STAY declares a special dividend of $0.35 per share and re-affirms 4Q 2020 guidance

• Today, STAY declared a special “catch-up” dividend of $0.35 per share, payable on January 20^th to shareholders of record on January 6^th.
• Anecdotally, we had expected, given prior commentary, a distribution of $0.26-$0.32 per share.  That said, the announced distribution, in and of itself, implies an about 3% yield at the current share price and we think reflects both STAY’s ability to generate cash internally as well as the potential to disburse proceeds from asset monetizations to shareholders.
• On the latter point, recall that in November 2020 STAY sold a single hotel location in California for $65 million, which implied a ~20x multiple on 2019 adj. property-level EBITDA and a capitalization rate of 3.8%.  Moreover, at the time, management indicated that it saw additional opportunities to dispose of assets that could be monetized “at multiples significantly above the company’s current trading level”.
• In our view, future additional sales will not only provide a return of cash to shareholders but also highlight the underlying value of STAY’s unique real estate footprint and underscore the company’s on-going focus on an asset-light growth strategy.
• Additionally, in today’s release, the company reaffirmed 4Q 2202 guidance, which called for comparable system RevPAR down 11%-15% (implying a 15.5%-16.5% decline for the full year) with adjusted EBITDA of $78-$88 million.  Full-year capital spending was expected to be $170-$190 million.
• Our fair value estimate for STAY remains $15 per share, based on a blended multiple of 9.5x 2022E EBITDA of ~$500 million and net debt of $2.08 billion, albeit with incremental upside to ~$17 per share, in the event of strategic alternatives.

Close coverage of GLIBA as its merger with LBRDK is set to close today, after the market bell

• For context, GLIBA shares have returned 112% since our initial recommendation in January 2019 (compared with ~41% gain in the S&P 500 and a 34.5% rise in the Russell 2000).
• That said, with the LBRDK merger set to close this evening we prefer to maintain a disciplined approach and will withdraw our recommendation, as of today’s close.
• To be sure, we will continue to monitor GLIBA/LBRDK for an opportunity to re-recommend as we continue to see the longer-term potential for a merger, likely via Reverse Morris Trust (RMT), with Charter Communications (NASDAQ: CHTR).

Drop Coverage of SunPower Corp. Effective Immediately

• SunPower Corp. (NASDAQ: SPWR) completed the spin-off of Maxeon Solar Technologies Ltd. (NASDAQ: MAXN) on August 26, 2020.
• Given the transaction has now passed our coverage mandate of 90 days post-spin, we DROP coverage of SunPower Corp. effective immediately.
• Our prior estimates and fair values for SPWR should no longer be relied on.

Drop Coverage of Maxeon Solar Technologies Ltd. Effective Immediately

• Maxeon Solar Technologies Ltd. (NASDAQ: MAXN) was spun-off from SunPower Corp. (NASDAQ: SPWR) on August 26, 2020.
• Given the transaction has now passed our coverage mandate of 90 days post-spin, we DROP coverage of Maxeon Solar Technologies Ltd. effective immediately.
• Our prior estimates and fair values for MAXN should no longer be relied on.

Preliminary voting results indicate shareholder approval of GLIBA’s combination with LBRDK; the transaction is scheduled to close, after the bell, on December 18^th; fair value slightly increased to $104 per share (from $103 per share)

• Yesterday, after the market close, GLIBA announced that preliminary voting results from its special shareholder meeting indicate its stock-for-stock merger with LBRDK has been approved and that the combination is expected to be consummated after the market close on December 18, 2020.
• To that end, all holders of GLIBA’s outstanding A & B shares will receive 0.58 shares of LBRDK C & B shares, respectively, while GLIBA’s preferred shares would receive 1 share of newly issued LBRDK preferred stock.
• As a result, former holders of GLIBA common shares will own ~30.6% of LBRDK and Mr. John Malone, the Chairman of both GLIBA & LBRDK, will have ~49% of the combined entity’s aggregate voting power.
• The deal should mitigate the so-called “double-discount” to net asset value that has existed for some time as well as eliminate the corporate level tax on its LBRDK gains while still maintaining its attractive long-term exposure to Charter Communications (NASDAQ: CHTR). As well, management noted that the deal would “improve flexibility for future combinations”, which we think alludes to the longer-term (but, in our view, inevitable) merger, likely via Reverse Morris Trust (RMT), with CHTR. (To that end, while small, we think GCI Communications is likely to be a synergistic asset for CHTR.)
• Our current fair value estimate is $104 per share (previously $103 per share) based on our estimated value of GLIBA’s holdings, which previously included TREE (prior to its monetization in November 2020), along with LBRDK and, most impactfully, CHTR, for which our outlook remains constructive amid a mix shift toward higher-margin broadband subscribers and improved free cash flow generation. As well, we note that our valuation of GLIBA’s operating asset, GCI Communications, represents a ~20% discount to its April 2017 purchase price and we continue to assign no value to the company’s ownership of Evite.

