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

LNDC monetizes its investment in Windset Farms for $45 million; leverage ratio reduced to 4.6x on a TTM basis (from 5.8x) and, by our calculation, 3.8x 2022E EBITDA

• Last night, after the market close, Landec announced it had completed the sale of its $45.1 million equity interest in Windset Farms (held since 2010) to its founders. (For context, we previously anticipated that the sale of this asset, which was equal to the carrying value of the investment on LNDC balance sheet at the end of 3Q F2021, would likely occur at the agreement’s next put/call date in September 2022.)
• Net proceeds of $41.2 million were simultaneously deployed toward reducing LNDC’s outstanding term debt. As such, the company’s pro forma trailing 12-month leverage ratio has been reduced to 4.6x (from 5.8x) and the company expects annual interest expense savings of ~$3.9 million. For context, the company’s current leverage covenant of 7.0x gradually steps down to 4.0x in February 2025. By our calculation, LNDC’s leverage ratio will be ~3.8x at the end of F2022E.
• While not explicitly discussed in last night’s release, LNDC made no changes to its recently articulated full-year guidance, which calls for F2021 consolidated sales of $523-$532 million with adjusted EBITDA growth of 23%-32% to $27-$29 million (see Exhibit #1 on page 2)
• By segment, at Curation Foods (CF), LNDC forecasts F2021 sales will decline 14%-15% to $430-$435 million with adjusted EBITDA of $8.0-$9.0 million. At Lifecore, management forecasts top-line growth of 8%-13% to $93.0-$97.0 million with a 12%-22% increase in adjusted EBITDA to $22.5-$24.5 million (see Exhibit #1 on page 2).
• Our base case sum-of-the parts fair value estimate of $13 per share for LNDC is based on a blended multiple of ~11x on F2023E EBITDA of ~$46.5 million and net debt of ~$140 million (see Exhibit #2 on page 2).

Drop Coverage of American Outdoor Brands Inc., Smith & Wesson Brands Inc., Fortive Corp., and Vontier Corp. Effective Immediately

• American Outdoor Brands Inc. (NASDAQ: AOUT) was spun-off from Smith & Wesson Brands Inc. (NASDAQ: SWBI) on August 24, 2020.
• Vontier Corp. (NYSE: VNT) was spun-off from Fortive Corp. (NYSE: FTV) on October 9, 2020.
• Given the transactions have now passed our coverage mandate of 90 days post-spin, we DROP coverage of American Outdoor Brands Inc., Smith & Wesson Brands Inc., Fortive Corp., and Vontier Corp. effective immediately.
• Our prior estimates and fair values for AOUT, SWBI, FTV, and VNT should no longer be relied on.

Drop Coverage of Tenneco Inc. Effective Immediately

• We are dropping coverage of Tenneco Inc. (NYSE: TEN) effective immediately given lack of forward progress on its April 2018 announcement to spin-off its Aftermarket and Ride Performance business.
• For context, the spin-off was announced in conjunction with the company’s acquisition of Federal-Mogul, which closed on October 1, 2018. The separation was scheduled to be completed in 2H 2019, but was delayed several times, with the last targeted date released being mid-2020. During the COVID pandemic, management stated it would “be looking to pick that conversation back up at the right time” in reference to moving forward with the spin.
• Given lack of material progress towards the spin-off we DROP coverage of TEN and will resume coverage if and when the company begins to move forward with a separation.
• Our prior estimates and fair values for TEN should no longer be relied on.

OSPN reaches an agreement with Legion Partners, which adds two of its four nominees and secures the retirement of three current Board members

