Increase PNTG Fair Value Estimate to $20 (From $15), Maintain HOLD

• The Pennant Group Inc. (NASDAQ: PNTG) was spun off from The Ensign Group Inc. (NASDAQ: ENSG) on October 1, 2019.
• PNTG’s recently reported 3Q 2019 results included management’s initial 2020 guidance of $376 – $386 million in revenue and adjusted EPS of $0.53 – $0.58 per share.
• Based on PNTG’s current share price, shares of PNTG trade at approximately 50x 2020 net income. Based on our 2020 EBITDA forecast of $28.4 million shares are trading 26.6x EV/EBITDA.
• Pennant’s business is pursuing a growth via acquisition strategy that has thus far proven effective, however we struggle to reconcile the current premium valuation multiple. Clearly, the market favors, in terms of valuation, the home health and hospice industry relative to our internal view.
• PNTG’s growth has been primarily fueled by its acquisition strategy. In 3Q 2019, the company acquired one hospice agency and a 91 unit senior living community. In 1H 2019 the company acquired 8 home health and hospice agencies and another senior living community.
• While we do not see a near-term catalyst for multiple contraction, share price pressure could arise from either an increase in interest rates (making the growth through acquisition strategy more costly), ineffective integration of acquired properties into PNTG’s system, or general market sentiment on the industry.
• We adjust our valuation multiple to reflect the peer groups current trading level and increase our fair value estimate to $20 per share (from $15 per share). Our fair value is derived by applying a 20x multiple (previously 15x) to our 2020 EBITDA estimate of $28.4 million, while accounting for $25 million in net debt and . We maintain our HOLD rating.
• For more details, please refer to The Spin Off Report dated September 4, 2019, and UPDATE dated October 1, 2019.

EVRI prices 10 million share offering at $11.25 per share and expects net proceeds of $107 million (not including the 1.5 million share over-allotment option) 

• Last night, Everi Holdings priced its previously announced offering of 10 million shares at $11.25 per share.
• The company expects the offering to close December 10^th and garner net proceeds of $107 million (not including the 1.5 million 30-day over-allotment option).
• Funds are expected to be used to repay debt; specifically, any borrowings on its revolver, of which there were none at the end of 3Q 2019, and/or the $375 million that is outstanding on its 7.5% senior unsecured notes due 2025.
• Assuming proceeds are fully deployed towards debt reduction EVRI’s total net debt leverage ratio will improve, by our calculation, to 3.9x (from 4.4x at the end of 3Q 2019) and its secured leverage ratio will decline to ~2.5x (compared to 3.0x at the end of 3Q 2019 and the 4.5x covenant contained in its credit agreement).
• Our fair value estimate remains $13 per share, reflecting a blended multiple of ~8x (unchanged) on our 2020E EBITDA estimate of $250 million (unchanged) as well as net debt of $965 million (previously $1.085 billion) and a diluted share count of 92.0 million (previously 80.5 million).
• Notably, our EBITDA forecasts do not add back stock-based compensation and our applied segment valuation multiples of 7.0x for Games and 10.5x for FinTech represent modest discounts to their respective peer groups, which trade at ~8.0x and 12x, respectively.
• For context, EVRI shares have appreciated 130% year-to date (compared with a 24.5% gain in the S&P 500 and a 20% rise in the Russell 2000).

Verint Systems to Spin Off Cyber Intelligence Business

On December 4, 2019, after the market close, Verint Systems Inc. (NASDAQ: VRNT) announced its intention to separate its customer engagement business from its cyber intelligence business via a tax-free separation through a pro-rata distribution of common stock of a new entity that will hold the cyber intelligence business. Verint expects to complete the separation shortly after the end of its next fiscal year ending January 31, 2021. The transaction is subject to certain customary conditions, including final approval of the Verint Board of Directors, receipt of tax opinions, and rulings from the Internal Revenue Service and the Israeli Tax Authority. The separation is not expected to require a shareholder vote.

