Follow-up notes from this morning’s ANZ divestiture conference call; discontinue coverage, as of today’s close

• As a reminder, last night, OI agreed to sell its Australia & New Zealand (ANZ) business unit in a dual-pronged transaction with Visy Industries (private) and real estate investment trust Charter Hall (CHC AU).  The total purchase price is for USD $652 million, from which OI expects net proceeds of USD $620 million (i.e. leakage, including taxes & fees, of just ~5%).
• The transaction multiple was ~7.6x and management expects the deal to de-lever the company’s balance sheet by ~0.25x.  For context, OI’s leverage ratio, per its credit agreement, was 3.9x at the end of 1Q 2020 (compared with its 5.0x covenant).  Management expects to receive 95% of the funds at closing, on August 31^st, with the remainder coming in within the next 12 months (without preconditions).
• As a result of this transaction, OI will focus on its two core/integrated operating segments, Americas and Europe; to that end, the remaining Asian-related assets (of the prior Asia Pacific segment) will now be reported under the Corporate/Other heading.
• Additionally, the company indicates that this deal substantively concludes its strategic review although the company still intends to execute on $200-$300 million of tactical divestitures over the next 18-months, which will likely be comprised of a “handful” of smaller transactions (e.g. JV interests and/or non-core properties).
• On the fundamental front, OI has seen continued improvement in sales volumes in the first half of July although the company will provide more details when it reports 2Q 2020 results on August 4^th after the market close as well as on its conference call the following morning at 8 a.m. (ET).  (For context, OI’s volumes in June were down 3% compared with declines of ~18% in April and May.)
• Our fair value estimate remains $11 per share, reflecting a blended multiple of ~6.5x on 2022E adjusted EBITDA of $1.095 billion (previously $1.195 billion) as well as net debt, incl. potential asbestos liabilities, minority interest & unfunded pension liabilities, of $5.170 billion (previously ~$5.75 billion).
• That said, we will discontinue coverage of OI, as of today’s close; for context, shares returned about ~69.5% since our initial recommendation in March 2020 (compared with gains of 18% and 17% in the S&P and Russell, respectively).

OI to sell its ANZ business to Visy Industries for a net $620 million; indicates volume in June was down 3% (versus 18% declines in April and May) and 2Q 2020 cash flows were positive

• Last night, after the market close, OI announced an agreement to sell its Australia & New Zealand (ANZ) business unit to Visy Industries (private) for AUD $947 million (or USD $652 million).  OI expects net proceeds of USD $620 million, which will be used to repay debt.
• Per management, the ANZ business, which is reported as part of OI’s broader Asia Pacific segment, generated 2019 sales and adj. EBITDA of AUD $754 million and AUD $124 million, respectively.
• The deal, which is slated to close August 31^st, is expected to be completed in two separate transactions: 1) a sale-leaseback transaction of ANZ’s properties with Charter Hall for AUD $214 million; and 2) the sale of ANZ’s operating business to Visy for AUD $733 million.
• For context, the aggregate purchase price represents more value than we had initially placed on the company’s entire Asia Pacific segment and the deal’s implied multiple of ~7.6x 2019 EBITDA is higher than the ~6.5x blended multiple we applied to its higher-margin American and European segments.
• On the fundamental front, OI indicates that sales volumes in June were down ~3%, which represents a marked improvement compared to the 18% declines experienced in April and May. To that end, the company expects overall volumes to be down ~15% in 2Q 2020 with adjusted earnings at around “breakeven” (compared with the current consensus estimate of $0.11).
• Importantly, the company indicated that cash flows were “solidly positive” in 2Q 2020, which is seasonally abnormal, and that the company’s total liquidity compares “favorably” with 1Q 2020 levels. For context, at the end of 1Q 2020, net debt was $5.5 billion and the leverage ratio, per its credit agreement, was 3.9x (vs. 4.0x at year-end and its 5.0x covenant).  Total available liquidity stood at ~$1.7 billion, including $891 million in cash at the end of 1Q 2020.
• Currently, our fair value estimate remains $11 per share, reflecting a blended multiple of 6.2x on 2022E adjusted EBITDA of $1.195 billion as well as net debt, including potential asbestos liabilities, minority interest and unfunded pension liabilities, of ~$5.75 billion; that said, we intend to make updates to our forecasts following this morning’s conference call at 8 a.m. (ET).  The dial-in number for the call is (888) 735-1701.