• Today, following an increasingly contentious back-and-forth ahead of the Annual Meeting on June 9th, OSPN and Legion Partners, a 6.9% holder, entered into a cooperation agreement that ends the on-going proxy battle.
• The deal stipulates that two of Legion’s four independent director nominees, Sarika Garg, the former chief strategy officer of Tradeshift (a business commerce SaaS platform) and Michael McConnell, a private investor with Board experience in the SaaS space, will be appointed to OSPN’s Board following the 2021 Annual Meeting.
• As well, current OSPN director Matthew Moog will not stand for re-election at the 2021 Annual Meeting while current chairman John Fox will step down from the Board by September 30th. Lastly, current director Jean Holley will retire from the Board prior to the 2022 Annual Meeting.
• Overall, we think this agreement strikes a fair (and somewhat predictable) balance between the understandable push for a fresh perspective on OSPN’s Board and the maintenance of institutional continuity. That said, we would surmise that the likelihood of transformative strategic alternatives has been incrementally diminished, at least in the near-term.
• Nevertheless, we maintain our current sum-of-the parts fair value estimate of $34.50 per share, which values OSPN’s Hardware business at 2.5x 2022E EBITDA, applies sales multiples of 1.0x and 8.5x to the company’s legacy/non-recurring licensing and core/recurring software & services businesses, respectively, and accounts for ~$100 million of projected net cash (see Exhibit #1 on page 2).

Sulzer Ltd to Spin-Off medmix

On May 27, 2021, Sulzer Ltd (SUN SW) announced that the company intends to spin-off its applicator systems business into a new independent standalone publicly traded company. The new company, which is to adopt the corporate moniker medmix, is expected to begin trading in 2H 2021 subject to shareholder approval at the company’s general meeting, which is scheduled for 3Q 2021. Shareholders of record will receive one share of medmix for each share of Sulzer held. In conjunction with the planned separation, medmix will look to raise CHF 200-300 million to shore up its capital structure and fund growth. The company plans to hold a capital markets day on June 15, 2021.

As it stands today, Sulzer operates as a leader in fluid engineering. The company specializes in manufacturing various pumps, agitators, mixing solutions, separation, and application technologies. In 2020, the company generated sales of CHF 3.3 billion, a 11% year-over-year decrease, as the pandemic resulted in site, supply chain, and customer disruptions. SUN earned CHF 407 million in adjusted EBITDA, representing a 12.3% margin (a decline of 60 basis points from the prior year). The company has employed a bolt-on acquisition growth strategy in recent years, with a focus on growing medical, water and sustainable solutions.

The company operates the following divisions:

• Pumps equipment – provides customer specific engineered pumping solutions for the water, oil and gas, power, and industrial industries. Products include pumps, agitators, compressors, grinders, screens and filters. Pumps generated CHF 1.3 billion in sales (12.2% year-over-year decline) and a loss of CHF 16.1 billion before interest and taxes in 2020.
• Rotating equipment – services parts, maintenance, and repair for a variety of industrial equipment including pumps, turbines, compressors, and generators. Services encompasses OEM and third-party equipment. The Rotating segment generated CHF 1.1 billion in revenue and CHF 126 million in EBIT in 2020.
• Chemtech – provides a variety of solutions for the chemicals, petrochemicals, refining, and LNG industries. Product offerings include mass transfer and static mixing solutions. The segment generated CHF 593 million in sales and CHF 36 million in EBIT in 2020.
• Applicator systems – products target the healthcare, adhesives, and beauty markets. The division’s products are marketed under the brand names Mixpac, Transcodent, Cox, Medmix, Haselmeier, and Geka. Applicator sales totaled CHF 351 million with EBIT of CHF 20.2 million.

Recently, aside from COVID related restrictions, the company’s sales and margins have been negatively impacted by a variety of issues, including that the company’s profitability is largely being driven by the Pumps segment, which carries lower margins, as well as increased competition in the Applicator division where beauty applicators have particularly seen increased competition from social media influencers that have taken share from SUN’s traditional customers. Beauty is about 36% of Applicator sales.

To further complicate the SUN story, the company’s largest shareholder is Viktor Vekselberg, a Russian billionaire who has appeared on a list of U.S.-sanctioned individuals and entities. In the past, SUN has purchased shares from Renova Holdings, Vekselbergs firm, in order to avoid being hit by U.S. Sanctions. The company is currently not paying Renova its share of dividends, which the company has maintained at CHF 4.00 per share. Renova currently owns 16.7 million shares of SUN, representing 48.8% of shares outstanding. Incorporating Renova’s dividends as debt has raised concerns over the company’s leverage ratios.

