Becton Dickinson and Co. Completes Spin-Off of Embecta Corp.; Rate BDX at NEUTRAL with $270 FVE; Rate EMBC at NEUTRAL with $38 FVE

• On April 1, 2022, before the market open, Becton Dickinson and Co.(NYSE: BDX) completed the spin-off of its diabetes care business, Embecta Corp. (NASDAQ: EMBC).
• BDX is currently operating under what it refers to as the “BD 2025” plan, which rests on three pillars: Grow, Simplify, and Empower. Across the three pillars of BD 2025, which was introduced in 2021, the company is looking to strengthen BDX’s growth profile, reshape its innovation pipeline, reduce complexities, manage its portfolio with an eye to increasing margins to above pre-pandemic levels, and prudently deploy capital balancing for returns to shareholders, internal investments, and targeted M&A.
• The spin-off of Embecta fits into BD 2025 as it will allow the parent company increased financial flexibility while improving the company’s top line growth profile. While it can be noted that Embecta’s margin profile exceeds that of BDX post-spin, management targets post-spin BDX margin expansion of 400 basis points and top-line growth in excess of 5.5% is achievable as Transformative Solutions growth rates should exceed that of the Durable Core portfolio while exhibiting wider margins.
• As to rationale, it appears that the removal of what is essentially a stagnant business, in terms of its contribution to annual revenue growth, will help management in its capital allocation decisions. With Embecta being a standalone company, management would be able to fund projects that would not meet return-rate hurdles within the larger BDX. For reference, Diabetes Care generated $1.165 billion in revenue in F2021, a 7.3% increase from the prior year.
• We adjust our post-spin fair value estimates to reflect updated management commentary of the post-spin entities, we now fairly value shares of BDX at $270 per share and shares of EMBC at $38 per share.
• We rate both post-spin BDX and EMBC at NEUTRAL, noting that while our EMBC fair value estimate represents approximately 21% potential upside from the current share price, we expect selling pressure on EMBC to weigh on the share price in the near term. We will revisit our recommendation when trading volume normalizes.
• For more details, please refer to The Spin Off Report dated February 16, 2022.

ALERT: Crane Co. to Spin-Off Aerospace & Electronics and Process Flow Technologies Businesses into Standalone Company

On March 30, 2022, before the market open, Crane Co. (NYSE: CR) announced that its Board of Directors has approved a plan to spin-off its Aerospace & Electronics and Process Flow Technologies businesses into a separately traded, standalone public company.

The separation, which if completed, is expected to be accomplished via a tax-free distribution of the Aerospace & Electronics and Process Flow Technologies businesses to CR shareholders. Following the transaction, which is posited to be completed within approximately 12 months from the announcement, CR shareholders will own 100% of the new entity.

Following the transaction, the parent company, which will control the Payment and Merchandising Technologies business, will change its corporate name to Crane NXT and is expected to trade on the NYSE under the symbol “”CXT””. Post-spin, the spin company will retain the current Crane Co. corporate moniker and “”CR”” ticker on the NYSE.

Crane as it stands today is a diversified industrial manufacturer of highly engineered components. The company operates under three reportable segments: Aerospace & Electronics (“”AE””) (42.3% of revenue and 51.5% of adjusted operating income in 2021), Process Flow Technologies (“”PFT””) (37.6% of revenue and 29.9% of adjusted operating income in 2021), and Payment & Merchandising Technologies (“”PMT) (20.1% of revenue and 18.6% of adjusted operating income in 2021).

AE serves the commercial aerospace, military aerospace, defense, and space markets, providing original equipment and aftermarket parts used in landing systems, sensing and utility systems, fluid management, and microwave systems, amongst others. PFT (formerly known as Fluid Handling) provides fluid handling equipment including process valves and related products, commercial valves, and pumps and systems. PMT supplies “”high technology payment acceptance and dispensing products”” as well as being a supplier of “”banknotes and highly engineered banknote security features””.

