ALERT: LB to Spin-Off Victoria’s Secret Business

On May 11, 2021, before the market open, L Brands Inc. (NYSE: LB) announced plans to spin-off its Victoria’s Secret business from its Bath & Body Works business into a standalone, publicly traded 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 in August 2021.

L Brands currently operates two business segments: (1) Victoria’s Secret (~55.5% of sales in February-ending F2020), which primarily sells women’s intimate apparel; and (2) Bath & Body Works (54.5% of F2020 revenue), which sells body care and home fragrance products.

The separation of Victoria’s Secret follows an attempted sale of 55% of the brand to Sycamore Partners for $525 million. The sale was mutually terminated in May 2020, following a dispute over completion of the purchase as Sycamore attempted to cancel the agreement as it claimed L Brands failure to maintain normal business operations was a breach of terms, despite the COVI-19 pandemic restrictions. L Brands subsequently filed a lawsuit against Sycamore.

The company is not providing full year F2021 guidance but had previously indicated the expectation that 1Q F2021 sales will be roughly flat, year over year, at ~$2.6 billion, with EPS will be $0.85-$1.00. In conjunction with the spin announcement, the company disclosed preliminary 1Q F2021 results that include an adjusted EPS of $1.25 per share, $570 million in operating income ($380 million from Bath & Body Works and $245 million from Victoria’s Secret), and sales of $3.0 billion (versus $1.7 billion in 1Q F2020, negatively impacted by COVID closures). 1Q F2021 results benefited from reduced COVID related restrictions and stimulus payments.

While Victoria’s Secret (VS) remains an iconic brand worldwide and the market share leader within the domestic women’s lingerie market, the business’s financial results saw a marked deterioration in F2015-F2020 amid a range of strategic, organizational, and competitive challenges, including leadership changes, evolving consumer tastes, the 2016 exit of non-core categories, particularly swimwear, and the pandemic. That said, the prospects for the brand have markedly improved under the new leadership of Martin Waters (who replaced John Mehas in November 2020). Amid a more favorable outlook, recent reports in the business press have estimated its value as a standalone could be $2-$3 billion (compared with the less than $1 billion valuation implied by the previously scuttled sale). In contrast to VS, LB’s Bath & Body Works (B&BW) business has posted consistently strong results, in terms of both same store sales and profitability, resulting in double-digit compound annual top-line and EBITDA growth since F2015.

 
PRELIMINARY VALUATION

In terms of earnings estimates, we expect that both Victoria’s Secret and Bath & Body Works will see improved revenue in F2021 on the tail winds of reopening and consumer spending, before moderating in F2022. Based on current operating performance, we forecast a 12.7% EBITDA margin for Victoria’s Secret and a 29.7% EBITDA margin for Bath & Body Works, resulting in EBITDA estimates of $809 million and $2.1 billion, respectively.

Victoria’s Secret peers could include Abercrombie & Fitch (NYSE: ANF), American Eagle Outfitters (NYSE: AEO), Capri Holdings (NYSE: CPRI), Chico’s (NYSE: CHS), The Gap Inc. (NYSE: GPS), Hanesbrands (NYSE: HBI), PVH Corp. (NYSE: PVH), Tapestry (NYSE: TPR), Urban Outfitters (NASDAQ: URBN), and Zumiez Inc. (NASDAQ: ZUMZ), which trade, on average, at about 10.5x 2022E EBITDA. Applying a low-end/discounted multiple of 5x to F2022E EBITDA implies segment value of $4.0 billion.

For Bath & Body Works, potential peers trade in a wide range of multiples, given divergent growth and margin profiles; high-quality peers, such as Estee Lauder (NYSE: EL), Natura & Co. (NTCO3 BZ), which acquired Avon Products in January 2020, and Ulta Beauty (NASDAQ: ULTA), trade, on average, at ~19x 2022E EV/EBITDA (in a range of 13x-15x), while more challenged peers, such as Sally Beauty (NYSE: SBH), trade closer to 8.0x 2022E EBITDA. Again, applying a low-end multiple of 10x to F2022E EBITDA implies an enterprise value of $20.5 billion.