In the company’s announcement, management cited the growth in the Applicator business, which it will now operate as a more focused standalone entity, a motivation for the transaction. Given the growth by acquisition strategy that SUN employs, moving forward as a conglomerate would likely result in capital allocation decisions being made that could stifle either side of the transaction. In our view, the growing percentage of Applicator sales to the Healthcare industry will likely allow for multiple expansion on medmix as a standalone company. Further, we view a more focused flow control parent company as having opportunities to grow via acquisition on the back of worldwide infrastructure buildouts.

SUN currently trades at 8.3x the consensus 2022 EBITDA estimate. For reference, flow control focused peers trade at 13.6x on average, albeit in a wide range, while healthcare/medical devices peers trade closer to 15x.

Following the spin-off, medmix will be a leading supplier of high-precision delivery devices across healthcare and consumer/industrial end markets. In healthcare, the company’s products include dental mixing devices, bone cement mixing devices, and proprietary injection pens. On the consumer/industrial side the company provides microbrushes and mixing and dispensing systems. Management expects significant 2020 revenue growth on a rebound from COVID, with a longer-term target of high single digit revenue growth. As for profitability, 2021 EBITDA margins approximating 25% are forecast with a return to historical >26% margin in 2022; the mid-term goal is to achieve margins of approximately 30%.

As for the parent company, post-spin SUN will continue a transition away from the energy end markets into more sustainable growth industries including water, biopolymers, and recycling industries. Continued sector diversification via organic and inorganic growth should provide revenue growth and margin expansion opportunities. Management has cited pro-forma 2021 revenue of CHF 3 billion and operational profitability around 9%, with a mid-term profitability target of 10% to 11%. Based on management commentary, including an assumed rebound in 2021 as COVID impacts dissipate, and a resumption of growth trends resulting in segment margins expanding to approximate historical levels, we forecast the parent company to generate CHF 3.2 billion in revenue and CHF 339 million in EBITDA. Applying a 9.0x multiple results in an enterprise value of CHF 31 billion post-spin. The 9.0x multiple approximates the current company’s trading multiple as we expect continued backlog of low margin pumps to continue to weigh on shares post-spin. We forecast medmix to generate CHF 489 million in revenue and CHF 122 million in EBITDA in 2022. Applying a discounted multiple to medmix an enterprise value of CHF 1.6 billion is derived. Our 13x multiple is at the low end of peers, which we view as warranted given the current beauty trends.

On a preliminary pre-spin sum-of-the-parts basis, we fairly value shares of Sulzer AG at CHF 123 per share, representing approximately 5% appreciation potential from the current share price. Upside to our fair value could be derived from multiple expansion at medmix as the company continues to increase it healthcare revenue contribution, or at the parent company as it expands into higher margin segments.

IAC Completes Spin-Off of Vimeo; Rate Vimeo at BUY, Maintain $54 FVE; Rate Post-Spin IAC at BUY with $182 Fair Value Estimate

