TFII prices 6M share IPO on NYSE at C$44.20; posts 2019 EPS growth of 11% to C$3.94 with FCF of ~C$5.40

• TFII priced at initial public offering (IPO) of 6 million shares on the New York Stock Exchange (NYSE) at C$44.20 per share or US$33.35 for gross proceeds of US$200.1 million. (The underwriters have been granted a 30-day over-allotment option of 900,000.)
• Shares will begin trading on the NYSE today trade under the ticker symbol “TFII”.
• Proceeds are expected to reduce borrowings on revolving credit facilities.  Notably, TFII is not capital constrained having ended 2019 with net debt of C$1.74 billion, of which ~C$600 million was outstanding on revolvers, and a leverage ratio of ~2.2x (within the company’s targeted range of 2.0x-2.5x). As well, TFII generated ~C$463 million of free cash flow (or about C$5.40 per share) in 2019.
• Tangentially, TFII posted 2019 consolidated revenue growth (ex-fuel) of ~1% to C$5.18 billion with operating income up 19% to C$430.5 million and adjusted EBITDA of C$864.5 million.  Adjusted EPS increased 11% to C$3.94 (compared with most recent guidance of C$3.90-C$4.00 per share).
• Given the offering management has not provided 2020 financial guidance but we discern management’s expectation is for industry conditions to remain relatively soft in 1H 2020 but strengthen into 2H 2020, which in-line with what we have broadly heard from other transports in 4Q 2019.
• Notably, within the offering document (page S-31) it states TFII “buys and sells business units in the normal course of its business…at any given time, the Corp. may consider, or be in the process of negotiating, a number of potential acquisitions and dispositions, some of which may be material in size” and “relate to some or all of the Corporation’s four reportable business segments, that is, TL, Logistics, LTL and Package and Courier. Specifically, the company highlights the C$800 million sale of its Waste Management division in February 2016.

VVI reports 2019 adj. EBITDA growth of ~4% to $153 million; issues initial 2020E adj. EBITDA guidance of $195-$206 million, implying growth of 28%-35% and that Pursuit is likely to achieve the important $250 million sales benchmark in 2020

• For full-year 2019, Viad reported consolidated sales growth of almost 6% to $1.37 billion (compared with consensus of $1.362 billion) with a 4.4% gain in adjusted segment EBITDA to $152.7 million (compared with consensus of $156 million and the most recent guidance of $153.5-$157.5 million).
• At year-end, VVI had net debt of $280.3 million with a debt to cap ratio of 39% and a leverage ratio of 1.8x (compared with 1.4x at the end of 2018 and its 3.5x covenant).
• In terms of full-year 2020E guidance, VVI expects “low-double digit” consolidated sales growth with adj. segment EBITDA of $195-$206 million, implying 28%-35% year over year growth. (Notably, 2020E guidance assumes “minimal” impact from the recent Coronavirus outbreak.)
• By segment, VVI expects GES to post 2020E sales growth in the “low-double digit” range with adj. segment EBITDA of $109-$114 million (versus $71.5 million in 2019). Management expects ~$100 million of positive “show-rotation” as well as “low-single digit” same-show revenue growth in 2020.
• At Pursuit, VVI projects top-line growth of 12%-17% with adj. segment EBITDA of $81.5-$83.5 million (versus $81.2 million in 2019).  Importantly, VVI’s guidance suggests the Pursuit segment will surpass the $250 million threshold, which we discern remains the starkest benchmark precipitating an eventual split of VVI’s disparate assets, in 2020.
• Our fair value estimate remains $74 per share based on a 7.0x multiple on 2020E/2021E blended EBITDA of ~$94 million at GES and a 12x multiple on our 2021E EBITDA estimate of $99 million at Pursuit as well as projected net debt of ~$237 million (previously $194 million).

Drop Coverage of The Pennant Group Inc. Effective Immediately

• On October 1, 2019, The Ensign Group Inc. (NASDAQ: ENSG) completed the spin-off of The Pennant Group Inc. (NASDAQ: PNTG).
• Given the transaction has now passed our coverage mandate of 90 days post-spin, we DROP coverage of The Pennant Group Inc. effective immediately.
• Our prior estimates and fair values for PNTG should no longer be relied on.

