Drop Coverage of Ecolab Inc. Effective Immediately

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

On December 3, 2020, International Paper (NYSE: IP) announced plans to spin off its Printing Papers business. The spin-off, which is expected to be tax-free to shareholders, is targeted to be completed late in the third quarter of 2021, subject to customary conditions including the declaration of effectiveness of the company’s Form 10 filing with the SEC. IP intends to retain a 19.99% stake in the spun-off company, with the expectation that the company will ultimately monetize its ownership position to provide incremental capital to the parent company. In conjunction with the spin-off, IP expects to decrease its current dividend ($2.05 per share) by 15% to 20%, while the spin company is not expected to pay a dividend

International Paper is a “global producer of renewable fiber-based packaging, pulp and paper products”. The company, headquartered in New York, has operations in North America, Latin America, Europe, North Africa, and Russia. The company’s manufacturing footprint, as of year-end 2019, included 27 pulp, paper and packaging mills, 163 converting and packaging plants, 16 recycling plants, and three bag facilities. In addition, the company owns or manages approximately 329,000 acres of forestland in Brazil and has management agreements and harvesting rights for government owned forestland in Russia.

The company, which generated $22.4 billion in revenue and $3.3 billion in adjusted EBITDA in 2019, reports results under three segments: Industrial Packaging (69% of revenue and 80% of operating income in 2019), Global Cellulose Fibers (11% of revenue and operated at a slight loss in 2019), and Printing Papers (19% of revenue and 20% of operating income in 2019.). The Industrial Packaging segment, which is the largest manufacturer of containerboard in the U.S. produces products such as linerboard, recycled linerboard, medium and recycled medium, whitetop, and saturating kraft. The Printing papers segment manufactures mainly uncoated papers used for printing and writing, which are sold under a variety of proprietary brands (Hammermill, Springhill, Postmark, amongst others, and also under private labels. The Cellulose Fibers segment sells products that includes fluff, which is filler user in products such as diapers and incontinence products, market pulp for tissue and paper products, and specialty pulps used in a variety of end products including textiles, and paints and coatings.

As the world has increasingly moved away from printed materials to focus more on digital consumption, IP has attempted to shift focus in recent years to its Packaging and Cellulose Fibers businesses. Consolidated revenue has remained fairly stagnant over the past five years, with sales of $22.4 billion in 2019 versus $23.6 in 2014; 2019 revenue declined 4% year-over-year, with Packaging revenue declining 4.3%, Printing Papers declining 1.3%, and Cellulose segment declining 9.5%. Through 3Q 2020, year-over-year consolidated revenue declined by 8.6%, including a 13.3% decline in the Cellulose Fibers business.

PRELIMINARY VALUATION

Following the spin-off, the parent company will generate approximately $17 billion in sales, with 85% of revenue being derived from the current Industrial Packaging segment, with the remainder from the Cellulose Fibbers business. IP intends to reduce its cost structure by approximately $300 million and expects to generate incremental earnings growth of $50-$100 million by year-end 2023. For the combined Packaging and Cellulose segments, 2019 revenue decreased 5% (4.2% at Packaging, and 9.5% at Cellulose Fibers). Through 3Q, as a standalone company, ex the Printing Papers business, the parent company’s revenue would have declined almost 5% with an operating margin of 9.8% (versus 11.1% in the prior year period). Assuming similar revenue declines through 2021, and slight margin expansion based on management’s cost-cutting guide, it could be expected that the parent company would generate $16.6 billion in revenue and $1.7 billion in operating profit. Assigning proportional depreciation expense (based on segment assets), implies the parent company would generate $2.8 billion in EBITDA as a standalone entity in 2021.

The spin company is expected to have annual sales of $4 billion and operate 8 mills that have annual capacity of 2.9 million metric tons and 0.4 million metric tons of coated paperboard capacity. Similar to the parent company, we use the current revenue and margin trends to estimate that the company would generate $4.1 billion in revenue and $326 million in operating profit in 2021. Assuming $200 million in D&A expenses, the spin company would earn $526 million before interest, taxes, depreciation, and amortization.

Shares of IP currently trade at 8.3x the consensus 2021 EBITDA estimate, roughly in line with its packaging focused peers, which include Westrock Co (WRK), Packaging Corp. of America (PKG), and Graphic Packaging Holding Co. (GPK), amongst others, which, as a group, trade at approximately 8.5x. Post spin, the Paper company will be more closely comparable to paper and pulp manufacturers, including the likes of Domtar (UFS), which trade at a lower multiple, averaging 7.0x the 2021 consensus EBITDA estimate. Applying peer multiples to the spin and parent company, incorporating current net debt of $8.5 billion, and 393 million shares outstanding, implies a preliminary, pre-spin, sum-of-the-parts fair value estimate of $48 per share.

