margin, resulting in 2.0 billion in operating income. HC products include food safety indicator solutions, skin, wound care, and infection prevention, dentistry solutions, and filtration and purification systems.

• Consumer generated $5.5 billion in revenue and $1.2 billion in operating income from the sale of bandages, braces, supports, home cleaning products, and stationary products, amongst others.

As part of the seperation, 3M will retain a 19.9% ownership stake in the new Health Care company, “which willl be monetized over time.” Helath Care Co. will be spun off with initial net leverage of approximately 3.0x – 3.5x EBITDA, which management states will position the new company for rapid deleveraging.

PRELIMINARY VALUATION

3M shares currently trade at 9.2x the 2023 consensus EBITDA estimate. The company has been the subject of litigation in relation to its subsidiary Aearo Technologies Combat Arms Earplugs products, which veterans groups claim caused hearing loss risks that were known by the company, yet not disclosed. In conjunction with the spin off announcement, 3M announced that Aearo Technologies has voluntarily filed for bankruptcy and established a $1 billion trust to pay settlement claims. The spin-off, and the pending “sale” of its food safety business, should increase liquidity at the parent company, while the Health Care company should see a degree of multiple expansion to more closely approximate health care peers. We currently posit that the parent company multiple would likely not see significant changes as the company will remain a large, diversified conglomerate.

Following the separation, the Health Care company will have a revenue base of $8.6 billion. Over the prior three year period, the Health Care division has experienced 6.7% and 9.8% revenue growth while operating margins have largely bounced back from 2020 lows of 21.2% to 23.7% in 2021. Notably EBITDA margins for 2021 approximated 31%. The company will look to capitalize on current healthcare market growth, including forecasted growth in the biopharma filtration segment, which represents a $10 billion segment growing at 10-15% annually, and the healthcare IT industry, which is forecast to grow at 7-14% annually. Assuming annual revenue growth of 6%, and stable EBITDA margins of 31%, we forecast the new company would earn almost $3 billion in 2023. Applying a 12.0x multiple, at the low end of health care peers, we estimate that the spin company would be valued at $35.9 billion on an enterprise basis.

We forecast slower growth of 4% annually at the remaining parent company businesses, and incorporate a pro-forma estimate of 25% post-spin EBITDA margin to derive our 2023 earnings before interest, taxes, depreciation, and amortization estimate of $7.2 billion. Applying a 9.0x multiple to the parent company, we assign a fair enterprise value of $65.1 billion to the new 3M.

On a preliminary, pre-spin, sum-of-the-parts basis, we fairly value shares of 3M at $154 per share after accounting for the current net debt and shares outstanding.