Drop Coverage of The Ensign Group Inc. Effective Immediately

• On October 1, 2019, The Ensign Group Inc. (NASDAQ: ENSG) completed the spin-off of The Pennant Group Inc. (NASDAQ: PNTG).
• Given the transaction has now passed our coverage mandate of 90 days post-spin, we DROP coverage of The Ensign Group Inc. effective immediately.
• Our prior estimates and fair values for ENSG should no longer be relied on.

Merck to Spin Off Women’s Health Business

On February 5, 2020 before the market open, Merck & Co. Inc. (NYSE: MRK) announced a plan to separate its Women’s Health business, biosimilar drugs and legacy products into a yet-to be-named new publicly traded company. The tax-free separation, which is expected be completed in the first half of 2021, is subject to customary closing conditions. The company has forecast operating efficiencies of over $1.5 billion by 2024 related to the spinoff.

Merck, with consolidated 2019 revenues of $46.8 billion, is one of the largest manufacturers of healthcare solutions worldwide. The company offers therapeutic and preventive agents to treat cardiovascular, type 2 diabetes, chronic hepatitis C virus, HIV-1 and other infections, insomnia, and inflammatory diseases; neuromuscular blocking agents; cholesterol modifying medicines; and anti-bacterial and vaginal contraceptive products. The company also offers products to prevent chemotherapy-induced and post-operative nausea and vomiting; treat non-small-cell lung, ovarian and breast, thyroid, cervical, and brain cancers.

NewCo, which is expected to generate revenues of approximately $6.25 billion, in 2021 is expected to generate the majority of its growth from its patent protected NEXPLANON (etonogestrel implant) franchise and fueled by its leading contraceptive and fertility businesses. The company is expected to carry between $8.5 and $9.5 billion in debt following the separation. NewCo will distribute approximately $8.5 billion of debt proceeds to MRK in relation to the spin-off. The company is expected to pay a dividend.

Post-spin Merck will continue to focus on its strong growth areas of of Oncology, Vaccines, Hospital and Animal Health. The company will be led by key products, including KEYTRUDA (pembrolizumab), Lynparza (olaparib), Lenvima (lenvatinib mesylate), GARDASIL (Human Papillomavirus Vaccine, Recombinant), BRIDION (sugammadex), ZERBAXA (ceftolozane and tazobactam), and BRAVECTO (fluralaner). By separating its slower growth businesses, Merck can focus on key growth areas, most notably its cancer drug Keytruda and other vaccines. Notably, the separation will reduce Merck’s total human health products by approximately 50% and its Human Health manufacturing footprint by approximately 25%. Merck expects to retain its current dividend of $2.44 per share post separation and anticipates future increases with the goal of achieving a 47% to 50% payout ratio over time. The transaction follows a trend of specialization among pharmaceutical companies. Pfizer Inc. (NYSE: PFE) last year announced the spin off its off-patent drugs unit, which will merge with Mylan NV, a transaction which would allow Pfizer to maintain its more profitable drugs such as cancer treatment Ibrance.

PRELIMINARY VALUATION

The product portfolio planned to be spun off into NewCo is expected to generate revenue of $6.5 billion within the current Merck conglomerate, with non-GAAP operating margins of ~45%. Management states that using 2021 as a base year, NewCo is forecast to have sales between $6.0 billion and $6.5 billion. The standalone company will generate non-GAAP operating margins in the mid-30% range, with EBITDA margins in the low-to-mid 40% range in the first year. Based on the above commentary, and assuming roughly the mid-point of 2021 standalone revenue guidance, and 3% growth, NewCo would be forecast to generate approximately $6.44 billion in revenue. Assuming a 42% EBITDA margin, the company would earn $2.7 billion before interest, taxes, depreciation, and amortization.

