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.

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

Overall, 1Q F2022 results modestly topped our expectations, particularly at NRS, Net2Phone and Mobile Top-Up; spin-off of Net2Phone still on track for early C2022 (with an eventual NRS transaction likely further down the road); fair value remains $65 per share, and we would continue to view any pullbacks as buying opportunities.

• Last night, after the market close, IDT reported 1Q F2022 results, which demonstrated an ~8% increase in sales to $370 million (vs. $343 in the prior period) with adjusted EBITDA and EPS of $14 million and $(0.08), respectively (vs. $18.1 million and $0.35 in the prior year period). Consolidated adj. EBITDA less Capex rose ~4% to $14 million (from $13.5 million in 1Q F2021).
• Notably, at NRS, sales more than doubled to $10.1 million, driven by robust growth in both NRS Pay and advertising/data revenue, with recurring revenue increasing 126% to $8.6 million. At Net2Phone, sales increased 33% to $12.9 million with a 37.5% increase in subscription revenue to $12.5 million. At Traditional Communications, sales increased almost 7% to ~$335 million, driven by a ~34% rise at Mobile Top-Up, while segment adjusted EBITDA increased ~17% to $20.9 million.
• The company ended 1Q F2021 no debt and $159.3 million in net cash (or roughly $6.25 per share).
• Anecdotally, the company indicated that it is still preparing for a potential spin-off of Net2Phone in early C2022 “should it be approved by the Board”. On the NRS front, the company declined to commit to a timeline for a potential spin-off, particularly ahead of the prospective Net2Phone transaction, while indicating that it is currently focused on building NRS into a “huge business” (i.e., a billion dollar plus enterprise value).
• Modest upward tweaks to our forecasts aside, our base case fair value estimate remains ~$65 per share, which values IDT’s Traditional Communications at 5.5x F2023E EBITDA, applies sales multiples of 3.0x and 8.5x to the company’s Net2Phone and Fintech businesses, respectively, and accounts for ~$227.5 million of projected net cash (see Exhibit #1 on page 2). That said, we would continue to view any pullbacks in this name as opportunities to add to or begin establishing positions.

Please see the attached Hidden Opportunities Update on ECN Capital Corp. (TSX: ECN).

Close coverage of ECN, as of today’s close, with the SFC transaction set to close on December 6th

• With the sale of its Service Finance (SFC) business to Truist Financial Corp. (NYSE: TFC) for US$2 billion (or about 15x on 2022E EBITDA and roughly 20x 2022E operating earnings) expected to close on December 6, 2021, we close coverage of ECN, as of today’s close.
• For context, ECN shares have returned 118.5% (compared with a 35% increase in the S&P 500 and a 44.5% rise in the Russell 2000) since our initial recommendation in September 2020.
• Notably, the company expects to distribute proceeds of C$7.50 from the transaction, consisting of a Return of Capital of C$4.15 and the remainder being classified as a special dividend, prior to year-end 2021.
• We will continue to monitor ECN for an opportunity to re-recommend the shares as the post-transaction valuation shifts and/or the potential for additional strategic alternatives emerge.
• As a reminder, the company will hold an Investor Day to discuss its remaining portfolio, which will consist of Triad Financial and Kessler Group, on February 8, 2022 at 12:30 p.m. (EST).

Please see the attached Hidden Opportunities Update on Vonage Holdings Corp. (NASDAQ: VG).

VG to be acquired by Ericsson for ~$6.2 billion or $21 per share in cash

• 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).
• The purchase price represents a premium of 28% to Friday’s closing price and a ~35% boost on a 3-month VWAP basis. By our calculation, the transaction values VG at 4.45x 2021E sales and 31.5x 2021E EBITDA, which seems fair. [For context, our valuation framework valued VG’s Consumer business at 1.0x 2023E EBITDA and applied a blended multiple of 3.4x to VCP 2023E sales, which reflected multiples of 4.0x and 2.5x on the API and UC/CC business; see Exhibit #2 on page 2.]
• The deal, which still requires shareholder and regulatory approvals, is expected to close in 1H 2022.
• Anecdotally, VG indicates that as part of its strategic review the company reached out to “a number of potential strategic and financial partners”; to that end, along with our view that the valuation is adequate, it is our initial inclination that the transaction is unlikely to face any additional competition.
• Ericsson will hold a conference call this morning at 9:30 a.m. (ET) to discuss the acquisition; call-in at (631) 913-1422 (with pin code 89920727#).

