ALERT: EHC to Spin-Off its Home Health and Hospice Business

On January 19, 2022, after the market close, Encompass Health Corp (NYSE: EHC) announced that it intends to spin-off its Home Health and Hospice (HH&H) business into a standalone, publicly traded company. As currently posited the plan would include a rebranding of the HH&H business to Enhabit Home Health & Hospice, and would be conducted via a tax-free distribution of shares to existing EHC shareholders in 1H 2022. The spin-off, if completed is subject to customary closing conditions including the effective declaration of a Form 10 filing with the SEC, regulatory approvals, and the receipt of a favorable IRS private letter ruling in relations to the tax-free nature of the proposed transaction.

For context, the spin off announcement is the culmination of a strategic review that began in December 2020 shortly after activist investor Jana Partners disclosed a 1.8% passive stake in the company, which is currently at ~2.0% (down from a peak of ~2.6%). In April 2021, the chief executive of the HH&H business, April Anthony, announced that she was stepping down from her post, effective mid-June 2021. Ms. Anthony was replaced by Ms. Barbara Jacobsmeyer (as well the company named Ms. Crissy Carlisle, previously EHC’s chief investor relations officer, as HH&H’s chief financial officer). In July 2021, the company indicated that the EHC’s Board had concluded that a full or partial separation, “”by either private or public means””, of HH&H would “”enhance the long-term success and value of the business””.

PRELIMINARY VALUATION

EHC reports two operating segments: (1) Inpatient Rehabilitation (77% of consolidated sales and 83.5% of adjusted EBITDA in 2020); and (2) Home Health and Hospice (23% of 2020 sales and 16.6% of adjusted EBITDA). With respect to financial guidance, for full year 2021 the company expects revenue of $5.08-$5.13 billion (compared with its initial range of $5.00-$5.17 billion), with adjusted EBITDA of $1.025-$1.045 billion (compared with its initial range of $925-$955 million) and adjusted EPS of $4.23-$4.38 (initially $3.31-$3.53). As well, following a brief withdrawal of guidance as the COVID-19 pandemic was intensifying, the company recently reinstated long-term growth guidance calling for growth of 8%-10% for both the top line and adjusted EBITDA (compared with its prior commentary of 7%-9%, albeit off a higher base) in 2020-2025.

In 2020, Inpatient Rehabilitation (IR) segment sales increased ~1.5% to $5.366 billion, as favorable pricing offset decreased volumes, while adjusted EBITDA declined 8.5% to $823 million, largely due to pandemic-related costs (e.g., supplies and paid time off for employees). Based on management commentary and current trends, it can be reasonably projected that the IR segment could generate F2023E sales of ~$4.5 billion, with adjusted EBITDA of $1.1 billion. Applying the 9.5x multiple awarded peers such as HCA Healthcare (NYSE: HCA) and Select Medical Holdings (NYSE: SEM), as well as The Ensign Group Inc. (NASDAQ: ENSG) and Brookdale Senior Living Inc. (NYSE: BKD), implies segment value of ~$10.5 billion.

In 2020, Home Health & Hospice segment sales declined 1.3% to $1.078 billion, driven by both lower prices and reduced volumes, while adjusted EBITDA fell ~16.5% to ~$163.5 million. Based on management commentary and current trends, it can be reasonably projected that the HH&H segment could generate F2023E sales of ~$1.177 billion, with adjusted EBITDA of $226 million. Applying the 13.0x multiple awarded peers such as Amedisys (NASDAQ: AMED) and LHC Group (NASDAQ: LHCG) implies segment value of ~$2.9 billion.

Accounting for corporate costs capitalized at the weighted average applied to segment earnings, as well as projected net debt of ~$3.8 billion, yields a sum-of-the-parts valuation of roughly $8.3 billion, or about $83 per share.

Close coverage of VG with shares trading near the $21 per share acquisition price offered by Ericsson and our expectation that the deal closes as announced

• For context, VG has returned 37.6% (compared with a 4.3% increase in the S&P 500 and a 3.6% decline in the Russell 2000) since our initial recommendation in September 2021.
• That said, with shares trading toward roughly in-line with the $21 per share acquisition price offered by Ericsson (NASDAQ: ERIC) in late-November 2021 and our expectation that the transaction closes in 1H 2022 as announced, we prefer to maintain our disciplined approach and close coverage/withdraw our recommendation, as of today’s close.
• Today, Vonage announced that its Board had unanimously approved an agreement to be acquired by Swedish-based Ericsson (NASDAQ: ERIC) for ~$6.2 billion or $21 per share in cash (compared with our initial fair value estimate of $20 per share).