LDL sets 2025E financial targets calling for adj. EBITDA of $140-$160 million with FCF conversion of 75%-plus and a ROIC of 20%-plus (with an interim adj. EBITDA target of $110-$120 million in 2023); fair value increased to $33 per share

• Today, at its virtual investor day, LDL articulated new long-term goals that target 2025E adjusted EBITDA of $140-$160 million with a free cash flow (FCF) conversion rate of greater than 75% and 20%-plus returns on invested capital (ROIC).  (For context, these targets compare with trailing 12-month figures of $61 million, 52% and 6.5%, respectively.)
• LDL also set interim goals for 2023, which target adj. EBITDA of $110-$120 million, FCF conversion of 65% and ROIC of ~15%.
• Underlying its 2023 adj. EBITDA target is the projection that Specialty Filtration and Advanced Materials sales will reach ~$300 million and ~$640 million (compared with trailing 12-month figures of $229 million and $535 million), respectively.  To that end, management estimates that the total addressable markets for Specialty Filtration and Advanced Materials are ~$5 billion and ~$15 billion, respectively, with projected compound annual growth rates of 5%-10% and 2%-3%. In terms of the long-term sustainability of the demand for fine fiber meltdown (the key filtration layer in high-quality face masks, such as the N95 and its equivalents) management sees annual demand settling out at ~5,000 metric tons in 2023 (and beyond) compared with 7,000 metric tons in 2020-2022 and pre-pandemic levels of ~600 metric tons.
• While LDL discussed its previously disclosed restructuring measures, no significant divestitures were announced. That said, management’s long-term “roadmap” includes a “continued focus on opportunistic portfolio optimization” (although profitability and subsequently growth appear the focus in 2021-2022).
• In terms of the balance sheet, LDL targets a leverage ratio of less than 2.5x (compared with 3.4x at the end 3Q 2020 and its 6.5x covenant, which steps down to 4.5x in 2Q 2021).
• All things considered, our fair value estimate is increased to $33 per share, reflecting a ~6.0x blended multiple on 2023E adj. EBITDA of ~$110 million as well as projected net debt of ~$95 million.

ALERT: SolarWinds Files Confidential Form-10 to Spin-Off MSP Business

On December 9, 2020, SolarWinds Corp. (NYSE: SWI) issued a press release that stated the company has confidentially filed a Form-10 registration statement with the SEC in relation to a proposed spin-off of its managed service provider business (MSP). Previously SWI had stated that the company’s Board of Directors had authorized the exploration of a potential spin-off of the MSP business into a standalone entity. Now, with a Form-10 filing being made, albeit confidentially, our confidence that a transaction will be consummated has substantially increased. If/when the spin-off occurs, it is expected to be tax-free to shareholders, and anticipated to be completed in 1H 2021.

SWI is a leading provider of IT infrastructure management software. The company products “are designed to do the complex work of monitoring and managing networks, systems and applications across on-premise, cloud and hybrid IT environments without the need for customization or professional services.” The company, which reports results under one segment, operates via two business lines, one referred to as “Core IT”, which sells solutions directly to corporate IT professionals, including network and system engineers, database administrators, storage administrators, DevOps, and service desk professionals. The other business line referred to as MSP, sells solutions to managed service providers that use the solutions to manage their client’s network and application needs.