ALERT: Johnson & Johnson to Separate its Consumer Business

On November 12, 2021, before the market open, Johnson & Johnson (NYSE: JNJ) announced plans to separate its consumer health business from its pharmaceutical and medical device businesses, resulting in two standalone publicly traded companies. The separation is targeted to be completed in 18 to 24 months from the announcement and is expected to be tax-free to shareholders.

Management states that separating out the consumer business will provide increased flexibility for the separate companies to pursue accelerated growth opportunities. Notably, the combined dividend of the two post-separation companies is expected to remain at least at the same level as prior to the transaction.

In a TV interview this morning, JNJ CEO Alex Gorsky stated that while the company intends to accomplish the separation via a spin-off, the Board would review all options for the consumer business to unlock shareholder value.

JNJ as it stands today operates three business segments: Pharmaceutical (~55% of revenue and ~74% of pre-tax income, ex corporate costs), Consumer Health (~16% of revenue and ~5% of pre-tax income, ex corporate costs), and Medical Devices (~29% of revenue and ~20% of pre-tax income, ex corporate costs).

The Pharmaceutical segment develops and manufactures therapies focused on immunology, infectious diseases, neuroscience, oncology, cardiovascular, and pulmonary hypertension. The segment generated $45.7 billion in revenue in 2020, representing an 8.0% year-over-year increase. Through 3Q 2021, revenue benefited from the company’s COVID-19 vaccine and experienced 13.5% revenue growth versus the first nine months of 2020. COVID-19 vaccine sales totaled $766 million through 3Q 2021. The Pharmaceutical segment generates pre-tax margins above 30%, with recent performance outpacing that historical rate. Through 3Q 2021 segment pre-tax margins were 36.6%. Moving forward the segment will continue to build out its development pipeline within its therapeutic areas of focus. (JNJ reports pre-tax income on a segment basis that does not include interest expense.)

Consumer Health owns and markets a variety of products focused on personal healthcare, over-the-counter medicines, baby care, oral care, women’s health, and wound care. Well known brands in the segment’s portfolio include TYLENOL, SUDAFED, ZYRTEC, NEUTROGENA, BAIND-AID, and AVEENO, amongst others. The segment generated $14.1 billion in revenue in 2020, with pre-tax income $2.8 billion when excluding a $3.9 billion charge related to talc legal expenses. Through 3Q 2021 segment revenue increased at 5.2% with an 22.4% pre-tax margin, which represented 140 basis point expansion when excluding talc related legal expenses. Consumer Health’s future growth will include expanded sales of its existing portfolio and continued innovation within the businesses core competencies. Notably, the company is currently involved in legal actions against it for its talc products, which are alleged to have caused cancer. JNJ recently separated out the assets related to the lawsuits and filed bankruptcy for those assets, which in theory, if upheld by the court system, should remove ongoing legal liability to JNJ.

JNJ’s Medical Devices segment sells products focused on orthopedics, surgery, and vision fields. The segment generated revenue of $22.9 billion in 2020, representing a 11.6% year-over-year decline as the segment was disproportionately impacted by COVID-19 restrictions that resulted in delays in non-essential medical procedures. Through 3Q 2021 segment revenue increased by 23.4% versus the prior year period and operated with an 18.8% pre-tax margin. Medical Devices appears positioned to capitalize on the resumption of non-essential surgical procedures as COVID-19 restrictions allow for backlogs of procedures begin to work through facilities.