Drop Coverage of International Paper Co. and Sylvamo Corp. Effective Immediately

• On October 1, 2021, before the market open, International Paper Co. (NYSE: IP). completed the spin-off of Sylvamo Corp. (NYSE: SLVM).
• Given the transactions have now passed our coverage mandate of 90 days post-spin, we DROP coverage of International Paper Co. and Sylvamo Corp. effective immediately.
• Our prior estimates and fair values for IP, and SLVM should no longer be relied on.

Drop Coverage of Regal Rexnord Corp. and Zurn Water Solutions Corp. Effective Immediately

• On October 4, 2021, after the market open, Rexnord Corp. (formerly “RXN”) and Regal Beloit Corp (formerly “RBC”) was completed a Reverse Morris Trust (“RMT”). Rexnord separated its Process & Motion Control business via a spin-off to shareholders, which immediately merged with Regal Beloit.
• Following the transactions, Rexnord changed its corporate moniker to Zurn Water Solutions Corp. (NYSE: ZWS), while Regal Beloit changed its name to Regal Rexnord Corp. (NYSE: RRX)
• Given the transactions have now passed our coverage mandate of 90 days post-spin, we DROP coverage of Regal Rexnord Corp. and Zurn Water Solutions Corp. effective immediately.
• Our prior estimates and fair values for RRX, and ZWS should no longer be relied on.

CNH Industrial Completes Spin-Off of Iveco; Maintain NEUTRAL Rating on Post-Spin CNHI with a $15 FVE; Despite Selling Pressure Concerns We Cautiously Rate IVG IM at BUY with a Revised $24 Fair Value Estimate

• CNH Industrial N.V. (NYSE: CNHI, CNHI IM) has completed the spin-off of its “on-highway” business, which has adopted the corporate moniker Iveco Group.
• Shares of Iveco are trading on Borsa Italiana under the ticker “IVG”.
• We previously adjusted our post spin earnings estimates for the parent company’s Agriculture segment based on increased confidence that our segment margin assumptions were likely too conservative following the completed acquisition of Raven Industries, which will increase the contribution to Agriculture’s “connected” ag products and should provide an increased margin contribution over the next several years.
• We forecast post-spin CNHI’s Ag segment margins of 11.5% while maintaining our valuation multiple, resulting in a segment valuation of $18.7 billion. The previous margin adjustment resulted in a post-spin fair value estimate for CNHI of $15 per share (EUR 14 per share).
• Given shares of CNHI are currently trading at approximately our fair value estimate, we rate post-spin shares of CNHI at NEUTRAL
• Shares of Iveco Group, which do not have an associated U.S. listed ADR, are currently trading at approximately EUR 9.70 per share and have traded ~11.5 million shares today. IVG has approximately 270 million shares outstanding (~27% of which are controlled by the Agnelli family and are not likely to be sold).
• We note that the spin company only trading on the Italian exchange may result in a degree of post-separation selling pressure, as investors constrained to ownership positions in domestic stocks may be forced to sell the distribution indiscriminately (and overwhelm what may be somewhat limited offsetting demand). If U.S.-based investors are forced to sell, shares of Iveco could be temporarily depressed to levels that present an attractive risk/reward scenario for new investors.
• We adjust our IVG IM fair value estimate to EUR 24 per share (from EUR 26). Our revised fair value estimate is based on a 5.0x EV/EBITDA multiple on our unchanged 2023 EBITDA estimate of EUR 1 billion, and incorporates less than EUR 1 per share from the Nikola ownership position. Our prior fair value implied ~6.0x multiple on Iveco’s operating businesses. In light of the current trading levels, we view the revised multiple as more appropriate.
• At the current share price, IVG is trading at just 1.6x our 2023 EBITDA estimate of EUR 1 billion. For context, management has stated that it is targeting Industrial revenue of EUR 16.5 – 17.5 billion in 2026, with EBIT margins of 5.0% – 6.0%. Our 2023 estimates incorporate near term demand strength continuing with longer term revenue growth trends of 3% – 5%, resulting in 2026 sales roughly in-line with management’s expectations. Further, our 2023 Industrial EBIT margin assumption of 4.4% is below what management suggests should be achievable. In a sensitivity analysis, assuming margins of 3.0% – 5.0%, annual revenue growth of 3% – 5% and a valuation multiple of 5.0x 2023 EBITDA (assuming EUR 330 million in depreciation), IVG’s per share value ranges from EUR 18.12 to EUR 24.02. While this may suggest we are on the higher end of the valuation range, the current share price suggests ample upside to the low end, which itself implies minimal growth in revenue and margin.
• We cautiously rate IVG IM at a BUY while noting that selling pressure may still arise. From current levels, to achieve our fair value management will likely have to demonstrate progress toward its revenue growth and margin goals, which may take several quarters, before the market begins to give full credit for the improvements being made.
• For more details, please refer to The Spin Off Report dated December 8, 2021, and UPDATE dated December 27, 2021.