In addition to the spin-off announcement, VRNT announced a a new share repurchase program to repurchase up to $300 million of common stock over the period ending February 1, 2021. Repurchases are expected to be financed with the proceeds of a financing agreement with Apax Partners, a global private equity advisory firm, which has agreed to invest up to $400 million in Verint, subject to customary closing conditions. The investment will be made in the form of convertible preferred stock in two tranches of $200 million each. The first tranche is targeted to close in VRNT’s first quarter ending April 30, 2020. The second tranche, is expected to close shortly following the separation (expected shortly after the end of Verint’s next fiscal year ending January 31, 2021), will be made into Verint, the entity holding the customer engagement business.

Founded in 2002 and based in Melville, New York, Verint Systems Inc., with a current market capitalization of $3.2 billion, is a software analytics company specializing in customer engagement management, security, surveillance, and business intelligence applications. The company, which generated $1.27 billion in consolidated revenue in 2018, consists of two business segments: 1) Customer Engagement Solutions, i.e. call center software, which is approaching $1 billion in annual revenue (~78% of adjusted EBITDA in F2019); and 2) Cyber Intelligence Solutions, which helps organizations, primarily governments, increase security (i.e. prevent crime, terrorism and/or cyber-attacks) and is currently approaching $500 million in annual revenue (~23% of EBITDA). .

In recent years, Verint’s Customer Engagement business shifted from primarily on-premise solutions to a cloud-based architecture that has resulted in significant new competition. Previously, the company had enjoyed a virtual duopoly shared with Nice Systems Inc. (NASDAQ: NICE). Given the profitability disparity between the businesses, the separation may make it easier for investors to evaluate and make independent investment decisions in each business. Verint has previously explored a possible strategic separation of the businesses. Notably, in July 2018, the company ended takeover discussions with Israel-based NSO Group, which were estimated at approximately $1 billion. 

VRNT shares have appreciated 13% year to date, versus a 24% gain for the S&P 500 over the same period. The positive investment case on the shares appears based on the company’s ability to successfully shift to a cloud-based business model, which should improve margins and generate a more stable business via a recurring revenue base.

PRELIMINARY VALUATION

In terms of public peers, CES could be compared with software and cloud players, including Guidewire Software (NYSE: GWRE), NICE Ltd. (NASDAQ: NICE), Nuance Communications (NASDAQ: NUAN), Pegasystems (NASDAQ: PEGA), Synchronoss Technologies (NASDAQ: SNCR), Tyler Technologies (NYSE: TYL), Five9 Inc. (NASDAQ: FIVN), LivePerson Inc. (NASDAQ: LPSN), ServiceNow Inc. (NYSE: NOW), and Zendesk Inc. (NYSE: ZEN), which, on average, trade at ~6x 2021E sales and almost 25x 2021E EBITDA (albeit in an extremely wide range). Recent M&A activity in the sector, while, again, not perfectly comparable, has averaged ~4.0x sales, ~16x trailing EV/EBITDA, and ~11.5x forward EV/EBITDA.

Applying a discounted multiple of 12.5x, a 15% discount to NICE, which we view as the most relevant valuation comparison in terms of product offerings, growth rate, and margin profile, to January-ending F2022E EBITDA of ~$305 million yields a base case segment value of $3.8 billion, or roughly $56 per share

As for CIS, in terms of publicly traded peers, the business could be compared to Elbit Systems (NASDAQ: ESLT), which bought NICE’s Cyber & Intelligence unit in 2015, FireEye Inc. (NASDAQ: FEYE), Fortinet Inc. (NASDAQ: FTNT), Jacobs Engineering (NYSE: JEC), Palo Alto Networks (NASDAQ: PANW), Proofpoint Inc. (NASDAQ: PFPT), Sophos Group (SOPH LN), and Trend Micro Inc. (4704 JT), which, on average, trade at more than 4x 2021E EV/sales and roughly 20x 2021E EV/EBITDA. In terms of industry M&A, activity in the sector has averaged ~2.5x sales, ~14x trailing EV/EBITDA, and nearly 10x forward EV/EBITDA.