Maintain BUY on CARR, Revise Fair Value Estimate to $28 (from $21)

• Following strong 1Q 2020 results (the first as an independent company), Carrier Global Corp. (NYSE: CARR) and the recent market rally, we re-evaluate sector valuations and our fair value estimate for Carrier Global Inc. (NYSE: CARR).
• Broad-based industrial peers with HVAC exposure, including Johnson Controls International Inc. (NYSE: JCI) and Trane Technologies plc. (NTSE: TT) have experienced significant multiple expansion year-to-date, and currently trade at between 16x and 25x 2021E EPS, reflecting the HVAC sector’s relative stability versus other industrials, and the expectation that the current low interest rate environment may accelerate U.S. housing demand.
• CARR appears well-positioned to demonstrate earnings upside in the near term, supported by 1) improving profitability, having reported 10.9% operating margin, versus 11.4% in the year-ago quarter; and 2) maintained guidance of $600 million in cost savings over three years ($420 million expected in 2020). 
• Given multiple expansion and positive company fundamentals, we adjust our applied P/E multiple to 18x (versus 9x previously), a premium to peer JCI at 16x (which has the most similar product portfolio, including a fire & security business), and a discount to TT, at 25x. These changes result in an upward adjustment to our fair value estimate to $28 (versus $21 previously). With the implied fair value estimate implying 19% upside to the CARR’s current share price, we maintain our BUY recommendation. In the near term, we expect continued restructuring to benefit profitability and cash flow. Longer term, CARRs end-markets remain robust, with growth for the company’s HVAC, Refrigeration, and Fire & Security businesses likely to be supported by favorable secular trends, including urbanization, climate change, increasing requirements for food safety driven by the food needs of the growing global population, rising standards of living, and more energy and environmental regulations. Increased urbanization in emerging market countries, especially India and China, also benefits the industry for air conditioning, cooling, and security systems.
• Industry consolidation in the sector is expected to continue, with acquisitions already a stated element of CARRs growth strategy, Lennox International Inc. (NYSE: LI) has also been cited as a potential acquirer, despite antitrust concerns.
• CARR shares have appreciated approximately 110% since the spin-off on April 3, 2020, versus 28% for the S&P 500 over the same period.  For more details, please refer to The Spin Off Report dated March 10, 2020, and UPDATEs dated May 8, 2020, March 13, 2020, and March 30, 2020.

 Maintain BUY on SWBI, Revise Fair Value Estimate to $27 (from $24)

• Following strong FQ4 earnings results and ensuing market rally, we re-evaluate sector valuations and our fair value estimate for shares of Smith & Wesson Brands Inc. (NYSE: SWBI). 
• Shares of the consolidated company currently trade at 8.9x 2021E EBITDA, in line with their historical peak of 9x (achieved in both 2018 and 2015 as a combined firearms/recreation company) but a significant discount to firearms peer Sturm Ruger & Co. (NYSE: RGR), which currently trades at 11.4x 2021E EBITDA. Given recent multiple expansion and evidence of strong demand in the firearms business, we adjust the applied EV/EBITDA multiple for SWBI to 12x, in line with RGR (versus 10x previously).
• For post-spin American Outdoor Brands Inc. (AOBC), we adjust the applied EV/EBITDA multiple to 9x (versus 8x previously), reflecting a discount to larger, more established retail peers. In addition, we adjust our post-spin capitalization assumptions based on the company’s pro forma balance sheet as of April 30, 2020, which includes revised share count assumptions based on a 1:4 distribution.
• These changes result in a revision of our pre-spin sum-of-the-parts fair value estimate to $27 per share (versus $24 previously). With the pre-spin fair value estimate implying 18% upside to SWBI’s current price, we maintain our BUY recommendation. SWBI shares have experienced a strong recent run of over 150% year-to-date, from $9 levels in January, versus a 3% decline for the S&P 500 over the same period. That said, despite the strong run, following the separation of the lower-margin outdoor business, we would expect SWBI shares to benefit from a re-rating as a pure-play firearms manufacturer. Moreover, a premium multiple to RGR may be warranted given unique near term demand catalysts which could provide further upside to revenue and earnings as well as industry-wide regulatory catalysts. Note that post-spin SWBI will benefit from a leading market share position, an acceleration in domestic gun purchasing related to the COVID-19 pandemic, and growth in adjacent markets.
• For more details, please refer to The Spin Off Report dated June 19, 2020.