Given shares of IP currently trade at a slight premium to our preliminary fair value estimate, it suggests that managements motivation for the separation likely lies in freeing up capital for the packaging company to reduce debt and invest in future growth versus an immediate rerating of the shares to unlock value. Future growth, including the quoted $350 million in earnings ($300 million of which is cost cutting), may provide upside to our initial outlook.

On December 2, 2020, after the market close, XPO Logistics (NYSE: XPO) announced a plan to separate its Logistics business from its Transportation business in a tax-free separation. The separation transaction, if completed, is expected to be completed in 2H 2021, subject to final approval by the Company’s Board of Directors, regulatory approvals and other conditions, including a refinancing of the company’s debt.

XPO is a global diversified transportation company offering contract logistics services as well as asset-based less-than-truckload (LTL) and non-asset based truck brokerage services.  The company generated consolidated 2019 revenues and adjusted EBITDA of $16.65 billion and $1.265 billion, respectively. The company’s Logistics segment provides contract logistics services, including ~200 million sq. ft. of warehouse space, in 27 countries while XPO’s Transportation segment offers over-the-road LTL services, primarily in North America, as well as truck brokerage services in 17 countries.

Notably, this separation comes following a strategic review that was announced in January 2020 but subsequently terminated in March 2020, in which XPO indicated that it explored the potential spin-off or sale of one or more of its business lines.  At the time, the company indicated that all business line would be considered except its North American less-than-truckload (LTL) operation, which is markedly more asset intense than its other business lines (and essentially the legacy operations of Con-Way Freight, which XPO purchased in 2015).  (As well, XPO sold its North American truckload (TL) unit, primarily the legacy assets of Contract Freighters (CFI), to TFI International (TSE: TFII) 2016.)

Following the separation, the Logistics business (NewCo) will the second largest contract logistics company globally, providing supply chain services, such as warehousing and e-commerce fulfillment. Post-spin XPO (RemainCo) will operate the third largest less-than-truckload network in North America, behind FedEx (NYSE: FDX) and Old Dominion (NASDAQ: ODFL), as well as the second largest truck brokerage company globally.

PRELIMINARY VALUATION

Through nine months of 2020 Transportation revenue has declined 10.1% and margins have declined over 110 basis points to 9.3%. Logistic revenue over the same period declined 2.4% with segment EBITDA margins declined 90 basis points to 7.2%. Given current year trends, and assuming modest improvement through 2021, it can be estimated that the Transportation segment could generate $9.3 billion in revenue and $1.1 billion in EBITDA in 2021. Similarly, the Logistics business could be forecast to generate $5.9 billion in revenue and $532 million in EBITDA in 2021.

In terms of valuation, XPO’s more asset-intense Transportation segment could be compared, for valuation purposes, to Saia (NASDAQ: SAIA), Old Dominion (NASDAQ: ODFL), Knight-Swift Transportation (NYSE: KNX) and Fed Ex (NYSE: FDX), which trade nearly 13.0x the consensus 2021 EV/EBITDA estimate. Applying this peer multiple to 2021E EBITDA implies a segment value of $14.5 billion.

XPO’s Logistics business could be compared to a wide-range of logistic providers, including Kuehne + Nagel (KNIN SE) and Clipper Logistics PLC (CLG LN), amongst others, which trade at roughly 10x 2021E EV/EBITDA.  Applying the peer multiple to 2021E EBITDA implies a segment value of $5.3 billion.

Accounting for corporate costs, capitalized at the weighted average segment multiple, as well as current net debt of $6.7 billion yields a total value of $11.2 billion or $120 per share (based on a shares outstanding of 91.4 million).

Drop Coverage of Arconic Cop Effective Immediately

• Arconic Corp. (NYSE: ARNC) was spun-off from Howmet Aerospace Inc. (NYSE: HWM) on April 1, 2020.
• Given the transaction has now passed our coverage mandate of 90 days post-spin, we DROP coverage of Arconic Corp. effective immediately.
• Our prior estimates and fair values for ARNC should no longer be relied on.

Drop Coverage of Howmet Aerospace Inc. Effective Immediately

• Howmet Aerospace Inc. (NYSE: HWM) completed the spin-off Arconic Corp. (NYSE: ARNC) on April 1, 2020.
• Given the transaction has now passed our coverage mandate of 90 days post-spin, we DROP coverage of Howmet Aerospace Inc. effective immediately.
• Our prior estimates and fair values for HWM should no longer be relied on.