Accounting for net debt of $2.5 billion and 284 million shares outstanding, on a pre-spin, sum-of-the-parts basis, we fairly value shares of LB at $78 per share.

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

Paper Excellence to acquire UFS for $55.50 per share in cash

• This morning, UFS announced it had agreed to be acquired by privately held Canadian paper & packaging company, Paper Excellence, for $55.50 per share in cash. (Notably, this agreement follows reports last week that the parties were exploring a potential transaction that could value UFS shares in the “mid-$50s”.)
• The deal, which is expected to close in 2H 2021, represents a ~17% premium to last night’s closing price and an almost 40% premium to where the shares were trading on May 3rd (the day prior to reports that a deal could be in the works surfaced in the business press).
• By our calculation, the ~$3 billion purchase price represents a ~7.2x EV/EBITDA multiple on 2022E EBITDA (and is modestly above the high-end of our bull/bear valuation range). In that context, we would note that M&A in the space has averaged roughly 8x trailing and 7.5x forward EBITDA in recent years while peers currently trade at ~7.5x 2022E EBITDA (albeit in a range of 4.5x-10.0x).
• From our perspective, this deal, which in some form seemed somewhat inevitable following the sale of its Personal Care (PC) division to private-equity firm, American Industrial Partners (AIP), for $920 million, in March 2021, is very likely to mark a successful close to the UFS story, where shares have more than doubled since our re-initiation in September 2020 (compared with a 28% increase in the S&P 500 and a 50.5% increase in the Russell 2000. [Note: Recall, we had previously recommended UFS from March 2017 until it reached our fair value estimate in January 2018 during which time the shares returned ~39.5% versus roughly 10% gains in both the S&P and Russell.]

ALERT: BRKS to Spin-Off Life Sciences Business

On May 10, 2021, after the market close, Brooks Automation, Inc. (NASDAQ: BRKS) announced plans to spin-off its Life Sciences business into a standalone, publicly traded 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 in calendar year 2021.

Brooks Automation’s (“Brooks”) business currently focuses on automation solutions for the semiconductor and life sciences industry. The company operates under two distinct segments: Brooks Semiconductor Solutions Group, which generated $509 million in revenue and $83 million in operating income in F2020 (September fiscal year-end), and Brooks Life Science, which generated $388.5 million in revenue and $38.2 million in operating income in 2020. On a trailing twelve-month basis, Life Sciences has generated $449 million in revenue while the semiconductor business registered $553 million in sales.

The Semiconductor business provides factory automation, wafer handling systems, and wafer handling robotics, along with associated support services. Semiconductor increased revenue by almost 14% in F2020, and 18.3% through 1H F2021. Given the reliance on the semiconductor industry, this business tends to be cyclical in nature. Semiconductor segment should benefit from what is expected to be significant capital investments being made by chip makers and governments that are looking to secure strategic availability of semiconductors. Brooks Life Science segment provides products and services focused on automated ultra-cold storage solutions for biological and chemical compound samples. Sample management solutions include consumables such as vials and tubes, and offers end-to-end “cold-chain of custody” capabilities. The services portion of Life Science provide genomic analysis and management/care of biological samples used in various industries such as pharmaceutical, biotech, and academia, amongst others. Gene sequencing and off-site transportation and storage services are key offerings from the company. Life Sciences increased revenue by 16.3% in F2020 and operated at a 9.8% margin. Through 1H F2021 Life Sciences increased revenue by 18.6%, which was largely attributable to increased sales at GENEWIZ, a provider of genomic analysis and gene synthesis services, which Brooks acquired in November 2018.