GLIBA and LBRDK reach preliminary understanding on the exchange ratio for a potential combination; fair value increased to ~$87 per share (from $79)

• Today, special committees for both GCI Liberty (GLIBA) and Liberty Broadband (LBRDK) have reached a preliminary understanding on an exchange ratio for a potential combination transaction between the two entities.
• To that end, the contemplated transaction would entail LBRDK acquiring all the outstanding shares of GLIBA in a stock-for-stock merger.  Each of GLIBA’s outstanding A & B shares would 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.
• The special committees also reached a preliminary agreement with Mr. John Malone, the Chairman of both GLIBA and LBRDK, that would limit his beneficial ownership in the potential combined entity to no more than 49% of the aggregate voting power.
• In our view, this transaction is the logical progression in a value unlocking/simplification process at GLIBA/LBRDK that will ultimately result in the longer-term (but inevitable) merger, likely via a Reverse Morris Trust (RMT) transaction, with Charter Communications (CHTR) that while small would likely be highly synergistic.
• Nonetheless, shares of GLIBA still trade at a ~15% discount to the market value of its publicly traded holdings, the purchase price of its operating asset, GCI Communications, and net debt (i.e. NAV).
• Moreover, we see ~25% of potential upside to our revised fair value estimate of $87 per share (previously $79) based on our estimated value of GLIBA’s holdings, which include LBRDK, Lending Tree (TREE) and, most impactfully, CHTR, for which our outlook remains constructive amid a mix shift toward higher-margin broadband subs and improved free cash flow. As well, we would note that our valuation of GLIBA’s operating asset, GCI Communications, represents a ~20% discount to the price it was purchased for in April 2017 and we continue to assign no value to the company’s ownership of Evite.

Preliminary 4Q F2020 results beat on the top-line but lag materially on the bottom-line; leverage remains a concern but asset sales and operational improvements should be mitigating factors; FVE reduced to $12 per share (from $13)

• Landec expects to report consolidated 4Q F2020 (May-ending) sales of $156.1 million with adjusted EBITDA of $12.6 million-$14.6 million. By segment, Curation Foods (CF) is projected to report 4Q F2020 sales of $130.6 million with adj. EBITDA of $5.8-$7.8 million while Lifecore is expected to post fourth-quarter sales of $25.5 million with adj. EBITDA of $7.5 million.
• Relative to initial full-year guidance these figures remain slightly above expectations on the top-line but well-below on the bottom-line, particularly at CF.  To that end, guidance implies that CF will post full-year adj. EBITDA of ~$3-$5 million (compared with initial guidance of $12-$14 million) while Lifecore’s full-year adj. EBITDA will be ~$20 million (versus the initial guide of $21-$23 million).
• At CF, management highlighted volatility in customer buying habits during the quarter, which led to gross margin compression. At Lifecore, the company incurred roughly $2 million of additional costs associated with new safety protocols, which also temporarily weighted on output (i.e. 50%-60%). Notably, management indicated that volatility at CF has seemingly normalized in 1Q F2021 and Lifecore is back to pre-pandemic levels of output. [Note: audited results will be released and F2021 guidance provided in early-August.]
• Also, the company announced that it would sell its manufacturing plant in Hanover, PA and consolidate production into its facilities in Guadalupe, CA and Bowling Green, OH.  Management envisions proceeds in the “high seven, low eight” figure range from the sale, which will be used to reduce debt.
• On the leverage front, LNDC had previously received covenant waivers through March 2020 and expressed a degree of confidence that its ongoing discussions with lenders for an extension will have a satisfactory outcome.
• Our fair value estimate is reduced to $12 per share (from ~$13), based on a blended multiple of 11x, F2022E EBITDA of $43 million and net debt, incl. Windset, of $134.5 million.