Applying a 9.5x multiple, which is roughly in line with the lowest-valued peers-  JEC, which garners single-digit margins and also provides construction services, and Trend Micro, a Japanese anti-virus/end-point software provider– to January-ending F2022E EBITDA of ~$111 million yields a base case segment value of roughly $1.1 billion, or ~$16 per share. For context, on an EV/sales basis, the base case valuation implies a multiple of less than 2x. (As well, we would note that it was reported by the financial press that in mid-2018 VRNT was in discussion to merge its CIS segment with Israeli-based but Francisco Partners-controlled NSO Group in a roughly $1 billion deal.)

Based on the above valuation exercises, incorporating projected net debt of $240 million and 68.5 million shares outstanding, on a pre-spin, sum-of-the-parts basis, shares of VRNT can be fairly valued at $69 per share. Given the implied upside from the current share price ($53.27 as of this writing), the transaction appears to have the potential to unlock significant value. It should be noted that our valuation assumptions use the current share count. The convertible preferred investment being made by Apax has an initial conversion price of $53.50, which would dilute the share count by approximately 5% if converted. However, management has highlighted their $300 million share repurchase plans which would in theory offset a large portion of this dilution.

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.

VRNT announces a tax-free spin-off of its CIS business, a $400 minority investment and a $300 million stock buyback; F2020E EPS guidance was re-affirmed and F2021 EPS guidance implying 10% growth is introduced 

• Verint plans to separate its CES (parent) and CIS (spinco) businesses in a tax-free transaction that is expected to close in February 2021.
• In connection, VRNT announced a ~$400 million minority investment from Apax Partners in two equal tranches of convertible preferred stock.
• The first $200 million Series A tranche, expected to close in 1Q F2021, has an initial conversion price of $53.50 and offers Apax a 5% minority interest in VRNT. Proceeds from the investment will fund a new $300 million share repurchase authorization. (By our calculation, at ~$55 per share, the buyback could reduce VRNT’s diluted share count by 5.45 million or ~8%.)
• The second $200 million Series B tranche is expected to close shortly after the separation and further bolster the balance sheet. Both series will have an initial dividend of 5.2% (declining to 4%) and represent, on an as-converted basis, an 11.5%-15% ownership in the Customer Engagement business.
• Additionally, the company confirmed F2020 EPS guidance of $3.65, representing ~14% year over year growth, while reducing full-year top-line guidance to $1.36 billion (from $1.375 billion).
• For F2021E, the company’s initial guidance calls for 7% top-line growth and 10% EPS growth to $4.00, which is roughly in-line with our $4.02 forecast and consensus of $4.05.
• Fair value is slightly reduced to ~$68.50 per share (from $70; see Exhibit #2 on page 2) based on an ~11.5x blended multiple on F2022E EBITDA of $415 million and projected net debt, including leases liabilities, contingent considerations and minority interest, of ~$240 million (previously $101 million).
• For additional information, please also see the Alert published by The Spin-Off Report who will be providing additional coverage of the impending transaction.

EVRI to offer 11.5 million shares, including the over-allotment option with proceeds targeted for debt reduction

• Last night, Everi Holdings announced it had commenced a secondary share offering of 10 million shares with an 30-day over-allotment option for an additional 1.5 million shares. (For context, our diluted share count assumption for F2020E was 80.5 million.)
• Net proceeds are expected to be used to repay debt; specifically, any borrowings on its revolver, of which there were none at the end of 3Q 2019, and/or the $375 million that is outstanding on its 7.5% senior unsecured notes due 2025.
• Assuming the offering is fully subscribed and priced around $11.50 per share, net proceeds could be expected to be at least $125 million.
• By our calculation, if proceeds are fully deployed toward debt reduction EVRI’s total net debt leverage ratio would be improved to 3.9x (from 4.4x at the end of 3Q 2019) and its secured leverage ratio would decline to ~2.5x (compared to 3.0x at the end of 3Q 2019 and the 4.5x covenant contained in its credit agreement).
• Based on these assumptions we expect the offering will be relatively neutral to our $13 per share fair value estimate (although we will make formal adjustments as additional details or discussions with management materialize).
• For context, EVRI shares have appreciated 150% year-to date (compared with a 24.5% gain in the S&P 500 and a 20% rise in the Russell 2000).