The Life Sciences business was started in 2011, when the then pure-play semi-conductor capital equipment company leveraged its core competencies in automation and cryogenic technology to diversify the company’s business lines. Over the past ten years the company has made several acquisitions, such as GENEWIZ, that has moved the business further away for a pure play on the semiconductor segments core competencies. Given the Life Sciences business is now profitable and cash flow positive, the rationale for the spin appears rooted in an attempt to unlock value from the Life Sciences business, which appears under valued within the current corporate structure, and a return to a pure-play automation company. As two separate entities, each will have better control of their capital allocation decisions, which may ultimately be beneficial to both companies.

PRELIMINARY VALUATION

We base our forward earnings estimates on current trends through 1H F2021 and management commentary. We forecast Life Sciences annual revenue growth of 15%, while we estimate that Semiconductor can increase sales by 18% and 20% in F2021 and F2022, respectively, based on strong secular trends. We assume Life Sciences can operate at a 22% EBITDA margin resulting in $113 million in EBITDA, while Semiconductor operates with a wider 25% margin, generating $180 million in EBITDA. Notably our margin assumptions incorporate increased G&A expense that will be allocated to Life Sciences post-spin and a decrease in G&A expenses that had historically been allocated to the Semiconductor business given management historically has allocated G&A based on revenue.

Following the separation, we expect investors to have a easier time valuing shares of the post-spin companies versus the current conglomerate structure incorporating semiconductor and life sciences. Life Sciences can be compared to a variety of companies given the varying products and services that are offered that roughly fall into the category of life science testing and diagnostic equipment and services such as Thermo Fisher, Agilent Technologies, and Danaher, amongst others, which trade at roughly 29x 2022 EBITDA. For its part, BRKS currently trades at 23.2x 2022 EBITDA. We posit that the Semiconductor business could experience a degree of multiple compression to more align with traditional semi comps, while the Life Sciences company would widen its multiple to approximate peers better. Applying a 29x multiple to Life Sciences and a 23x multiple to Semiconductor, we estimate that Life Sciences and Semiconductor would be valued at $3.3 billion and $4.1 billion, respectively, on an enterprise value basis. Incorporating $270 million in net cash and 74.3 million shares outstanding, we preliminarily value shares of Brooks at $104 per share.

On May 6, 2021, before the market open, Becton, Dickenson and Company (NYSE: BDX) announced plans to spin-off its diabetes care business into a standalone, publicly traded 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 in 1H 2022.

BDX is a global medical technology company that develops, manufactures, and sells medical devices, instrument systems, and reagents. BDX, which generated $17.1 billion in revenue and $6.3 billion in EBITDA in F2020 (September fiscal year end), currently operates under three segments: 1) BD Medical (51% of sales and a 26.2% operating margin in F2020); 2) BD Life Sciences (27% of revenue and a 30.0% operating margin in F2020); and 3) BD Interventional (22% of sales and a 22% operating margin in F2020). BD Medical primarily focuses on healthcare delivery devices, including a wide range of IV catheters, delivery management systems such as infusion pumps, medication compounding systems, diabetes focused syringes, pen needles, and other injection and infusion products, along with a variety of prefillable drug delivery systems (syringes). Life Sciences focuses on integrated diagnostic solutions for the collection of specimens and BD Interventional focuses on specialty products, which are generally disposable (i.e. one use), for vascular, urology, and oncology uses.F

2020 revenue was essentially flat versus the prior year, period declining 1%, as the company’s Life Sciences segment’s diagnostic solutions sales increased 32% ($2.045 billion in F2020 versus $1.547 billion) on COVID-19 diagnostic testing, which was more than offset by 4.2% declines in each the Medical and Interventional segments. Through 1H F2021 company revenue increased 20.6% versus 1H F2019 as demand for syringes related to the COVID-19 vaccination effort (BD Medical), continued COVID-19 diagnostic testing (BD Life Sciences), and to a lesser degree a small increase in demand for Interventional products. In terms of the Diabetes Care business to be spun out, the business has exhibited a slower revenue growth rate than the company’s other business, and while management does not break out individual business operating performance, on this morning’s conference call it was stated that excluding the Diabetes Care business from the parent would improve the overall BDX growth rate, while noting that the operating margin of Diabetes Care was higher than consolidated BDX.