SWI, which conducted an IPO in 2018, generated $933 million in revenue and $437 million in EBITDA, representing a 44.4% margin, in 2019. The company has reported consolidated revenue growth in the low teens since becoming public, but has reported a MSP revenue CAGR of 17% since 1Q 2018, implying a mid-single digit growth rate for the Core IT business. Management has stated that the characteristics of the two businesses differ in both growth and margin profiles, with Core IT exhibiting low to mid-single digit top line growth and EBITDA margins “well above the rule of 50”. The MSP business margins are reportedly “approaching the rule of 50”.

PRELIMINARY VALUATION

In terms of rationale, the proposed spin-off appears an attempt to unlock the value of the smaller, higher growth MSP business that may be obfuscated by the larger, slower growth legacy Core IT business. In fact, management suggests that post-spin SWI’s high-margin and free cash flow generation would support higher levels of leverage than current (currently ~3.6x net debt to TTM EBITDA) with potential for a special dividend, and the implementation of a regular dividend (SWI does not currently pay a dividend). MSP on the other hand would exhibit a lower leverage ratio than the current corporate structure, which would be more in-line with peers, and would focus its cash flow on investment and accelerating growth.

Given the confidential filing and lack of clean segment revenue and profitability data, our valuation exercise is based on management’s recent commentary regarding the two businesses. Management has said that in 2020 the parent SolarWinds business would generate greater than $700 million in revenue, while the MSP business is forecasted to generate approximately $300 million in revenue. Based on these growth rates, and the above-mentioned rule of 50 margin guidance, it can be forecast that post-spin SWI would generate $743 million in revenue and $446 million in EBITDA in 2022. MSP, under the same framework, would register sales of $376 million, and EBITDA of $169 million.

Given the different business characteristics (growth and use of cash flow), it could be expected that post-spin the MSP business would see a degree of multiple expansion, while the larger parent company’s multiple is likely to contract. Shares of SWI currently trade at 15.2x the consensus 2022 EBITDA estimate.

The core business could be imperfectly compared with Cisco (NASDAQ: CSCO), Micro Focus (MCRO LN), and IBM (NYSE: IBM), which trade, on average, at ~9x 2022E EBITDA. The MSP business could be compared with other SaaS-related growth companies, such as Autodesk (NASDAQ: ADSK), Check Point Software (NASDAQ: CHKP), Palo Alto Networks (NASDAQ: PANW), SecureWork (NASDAQ: SCWX), and ServiceNow (NYSE: NOW), which trade, on average, at ~29x 2022E EV/EBITDA. Applying a discounted multiple of 27.5x to 2022E EBITDA implies segment value of $4.9 billion.

Under these assumptions, applying peer multiples, incorporating current net debt of $1.6 billion and 314 million shares outstanding, shares of SWI would be fairly valued at $23 per share on a preliminary basis. It should be stressed that given the confidential nature of the company’s Form-10 filing and lack of segment disclosures, this preliminary valuation is subject to revision upon further financial disclosures.

Drop Coverage of Carrier Global Corp. Effective Immediately

• Carrier Global Corp. (NYSE: CARR) was spun-off from Ratheon Technologies Corp. (NYSE: RTX) on April 3, 2020.
• Given the current share price is above our fair value estimate, and the transaction has now passed our coverage mandate of 90 days post-spin, we DROP coverage of Carrier Global Corp. effective immediately.
• Our prior estimates and fair values for CARR should no longer be relied on.

Drop Coverage of Corteva Inc. Effective Immediately

• Corteva Inc. (NYSE: CTVA) was spun-off from DuPont Inc. (NYSE: DD) on June 3, 2019.
• Given the current share price is above our fair value estimate, and the transaction has now passed our coverage mandate of 90 days post-spin, we DROP coverage of Corteva Inc. effective immediately.
• Our prior estimates and fair values for CTVA should no longer be relied on.

Drop Coverage of ChampionX Corp. Effective Immediately

• ChampionX Corp. (NYSE: CHX) was spun-off from Ecolab Inc. (NYSE: ECL) on June 3, 2020.
• Given the transaction has now passed our coverage mandate of 90 days post-spin, we DROP coverage of ChampionX Corp. effective immediately.
• Our prior estimates and fair values for CHX should no longer be relied on.