MSG Files Initial Form 10 with SEC for Revised Spin-Off Plan; Maintain BUY, $355 Fair Value Estimate

• On December 3, 2019, The Madison Square Garden Co. (NYSE: MSG) issued a press release announcing that the company has filed an initial Form 10 with the SEC in relation to the company’s revised spin-off plan. The filing was made confidentially, and the spin-off is still expected to be completed in 1Q calendar 2020.
• The company plans to spin-off the Entertainment business from the Sports business. The company had previously planned to spin-off the Sports company from the Entertainment company.
• Entertainment will not retain any stake in the Sports company; however it is still posited that Entertainment would retain approximately $1 billion in cash.
• The change in spin structure comes on the heels of reports from the NY Post that private equity firm Silver Lake Partners, which is currently the largest shareholder with a 9.82% stake in MSG’s A shares, was interested in increasing its ownership interest in MSG’s sports teams.
• While the original planned structure of the spin-off (spin Sports with Entertainment retaining a 33% stake in Sports plus $1 billion in cash) was an important component of our original bullish thesis on MSG shares, the revised structure does not materially change our position. The Sports and Entertainment businesses are undervalued in the current conglomerate structure, in our view. A separation of the businesses will highlight the mispricing, and increased interest/investments in the Sports business should help narrow the discount to the sum-of-the-parts fair value.
• Furthermore, the apparent delay in progress on the second Sphere project should allow investors to increase their comfort levels in the Las Vegas project in terms of costs and potential returns. We contend that incremental clarity on the Las Vegas project’s budget, interest in a post-spin minority investment in Sports, or the release of new Forbes valuations for the Knicks and Rangers would be positive catalysts for shares. (We expect NHL valuations to be revised in December and NBA valuations to be updated in February). We maintain out BUY rating and $355 per share fair value estimate. Our fair value estimate is based primarily on asset valuations for MSG’s sports teams and owned venues, and earnings for the entertainment company’s operating assets. It should be noted that our operating assets earning assumptions do not include ancillary revenue and earnings that would be generated from inter-company arrangements (i.e. Sports paying Entertainment fees for use of Entertainments arenas), which could provide optionality to our fair value. We expect to garner more clarity on these agreements upon public filing of the company’s Form 10.
• For more details, please refer to The Spin Off Report dated February 13, 2019, and UPDATEs dated August 20, 2019, and November 8, 2019.

Following the Liberty Investor Day yesterday our fair value estimate for GLIBA is increased to $84 per share on initial 2020E forecasts for GCI, CHTR, LBRDK and TREE

• Our fair value estimate for GLIBA is increased to $84 per share, driven by the roll-out of our initial 2020E forecasts for GCI, CHTR, LBRDK and TREE.
• The most impactful revision, in terms of GLIBA’s value, is the increase in our fair value estimate for CHTR to ~$470 per share, which is based on a 10.0x multiple on 2020E EBITDA of $18 billion.  Consequently, the fair value of LBRDK, whose primary asset is ~54 million shares of CHTR, is increased to $139 per share.
• As well, our fair value estimate for TREE has increased to $327 per share based on a 20x multiple on 2020E EBITDA of $260 million.
• The fair value estimate of GLIBA’s operating segment, GCI Communications, remains ~$21 per share based on an 8.5x multiple on 2020E EBITDA of $256 million. (Note: we continue to assign no value to the company’s ownership of Evite).
• We continue to see an opportunity for GLIBA’s discount to net asset value (NAV) to be narrowed (or eliminated) via a range of potential transactions with Charter Communications. In that context, we view the merger between DirecTV and Liberty Entertainment in 2009 as offering a relevant roadmap for an all-stock or Reverse Morris Trust transactions potential to unlock value (at both GLIBA and LBRDK).  Longer-term, we think incremental upside optionality remains from further appreciation in the value of GLIBA’s holdings, particularly CHTR, which itself has been reported to be a potential acquisition target.