In terms of rationale, it appears that removal of what is essentially a stagnant product, in terms of its contribution to annual revenue growth, will help management in its capital allocation decisions. As a standalone company, with what we would expect to be minimal leverage to allow for M&A activity, Diabetes Care management would be able to fund projects that would not meet return rates hurdles within the larger BDX.  For reference Diabetes Care generated $1.084 billion in revenue in F2020, a 2.4% decline from the prior year, and $569 million through 1H F2022, which represented a 4% increase.

PRELIMINARY VALUATION

We base our BDX and Diabetes Care forward earnings estimates on current trends through 1H F2022 while assuming that the benefits from COVID-19, primarily testing and syringe usage, are likely to remain strong through F2022 and begin to abate in F2023. Given management’s commentary we assume that the Diabetes Care business remains around a $1.1 billion sales business with operating margins of 28% given commentary indicating higher margins versus the consolidated business, which operated at 25.7% in F2021. Under these assumptions, we forecast the spin company to generate $1.1 billion in revenue and $439 million in EBITDA in F2023, after assigning a proportional amount of D&A to the company. Excluding the Diabetes Care business, we forecast 10% revenue growth in F2022, before flat sales in F2023. Assuming operating margins of 25% and assigning proportionate D&A expense, we forecast the parent company to generate $17.6 billion in revenue and $6.4 billion in EBITDA in F2023.

Given the separation appears to be rooted in managements desire to more effectively allocate capital to a low growth business, versus transactions in which a subsidiary is significantly undervalued within a conglomerate, we do not see significant opportunities for multiple rerating aside from compression on the spin company given its lower growth rate. We value the parent company at 14.0x our F2023 EBITDA estimate and Diabetes Care at 10x our F2023 EBITDA estimate, resulting in enterprise values of $89.8 billion and $4.4 billion, respectively. Accounting for net debt of $14.0 billion and 293.5 million shares outstanding, on a preliminary sum-of-the-parts basis we fairly value shares of BDX at $273 per share. We note that given lack of clarity on the actual operating margin of the Diabetes business, upside exists if the business does operate at a significantly higher margin than we posit in our preliminary valuation.

LNDC enters into an outsourcing agreement for CF with logistics-provider/distributor, Castellini Co.

• Last night, after the market close, Landec announced it had reached an agreement with Castellini Co., a leading logistics-provider/distributor in the fresh foods sector, for it to manage Curation Foods’ warehousing & transportation management functions, including contracting/pricing negotiations with freight carriers and dispatching services.
• In conjunction, LNDC will further streamline its operating footprint by seeking to sell its distribution facility in Rock Hill, SC, closing its Vero Beach, FL facility and transferring its Rock Tavern, NY facility to Castellini. Landec will also reduce headcount by 56 (although the majority of those workers will be offered positions at Castellini).
• In terms of the financial impact, LNDC expects to record ~$3 million of restructuring costs (e.g. early lease terminations on property & equipment as well as severance), of which $2 million will be non-cash items, in 4Q F2021. On the positive side, the company expects to realize net proceeds of ~$1 million from the sale of the Rock Hill facility and ~$1 million of annualized cost synergies in F2022. The company also sees incremental revenue opportunities as the agreement will give CF access to some new markets that could not be served by LNDC’s internal distribution network.
• Recall, LNDC reported 3Q F2021 results about a month ago and reduced full-year F2021 consolidated guidance to reflect COVID-19 headwinds at CF (see Exhibit #1 on page 2); to that end, F2021 sales are now expected to be $523-$532 million with adj. EBITDA growth of 23%-32% to $27-$29 million.
• By segment, at CF, LNDC forecasted F2021 sales would decline 14%-15% to $430-$435 million with adj. EBITDA of $8-$9 million. At Lifecore, management continued to forecast top-line growth of 8%-13% to $93-$97 million with a 12%-22% increase in adj. EBITDA to $22.5-$24.5 million (see Exhibit #1 on page 2).
• LNDC ended 3Q F2021 with net debt of $184 million and a net leverage ratio of 5.5x (vs. its 7.0x covenant). On a pro-forma basis, incl. the ~$45 million value of its investment in Windset Farms, which has a put/call date in March 2022, the leverage ratio is 4.2x.
• Our base case fair value estimate of $13 per share is based on a blended multiple of ~11x on F2023E EBITDA of ~$46.5 million and net debt, incl. Windset, of ~$140 million (see Exhibit #2 on page 2).