SYNNEX Completes Concentrix Spin-Off; Initiate Coverage of CNXC with a NEUTRAL rating and $85 FVE; Now Rate SNX at NEUTRAL with a $80 FVE

• On December 1, 2020, before the market open, SYNNEX Corp. (NYSE: SNX) completed the spin-off of its Concentrix business.
• SNX shareholders of record as of November 17, 2020, received one share of Concentrix common stock for each share of SNX held. Concentrix will trade on the NASADQ under the ticker “CNXC”. SYNNEX will continue trading on the NYSE under the ticker “SNX”.
• Following the separation, SYNNEX will remain focused on IT distribution, logistics, and integration services, with annualized revenues of approximately $19 billion. The company will remain among the top three Americas and Japan IT distribution companies. We expect the company to maintain its leadership position while shifting its revenue mix toward more value-added services—which should improve margins over time. That said, in the near term, the business will remain pressured by reduced IT capital expenditures.
• Concentrix appears more favorably positioned following the spin-off. With faster revenue growth and higher margins, the company should see a multiple rerating to resemble more closely that of its pure play peers. Trends such as companies outsourcing BPO software should provide a longer-term benefit, while near term CNXC’s exposure to the leisure and hospitality industries, which have been negatively impacted by the COVID-19 pandemic, may stifle growth over the next several quarters.
• The post-spin fair value estimate for Concentrix is updated to $85 per share (previously $75 per share) based on updated peer valuation multiples. The post-spin fair value estimate for SYNNEX remains $80 per share.
• Given limited upside from initial trading prices to our fair value estimates, we initiate coverage of Concentrix Corp. and post-spin SYNNEX at NEUTRAL.
• For more details, please refer to The Spin Off Report dated September 21, 2020 and UPDATE dated October 14, 2020.

AAN Completes Spin-Off of The Aaron’s Company Inc. Changes Name to PROG Holdings Inc.; Rate PROG Holdings at BUY with a $67 FVE; Rate Aarons at NEUTRAL with a $23 FVE

• On November 30, 2020, after the market close, Aaron’s Holding Company Inc. (formerly NYSE: AAN) completed the spin-off of its Aaron’s Business segment into a stand-alone, publicly traded company.
• AAN shareholders of record as of November 27, 2020, receive one share of The Aaron’s Company Inc. for every two shares held of the parent company. Following the distribution, the parent company changed its corporate moniker PROG Holdings Inc. and now trades on the NYSE under the symbol “PRG”. The spin company trades on the NYSE under the ticker “AAN”.
• “Regular-way” trading in PRG and AAN will begin today, December 1, 2020.
• While the long-term investment case for AAN may be up for debate, PRG looks poised to benefit from the growing trend in consumer finance of rent to own type financing. Further the current economic environment appears favorable to both Aarons and PROG Holdings. Given the current COVID-19 crisis, the apparent increase in desirability for suburban home dwellings, vs. urban apartments, may in fact result in increased preference/need for rent to own businesses such as AAN and PRG. As demand for suburban houses has grown, home prices have also increased. New suburbanites may have to stretch budgets to secure a home, which may constrain their appliance, furniture, and home décor budgets, which may skew the perceived favorability of a rent-to-own solution.
• Alternatively, a persistently high unemployment rate could also benefit both post-spin companies as constrained budgets may be able to afford the rent-to-own model for household necessities (i.e. replacing a broken refrigerator) versus traditional upfront payment options. The ability to drive increased sales per store/partner location should support our case for a rerating of PROG Holdings and support the post-spin AAN valuation.
• On a post-spin basis, we now fairly vale shares of PROG Holdings at $67 per share (previously $61 per share). The increased fair value estimate is derived by increasing the valuation multiples to reflect increased peer multiples. We now use a 9.5x 2022 EBITDA (previously 9x) and 15.0x 2022 EPS (previously 13.0x) on unchanged estimates.
• Given the implied upside from our PRG fair value estimate versus last nights when-issued closing price, we initiate coverage of PROG Holdings with a BUY rating.
• We maintain our post-spin AAN fair value estimate of $23 per share. Given limited upside from last nights when-issued closing price, and general concern about physical retail store trends, we initiate The Arron’s Company Inc. with a NEUTRAL rating.
• For more details, please refer to The Spin Off Report dated October 6, 2020, and UPDATEs dated October 29, 2020 and November 18, 2020.

STAY monetizes one hotel in CA for $65 million or ~20x 2019 EBITDA; expects a distribution of $0.11-$0.12 per share (along with a catch-up dividend of $0.15-$0.20) in 1Q 2021; fair value remains $15 per share