PRELIMINARY VALUATION

In theory, the separation makes sense in the fact that JNJ has invested considerably in its Pharmaceutical development pipeline, positioned Medical Devices to capitalize on market trends, and widened margins at Consumer Health. JNJ’s announcement follows trends within the pharmaceutical industry to separate out non-pharma related businesses for which management and investors think that the market is not fully giving credit too. Following the separation, it appears reasonable for the more focused post-spin companies to be re-rated to more accurately reflect the current operating profiles and peer comparable sets.

Post-spin, we expect the parent company, which will control the current Pharmaceutical and Medical Device segments, will be compared to large pharma companies such as Pfizer Inc. (NYSE: PFE), Merck & Co. Inc. (NYSE: MRK), and Abbvie Inc. (NYSE: ABBV), amongst others. This large pharmaceutical peer group trades at approximately 11.0x the consensus 2023 EBITDA estimate and 13.0x 2023 EPS. In our view, the JNJ parent company likely warrants a premium multiple given its current accelerated revenue growth, participation in COVID vaccines, a strong development pipeline, and its Medical Devices portfolio. For reference, Medical Devices peers, including Stryker Corp. (NYSE: SYK), and Zimmer Biomet Holdings Inc. (NYSE: ZBH), amongst others, trade on average at 16.8x the 2023 consensus EBITDA estimate and ~24.0x 2023 EPS. Consumer Health peers include L’Oreal (LO FP), Kimberly-Clark Corp. (NYSE: KMB), and Edgewell Personal Care Co. (NYSE: EPC), amongst others, trade on average at 19.0x EBITDA and 23.0x EPS.

Given current revenue and margin trends, we forecast that JNJ’s current operating segments can generate 2023 revenue and EBITDA of $56.7 billion and $23.8 billion, respectively, at Pharmaceutical, $32.6 billion and $7.7 billion, respectively, at Medical Devices, and $15.7 billion and $3.9 billion, respectively, at the Consumer business. Applying respective multiples of 12.0x, 16.0x, and 19.0x, to Pharmaceutical, Medical Devices, and Consumer segments, we estimate enterprise values of $286.3 billion, $123.0 billion, and $74.4 billion. On a sum-of-the-parts basis, incorporating estimated corporate expenses of $850 million capitalized at 13.6x (the weighted average multiple of the individual segments), we estimate an enterprise value of $472 billion for JNJ. Accounting for net debt of $2.9 billion and 2.6 billion shares outstanding, on a preliminary basis we fairly value shares of JNJ at $178 per share.

Please see the attached Hidden Opportunities Update on ECN Capital Corp. (TSX: ECN).

ECN will distribute the C$7.50 per share in proceeds from the SFC sale prior to year-end 2021, of which C$4.15 will be a Return of Capital and the remainder a special dividend; reiterates 2021 and 2022 guidance for Triad and KG

• In connection with 3Q 2021 results, ECN indicated last night, after the market close, that it intends to distribute proceeds from the sale of its Service Finance (SFC) business to Truist Financial Corp. (NYSE: TFC), prior to year-end 2021.
• The transaction is expected to close shortly following its shareholder meeting on December 2, 2021, and the C$7.50 distribution will consist of a Return of Capital of C$4.15 with the remainder being classified as a special dividend.
• In terms 3Q 2021 results, the company reported a 36% increase in sales from continuing operations to $52.7 million with EPS (from continuing operations) of $0.06, which roughly doubled the $0.03 posted in 3Q 2020, and a ~45% increase in adjusted EBITDA of $26.8 million (compared with $18.4 million in the prior year period).
• At Triad, segment sales increased ~66% to $31 million, on a 48% increase in originations to $299 million, with a 75% increase in adj. EBITDA to $17.5 million. At Kessler Group (KG), sales were flat at $19.3 million while adj. EBITDA increased marginally to $12.8 million (from $12.4 million in 3Q 2020).
• The company reiterated 2021 and 2022 guidance for both segments (with the anecdotal indication that upward adjustments, particularly at Triad, could be made at its 2022 Investor Day on January 25th).
• To that end, for full-year 2021E, Triad is expected to post adjusted operating earnings of $43-$46 million on originations of ~$1 billion (versus $700 million in 2020) along with adj. operating earnings of $46-$49 million at KG.
• For 2022E, the company expects ECN, ex-SFC, to generate EPS of US$0.25-$0.30 per share, including adj. operating income of $57-$65 million (on originations of $1.25-$1.5 billion) at Triad and $52-$59 million at KG (implying year over year growth, at the midpoint, of 37% and 17%, respectively).
• Our fair value estimate for ECN, including the SFC special dividend, remains C$12.00 per share, reflecting a blended multiple of ~9.5x on 2022E adjusted EBITDA of US$125 million and net debt of US$350 million as well as a USD/CAD conversion rate of 1.25x (see Exhibit #1 on page 2).