American Outdoor Brands to Spin-Off its Outdoor Products and Accessories Business

On November 13, 2019, after the market close, American Outdoor Brands Corp. (NASDAQ: AOBC) announced its intention to separate its outdoor products and accessories business from the company’s firearms business. The tax-free spin-off will create two independent publicly-traded companies: Smith & Wesson Brands, Inc. and American Outdoor Brands, Inc. The transaction is expected to be completed in the second half of calendar 2020 and is subject to customary closing conditions. Note that AOBC operates on a fiscal year with an April year end.  Upon successful completion of the spin-off, Jeffrey D. Buchanan, Chief Financial Officer of the company, plans to retire. Deana L. McPherson, currently Chief Accounting Officer, will assume the role of Chief Financial officer of Smith& Wesson Brands Inc. and H. Andrew Fulmer, currently Vice President, Financial Planning & Analysis, will serve as Chief Financial officer of American Outdoor Brands, Inc.

Based in Boone County Missouri, American Outdoor Brands Inc. will be a provider of outdoor products and accessories for rugged outdoor enthusiasts. The business is an industry-leading provider of shooting, reloading, gunsmithing, and gun cleaning supplies; specialty tools and cutlery; fishing accessories; survival products; and electro-optics products. Key brands include Caldwell; Crimson Trace; Wheeler; and Tipton. Brands that will be licensed by the company include Smith & Wesson Accessories; M&P Accessories, Thomson/Center Arms Accessories; and Performance Center Accessories, all of which are owned by Smith & Wesson Brands, Inc. and will be exclusively licensed to American Outdoor Brands, Inc. after the spin-off.

Following the spin-off, Smith & Wesson Brands, Inc, based in Springfield, Massachusetts, will continue its firearms business, which includes handgun, long gun, and suppressor products marketed under the Smith & Wesson, M&P, Performance Center, Thompson/Center Arms and Gemtech brands. The company’s current credit facility, which has a maturity date of October 2021, will become secured upon the spin-off and remain an obligation of Smith & Wesson Brads Inc. Prior to the completion of the spin-off, AOBC intends to call its Senior Notes, repay its existing bank term loan, and consolidate both of those credit facilities into the lower interest rate revolving line of credit. The modification of the credit facility is expected to be finalized by the end of this month.

AOBC shares have been volatile, having declined 41% year to date, versus a 23% gain for the S&P 500 over the same period. However, the current administration’s proposed rule changes, which could be enacted by year-end, would shift oversight of commercial firearm exports from the U.S. Department of State to the Department of Commerce, easing sales of firearms internationally. A relaxing of rules could increase foreign gun sales by as much as 20%, the National Sports Shooting Foundation has estimated.

PRELIMINARY VALUATION

Following the separation, management suggests that the outdoor spin company would generate $200 to $210 million in revenue and $25 to $30 million in EBITDA, implying a 13.4% EBITDA margin. These expectations imply between 10% and 15% top line growth over the next roughly 24 months. For the parent Smith & Wesson would have sales between $450 and $500 million with EBITDA ranging from $90 to $105 million. The growth estimates for the firearms company are well below that of the outdoors spin company at roughly 1% annually. It can be noted that the company experienced significant growth into the last presidential election cycle (roughly 20% annually in F2015 and F2016) followed by a 42% decline in F2017.

AOBC currently trades at 5.7x 2019 consensus EBITDA and 5.5x 2020 consensus EBITDA. The closet peer to the parent company is Sturm, Ruger & Co., Inc. (NYSE: RGR), which for context currently trades at 8.2x trailing EBITDA (the company does not have a consensus EBITDA estimate given limited analyst coverage). On a historical basis, in recent years AOBC has typically trailed on valuation multiples versus RGR by approximately one to three turns, this is likely due to lower EBITDA margins between the two companies, particularly since AOBC began diversifying its business away from a pure firearms company. Over the three years AOBC’s trailing EBITDA margin has declined from approximately 28% to just over 13% (average of 18.5x) while RGR’s margins declined from 26% to just under 14% (average of 21.2x). Within this context we would expect that shares of the parent company would experience a degree of multiple expansion following the separation of the lower margin outdoors business following the separation.