PRELIMINARY VALUATION

In 2021, CR generated revenue of $3.18 billion, representing a 15.2% increase over the prior year as core sales increased by 12.4% and foreign currency benefited the company by 2.6%. The revenue increase was attributable to a 19% increase in sales at PFT, as strength in the chemical, pharmaceutical, and general industrial end markets as well non-residential construction in Canada, and a 21.8% increase at PMT due to higher core sales to gaming, retail, vending and transportation customers as well as higher banknote sales globally. For its part, AE sales increase 1.9% in 2021 as strong military original equipment and aftermarket sales in the prior year period due to COVID-19 were not sustained.

Looking forward, management had previously indicated that it expected consolidated revenue of $3.3 billion, adjusted EPS of $7.00 – $7.40, and free cash flow of $350 – $390 million in 2022. As standalone companies, Crane Co. (AE and PFT) is expected to generate $1.9 billion in revenue and operate with a pre-corporate adjusted EBITDA margin of 18.5%, while Crane NXT (PMT) is forecast to generate $1.4 billion in sales and operate with a pre-corporate adjusted EBITDA margin of approximately 28%.

In terms of post-spin trading, it could be expected that upon separation, the spin company would see a degree of multiple expansion as the investment thesis is significantly simplified and becomes more comparable to peers in the flow control and aerospace supplier industries. For reference, CR currently trades at 9.7x the consensus 2022 EBITDA estimate, while flow control peers trade at approximately 14x and aerospace supplier peers trade at almost 19x. Applying a weighted average multiple of 15.7x to estimated EBITDA of $352 million implies an enterprise valuation of the business of $5.5 billion.

For its part, the parent company comparable set is challenging to define, however it is reasonable to assume that CR investors would exit the position in favor of the AE and PFT businesses and shares would trade closer to traditional payment companies. As such, we apply a 7x multiple to estimated EBITDA of $392 million resulting in a $2.7 billion enterprise value.

Incorporating corporate costs of $90 million valued at 11.1x (weighted average of post-spin company multiples), $468 million in net debt, and 56.9 million in net debt, shares of CR would be valued at $120 per share on a preliminary, pre-spin, sum-of-the-parts basis.

It should be noted that a key rationale for this planned separation from managements perspective is that the PMT business has historically been misunderstood and undervalued within the current conglomerate structure, which if true could prove our Crane NXT multiple assumption conservative and provide upside to this valuation. In managements presentation it was suggested that if Crane NXT were compared to SMID-Cap Industrial Technology peers or Tech-Enabled Payment and Authentication peers, Crane NXT could be valued between 11.5x and 14.5x. If Crane NXT were to be valued at 11.5x it would add $27 per share to our SOTP valuation

Drop Coverage of International Business Machines Corp. and Kyndryl Holdings Inc. Effective Immediately

• On November 3, 2021, after the market close, International Business Machines Corp. (NYSE: IBM). completed the spin-off of Kyndryl Holdings Inc. (NYSE: KD).
• Given the transactions have now passed our coverage mandate of 90 days post-spin, we DROP coverage of International Business Machines Corp. and Kyndryl Holdings Inc. effective immediately.
• Our prior estimates and fair values for IBM, and KD should no longer be relied on.

Forbes’ 2022 valuation for the Atlanta Braves rises 12% year over year to $2.1 billion (moving into the top-10 most valuable franchises); fair value estimate remains $42 per share