Please see the attached Hidden Opportunities Update on Arko Corp. (NASDAQ: ARKO).

ARKO reports roughly in-line 3Q 2021 results; acquires 36 C-stores in NC for ~$12 million, net, and indicates the M&A pipeline is robust; fair value remains $13 per share

• ARKO reported 3Q 2021 consolidated sales up 111% to $2.035 billion (versus consensus of $2.04 billion) with adjusted EBITDA growth of nearly 40% to $80.2 million (versus consensus of $80.3 million). Adj. EPS were $0.25 (compared with consensus of $0.21 and $0.14 in the prior period).
• For context, in the first nine months of 2021 ARKO’s consolidated sales have increased 103% to $5.43 billion while adj. EBITDA advanced ~39% to $198.2 million. EPS have been flat at $0.31.
• At the core-Retail segment, sales increased ~40% to $1.297 billion while operating income rose 21% to $75 million. On the Fuel-side, retail sales rose 67% to $847.9 million, reflecting acquisitions (e.g., ExpressStop) offset by a same store sales decline, in terms of gallons, of 1.4%; the retail fuel margin expanded to $0.345 (from $0.31 in 3Q 2020). On the Merchandise-front, revenue increased ~8% to $434.65 million, reflecting same-store sales growth, ex-tobacco, of 1.8%, while the contribution margin improved 270 bps to 30.6%. (On a two-year stacked basis, same store sales, ex-tobacco, were up 8.7%.)
• In terms of the balance sheet, the company ended 3Q 2021 with net debt of $382.6 million (down from $424.5 million in 2Q 2021), implying a leverage ratio of ~1.75x (compared with ~2.3x at the end of 2020).
• Importantly, ARKO announced a deal to purchase 36 Handy Mart locations in North Carolina for $112 million, of which $100 million will be contributed by Oak Street to purchase 29 of the sites. ARKO’s annual rent on those sites will be $6 million.
• Our fair value estimate remains ~$13 per share, reflecting a blended multiple of ~10x on 2022E adj. EBITDA of ~$250 million (previously $243.5 million) and net debt, incl. leases, of ~$524 million and a diluted share count of ~150 million (see Exhibit #1 on page 2).

Sylvamo Reports Strong 3Q 2021 Results Following Spin-Off from International Paper; Continue to See Value in Current Share Price; Maintain BUY, $45 FVE