Assuming the above derived EBITDA estimates, and a 6.0x multiple on the parent firearms company, Smith & Wesson would be valued at $615 million on an enterprise basis. It should be noted that this value is slightly less than the current enterprise value of the combined AOBC (as of last night’s closing). On the other side, the spin company, given its sizeable difference in earnings power, will likely result in large shareholder rotation, which could pressure Outdoor shares in initial trading. However, we would expect that shares would eventually be valued at the lower end of outdoor accessory focused peers. If shares were valued at 8.0x our EBITDA estimate of $27.3 million, shares would be valued at $218 million on an enterprise basis. The 8.0x multiple used in valuing the spin company is at the lower end of outdoor accessory focused peers and similar the historical average of peer Vista Outdoor Inc. (NYSE: VSTO).

Under the above derived valuation scenario, on a preliminary, sum-of-the-parts basis, shares of American Outdoor Brands Corp. would be fairly valued at almost $12 per share when incorporating current net debt of $190.2 million and shares outstanding of 54.8 million. This preliminary valuation suggests significant upside potential from the separation; however, the current political environment suggests sizeable risks to the parent company’s public perception, future sales and earnings, and ultimately the value of the standalone company, which may ultimately prove this preliminary valuation aggressive.

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.

SunPower to Spin-Off its Solar Panel Business

On November 11, 2019, before the market open, SunPower Corporation (NASDAQ: SPWR) announced its intention to separate its solar panel business, Maxeon Solar Technologies, via a spin-off from the company’s storage and energy services operations. As part of the transaction, SunPower’s partner Tianjin Zhonghuan Semiconductor Co. Ltd. (TZS), a manufacturer of silicon wafers, will make a $298 million investment in Maxeon Solar to help finance production capacity. The transaction, which is expected to be tax-free to shareholders, will be accomplished via a 100% distribution of shares in a new publicly traded company, to be named Maxeon Solar, to SPWR shareholders, followed by the TZS investment. After the completion of the transactions, TZS will own approximately 28.848 percent of the diluted ordinary shares of Maxeon Solar with approximately 71.152 percent owned by SunPower shareholders. The spin-off is expected to be completed in the second quarter of 2020 and is subject to customary closing conditions. At the time of separation, the two companies will enter into a multi-year exclusive supply agreement covering sales within the Unites States and Canada of products manufactured by Maxeon Solar.

SunPower Corporation is a manufacturer of crystalline silicon photovoltaic cells and solar panels based on an technology invented at Stanford University. The company, which generated $1.7 billion in 2018 sales, is majority-owned (66%) by French energy services company Total SA (FP FP) The post-spin parent company, which will retain the SunPower name, will continue as the leading North American distributed generation, storage, and energy services company, and remain headquartered in California. Maxeon Solar, which will be headquartered in Singapore, will be the leading global technology manufacturer and marketer of premium solar panels. The company will maintain its 20 percent ownership of the Perforance Series manufacturing joint venture (Huansheng Photovoltaic [Jiangsu] Company Ltd.) and will continue to market those panels globally.

SunPower shares have been volatile, having appreciated almost 70% year to date, versus a 25% gain for the S&P 500 over the same period.

The solar sector, which experienced a strong selloff in late October, has been negatively impacted by the current global trade dispute. Last month, SunPower received an exemption for some of its solar cells and panels from the current administration’s 30 percent important tariffs.  The exemption covers the company’s premium interdigitated back contact (IBC) cells and modules.

PRELIMINARY VALUATION 

In managements spin-off announcement presentation, the company issued long-term financial targets for Maxeon that included revenue growth of 10% – 20%, gross margins in excess of 15%, and greater than 10% EBITDA margins. For the post-spin parent company management targets long-term revenue growth of 10% -20%, gross margins of 20% or greater, and EBITDA margins in excess of 10%. Assuming managements financial targets can be achieved, it is estimated that the post-spin companies begins to drive profitability on increased sales and widening EBITDA margins. Under these assumptions it can be forecast that the Maxeon Solar would generate between $60 and $96 million in EBITDA in 2020. New SunPower would earn between $48 and $98 million in EBITDA.