As a starting point for the parent company, we base our 2020 revenue estimate on management’s guidance for the full company revenue of $48.8 billion to $50.3 billion. Excluding NewCo’s contribution, and assuming revenue growth of 10% and 12% in 2021 and 2022, respectively, it can be estimated that post-spin Merck will generate 2022 revenue of $53.0 billion. Ex-NewCo the company is targeting non-GAAP operating margins in excess of 40% in 2024. Assuming that NewCo accounts for depreciation and amortization of roughly $500 million, this implies that post-spin Merck would have EBITDA margins of about 46.5%. Under these assumptions, the post-spin Merck would earn $22.0 billion in EBITDA during 2022.

In terms of valuation for the post-spin entities, we note that shares of MRK currently trade at 9.5x the consensus 2022 EBITDA estimate. For context peers to MRK include other large diversified pharmaceutical focused company’s such as Pfizer Inc. (NYSE: PFE), Novartis AG (NYSE: NVS), Bristol-Myers Squibb Co. (NYSE: BMY) and Eli Lilly & Co. (NYSE: LLY), amongst others. The peer group trades on average at 11.0x, albeit in a wide range of ~7.0x-~14.0x. However, the larger players such as PFE, LLY, and NVS trade inn a far narrower range and at an average of 12.9x 2020 EBITDA.

Following the spin-off, it appears reasonable to assume that the parent company would experience a degree of multiple expansion as the spin-off results in higher realized sales growth and margins while maintaining the current $2.44 per share dividend. Valuing MRK at 11.0x the above derived EBITDA estimate of $22.0 billion, the parent company would be valued at $242.2 billion on an enterprise value basis.

Conversely, assuming NewCo would see its standalone trading multiple decline, shares could be valued at 9.0x 2020 EBITDA estimate of $2.7 billion, and NewCo would be valued at $24.3 billion on an enterprise basis. On a preliminary, sum-of-the-parts basis, shares of MRK would be fairly valued at $98 per share based on the above estimates.

IR Reports Full Year 2019 Results; RMT with GDI On-Track to be Completed in Early 2020; Maintain BUY, Increase Pre-Spin FVE to $151 per share on IR; Maintain HOLD on GDI with a $37 per share FVE

• On January 29, 2020, before the market open, Ingersoll-Rand plc (NYSE: IR) reported 4Q and full year 2019 results, which included year-over-year adjusted EPS growth of 14% to $6.37 on top line growth of 6% to $16.6 billion, and 70 basis points of operating margin improvement.
• IR’s Climate segment increased revenue by 6% to $3.2 billion in 4Q 2020 driven largely by a strong North American commercial HVAC end market while segment margins declined 30 basis points to 13% attributable to weakness in the transport market.
• Ingersoll’s Industrial segment increased sales 6% to $918 million, primarily due to acquisitions as organic sales declined 2%, and increased margins by 240 basis points to 16.0% on operational improvements.
• IR stated that it remains on-track to complete the spin-off of its Industrial segment in early 2020. The Industrial segment will merge with Gardner Denver Inc. (NYSE: GDI) in a Reverse Morris Trust (RMT) transaction. The combined company will assume the Ingersoll-Rand corporate moniker and trade under the symbol “IR”. Post-spin, the current Ingersoll-Rand will change its name to Trane Technologies and trade under the symbol “TT”.
• IR issued initial 2020 post-spin guidance for Trane Technologies, which includes organic revenue growth of ~3.0% – ~5.0% (~$13.5 billion to ~$13.7 billion) and an adjusted operating margin of 15.3% to 15.7% (implying 30 – 70 basis points of expansion).
• Based on the mid-point of IR’s guidance, TT would earn $2.15 billion in EBITDA in 2020. Assuming 4% revenue growth and 15.5% EBITDA margins in 2021, we forecast $2.2 billion of 2021 EBITDA. Applying a 14.0x multiple and accounting for $2.4 billion net debt, post spin TT shares would be fairly valued at $119 per share.
• Incorporating 50.1% ownership interest in New Ingersoll, a pre-spin fair value estimate of $151 per share is derived.
• Given favorable industry and Climate segment trends, including strength in the North American commercial HVAC end market, and implied upside to our fair value estimate from IR’s current share price, we maintain our BUY rating on pre-spin IR.
• We maintain our HOLD rating and $37 per share FVE on GDI.
• For more details, please refer to the Ingersoll-Rand plc Spin-Off Report dated January 13, 2020.