• On November 10, 2021, before the market open, Sylvamo Corp. (NYSE: SLVM) reported 3Q 2021 results which included revenue of $908 million, adjusted EBITDA of $177 million, and free cash flow of $135 million. 3Q revenue increased 23% versus the prior year period on realization of previously taken price increases, and to a lesser degree improvement in volume and mix (particularly in Europe).
• 3Q EBITDA margins were 19.5%, a 540 basis point improvement from 3Q 2020, on benefits from price and mix, volume, and implementation of operational efficiencies, which were partially offset by higher input costs.
• As a reminder, this is SLVM’s first quarterly report as an independent company following the October 1, 2021, spin-off from International Paper Co. (NYSE: IP). IP Shareholders of record as of September 15, 2021, received one share of SLVM for every 11 IP shares owned. IP retained a 19.9% stake in SLVM with the expectation that IP will ultimately monetize its ownership position.
• In terms of cash flow, SLVM generated $166 million in free cash flow in 3Q ($325 million year-to-date). Primary use of free cashflow will be for capital investments, and debt reduction, with the goal of eventually being positioned to return capital to shareholders via a dividend or share repurchases.
• Management issued 4Q guidance, which includes continued price increase realization, and seasonal strength in Latin America, which will be partially offset by higher operational, input, and distribution costs. 4Q 2021 EBITDA is currently expected to total $140 – $150 million, implying full year 2021 EBITDA of ~$569 million.
• We maintain our 2022 earnings estimate of $563.3 million, which we view as a conservative base for earnings on a go forward basis given risks to revenue and margins given current supply chain constraints and input cost trends. Our $45 fair value estimate is based on a 6.0x multiple of our 2022 EBITDA estimate, incorporating net debt of $1.4 billion and 44.4 million shares outstanding.
• Our BUY rating on shares is rooted in our view that the current trading multiple is too heavily discounted, despite general concerns about structural issues within the printing paper industry. We note that SLVM’s vertically integrated business model allows for the company to be a low-cost producer, which should be viewed positively versus peers.
• In support of our view of value in the current share price, we point to the company’s ability to generate free cash flow. Pre-COVID the company generated more than $400 million in annual cash flow in 2018 and 2019. Through 3Q 2021 free cash flow has totaled $325 million. Assuming a normalized free cash flow generation capability of $400 million shares currently yield ~15% while peers trade with free cash flow yields closer to 12%. By our calculation, if SLVM were to trade at a 12% free cash flow yield (and generate $400 million in free cash flow) the shares would be valued at $44 per share.
• As background on our recommendation, our initial NEUTRAL recommendation was rooted in the belief that investors in pre-spin IP would likely exit their ownership position in SLVM for a variety of reasons, including the lack of a dividend at Sylvamo, its inclusion in the S&P SmallCap 600 versus IP’s S&P 500 membership, and the printing paper industry’s structural issues (i.e., the secular decline demand for printing paper). We upgraded shares to BUY on October 7, 2021, when shares were trading at $24.80.
• In terms of valuation, at the current price shares trade at 4.8x our 2022 EBITDA estimate, while other paper companies trade at ~7.0x average. We believe the forced selling dynamics resulting from the spin-off have eased and shares of SLVM will trade in closer proximity to the peer group.
• For more details, please refer to The Spin Off Report dated August 27, 2021, and UPDATE on October 1, 2021, and October 7, 2021.

ALERT: Vector Group to Spin-Off Douglas Elliman

On November 8, 2021, after the market close, Vector Group Ltd. (NYSE: VGR) announced plans to spin-off Douglas Elliman into a standalone publicly traded company. The company plans to file a Form 10 with the SEC that will detail historic financial information. The spin-off, which is expected to be tax-free to shareholders, is currently targeted to be completed late in 4Q 2021. VGR shareholders will receive one share of Douglas Elliman for very two shares of VGR owned, and the spin company is planning on paying an annual dividend of $0.20 per share ($0.05 paid quarterly).

Vector Group is a holding company with two distinct operating segments: (1) Tobacco, through which VGR is the fourth largest U.S. tobacco concern with a wide range of largely discount brands; and (2) Real Estate, which consists of real estate firm Douglas Elliman (D.E.), the sixth largest real estate broker in the U.S., as well as a portfolio of unconsolidated real estate holdings.

It had previously been posited that the company could consider separating its disparate operating segments, as they have negligible overlap, trade at varying multiples, and likely contribute to the lack of sell-side research coverage/overall investor awareness. The current real estate market has shown strength given secular trends as a result of the COVID 19 pandemic, which has resulted in significant asset price increases and reduced supply of available inventory. Management cites that it expects the current housing market trends to remain strong given low interest rates, inflation trends, and the market being in the early stages of an economic rebound. Notably, in relation to interest rates, management cites historical precedent that in rising interest rate environments housing market strength has not experienced significant pullbacks as would commonly be expected. Conversely, tobacco usage trends have been in decline for several decades given increased awareness of health risks. Further, the current trend towards ESG investing likely weighs on investors ability to invest in the current holding company given mandate restrictions.