ALERT: ODP to Spin-Off B2B Solutions Provider

On May 5, 2021, before the market open and in conjunction with reporting 1Q 2021 results, The ODP Corp. (NASDAQ: ODP) announced plans to separate into two independent, publicly traded companies via a spin-off of the company’s B2B solutions provider business. The distribution, which is expected to be tax-free to ODP shareholders, is subject to customary closing conditions, including final Board approval and receipt of a favorable ruling on the tax-free status of the distribution from the IRS, is expected to be completed in 1H 2022.

The ODP Corp. operates a fully integrated business-to-business (“”B2B””) distribution platform, with an online presence and 1,154 retail stores. The company’s primary brands include Office Depot, OfficeMax, CompuCom, and Grand & Toy, amongst others. ODP currently operates under three reportable segments: 1) Business Solutions Division (“”BSD””) ($4.7 billion in revenue and $116 million in operating income in 2020); 2) Retail Division ($4.2 billion in revenue and $275 million in operating income in 2020); and 3) CompuCom ($854 million in revenue and $14 million in operating income in 2020).

BSD operates the company’s B2B distribution platform that provides customers branded and private label office supply products and services. BSD operates in the United States, Puerto Rico, the U.S. Virgin Islands, and Canada. 1Q 2021 revenue declined 16% as the segment’s operations continued to be impacted by COVID-19 restrictions, primarily school closures and the work from home impact. In 2020, BSD sales declined approximately 5%, as increased demand from eCommerce partially offset COVID impacts.

The Retail Division operates the company’s branded retail store operations under the Office Depot and OfficeMax brands, which provide customers retail and private label office supply products, including breakroom supplies, technology, and furniture. Notably, in 2019, ODP implemented restructuring programs focused on improving operations at the BSD segment, which included cost reductions across the company as well as planned retail store closures through 2023. On the latter point, ODP has already closed 153 retail stores since the beginning of the restructuring program. 1Q 2021 retail sales declined 10% year-over-year, which is attributed to lingering COVID impacts and planned store closures.

The CompuCom business is a technology service provider to enterprise organizations. Services include technology lifecycle management, service desk, and remote technology monitoring and management (RMM), amongst others. Notably management has previously disclosed that it intends to sell the CompuCom business.

In terms of rationale, the separation is in line with management’s restructuring programs that focus on improving the B2B solutions platform. As standalone entities, management focus and business investments should be more targeted, which, in theory, should result in improved operations. Additionally, ODP’s businesses could see a tailwind in demand as offices begin to more fully open throughout the summer, and into the fall on the heels of school re openings.

Anecdotally, the spin-off may also provide an opportunity for office supply competitor Staples to finally acquire some, if not all, of ODP’s retail business. Staples, which was taken private by PE firm Sycamore Partners and operates as subsidiary “”USR Parent””, has long tried to purchase Office Depot, with attempts being thwarted by the Justice Department back to 1997. More recently ODP rejected a $40 per share offer for the whole company, however ODP indicated it would be willing to consider merging the retail operations with USR Parent.