Shares of SPWR currently trade at almost 12x the current consensus EBITDA estimate, while having averaged just under 10x over the past five years. Given the current lack of operating profitability and growth plans, the post spin valuations likely hinge on managements ability to drive wider margins on increased revenue. Assuming that New SunPower trades at a similar multiple to the current consolidated company, and Maxeon receives a slightly higher multiple to account for the forecasted wider margins, Maxeon would be valued at approximately $1.1 billion and New SunPower would be valued at $876 million. Accounting for current net debt of $813 million and 143 million shares outstanding, on a preliminary basis a pre-spin sum-of-the-parts fair value estimate of $8 per share is derived, roughly equivalent to PSWR’s closing price from Friday. In order for significant value to be unlocked management would have to execute at the high end of its forecast, which may prove difficult to achieve, as such we would expect investors to approach this transaction with caution. It should be noted that TZS’s investment in Maxeon Solar implies post-money equity value of $1.033 billion.

MSG Revises Spin-Off Plan, Reports 1Q F2019; Maintain BUY, Revise Fair Value to $355 (From $361)

• On November 7, 2019, after the market close, The Madison Square Garden Co. (NYSE: MSG) issued a press release detailing changes to the planned separation of its Sports and Entertainment businesses. The company now plans to spin-off the Entertainment business from the Sports business. Previously the company had planned to spin-off the Sports company from the Entertainment company, with the Entertainment company retaining a 33% stake in Sports. The spin-off is still expected to be completed in 1Q calendar 2020.
• Under the new plan, Entertainment would not retain any stake in the Sports company, however it is still posited that Entertainment would retain approximately $1 billion in cash. The rationale for the change in retained ownership interest was cited as being rooted in the fact that the second planned Sphere, to be located in London, was still in the planning phase, and will not be opening in 2021 as previously planned. Management stated Entertainment would have “sufficient financial flexibility” without the retained stake to fund the Las Vegas Sphere project.
• The change in spin/retained ownership structure comes on the heels of reports from the NY Post that private equity firm Silver Lake Partners, which is currently the largest shareholder with a 9.82% stake in MSG’s A shares, was interested in increasing its ownership interest in MSG’s sports teams.
• While the original planned structure of the spin-off (spin Sports with Entertainment retaining a 33% stake in Sports plus $1 billion in cash) was an important component of our bullish thesis on MSG shares, the revised structure does not materially change our position. The Sports and Entertainment businesses are undervalued in the current conglomerate structure, in our view. A separation of the businesses will highlight the mispricing, and increased interest/investments in the Sports business should help narrow the discount to the sum-of-the-parts fair value.
• Furthermore, the apparent delay in progress on the second Sphere project should allow investors to increase their comfort levels in the Las Vegas project in terms of costs and potential returns. We contend that incremental clarity on the Las Vegas project’s budget, interest in a post-spin minority investment in Sports, or the release of new Forbes valuations for the Knicks and Rangers would be positive catalysts for shares. (We expect NHL valuations to be revised in December and NBA valuations to be updated in February.)
• In addition to the revised plans, MSG also reported 1Q F2020 results. Year-over-year revenue declined by 1.5% as a 1% increase in Sports revenue was offset by a decline at Entertainment due to prior period large scale event (an MTV awards show) that did not re-occur in 1Q F2020. Operating income was negatively impacted primarily impacted by higher SG&A costs and a player waiver expense at Sports.
• We adjust our fair value estimate to $355 per share (previously $361) and maintain our BUY recommendation. The fair value revision is primarily a result of a lower net cash balance, and a slight increase in shares outstanding. The revised fair value estimate represents greater than 25% potential upside from the current share price ($281 as of this writing).
• For more details, please refer to The Spin Off Report dated February 13, 2019, and UPDATE dated August 20, 2019.