LB shares rise on WSJ report that CEO, Les Wexner, is in talks to step aside and that the company is seeking strategic alternatives for its Victoria’s Secret brand 

• Today, The Wall Street Journal is reporting that LB CEO, Les Wexner, the longest serving CEO of an S&P-listed company, is in talks with the Board to step aside and the company is evaluating strategic alternatives for its Victoria’s Secret brand.
• To be sure, with shares indicating up ~12% at ~$23 in the pre-market, investors are likely to view Mr. Wexner’s exit as a needed change in direction amid evolving consumer tastes toward more “inclusionary” brands as well as the company’s problematic association with the now deceased Jeffery Epstein.
• More importantly, in our view, the evaluation of strategic alternatives could be expected to help unlock the significant value of LB’s well-performing Bath & Body Works brand, which has consistently posted solid same-store sales growth and a 20%-plus operating margin in recent years.
• For context, this news comes ahead of the expiration of LB’s agreement/truce with activist-investor Barington Capital on 2/18/2020 and the 3/17/2020 deadline to nominate directors at LB’s shareholder meeting.
• Additionally, the company is tentatively scheduled to report 4Q 2019 results (and ostensibly provide 2020 financial guidance) after the market close on February 26^th with a conference call the following morning at 9 a.m. (EST).
• Notably, our current base case sum of the parts fair value estimate of $30 per share (see Exhibit #1 on page 2) reflects a blended multiple of ~7x on 2020E EBITDA of $1.781 billion (previously $1.925 billion) as well as net debt of ~$4.3 billion (previously $3.9 billion). 

Legion Partners files a 13D disclosing a 5.15% stake in LNDC; suggests the optimization and divestment of the Curation Foods business, which it estimates could unlock value of up to ~$20 per share

• In a 13D filing suggesting the optimization and divestment of LNDC’s Curation Foods business, activist-investor Legion Partners disclosed a 5.15% stake in LNDC.  By our estimation, Legion is now the company’s 7^th largest shareholder.
• Legion contends 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 (see Exhibit #1 on page 2).
• While we are maintaining our current valuation framework, which implies a base case fair value of $13 per share (with a bull case of up to ~$15 per share; see Exhibit #2 on page 2) based on F2021E forecasts, a 9.0x multiple for Curation Foods and a 12.5x multiple for Lifecore, we view the involvement of Legion Partners will be a significant catalyst in the ultimate unlocking of value at LNDC.
• In that context, we would note that with longtime-shareholder Wynnefield Capital controlling ~10% of the company’s shares (as well as two Board seats) the addition of Legion leaves roughly 15% of LNDC’s shares being controlled by investors that could be broadly described as “active”.

Drop Coverage of The Gap Inc. Effective Immediately

• On January 16, 2020, after the market close, The Gap Inc. (NYSE: GPS) announced that the company is no longer pursuing the planned spin-off of Old Navy into a standalone public company.
• Given the announcement, we DROP coverage effective immediately.
• Our prior estimates and fair values for GPS should no longer be relied on.

SYNNEX to Spin Off Concentrix Business

On January 9, 2020 after the market close, SYNNEX Corp. (NYSE: SNX) announced a plan to separate its Concentrix business from its IT distribution business. The tax-free separation, which is expected be completed in the second half of 2020, is subject to customary closing conditions. Following the separation, Dennis Polk, SYNNEX President and CEO, will continue to hold this position and Chris Caldwell, President of Concentrix, will become Concentrix President and CEO.