• In the 2022 Forbes appraisal of Major League Baseball (MLB) teams the valuation of the Atlanta Braves rose 12% to $2.1 billion (up from $1.875 billion) making it the 10th most valuable franchise in the league (up from 11th having passed the Washington Nationals).
• For context, the league-wide increase in valuations was, on average, 7.5% in 2022 (in a range of flat at $990 million for the Florida Marlins to up ~14% to $6 billion and $4.075 billion, respectively, for the New York Yankees and Los Angeles Dodgers).
• Over the last 3-, 5- and 10- years, the value of the Atlanta Braves, by our calculation, has increased at a compound annual rate of ~7.5%, 7.0% and 15%, respectively.
• The 2022 Forbes valuation for the Braves represents an implied multiple on estimated 2021 regular-season baseball revenue of ~4.7x (compared with the league-wide average of 6.2x and 8.2x for the top-10 most highly valued franchises).
• In our estimation, the private-market value of teams sold over the last 10-years has averaged a ~42% premium to its most recent Forbes valuation (in a range of 14.5%-78%) and represented an average EV/sales multiple of ~6.1x (in a range of 3.2x-8.7x).
• Our fair value estimate remains $42 per share for The Liberty Braves Group, reflecting a $42 per share valuation for the Braves, based on a ~5.5x multiple on 2022E sales, a $9 per share valuation for the company’s real estate/development assets (i.e., The Atlanta Battery) based on a 6% capitalization rate on stabilized net operating income, and net debt of ~$9 per share (see Exhibit #1 on page 2).

XPO sells Intermodal business for cash proceeds of $710 million; spin-off of North American Truck Brokerage still on track for 4Q 2022 and we continue to expect a sale or listing of the European operations in 2022

• Today, XPO Logistics announced that it has sold its North American Intermodal business to STG Logistics for cash proceeds of $710 million (or ~8.5x-9.5x, by our calculation). For context, XPO had previously disclosed that it was under an exclusivity agreement with a prospective buyer for the business when it announced the Brokerage spin in early-March 2022.
• The business, which generated ~$1.2 billion in annual sales (compared with ~$1.0 billion in 2013) is primarily the operations of Pacer International (formerly NASDAQ: PACR), which XPO acquired for ~$335 million in 2014. Assuming $75-$85 million of annual EBITDA suggests a purchase multiple of ~8.5x-9.5x.
• Management indicates that full-year 2022 guidance will be updated to reflect the divestiture when the company reports 1Q 2022 results (previously XPO forecasted full-year adjusted EBITDA, adj. EPS and free cash flow (FCF) of $1.36-$1.4 billion, $5.00-$5.45 and $400-$450 million, respectively). That said, we expect this deal to have no impact on the core less-than-truckload (LTL) business, which management has indicated is expected to generate EBITDA of “at least $1 billion” in 2022.
• As well, the company indicated it still plans to spin-off its North American Truck Brokerage business in 4Q 2022, subject to conditions, and is ostensibly still working toward the previously disclosed potential sale or listing of its European operations (which generates ~$3.1 billion of annual sales and, in our estimation, ~$150-$170 million of annual EBITDA).
• Our fair value estimate for XPO remains $92 per share based on a blended multiple of ~9.5x, reflecting 9.5x for LTL, 10.5x for Truck Brokerage/Last Mile and ~8x for Intermodal/Europe, on 2023E adjusted EBITDA of $1.49 billion (along with projected net debt of ~$2.95. billion; see Exhibit #1 on page 2).

Colfax to Complete Spin-Off of ESAB Corp. on April 4, 2022; Colfax to be Renamed Enovis Corp.; Maintain Pre-Spin BUY on CFX; Adjust Post-Spin Fair Value Estimates to Reflect Share Distribution Ratios, and Updated Performance Expectations