STAY is well-positioned and undervalued:  Anecdotes from an interview with Mr. Barry Sternlicht of Starwood Capital

• In a recent interview with Bloomberg’s Front Row, Mr. Barry Sternlicht, the CEO of Starwood Capital, discussed his views on the current real estate landscape, generally, and hotels, one of the sector’s “major food groups”, specifically.
• If we attempt to summarize his perspective, at least as it relates to our investment sphere, it would be that Mr. Sternlicht perceives a growing dichotomy in the current investing environment where large “group” (or convention-oriented) hotels in destination (i.e. air travel) markets have been the most impacted and are likely to experience a longer road to recovery while lower-end hotels, particularly those that act as almost “surrogate apartments”, in so-called “drive-to” domestic markets have come back “very quickly” and are well positioned longer-term.
• As tangible evidence, Mr. Sternlicht pointed out that Starwood’s ~200 location (24K key) hotel chain in the latter market is currently running at ~84% occupancy while many of its higher end hotels in Los Angles and Manhattan remain fallow. (Notably, Starwood controls the extended-stay hotel chain InTown Suites and recently purchased an 8.5% stake in STAY, at prices ranging from $7-$11 per share.)
• While we highlight this interview simply as an interesting anecdote from a savvy investor that is bullish on the overall extended-stay space, we do think the commentary augurs well for STAY’s near-term results, specifically the likelihood that operating trends have continued to improve since its most recent public commentary, which indicated that occupancy rates had trended north of 75% in early June.
• That said, our base case fair value estimate for STAY, which is based on a blended EV/EBITDA multiple of 9.5x on 2022E forecasts, remains $14 per share albeit with incremental upside, in the event of strategic alternatives, to ~$16-$18.50 per share.
• https://www.bloomberg.com/news/videos/2020-06-25/sternlicht-sees-nyc-worst-off-as-pandemic-takes-toll-on-real-estate-video

STAY is well-positioned and undervalued:  A quick look at valuation on an EV/PP&E basis, which our channel checks suggest is a key metric for PE players

• As described in our recent initiation, we think STAY is undervalued and well-positioned, both short & long-term, to outperform peers (and the market) in the current environment. (To that end, we would note that, per STR, U.S. lodging industry RevPAR fell ~70% in May with the mid-scale sub-sector seeing a ~52% decline. By comparison, RevPAR at STAY was down ~28%. Moreover, operating trends have continued to improve at STAY into June while we estimate industry-wide and mid-scale RevPAR are still down ~63% and ~44%, respectively.)
• In terms of valuation, while our initial framework primarily focused on STAY’s undervaluation on an EV/EBITDA basis (~8.75x vs. ~12x), we thought it may be illustrative for clients to keep an eye on another metric, EV/PP&E, which could be viewed as a rough approximation of “replacement value” and our recent channel checks suggest is a measure some investors, particularly private-equity players, look to inform investment decisions (particularly during times of temporary distress).
• On that front, STAY’s current enterprise value is pegged at roughly 85% of (or a ~15% discount to) its stated property, plant & equipment (PP&E) value of more than $4.9 billion (compared to estimated historical peak to trough ranges across the industry of ~50%-150%).
• Moreover, we would argue that reported gross PP&E likely materially understates true replacement value due, in part, to inflation in land, labor and construction costs. To that end, we would highlight that at a recent investor conference STAY’s REIT peers, Host (NYSE: HST) and Park (NYSE: PK) Hotels, indicated their internal estimates of replacement value on their assets were ~$26 billion and ~$19 billion, respectively (compared to their stated PP&E values of ~$18 billion and ~$11.5 billion). [Note: STAY has not explicitly disclosed internal estimates of replacement value but has publicly asserted that its footprint is “impossible to replicate today”.]
• That said, our base case fair value estimate for STAY, which is based on a blended EV/EBITDA multiple of 9.5x on 2022E forecasts, remains $14 per share albeit with incremental upside, in the event of strategic alternatives, to ~$16-$18.50 per share.