Vector Group Completes Spin-Off of Douglas Elliman; Rate DOUG at BUY with a $15 FVE, and Post-Spin VGR at NEUTRAL with a $10 FVE

• On December 29, 2021, after the market close, Vector Group Ltd. (NYSE: VGR) completed the spin off of its real estate brokerage business, Douglas Elliman. Douglas Elliman now trades on the NYSE: under the ticker DOUG.
• VGR shareholders of record as of December 20, 2021, received one share of Douglas Elliman for every two shares of Vector Group owned.
• Neither DOUG or VGR traded in the when-issued market.
• As a reminder, on November 8, 2021, VGR announced plans to spin off Douglas Elliman into a standalone publicly traded company. DOUG is planning on paying an annual dividend of $0.20 per share ($0.05 paid quarterly).
• Following the separation, we would expect the potential investor base for DOUG to be widened, as the separation from Tobacco will allow investors with limitations on investment in tobacco companies to participate in DOUG. Further, we posit that DOUG’s sole focus on residential real estate opens the door to further investments from ETFs, which should boost demand for the shares. Increased demand for the real estate brokerage business may provide a degree of optionality as the initial trading multiple for DOUG may exceed our 8x applied multiple.
• We assign shares of DOUG a $15 per share fair value and rate shares at BUY. Our DOUG fair value is derived by applying an 8.0x multiple to our 2023 EBITDA estimate of $123 million.
• Our post-spin fair value estimate for Vector Group is $10 per share and is derived by applying a 7.0x multiple to the core tobacco business and assign $330 million to the company’s real estate investments. Given shares are currently trading at slightly above our fair value estimate, we rate post-spin VGR at NEUTRAL.
• For more details, please refer to The Spin Off Report dated November 29, 2021, and UPDATE dated December 17, 2021.

CNH Industrial Approves Spin-Off of Iveco; Adjust Post-Spin Earnings Estimates and Fair Value Estimates; Maintain Pre-Spin NEUTRAL Rating on Post-Spin Iveco Sell Off Concerns

• CNH Industrial N.V. (NYSE: CNHI, CNHI IM) shareholders have approved the spin-off of its “on-highway” business, which will adopt the corporate moniker Iveco Group.
• Shares of Iveco are expected to begin trading on Borsa Italiana on January 3, 2022, under the ticker “IVG”.
• We adjust our post spin earnings estimates for the parent company’s Agriculture segment as further industry research, subsequent to our initial publication, increased our confidence that our segment margins were likely too conservative.
• In support of our increased Agriculture margin assumption, we point to the recently completed acquisition of Raven Industries, which will increase the contribution to Agricultures “connected” ag products, which should provide increased margin contribution over the next several years. Anecdotally looking at the peer group of Deere & Co. (NYSE: DE) and AGCO Corp. (NYSE: AGCO), similar trends in connected contributions appear to result in improved margin outlook.
• We now forecast post-spin CNHI’s Ag segment margins of 11.5% while maintaining our valuation multiple, resulting in a segment valuation of $18.7 billion. The margin adjustment results in a revised post-spin fair value estimate for CNHI of $15 per share (EUR 14 per share).
• We maintain our post spin IVECO fair value estimate of EUR 26 per share, and increase our pre-spin sum-of-the-parts fair value estimate to $21 per share (EUR 19 per share).
• We maintain our NEUTRAL rating on shares of pre-spin CNHI as we continue to see the risks associated from potential forced selling of Iveco shares post-distribution as outweighing the current upside implied by our fair value estimate.
• Following the spin-off, we would view the parent company as more attractive, given its more favorable margin profile and secular growth opportunities versus what we view as a challenging environment for achieving sustained profitability improvements at Iveco.
• We note that the spin company only trading on the Italian exchange may present a post-separation opportunity, as investors limited to ownership positions in domestic stocks may be forced to sell the distribution indiscriminately, with likely somewhat limited demand to offset selling pressure. If U.S.-based investors are forced to sell, shares of Iveco could be temporarily depressed to levels that present an attractive risk/reward scenario for new investors.
• For more details, please refer to The Spin Off Report dated December 8, 2021.