• On March 14, 2022, after the market close, Colfax Corp. (NYSE: CFX) announced that the company expects to complete the spin-off of its fabrication technology business, ESAB Corp., on April 4, 2022, after the market close.
• Shares of ESAB Corp. will be distributed on a one-for-three basis to CFX share holders of record as of March 22, 2022. ESAB is expected to trade on the NYSE under the ticker “ESAB”. CFX will retain a 10% ownership position in ESAB, which the company expects to divest within 12 months via a tax efficient debt exchange.
• Following the distribution, CFX will enact a one-for-three reverse stock split, and change its corporate moniker to Enovis Corp. Enovis will begin trading on the NYSE under the ticker “ENOV” on April 5, 2022.
• When-issued trading in ESAB and Enovis is expected to begin on March 21, 2022, on the NYSE under respective symbols “ESAB WI” and “ENOV WI”.
• We adjust our pre- and post-spin fair value estimates to reflect updated management commentary of the post-spin entities, the ESAB share distribution ratio, and the CFX/ENOV reverse stock split.
• Notably, management held analyst presentations yesterday for both ESAB and ENOV, which included updated guidance for ESAB that primarily reduced revenue and earnings contribution due to geo-political concerns with Russia. ESAB 2022 EBITDA guidance was reduced by approximately $20 million.
• We now value shares of ESAB at $70 per share, which is based on a 12x multiple of our 2023 EBITDA estimate of $446 million. For reference 2022 EBITDA guidance calls for $400 – $420 million and our valuation multiple is now near the low end of the peer group a slight premium to peer Lincoln Electric Holdings Inc. (NASDAQ: LECO).
• We adjust our Enovis fair value estimate to $73 per share, which is based on a 13x multiple of our 2023 EBITDA estimate of $306 million, and includes approximately $8 per share in value attributable to the 10% ownership position in ESAB (valued at our fair value).
• On a pre spin basis we fairly value shares of CFX at $48 per share and retain our BUY rating. In general, we are more positive about the near-term business prospects of post-spin ESAB given recent relative margin stability versus that of Enovis.
• For more details, please refer to The Spin Off Report dated November 15, 2021.

Please see the attached Hidden Opportunities Update on The Liberty Braves Group (NASDAQ: BATRK).

MLB/MLBPA labor agreement paves the way for a full 162-game season to begin April 7; fair value estimate remains $42 per share

• Yesterday, Major League Baseball (MLB) and the Major League Baseball Players Association (MLBPA) reached a new 5-year (2022-2027) collective bargaining agreement (by votes of 30-0 from the owners and 26-12 from the union’s executive subcommittee).
• The deal ends a 99-day lockout and paves the way for a full 162-game regular season to begin on April 7^th (albeit with a shortened spring training season and some minor logistical/scheduling maneuvering).
• Recall, the Liberty Braves reported 2021 sales of $568 million, up 19% versus 2019 (which we think is the more relevant comparison given the COVID-19 impact in 2020) while adjusted OIBDA more than doubled to $111 million (from $54 million in 2019).  Baseball revenue increased 20% to $526 million, while Development sales were up 10.5% to $42 million.  Notably, in 2021, the Braves played 79 regular season and 8 post-season games, including the World Series, (i.e., ~$6 million per game) compared with 81 regular season games and 3 post-season games in 2019. 
• In terms of the team’s prospects in 2022, current betting odds have the New York Mets (who were sold in 2020 for ~6.6x sales and a roughly 15% premium to their most recent Forbes valuation) are slightly favored over the Atlanta Braves as the favorites to win the NL East division (although the defending league champions are among the top-10 teams expected to win the World Series).
• Our fair value estimate remains $42 per share for The Liberty Braves Group, reflecting a $42 per share valuation for the Braves, based on a ~5.5x multiple on 2022E sales, a $9 per share valuation for the company’s real estate/development assets (i.e., The Battery) based on a 6% capitalization rate on stabilized net operating income, and net debt of ~$9 per share.

Please see the attached Hidden Opportunities Update on XPO Logistics, Inc. (NYSE: XPO).

XPO to spin-off of its North American Truck Brokerage business as well as sell/list its Intermodal and European operations; 2022E consolidated guidance reaffirmed  