• On May 25, 2021, before the market open, IAC/InterActiveCorp (NASDAQ: IAC) completed the spin-off of Vimeo Inc. (NASDAQ: VMEO). Shareholders of record received 1.6235 shares of VMEO for each share of IAC held.
• Vimeo shares sold off in initial trading to $43.08, from ~$52 in the when-issued market on May 24, 2021 on relatively heavy trading volume of ~4.5 million shares. That said, we maintain our $54 fair value estimate and rate shares at BUY.
• At current levels, Vimeo shares are trading at 13.5x our forecasted 2022 revenue estimate of $516 million and a roughly 14% discount to our fair value estimate, which is derived by a 17x sales multiple. For reference, IAC raised equity in Vimeo three times over the past two years at implied valuations of 9.7x, 18.4x, and 20.1x revenue, respectively.
• While initial selling pressure may not be fully flushed out in a single trading session, we see the potential for a reversion toward our fair value estimate as recent trends, which include 35%-plus top-line growth, should support multiple expansion from current levels.  Over the longer-term, we think concerns about the sustainability of growth could limit incremental multiple expansion over currently projected levels.
• For reference, VMEO increased revenue by 44% in 2020 and 57% in 1Q 2021. Management’s medium term (5+ years) goals include a top-line CAGR of over 30% and an adjusted EBITDA margin of 20%-plus.
• Vimeo reported an adjusted loss before interest, taxes, depreciation, and amortization of $13.9 million in 2020, however the company has reported three consecutive quarters of slightly positive EBITDA. The company does not expect to report a full year positive EBITDA in 2021.
• Post-spin, IAC is currently trading at $159.80 versus our fair value estimate of $182 per share. Thus, we rate post-spin IAC at BUY as we see upside in the publicly traded holdings of Angi Inc. (NASDAQ: ANGI) and MGM Resorts International (NYSE: MGM), and minimal value being assigned to the company’s operating businesses.
• Our fair value estimate for IAC is derived by valuing the operating businesses at what are, in our opinion, modest multiples, and adding the value of the public traded holdings, including targets of $18 per share for ANGI and $44 per share of MGM, as well as cash.
• Additional value could be unlocked at post-spin IAC via a spin-off of the ANGI shares, or improved operations at the DotDash, Search, and the Emerging & Other business segments that could warrant a rerating of the core operating businesses.
• For more details, please refer to The Spin Off Report dated April 1, 2021, and UPDATEs dated April 14, 2021, and May 24, 2021.

Shares of Vimeo Begin When-Issued Trading; Spin-Off to be Completed on May 25, 2021; Maintain Pre-Spin IAC BUY Rating, Lower FVE to $281

• Shares of Vimeo Holdings Inc. have begun trading in the when-issued market at a price of $57 per share in connection with the spin-off from IAC/InterActiveCorp (NASDAQ: IAC).
• The spin-off will be completed on May 25, 2021, before the market open, with Vimeo expected to trade on the NASDAQ under the ticker “VMEO”.
• With Vimeo shares trading at ~5% premium to our $54 per share fair value estimate, the company is trading at 17.8x our forecasted 2022 revenue estimate of $516 million. For reference, IAC raised equity in Vimeo over the past two years at implied valuations of 9.7x, 18.4x, and 20.1x revenue. Our fair value estimate is derived at 17x revenue.
• If shares of Vimeo were to be valued at 20x our 2022 estimate, shares would be fairly valued at $64 per share.
• At $57 per share of Vimeo, post-spin IAC is implied to be trading at $146 per share versus our post-spin fair value estimate of $182 per share.
• We adjust our fair value estimate for pre-spin IAC to $281 per share (previously $285 per share), which primarily reflects a reduction in our estimated value for the company’s holdings of Angi Inc. (NASDAQ: ANGI). We lower our estimated value per share to $18 per share of ANGI held (from $20) to reflect lower than previously anticipated margins as ANGI rolls out fixed cost services.
• We maintain our BUY rating on IAC prior to the spin-off as we see upside in the publicly traded holdings of ANGI and MGM Resorts International (NYSE: MGM), and minimal value being assigned to the company’s operating businesses.
• Additional value could be unlocked on a higher multiple being awarded to Vimeo, a spin-off of the ANGI shares, or improved operations at DotDash, Search, and Emerging & Other business segments that would warrant a rerating of the core operating businesses post Vimeo spin.
• For more details, please refer to The Spin Off Report dated April 1, 2021, and UPDATE dated April 14, 2021.

Drop Coverage of Eagle Materials Inc. Effective Immediately

• On May 19, 2021, before the market open, Eagle Materials Inc. (NYSE: EXP) announced that the company’s Board of Directors has decided not to pursue the previously announced spin-off of its light materials business.
• The Board cited company and industry trends since the initial separation announcement in May 2019, including recently streamlined operations, the divestiture of the Oil and Gas Proppants business, and the company’s size being a strength to pursue strategic growth opportunities as key reasons for remaining a combined entity.
• Notably, on April 14, 2020, EXP announced that the planned spin-off was delayed to an undermined time given the unprecedented market uncertainty given the COVID-19 pandemic.
• Given the announcement, we DROP coverage of EXP effective immediately.
• Our prior estimates and fair values for EXP should no longer be relied on.