PRELIMINARY VALUATION

We base our ODP earnings estimates on full year 2020 and 1Q 2021 results, in conjunction with the expectation that ODP’s BSD and Retail businesses will continue to experience sales declines through 2021. Top line pressure at BSD should lessen moving through the year on previously noted expectations for office and school re openings, before seeing a significant increase in 2022. Retail segment sales will likely continue to see pressure as we view consumers preference for online shopping to be sticky post-COVID combined with the continued planned store closures. Additionally, we expect BSD and Retail margins to slightly improve as the restructuring programs progress. Further we anticipate continued struggles at CompuCom given the recent hacking scandal, with 1Q 2021 revenue declining 14%.

Under this framework, we forecast that BSD would generate revenue and EBITDA of $4.6 billion and $209 million, respectively in 2022. Retail revenue is forecast to decline to $3.6 billion with EBITDA of $321 million in 2022. It could be expected that the BSD business would experience slight multiple expansion from the current 5.5x 2022 EBITDA multiple to better align with similar B2B providers, approximating 9x, while standalone Retail would see multiple compression to 4x given the current retail environment (the potential combination with Staples is not likely to expand the multiple at this time). We value the CompuCom business declining 15% in 2021, in line with 1Q 2021 results), and 10% in 2022 with 5% EBITDA margin, valued at 5.0x which is a discount to the low end of other IT RMM service providers given its recent performance. Including corporate costs capitalized at 10x, current net cash of $386 million, and 54.7 million shares outstanding, we assign a preliminary fair value estimate of $48 per share to ODP.

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

XPO posts better than expected 1Q 2021 results and raises full-year adj. EBITDA, adj. EPS and free cash flow forecasts; spin-off “on track” for 2H 2021 completion; fair value increased to $165 per share (from $159)

• On a consolidated basis, XPO posted 1Q 2021 sales up ~23.5% to $4.77 billion (vs. consensus of $4.33 billion) with 33% growth in adj. EBITDA to $443 million (vs. consensus of $387 million).  Adj. EPS more than doubled to $1.46 (compared with consensus of $0.97 and $0.69 in the prior year period.)
• By segment, Transportation sales increased ~21.5% to $2.9 billion, reflecting a 7.5% increase at LTL and a 35% rise at TB, with a 35.5% increase in adj. segment EBITDA to $343 million. At Logistics, segment sales increased 26.5% to $1.8 billion, with ~13% due to the January 2021 acquisition of KNIN’s U.K contract logistics operations, with a 28% rise in adj. EBITDA to $155 million.
• The company ended 1Q 2021 with net debt of $4.621 billion and a net leverage ratio of 3.1x (compared with $4.653 billion and 3.3x at the end of 2020).  The company remains intent on pursuing investment credit ratings at both XPO and GXO (with the spin-entity likely achieving that goal on “day one” and more granular info to be coming “soon”).
• The company increased full-year financial guidance across the board (see Exhibit #1 on page 2); to that end, XPO now projects adjusted EBITDA growth of 31%-35% to $1.825-$1.875 billion (up from its previous expectation of 24%-29% growth to $1.725-$1.8 billion) with adj. EPS of $5.90-$6.50 (compared with it previous target of $5.10-$5.85 and $2.97 in 2020). By segment, the company expects adj. EBITDA growth of 30%-34% at Transportation and 28%-32% Logistics (versus prior commentary that growth would be roughly even in the 24%-29% range at both divisions).
• As well, the company increased its full-year free cash flow outlook to $650-$725 million (compared with previous forecast of $600-$700 million) despite an increase in the net cap ex budget to $500-$550 (from $475-$525 million). At the mid-point of XPO’s revised guidance, leverage is likely to be 2.5x (or below) at year-end 2021.
• Fair value is increased to $165 per share (from $159), reflecting $116 for XPO/Trans. based on a blended multiple of 12.5x on 2022E EBITDA, inclusive of pro rata corp. costs and net debt, and $49 for GXO/Logistics based on a 9.5x multiple (see Exhibit #1 on page 2).  We continue to view the impending spin as a value unlocking event.