• Last night, after the market close, XPO Logistics announced plans for a tax-free spinoff of its North American Truck Brokerage division as well as the sale of its North American Intermodal business (which is currently under an exclusivity agreement with a prospective buyer) and the potential listing or sale of its European operations.
• The standalone Brokerage business, which will include XPO’s Last Mile offerings, comprised $4.8 billion of sales, $226 million of operating income and $305 million of adjusted EBITDA in 2021 while the European and Intermodal operations generated $3.1 billion and $1.2 million in 2021 sales, respectively.
• As reported, the Less-than-Truckload (LTL) segment generated $4.1 billion in sales, $618 million of operating income and $904 million of adjusted EBITDA in 2021. 
• The spin-off is expected to be completed in 4Q 2022, subject to customary conditions, and management reaffirmed its recently articulated 2022E consolidated guidance, which calls for full-year adjusted EBITDA, adj. EPS and free cash flow (FCF) of $1.36-$1.4 billion, $5.00-$5.45 and $400-$450 million, respectively. 
• Anecdotally, the company has indicated the expectation that its LTL business will generate adjusted EBITDA of “at least $1 billion” in 2022E (and that it sees the longer-term opportunity for “hundreds” of basis points of incremental profitability improvement).
• Our fair value estimate for XPO is $92 per share based on a blended multiple of ~9.5x multiple, reflecting 9.5x for LTL, 10.5x for Truck Brokerage/Last Mile and ~8x for Intermodal/Europe, on 2023E adjusted EBITDA of $1.49 billion (along with projected net debt of ~$2.95. billion; see Exhibit #1 on page 2). 

ALERT: XPO to Spin-Off Brokerage Business, Divest European Business, and North American Intermodal

On March 8, 2022, after the market close, XPO Logistics Inc. (NYSE: XPO) announced that its Board of Directors has approved a plan to spin-off its tech enabled brokered transportation services business (“brokerage”) from its less-than-truckload (“LTL”) business. In addition, XPO announced its intention to divest its European business and North American intermodal business.

The separation of brokerage from LTL, if completed, is intended to be tax-free to XPO shareholders and would be accomplished via a pro rata distribution of share in the brokerage business to XPO shareholders. The separation is expected to be completed in 4Q 2022, subject to customary closing conditions including an effectiveness declaration of a Form 10 filing with the SEC, receipt of a tax opinion from counsel, debt refinancing terms, and final Board approval.

Following the separation, XPO shareholders will own shares in two independent companies that are leaders in their respective industries. The spin company will hold the asset light truck brokerage business, is expected to have a low net debt leverage and will pursue an investment-grade credit rating.

The parent company will become a pure-play LTL industry leader. As of December 31, 20221, XPO’s LTL business consisted of 291 terminals, approximately 12,000 drivers, 7,900 tractors and 25,800 trailers. XPO’s LTL business is the third largest North American LTL providers, with a national network and integrated driver training and trailer manufacturing capabilities.

In reference to the asset divestitures, management stated that the European business will either be sold or listed on a European stock exchange, while the North American intermodal operation is currently under an exclusivity agreement in connection with a potential sale. Notably, last nights announcement follows the August 2, 2021, spin-off of GXO Logistics Inc. (NYSE: GXO), which became a pure-play global contract logistics provider. Following the spin-off, GXO shares increased in price by 58% in the initial four-month trading period, while shares of XPO declined 8% and the Russell 2000 increased by 4.8% over the same time period. (From the spin-off to yesterdays close, shares of GXO were up 2.4%, shares of XPO declined 27.8%., and the Russell 2000 declined 11.7%)

PRELIMINARY VALUATION

In terms of rationale, it would appear that XPO management would be seeking to replicate the benefits of the GXO spin-off in creating two pure-play, investment grade post-spin companies that would alleviate the apparent conglomerate valuation multiple discount that XPO currently is awarded. In relation to the GXO spin-off, the initial strategic review was rooted in management’s frustration that, despite industry-leading scale and operating performance in terms of growth, profitability, and free cash flow generation, its myriad businesses traded at persistent discounts to their most relevant peers. In pursuit of narrowing that perceived discount, XPO indicated that feedback from its investors overwhelmingly pointed to two primary potential actions: (1) simplifying the business (hence the spin-off, which essentially separated its freight-moving and warehousing businesses); and (2) achieving an investment-grade credit rating.