ALERT: AT&T to Spin-Off WarnerMedia, Merge it with Discovery

On May 17, 2021, before the market open, AT&T Inc. (NYSE: T) announced that the company has reached an agreement to spin-off WarnerMedia, which will immediately merge with Discovery Inc. (NASDAQ: DISCA, DISCB, DISCK) in a Reverse Morris Trust (“”RMT””). The transactions, which if completed are expected to be completed mid-year 2022 and be tax-free to shareholders, will include an approximate $43 billion dividend from DISCA to T, and result in T shareholders of record owning 71% of the newly combined, yet to be named, company, with Discovery shareholders owning 29%.

AT&T currently operates under three reportable segments: Communications ($138.9 billion in revenue and $49.0 billion in EBITDA in 2020), WarnerMedia ($30.4 billion and $8.9 billion EBITDA in 2020), and Latin America ($5.7 billion in revenue and $280 million in EBITDA in 2020). The communications segment provides wireless and wireline voice, video and broadband services under the AT&T, Cricket, and DIRECTV brand names. The company has approximately 183 million mobile subscribers, 17 million video subscribers, and 14 million broadband and internet subscribers. Notably, the communications segment has been a focus of investment in recent years, as the wireless industry continues to rollout 5G infrastructure. In February 2020, T spent $23 billion at the latest FCC 5G spectrum auction, being outspent only by Verizon Communications (NYSE: VZ), which spent $45 billion. The Latin America segment provides video and wireless service in Latin America and Mexico, and accounts for approximately 3% of consolidated revenue.

T’s WarnerMedia segment owns a portfolio of media assets that include streaming service HBOMAX, premium video channels HBO and Cinemax, news network CNN, movie studio Warner Brothers, and television networks TBS and TNT, amongst others. The assets were primarily acquired in 2018 when T purchased Time Warner Inc. in a stock and cash deal that at the time was valued at $85 billion. Since the acquisition, the company has focused on development and rollout of its HBOMAX streaming service, including continued investment in its original content portfolio.

Following the spin-off of WarnerMedia, T’s revenue and profitability will return to be dominated by the wireless services division, with an improved balance sheet that will allow for continued investment in wireless and fiber infrastructure. Post-spin AT&T expects near-term (2022-2024) revenue growth in the low single digit range, driven from wireless service and broadband growth. Adjusted EBITDA is forecast to grow in the mid-single digit range based on revenue growth, cost efficiencies, and returns on investment s from both wireless and fiber infrastructure. The company plans to double its fiber footprint and reach 30 million customer locations by year-end 2025. On a pro forma basis the company would have generated approximately $134 billion in revenue and $45.6 billion in EBITDA in 2020. Notably, management did highlight that EPS growth rates should exceed that of EBITDA growth based on the reduction of debt via the $43 billion payment received in the merger.

Discovery Inc. is a global media company that includes linear platforms, free-to-air and broadcast television, and direct-to-consumer subscription products. The company has significant worldwide presence, with approximately 12 channels in every country, and boasts 3.7 billion cumulative subscribers and viewers. The company’s portfolio includes brands such as Discovery Channel, HGTV, Food Network, and TLC, amongst other well-known properties. In January 2021, the company launched its Discovery+ streaming platform, which includes a vast category of original programing from across the company’s channels and exclusive original series. In 2020, Discovery generated $10.7 billion in revenue and $4.4 billion adjusted EBITDA.

On a pro-forma basis, the combined Discovery and WarnerMedia would have generated $39 billion in revenue and $12 billion in adjusted EBITDA in 2020. Post-Merger, the new company expects to generate $52 billion in revenue and $14 billion in adjusted EBITDA in 2023. The expected 2023 revenue base includes $15 billion indirect to consumer (DTC) revenue, primarily from HBOMAX and Discovery+ streaming platforms. Additionally, the combined company seeks to achieve run-rate cost savings synergies in excess of $3 billion, with free cash flow generation to be used to de lever the balance sheet. Following the merger, Discovery will carry debt of approximately $55 billion, equating to 5x gross leverage. Discovery targets a long-term leverage target of 2.5x-3.0x, which management expects to achieve in about 24 months post-merger. The debt paydown, will come in addition to annual content investments of more than $20 billion as the company looks to cement its position in the competitive streaming industry.