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

Per Bloomberg, Paper Excellence is reportedly exploring an acquisition of UFS with a potential deal price in the “mid-$50s”

• Last night, it was reported by Bloomberg that privately held Canadian paper & packaging company, Paper Excellence, is exploring a deal to acquire Domtar in a transaction that could value UFS shares in the “mid-$50s”.
• Recall, UFS completed the sale of its Personal Care (PC) division to private-equity firm, American Industrial Partners (AIP), for $920 million, in March 2021, which, in our estimation, left the standalone Pulp & Paper (P&P) business as a likely takeover target given on-going industry consolidation (amid secular demand challenges for communications paper).
• In our estimation, a deal in the “mid-$50’s”, which remains unconfirmed by either party, would imply a better than 7x EV/EBITDA multiple on F2022E consensus estimates (and be at the high-end of our bull/bear valuation range; see Exhibit #2 on page 2). In that context, we would note that M&A in the space has averaged roughly 8x trailing and 7.5x forward EBITDA in recent years (see Exhibit #1 on page 2) while peers currently trade at ~7.5x 2022E EBITDA (albeit in a range of 4.5x-10.0x).
• Our $44 per share fair value estimate is based on a 5.5x multiple, which is roughly in-line with UFS’s 5-year trading average, on 2022E standalone adj. EBITDA of ~$410 million as well as projected net debt of ~$150 million (see Exhibit #2 on page 2).
• Notably, Domtar is scheduled to report 1Q 2021 financial results on Thursday, May 6th before the market open and hold a conference call that morning at 10 a.m. (ET); call-in at (800) 700-1722.

Increase Fair Value Estimate to $74 per share on Better Than Forecasted Operational Performance, Closing of Urgent Care Platform Sale; Maintain BUY Rating

• We increase our fair value estimate on Tenet Healthcare Corp. (NASDAQ: THC) on increased confidence that the current admission and margin trends are sustainable moving forward. Additionally, we account for management’s most recent segment guidance and peer multiples.
• THC’s recent 1Q 2021 results exceeded our prior expectations, as revenue trends at the Hospital and Ambulatory segment continued to show positive momentum in terms of Hospital segment admissions (~85% of 1Q 2019 levels) and surgeries (~88% of 1Q 2019 levels), and in the Ambulatory segment surgical cases (~94% of 1Q 2019).
• Management increased the 2021 guidance ranges for consolidated results, with revenue now expected to range $19.4 – $19.8 billion (previously $19.2 – $19.6 billion) and EBITDA of $2.9 – $3.1 billion. On a segment basis, the increase was solely due to the Hospital segment, as the Ambulatory outlook was slightly decreased due to the sale of its urgent care centers (completed April 30, 2020) and the realignment of 24 imaging centers results into the Hospital segment.
• Notably Confier’s guidance remained intact, which appears reasonable given roughly flat year-over-year 1Q performance. As such, we maintain our 2022E revenue and EBITDA estimates of $1.3 billion and $378 million, respectively, for Conifer.
• We view the current trends of COVID-19 cases, and the increasing percentage of the U.S. population being vaccinated as positives for the Ambulatory and Hospital segment’s outlook for admissions and same facility case metrics, which we believe will drive 2021 revenue growth. Further the SCD ambulatory care portfolio acquisition results in a greater percentage of revenue being derived from higher margin sources, which we do not believe is fully discounted in the current share price.
• For Conifer, we view revenue stabilization and management’s ability to contain costs, which resulted in full-year 2020 margins equal to the prior year, despite the full year-over-year revenue decline, as a positive. The segment guidance calls for essentially flat segment revenue and EBITDA in 2021. We continue to believe that the revenue cycle management business is undervalued within the current consolidated corporate structure, and the eventual spin-off will result in a rerating of the business, thus unlocking value.
• We increase our post-spin THC revenue and EBITDA estimates to reflect the current operating performance. We now estimate post Conifer spin-off, THC will generate $19.4 billion in revenue and $2.3 billion of EBITDA in 2022. We now value post-spin THC at $18.6 billion on an enterprise value basis, which is 8.0x our 2022 EBITDA estimate.
• We increase our valuation multiple for Conifer to 14x (previously 12x) based on increased peer trading multiples and now fairly value Conifer at $5.3 billion on an enterprise value basis.
• On a pre-spin basis, we now fairly value shares of THC at $74 per share (previously $58 per share) when accounting for approximately $16.0 billion in net debt and 106.8 million shares outstanding and maintain our BUY rating.
• For more details, please refer to The Spin Off Report dated January 26, 2021 and UPDATE dated February 10, 2021.