Activist-investor Legion Partners increases LNDC stake to almost 10% in an amended 13D filing; reiterate BUY recommendation

• Today, in an amended 13D filing, Legion Partners indicated that its stake in LNDC had been increased to 9.82% (from a previous 8.17% position and its initial 5.15% investment, which was disclosed in January 2020).
• Over the last month, Legion purchased ~485,000 shares of LNDC at between ~$9.96-$10.03 per share and is now the company’s second largest shareholder, closely behind Wynnefield Capital’s ~10% ownership position. (Wynnefield, while not overtly “active”, is a longtime LNDC shareholder and a self-described value investor, specializing in U.S. small cap situations that have a company- or industry-specific catalyst. As well, its CIO, Nelson Obus, is on LNDC’s Board along with ally Andrew Powell who is currently serving as the company’s interim Chairman).
• For its part, Legion has publicly contended that Landec’s “odd combination of businesses” prevent the achievement of “full and fair value”, which it assesses to be “significantly” higher than current levels.
• To that end, by Legion’s calculation, Curation Foods could be worth $304 million, based on F2022 EBITDA of ~$32.5 million and a multiple of ~9.5x, while Lifecore Biomedical could be worth $447 million, based on F2022 EBITDA of ~$30 million and a multiple of ~15.0x.  Accounting for corporate costs, the value of LNDC’s investment in Windset Farms and projected net debt implies the company’s “intrinsic value” could be ~$20 per share.
• While we view Legion Partner’s on-going (and, in fact, deepening) involvement at LNDC as a significant catalyst toward the ultimate unlocking of value we are maintaining our current valuation framework, which implies a base case fair value of ~$13 per share based on F2021E forecasts, a 9.0x multiple for Curation Foods and a 12.5x multiple for Lifecore.

Within our universe, STAY would likely be the largest beneficiary of increased federal infrastructure spending (with potential benefits for GLIBA & UHAL)

• Today, Bloomberg is reporting that the Trump Administration is preparing a $1 trillion infrastructure proposal (as the existing spending authorization expires September 30^th); per the report, the majority of the funds would be spent on traditional infrastructure projects (i.e. roads, bridges) although a portion of the funds could be reserved for broadband investments (i.e. 5G and rural connectivity).
• In our view, STAY would likely be the largest direct beneficiary of traditional infrastructure spending within our universe as the Industrial & Construction sectors are its largest verticals at around 30% of sales (with Transportation comprising an additional ~12%). Moreover, management has commented that its footprint would likely be in the “bull’s-eye” of potential investment zones and that its product is “ideally suited” to accommodate people working on infrastructure projects, which notably tend to support longer-term/higher-margin business for STAY (i.e. 7-30 night stays carry operating margins in mid-to-high 50%’s).
• Again, within our universe, we also see potential benefits from increased infrastructure spending for UHAL, in terms of potential ad hoc transportation needs for equipment & materials, as well GLIBA, in terms of potential increased broadband investment.  (On a tertiary level, one could also postulate that the distribution/mobility efficiencies resulting from infrastructure improvements could be longer-term benefits to OI and CNDT’s Transportation business.)
• That said, given the current vagaries of any potential legislation’s priorities, timing and magnitude, our base case fair value estimate, which is based on a blended EV/EBITDA multiple of 9.5x, remains $14 per share with incremental upside, in the event of strategic alternatives, to ~$16-$18.50 per share.