• STAY completed the sale of a single hotel location in California, which is expected to be converted for an alternative use by the new owner, for $65 million.
• The transaction valuation represents multiples of 38.1x and 20.2x trailing-twelve month and 2019 adj. property-level EBITDA, respectively, or capitalization rates of 1.8% and 3.8%.  [For context, STAY, on a consolidated basis , currently trades at 9.5x 2019A EBITDA, 13.5x 2020E EBITDA, 11x 2021E EBITDA and 10.0x 2022E EBITDA.]
• On a “per key” basis, the purchase price implies ~$445,200 per room (compared with STAY’s current implied valuation of ~$81K.)
• The company expects to generate taxable income of $0.11-$0.12 per share on the sale, of which it will distribute “most or all” to shareholders along with a “catch-up” dividend in 1Q 2021.  Notably, management has previously indicated that the “catch-up” dividend could be $0.15-$0.20 per share.
• In our view, this sale highlights the underlying value of STAY’s unique real estate footprint and, along with the recent conversion of seven new franchise locations (in VA, GA and IL), underscores the company’s on-going strategy of monetizing undervalued assets and focusing on asset-light growth.
• To that end, while STAY will continue to work through its pipeline of 10 owned-hotels (with 1,268 rooms) its longer-term focus will remain squarely on its franchise operation, where the pipeline, at the end of 3Q 2020, was 55 franchise locations (with 6,656 rooms).
• Additionally, on the M&A front, while management is “very open to a brand acquisition” it sees a dearth of available targets and the focus will seemingly remain on strategically disposing of assets “that we can transact at multiples significantly above the company’s current trading level”.
• Our fair value 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.

AAN to Complete Spin-Off of The Aaron’s Company Inc. on November 30, 2020; Maintain Pre-Spin FVE of $74 and BUY Rating on AAN.

• On November 17, 2020, after the market close, Aaron’s Holding Inc. (NYSE: AAN) announced that the company would complete the spin-off of its Aaron’s Business segment into a stand-alone, publicly traded company on November 30, 2020.
• AAN shareholders of record as of November 27, 2020, will receive one share of The Aaron’s Company Inc. for every two shares held of AAN. Following the distribution, the parent company will adopt the corporate moniker PROG Holdings Inc. and will trade on the NYSE under the symbol “PRG”. The spin company will trade on the NYSE under the ticker “AAN”.
• “When-issued” trading in PROG Holdings and the spin-company are expected to begin on November 25, 2020, under the respective symbols “PRG WI” and “AAN WI”. “Regular-way” trading in PRG and AAN will begin on December 1, 2020.
• While the long-term investment case for AAN and the Progressive business may be up for debate, the current economic environment appears favorable. Given the current COVID-19 crisis, the apparent increase in desirability for suburban home dwellings, vs. urban apartments, may in fact result in increased preference/need for rent to own businesses such as AAN. As demand for suburban houses has grown, home prices have also increased. New suburbanites may have to stretch budgets to secure a home, which may constrain their appliance, furniture, and home décor budgets, which may skew the perceived favorability of a rent-to-own solution.
• Alternatively, a persistently high unemployment rate could also benefit both post-spin companies as constrained budgets may be able to afford the rent-to-own model for household necessities (i.e. replacing a broken refrigerator) versus traditional upfront payment options. The ability to drive increased sales per store/partner location should support our case for a rerating of the Progressive business and support the post-spin AAN valuation.
• On a pre-spin basis, shares of Aaron’s Inc. can be fairly valued at $73 per share (previously $74 per share), reflecting AAN’s current net debt and share count, consisting of $61 per share of businesses to be contributed to Progressive Leasing, and $11.50 per share for the post-spin Aaron’s Inc.
• Given the implied upside to the current share price, we maintain our rating on Aaron’s Holding Company Inc. as a BUY ahead of the planned spin-off of Progressive Leasing.
• On a post-spin basis, we fairly vale shares of PROG Holdings at $61 per share. We revise our post-spin AAN fair value estimate to $23 per share reflecting the one-for-two share distribution and updated pro-forma balance sheet.
• For more details, please refer to The Spin Off Report dated October 6, 2020, and UPDATE dated October 29, 2020.

GLIBA is monetizing the entirety of its stake in TREE as its stock-for-stock merger with LBRDK is set to close in 1Q 2021; fair value revised to $103 per share (previously ~$96 per share) 

• GLIBA is offering 2.96 million shares of LendingTree (NASDAQ: TREE) via a secondary offering at $295 per share (a ~10% discount from yesterday’s closing price); the transaction is expected to close on November 18^th. Concurrently, GLIBA is selling an additional ~400K shares via a private placement with Royal Bank of Canada (NYSE: RY).
• In our estimation, net proceeds to GLIBA from the preceding transactions will be ~$750 million (assuming gross proceeds of $1.007 billion, a tax basis of ~$17 million, fees of ~$2.5 million, and a 25% tax rate).
• Additionally, the disposition further simplifies GLIBA’s corporate structure in advance of its impeding all-stock merger with Liberty Broadband (NASDAQ: LBRDK), in which each 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 is expected to close in 1Q 2021 and 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 a synergistic asset for CHTR.)
• Our current fair value estimate is $103 per share based on our estimated value of GLIBA’s holdings, which previously included TREE 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 assign no value to the company’s ownership of Evite.