PRELIMINARY VALUATION

Through 3Q 2021, Tobacco segment revenue decreased by 2.4% to $895.9 million versus the prior year period. Segment operating income increased by 15.2% to $276.6 million over the same period. Tobacco revenue has been aided by recent price increases; however overall volume has declined. Management notes that its products primarily compete in the low-cost segment of the industry, and while there is a general secular trend away from tobacco usage, the COVID 19 pandemic’s impact has resulted in consumers having more discretionary cash given work from home policies and government stimulus, which may be resulting in a lower market share for discounted brands versus premium brands. Despite the lower unit volume, the price increases resulted in wider gross and operating margins. Moving forward we estimate that Tobacco sales continue a flat to low single digit revenue decline, with limited margin expansion opportunities as the cost of production and transportation largely offset any limited opportunities for price increases given the low-cost nature of VGR’s products. Given market trends and management commentary, it is reasonable to project that in 2022 Tobacco revenue will fall about 3% to $1.1 billion, whereas EBITDA could total $343.5 million if margins stay steady. Peers to the Tobacco segment, including Altria (NYSE: MO), and British American Tobacco (BATS LN), trade at about 8.3x 2022E EBITDA; notably, over the last decade, the multiples paid for M&A activity in the tobacco space have ranged in the 11x-13x EBITDA range. Applying an 8.0x multiple to 2022E EBITDA results in an enterprise value of $2.75 billion.

Through 3Q 2021, Real Estate revenue increased by 94% to $1.0 billion as strong growth in existing home sales continued in Douglas Elliman’s markets. Revenue was particularly impacted by the severe real estate sales declines experienced in 2020 given the COVID 19 pandemic, especially in DE’s larger markets such as New York City, which pre-pandemic accounted for the 49% of segment revenue. Increased sales activity has benefited operating profit with EBITDA generation of $89.2 million through 3Q 2021, versus $4.7 million in the prior year period. While the real estate segment is experiencing a significant rebound from COVID, we expect growth to moderate to historic levels moving forward while benefiting from continued entrance into new markets. We forecast revenue growth of 50% in 2021 will be followed by a 10% decline in 2022. We note that over a pre-covid five-year period the real estate segment had average annual revenue growth of 7%. Publicly traded peers of D.E., including RE/MAX Holdings Inc. (RMAX), Foxtons Group (FOXT LN) and Realogy Holdings (NYSE: RLGY), amongst others, trade at 9.0x 2022E EBITDA. Applying the peer multiple for 2022E to VGR’s estimated EBITDA yields an enterprise value of $795 million. We note that VGR acquire the remaining 29.4% of Douglas Elliman that it did not previously own in December 2018 for $40 million, which implied a valuation of $137 million for the business.

Incorporating corporate expenses of $25 million valued at 8.2x (the weighted average of segment multiples) and VGR’s unconsolidated investments in real estate projects and investment securities at carrying value of $235.5 million (as of June 2021), we estimate on a sum-of-the-parts basis that VGR is fairly valued at $3.6 billion on an enterprise basis. Incorporating net debt of $768 million and shares outstanding of 154 million, shares of VGR are fairly valued at $18 per share on a preliminary basis.

ALERT: General Electric to Spin-Off Healthcare and Renewable Energy

On November 9, 2021, before the market open, General Electric Co. (NYSE: GE) announced plans to spin-off its healthcare business and its renewable energy businesses into standalone publicly traded companies, resulting in three publicly traded companies. As the plan is currently posited, GE expects to spin-off Healthcare in early 2023, and Renewable Energy and Power in early 2024, with the separations being completed as tax-free distributions to GE shareholders. Following the separations, General Electric will control the current Aviation business and retain its corporate name.