SYNNEX Corp., with consolidated 2019 revenues of $23.8 billion, is one of the largest IT distribution and BPO (Business Process Outsourcing) companies in the Americas and Japan. The company operates two business segments: Technology Solutions and Concentrix. The Technology Solutions segment, which serves resellers, system integrators, and retailers, provides IT-focused distribution, including peripherals, information technology systems, software, networking and security equipment, and consumer electronics. It also provides logistics, integration services, systems design, marketing services and financing services. Following the separation, SYNNEX Technology Solutions will remain focused on on IT distribution and is expected to generate annual revenue of approximately $19 billion.

The Concentrix segment, which generates revenues of approximately $4.7 billion, is a top two global customer experience (CX) solutions provider, offering a portfolio of end-to-end business outsourcing services focused on customer engagement, process optimization, technology innovation, front and back-office automation, and business transformation services. The business currently supports over 125 of the Global Fortune 200 clients in various industry verticals, including automotive, banking and financial services, consumer electronics, energy and public sector, healthcare, insurance, media and communications, retail and e-commerce, and technology, as well as travel, transportation, and tourism. Concentrix was acquired by SYNNEX in 2006. The business, which provided call center, database analysis, and print-on-demand services, has since been integrated into the company’s global services portfolio.

SYNNEX has pondered a separation of these two disparate businesses for some time. In October 2018, the company completed the $2.4 billion acquisition of call center provider Convergys. The integration of Convergys, which had been somewhat complicated by the company’s declining revenues, may have played a role in prolonging the timing of a separation.

PRELIMINARY VALUATION

In terms of unlocking value, the transaction appears to make sense. Given the relative size of the higher margin Concentrix business versus the larger Technology Solutions business, the higher multiple business is being assigned a lower valuation within the current corporate structure. Following the separation, it could be expected that Concentrix would be rerated higher to more closely approximate standalone peers while the parent company would likely continue to trade at roughly the same levels.

For Concentrix, key competitors include Accenture (NYSE: ACN), Conduent (NASDAQ: CNDT), Genpact Ltd (NYSE: G), Globant SA (NYSE: GLOB), Sykes Enterprises Inc.(NYSE: SYKE), Teleperformance (OTC: TEP FP), and TTEC Holdings Inc. (NASDAQ: TTEC), which trade on average at 11.8x 2021 consensus EBITDA with a range of 5.4x to 20.9x (12.8x median). Excluding the Concentrix operations, the parent company can be compared to Arrow Electronics Inc. (NYSE: ARW), Ingram Micro Inc. (private), Scan Source (private), and Tech Data Corp. (NASDAQ: TECD). The publicly traded peers trade at an average of 7.3x 2021 consensus EBITDA. For its part, the current consolidated SNX trades at 6.9x 2021 consensus EBITDA.

As a basis for estimating a pre-spin fair value, respective anticipated market growth can be used to forecast standalone company earnings for Concentrix and the parent company SYNNEX. Based on F2019 revenue of $4.7 billion for Concentrix and 4.0% annual revenue growth, Concentrix would generate $5.1 billion in revenue in 2021. Assuming margins of 13%, roughly in line with historical average operating performance, the Company would generate $662 million in EBITDA in 2021. Valuing Concentrix at 10.5x, a discount to peers, the standalone company would be valued at $7.0 billion on an enterprise basis.

SYNNEX’s end markets are forecasted to grow at ~8% annually through 2023. Assuming the company can grow in line with end markets, absent Concentrix, SYNNEX would generate $22.2 billion in revenue in 2021. Assuming margins approximate the average of the prior 5 years, 2.8%, the company would earn $623 million before interest, taxes, depreciation, and amortization. Valuing post-spin SYNNEX at 6.5x derives an enterprise value of $4.0 billion.

On a preliminary pre-spin, sum-of-the-parts basis, shares of SNX can be fairly valued at $162 per share when including net debt of $2.8 billion and 50.8 million shares outstanding. Given the implied upside of about 10% from the current share price the transaction appears to unlock modest value. Notably shares of SNX are up almost 15% in this morning’s trading.

Online Spin-Off Tracker: Real-Time Tracking of All Spin-Off Announcements, Form-10 Filings, and Recently Completed Spin-Offs, with market prices compared against The-Spin-Off Report’s fair value estimates to highlight investment opportunities.