PRELIMINARY VALUATION

In terms of rationale, the transactions appear to make sense for both companies. With the successful launch of HBOMAX, T would have to continue to invest significant financial resources in content production to sustain momentum. At the same time, the communications focus on 5G and fiber rollout are also in need of capital. The cash infusion from the $43 billion payment allows the company greater flexibility in spending while the capital allocation and investment thesis become clearer without the WarnerMedia assets. For Discovery, the addition of WarnerMedia diversifies its business away from traditional broadcast/linear television and significantly improves its DTC revenue base from the current Discovery+ streaming business. Significant free cash flow will allow for a rapid reduction in outstanding debt while not restraining content investments need to continue to drive growth.

Based on WarnerMedia and Discovery 2020 results, combined with managements expectations for revenue growth and profitability it could be forecast that the newly combined company would generate $47 billion in revenue and $12.7 billion in EBITDA. Our revenue projections assume a 10% annual increase, which implies that the 2023 revenue would total almost $52 billion, while the 27% margin implies $14 billion in EBITDA, both of which are in line with management’s expectations. Post-merger, the company will continue to be compared to large media conglomerates such as Fox Corp. (NASDAQ: FOXA) and Viacom CBS Inc. (NASDAQ: VIAC), which trade at 8.5x and 7.9x the 2022 consensus EBITDA estimate, while the significantly larger streaming component than prior to the merger will allow for comparison to Netflix Inc. (NASDAQ: NFLX) and The Walt Disney Co. (NYSE: DIS), which trade at 26.5x and 21.7x the 2022 consensus EBITDA estimate. For its part, DISCA currently trades at 10.4x. We would expect modest multiple expansion to occur given the added assets, as such valuing shares at 11.0x our 2022 EBITDA estimate an enterprise value estimate of $140.2 billion is derived. Incorporating net debt of $57.8 billion, which includes the addition of $43 billion, and 1.78 billion shares outstanding, which includes 1.3 billion of new shares issued to T shareholders in the merger, a post-merger fair value estimate for Discovery of $46 per share is derived.

Following the spin-off of WarnerMedia, assuming 4% annual revenue growth and a 34% EBITDA margin, T would generate $145 billion in revenue and $49 billion in EBITDA in 2022. Shares of T currently trade at 8.0x the consensus 2022 EBITDA estimate, and will most aptly be comparable to Verizon Communications Inc (VZ), and to a lesser degree T-Mobile US Inc. (TMUS), and United States Cellular Corp. (USM), which on average trade at 7.5x the consensus 2022 EBITDA estimate. Applying the peer multiple to our EBITDA estimate, incorporating adjusted net debt of $166 billion, and 7.1 billion shares outstanding, a post-spin fair value estimate of $28 per share is derived. On a pre-spin basis, which includes the value of Discovery shares to be received in the merger, shares of AT&T are fairly valued at $37 per share.

ALERT: ADS to Spin-Off LoyaltyOne Business

On May 12, 2021, before the market open, Alliance Data Systems Corp. (NYSE: ADS) announced plans to spin-off 81% of its LoyaltyOne segment, which controls the company’s Canadian AIR MILES Reward Program and Netherlands-based BrandLoyalty business, into a separately traded, independent public company. The separation, which is subject to customary closing conditions, including the effectiveness declaration of the company’s Form 10 filing with the SEC, is expected to be tax-free to shareholders and completed by year-end 2021.

ADS is a data-driven and transaction-based marketing and customer loyalty solutions provider. The company, which generated $4.5 billion in revenue and $1.2 billion in adjusted EBITDA in 2020, currently operates under two segments: LoyaltyOne ($3.8 billion in revenue in 2020), and Card Services ($765 million in 2020 revenue).