ALERT: FTAI Files to Spin-Off its Infrastructure Business

On December 20, 2021, after the market close, Fortress Transportation and Infrastructure Investors LLC (NYSE: FTAI) announced that the company has confidentially filed a Form 10 with the SEC in relation to a potential spin-off of its infrastructure business. The spin-off, if completed is expected to benefit both post spin entities given differing end markets, strategies, and performance.

As currently posited, the spin-off would be completed via a pro rata distribution of shares in the infrastructure business to FTAI shareholders of record as of a yet to be determined date. FTAI expects that the separation would be completed in 1H 2022 if consummated, and is subject to standard conditions, including final board approval.

Fortress Transportation and Infrastructure, a holding company that acquires, manages and disposes of transportation-related assets, has been speculated to separate its infrastructure and equipment leasing units, particularly following the pending close of its acquisition of Transtar, the rail operating subsidiary of U.S. Steel (NYSE: X). (As well, the company could consider, perhaps in conjunction with or prior to a separation transaction, converting into a C-corp., which would eliminate the current K-1 tax reporting structure and, in our view, broaden/diversify the potential investor bases.)

Currently, FTAI, which is externally managed by SoftBank subsidiary Fortress Investment Group (9984 JP), operates two distinct business segments: (1) Equipment leasing, which owns and leases aviation equipment; and (2) Infrastructure, which operates multi-modal storage terminals and ports, primarily related to the storage and export of energy products. In terms of guidance, the company expects its aviation leasing business to generate ~$400 million in EBITDA during 2021 (down from its initial forecast of $450 million, due to COVID-related travel restrictions, particularly in Europe). Based on management commentary regarding the project development pipeline (e.g., the Repauno and Long Ridge energy terminals) as well as the Transtar acquisition, FTAI’s Infrastructure business could be estimated to generate normalized EBITDA of $200-$275 million annually (in 2022E/2023E). For additional context, current consensus estimates for 2022 sales and EBITDA are $837.0 million and $634.6 million (compared with $492.0 million and $248.6 million, respectively, for 2021E).

PRELIMINARY VALUATION

The separation, at least on the surface, appears to be an attempt to unlock value via a re-rating of the individual companies to more closely approximate that of peers. FTAI currently trades at 8.7x the consensus 2022 EBITDA estimate, which is inline with leasing peers, however, represents a more than 50% discount to the multiples of infrastructure peers. It should be noted that the full unlock of value is likely held back until C-Corp. conversion as we would expect a discount to peers given the current corporate structure and tax reporting requirements.

In terms of post-spin valuation, FTAI’s Equipment leasing business could be compared with aviation- and transportation-leasing companies, such as AerCap Holdings (NYSE: AER), Air Lease Corp. (NYSE: AL), and GATX Corp. (NYSE: GATX), which trade at ~9.0x 2022E EV/EBITDA (in a range of 6.0x-11.0x). Applying the peer multiple to forecasted 2022 EBITDA of $500 million implies standalone segment value of $4.5 billion. FTAI’s Infrastructure business could be compared to Macquarie Infrastructure Corp. (NYSE: MIC), Aeroports de Paris (ADP FP), and Flughafen Zurich AG (FHZN SW), which trade at ~14.0x (in a range of 12.0x-15.5x). Applying the peer multiple to forecasted 2022 EBITDA of $200 million implies standalone segment value of $2.8 billion.