ALERT: MDP to Spin-Off National Media Group, Sell Local Media Group to GTN

On May 3, 2021, before the market open, Meredith Corp. (NYSE: MDP) announced plans to spin-off its National Media Group (“”NMG””) business to shareholders as a standalone publicly traded company. Following the spin-off, the parent company, which will control the Local Media Group (“”LMG””) business will be sold to Gray Television Inc. (NYSE: GTN) for $2.7 billion in cash. MDP shreholders of record will receive one share of the spin company, which will retain the Meredith Corp. company name, for each share of MDP owned as well as $14.50 per share in cash. The transactaion, which have been unaniamously approved by MDP’s and GTN’sw respective Board of Directors but subject to MDP shareholder approval, is expected to be completed in 4Q 2021.

Meredith Corp., which was founded in 1902, operates two distinct segments:(1) National Media (73% of consolidated sales in June-ending F2020 and 64% of adjusted EBITDA), the so-called publishing division, which generates advertising, circulation, marketing, and licensing revenue from a stable of subscription magazines/digital platforms, including People, InStyle, Better Homes & Gardens, Travel + Leisure, Parents, Food & Wine, Shape, Martha Stewart Living, and Allrecipes; and (2) Local Media (27% of F2020 sales and 36% of adjusted EBITDA), which is the company’s broadcasting division and comprises 17 television stations in 13 U.S. states.

In terms of rationale, the transaction appears to make sense from the view point that MDP will be able to reduce its current leverage while receiving what appears to be a fair value for its LMG of approximately 10x. Management highlights that significant investments made in NMG’s transformation from print ot digital is now at a point where while a majority of revenue is still derived from print, the majority of the segments EBITDA is generated from digital. Further, combined with the $2.7 billion sale price, and the $14.50 per share special dividend, and expected cash generation prior to the closing, the company is targeting an initial leverage ratio of approximately 2x.

PRELIMINARY VALUATION

In F2020, National Media segment sales fell 10.5% to $2.08 billion, while adjusted EBITDA declined ~16% to $383 million. Assuming the significant impact that the COVID-19 pandemic has had on advertising revenue begins to abate in F2022, it can be reasonably projected that MDP’s National Media segment could generate F2022 sales and adjusted EBITDA of $1.9 billion and $325 million, respectively. Public peers, including Gannett (NYSE: GCI) and Tribune Publishing (NASDAQ: TPCO), trade at ~5.5x forward-12-month EV/EBITDA. Applying the peer multiple to F2022E EBITDA implies a segment value of $1.8 billion. Incorporating net debt of approximately $650 million (roughly 2x net debt to EBITDA), and 45.7 million shares outstanding, a post-spin fair value estimate of $25 per share is derived. Accounting for the $14.50 per share special dividend, a per-spin sum-of-the-parts fair value estimate of $39 per share is derived.