ADS’s LoyaltyOne segment owns and operates loyalty reward program “”AIR Miles Reward Program””, which is a loyalty program in Canada, and BrandLoyalty, which is a provider of customized loyalty programs for grocers worldwide. At the core of LoyaltyOne’s business is the ability to analyze consumer behavior data, which is then used by customers to more effectively market their goods and services. In 2020, LoyaltyOne revenue decreased by 26% to $765 million versus 2019, largely due to market impacts from COVID-19, and to a lesser degree the sale of Primerica in 2019, while adjusted EBITDA declined to $186.2 million from $244.5 million in the prior year period due to loss of fixed cost margin, which was partially offset by cost savings initiatives that resulted in EBITDA margin of 24.3% in 2020 versus 23.7% in 2019. Through 1Q 202, segment revenue declined 11%.

The Card Services business is a provider of “”private label, co-brand, general purpose and business credit card programs, digital payments and Comenity-branded financial services””. In 2020 the Card Services business declined by 17% versus 2019 to $3.8 billion, while segment EBITDA margins contracted 680 basis points to 17.8% as customers reduced credit card debt outstanding and lower sales volumes given COVID-19. Through 1Q revenue declined 23% versus 1Q 2021 as trends from 2020 persisted.

The separation of LoyaltyOne is likely one of the final stages of ADS’s plan, in progress since 2018, to streamline operations, which included the 2019 sale of the company’s Epsilon business and the January 2020 sale of Primerica, which was formerly included in the LoyaltyOne segment reporting. In conjunction with the separation, ADS will receive a dividend from LoyaltyOne, which will be used to retire debt. Additionally, ADS expects to monetize the retained 19% LoyaltyOne ownership stake over time, with proceeds being applied to debt reduction. Removal of the historically lower margin and slower revenue growth loyalty business should improve the parent company’s growth prospects, while the debt retirement should allow for increased flexibility for pursuing additional growth opportunities.

PRELIMINARY VALUATION

In terms of looking forward, both sides of ADS’s current business are still experiencing negative impacts from COVID-19, however, tends appear to be improving. In 1Q 2020 results, management highlighted that through 2020 trends improved for the AIR MILES program, while acknowledging they are still below pre-pandemic levels. Further, on the Card Services trends, year-over-year credit sales and in-store brand sales have also improved throughout 2020, however remain in the mid-single digit negatives. Management has issued 2021 guidance, which includes consolidated revenue declines in mid-single digits, with the expectation that LoyaltyOne would see growth in 2021 while Card Services will experience a longer timeframe until a rebound as consumers rebuild credit balances from pandemic lows.

By segment, at LoyaltyOne, assuming low single-digit revenue growth and adjusted EBITDA margin of 24%, which incorporates costs savings and proportional corporate costs, implying 2021E EBITDA of almost $191 million. Peers for the loyalty business could include other media and analytic companies such as Nielsen Holdings PLC (NYSE: NLSN), Quotent Technology Inc. (NYSE: QUOT), amongst others, which trade at approximately 11x the consensus 2022 EBITDA estimate. Applying a discounted 9x multiple to account for revenue and margin pressure, implies an enterprise value of $1.7 billion.

For Card Services, forecasting a 10% revenue decline in 2021, roughly in line with 1Q 2021 results, before a rebound of 10% in 2022 on a return to normal consumer behavior following the COVID pandemic, we estimate that the segment would generate $3.7 billion in revenue in 2022. Modeling a 30% adjusted EBITDA margin, above 2020 level of 24.6% but below the historical average that approximate 40%, segment EBITDA would total $1.1 billion. Card services could be most aptly compared to Synchrony Financial (NYSE: SYF), Discover Financial Services (NYSE: DFS), Capital One Financial Corp. (NYSE: COF), and to a lesser degree American Express Co. (NYSE: AXP), which trade on average at 8.2x the 2022 consensus EBITDA estimate. Valuing the Card Services business at 8.0x implies an enterprise value of $8.9 billion.

Accounting for net debt of $3.8 billion and 49.7 million shares outstanding, on a pre-spin, sum-of-the-parts basis, we fairly value shares of ADS at $138 per share.