Accounting for corporate costs, capitalized at the average segment multiple of 10.4x (the weighted average of the segment valuation multiples), as well as net debt of $2.9 billion, yields a preliminary sum-of-the parts fair value estimate of ~$3.8 billion, or $38 per share (based on 99.2 million shares outstanding).

Vector Group to Complete Douglas Elliman Spin-Off on December 29, 2021; Maintain BUY, Adjust Pre-Spin Fair Value Estimate to $18 per Share

• On December 16, 2021, after the market close, Vector Group Ltd. (NYSE: VGR) announced that the company’s registration statement for the spin-off of its real estate brokerage firm, Douglas Elliman, was declared effective. The separation will be completed on December 29, 2021, when shareholders of record as of December 20, 2021, will receive one share of Douglas Elliman for every two shares of Vector Group owned.
• Douglas Elliman is expected to trade on the NYSE under the ticker “DOUG” beginning on December 30, 2021, the first trading day following the distribution.
• Beginning on or about December 17, shares of Douglas Elliman will begin trading on a “when-issued” basis on the NYSE under the ticker “DOUG WI”, and Vector Group will trade “ex-distribution” under the ticker “VGR WI”.
• As a reminder, on November 8, 2021, VGR announced plans to spin off Douglas Elliman into a standalone publicly traded company. DOUG is planning on paying an annual dividend of $0.20 per share ($0.05 paid quarterly).
• We slightly adjust our DOUG earnings estimate to better incorporate last years strong 4Q revenue, and lower our base 2021 revenue estimate to $1.356 billion (previously $1.516 billion), which still represents an 80% increase over 2020 revenue.
• Given our adjusted estimate, we now fairly value shares of pre-spin VGR at $18 per share (previously $19 per share), consisting of ~$8 in value from DOUG and ~$10 in value from post-spin VGR.
• On a post-spin basis, we fairly value shares of Douglas Elliman at $15 per share to account for the one-for-two share distribution ratio.
• Following the separation, we would expect the potential investor base for DOUG to be widened, as the separation from Tobacco will allow investors with limitations on investment in tobacco companies to participate in DOUG. Further, we posit that DOUG’s sole focus on residential real estate opens the door to further investments from ETFs, which should boost demand for the shares. Increased demand for the real estate brokerage business may provide a degree of optionality as the initial trading multiple for DOUG may exceed our 8x applied multiple.
• Given the implied upside to our pre-spin fair value estimate, we continue to rate shares of VGR at BUY. We think that pre-spin holders of Vector Group may benefit from post-separation demand for shares in DOUG.
• For more details, please refer to The Spin Off Report dated November 29, 2021.

Please see the attached Hidden Opportunities Update on Landec Corp. (NASDAQ: LNDC).

LNDC sells the packaged salad and vegetable portion of Curation Foods for $73.5 million, while retaining its higher-margin avocado business and technology patents, to reduce leverage and improve focus on Lifecore

• Last night, after the market close, Landec announced that it had completed a sale of the fresh packaged salad and vegetable portion of its Curation Foods business to Taylor Farms Retail for $73.5 million.
• The monetized assets, which include the well-known Eat Smart brand, generated ~$366 million in trailing 12-month sales compared with total CF segment sales of ~$466 million (but were relatively lower margin, in our estimation).
• To that end, the company will retain its higher-margin avocado business, Yucutan Foods, including the O Olive Oil & Vinegar line, as well as its BreatheWay packaging technology patents (which generate licensing revenue).
• In conjunction with the transaction, LNDC paid down $67.9 million of debt, which we note represents a large portion of the ~$154.5 million net debt balance that was outstanding at the end of 1Q F2022.
• In that context, we would point out that along with the recent monetization of its investment in Windset Farms as well as the sale of some non-core manufacturing assets the company has made significant progress in de-levering its balance sheet over the last 12-months, which should allow investors to focus on the faster-growing/highly-profitable (i.e. double-digit top-line growth with ~30% EBITDA margins) Lifecore business.
• The company intends to provide updated guidance/commentary on the go-forward business in conjunction with the release of its 2Q F2022 earnings after the market close on January 5, 2022. A conference call will be held that evening at 5 p.m. (ET); call-in at(877) 407-3982.