We approach the pre-spin sum-of-the-parts valuation based on the current reporting structure, which includes two segments North American LTL, and Brokerage & Other Services. North American LTL reported revenue of $4.1 billion in 2021 and EBITDA of $904 million. Following the spin-off we would compare the parent company to peers such as Saia Inc. (NYSE: SAIA), which currently trades at 10.0x the 2023 consensus EBITDA estimate. For its part XPO currently trades at 7.1x the consensus 2023 EBITDA estimate. We forecast LTL revenue and EBITDA of $4.7 billion and $1.1 billion, respectively. in 2023. Valuing the parent company at 9.5x, a slight discount to SAIA, implies an enterprise value for the LTL business of $10.2 billion.

According to management, the brokerage business generated $4.8 billion in revenue and $305 million in EBITDA in 2021. We estimate that brokerage could generate $5.7 billion in revenue and $370 million in EBITDA in 2023. Applying a 10.5x multiple to the standalone brokerage business implies a $3.9 billion enterprise value. Our 10.5x multiple is a discount to peer C.H. Robinson Worldwide Inc. (NASDAQ: CHRW), which currently trades at 13.7x the 2023 consensus EBITDA estimate.

Backing out Brokerage’s revenue and EBITDA contributions from the Brokerage & Other Services segment results, we forecast that in 2023 the Intermodal and European businesses that are to be divested generate approximately $245 million in combined EBITDA. Assuming a conservative 8.0x valuation multiple could be achieved for the businesses, we estimate after-tax proceeds of $1.6 billion for the two divestitures. We note that the Intermodal business is essentially the old Pacer International, which was acquired by XPO in 2014 for $296 million (inclusive of debt assumed), which at the time equated to 9.1x forward EBITDA estimates.

Incorporating corporate costs, valued at the weighted average segment multiple, and projected 2023 net debt of $2.9 billion, we derive a preliminary sum-of-the-parts fair value estimate of $92 per share for XPO.

Please see the attached Hidden Opportunities Update on IDT Corporation (NYSE: IDT).

NRS posts another quarter of EBITDA positivity and better than 100% top-line growth in 2Q F2022; spin-off of Net2Phone on track to be completed by the end of F2022 (with an eventual NRS transaction likely further down the road); fair value remains $65 per share, and we view shares as substantially undervalued at current levels

• Last night, after the market close, IDT reported 2Q F2022 results, which demonstrated a ~0.8% decline in consolidated sales to $337 million (vs. $340 million in the prior period) with adjusted EBITDA growth of ~14.5% to almost $19 million. (Consolidated adj. EBITDA less Capex rose ~~16.5% to $14 million from $12.1 million in 2Q F2021). Adjusted EPS was $0.33 per share (vs. $0.49 in the prior year period).
• Notably, at NRS, sales more than doubled to $10.6 million, driven by robust growth in both NRS Pay and advertising/data revenue, with recurring revenue increasing 118% to $9.03 million.  (Anecdotally, management indicated that NRS generated EBITDA of ~$2 million in 2Q F2022 up from ~$1.25 million in 1Q F2022).  At Net2Phone, sales increased 24% to $13.5 million with a 32% increase in subscription revenue to $12.5 million.  At Traditional Communications, sales declined ~3% to $300 million, as 20% growth at Mobile Top-Up only partially offset declines in IDT’s legacy communications businesses, while segment adjusted EBITDA increased ~9% to $20.3 million.
• The company ended 2Q F2021 no debt and $148.3 million in net cash (or roughly $5.80 per share). On March 3^rd, IDT acquired Integra, a cloud-based contact center (CCaaS) platform (with ~$3 million in annual sales and ~$1.2 million of EBITDA), for ~$15 million, including ~$3.5 million of potential earnouts.
• Anecdotally, IDT indicated that following the Integra deal management is focused on working to complete the potential spin-off of Net2Phone “by the end of the current fiscal year on July 31^st”.
• Our base case fair value estimate remains ~$65 per share, which values IDT’s Traditional Communications at 5.0x F2023E EBITDA, applies sales multiples of 3.0x and 8.5x to the company’s Net2Phone and Fintech businesses, respectively, and accounts for ~$230 million of projected net cash (see Exhibit #1 on page 2).