GE currently operates under five reportable segments:

• Renewable Energy: segment focused on onshore and offshore wind, solar, and hydroelectric power generation.
• Power: serves power generation, industrial, government, and other customers worldwide with products and services related to energy production.
• Aviation: products and services include jet engines, aerospace systems and equipment, replacement parts, and repair and maintenance services for all categories of commercial aircraft; for a wide variety of military aircraft, including fighters, bombers, tankers and helicopters; for marine applications; and for executive and regional aircraft.
• Healthcare: includes diagnostic imaging systems such as magnetic resonance, computed tomography, and positron emission tomography scanners, X-ray, nuclear imaging, digital mammography, and molecular imaging technologies.
• GE Capital: offers financial services and products worldwide for businesses of all sizes; services include commercial loans and leases, fleet management, financial programs, credit cards, personal loans, and other financial services.

The announced spin-off transactions do not come as a complete surprise. GE stock has been under pressure for several years as lower sales, cost structure, significant debt (including pension obligation), and a lack of cash flow have long had pundits suggest that the company was worth more as a sum-of-the-parts than the market has awarded value. Notably, GE completed the spin-off of its transportation unit in 2019, which merged with Westinghouse Air Brake Technologies Corp (Wabtech) (NYSE: WAB). In terms of rationale management cites that increased strategic focus allowing for company specific growth opportunities that may not have been available in the current conglomerate structure. The transactions follow a year’s long industry trend of large industrial conglomerates separating into more focused entities, which has included the breakup of multi-industry companies such as ITT Cop., Tyco International, Ingersol Rand plc, Dow, DuPont, and Danaher, amongst others.

In terms of financial liabilities, GE has has made progress on debt and liability reduction, with an expected $75 billion in gross debt redution since year eand 2018 through 2021, made capital contributions of $9.4 billion to mitigate funding risk, and contributed $8.5 billion in funding since 2018 to manage pension obilgations. Management expects that following the seperations, all three companies will be rated investment grade, while noting that no post-spin capital structure allocations have been made as of this point in time. GE plans on retaining a 19.9% ownership stake in Healthcare which will allow for further financial fleibility.

PRELIMINARY VALUATION

Following the separations, Healthcare is expected to grow sales at a mid-single digit rate, with operating margins in the high teens, both on an organic basis. The Healthcare business currently has a $17 billion backlog and is targeted to generate FCF of approximately 100% of segment income. In 2020, the Healthcare business generated $17 billion in revenue, of which $8 billion was derived from services and $10 billion from equipment sales. Renewable Energy generated pro forma $33 billion in 2020, with $20 billion of that being derived from equipment sales, and $14 billion from services. The Renewable Energy business is targeting low single digit revenue growth, mid- to high-single digit operating margin, and free cash flow conversion of 80-90%. The remaining Aviation focused company would have generated $22 billion in revenue in 2020, with expectations of low- to mid-single digit market growth, high-teens operating margin, and greater than 90% free cash flow conversion.

Our preliminary valuation is based on a sum-of-the-parts approach, with earnings estimated on pro-forma 2020 revenue and managements guidance for independent company operating results. Our initial assumptions forecast that current business trends across the three businesses begin to improve in 2022 and run at close to managements market growth targets in 2023 in terms of market growth and operating margins. We note that managements targets are defined as “long-term through the cycle”, which may prove our estimates aggressive in the near term, especially in light of the spin transactions and implementation of operational improvements taking multiple years to fully complete.

We forecast 2023 revenue and EBITDA of $18.3 billion and $4.0 billion for Healthcare, $35.6 billion and $4.0 billion for Renewable Energy, and $21.3 billion and $5.3 billion for the Aviation company. Valuing Healthcare at 14.0x, Renewable Energy at 11.0x, and Aviation at 13.0x, all of which are towards the lower end of peer comparable ranges, on a sum-of-the-parts basis, GE is estimated to have a pre-spin fair enterprise value of $168.7 billion. Incorporating current net debt and shares outstanding, on a preliminary basis we fairly value shares of GE at $119 per share.