Investor Day Update:  Little in terms of incremental financial data/guidance but management indicated a cognizance that B&BW is “underappreciated” and that its corporate structure is a topic of regular Board discussion

• Today, at LB’s investor day in Columbus, OH management reiterated previously articulated 2019E guidance as well as its longer-term commentary projecting, on a consolidated basis, sales growth in the mid-to-high single digits with an operating margin profile in the mid-to-high teens.  By segment, LB still targets operating margins of 10%-15% at VS and in the low-20%’s at B&BW.
• In terms of ancillary data points, the company expects retained cash flow (FCF less dividends) of $415 million (or ~$1.50 per share) in F2019E, highlighting the manageability of its current maturity profile, as well as consolidated internal rates of return (IRR) on real estate investments of ~24% (reflecting returns of ~18% at VS and ~35% at B&BW).
• At VS Sport, management anecdotally targets a sales base, including swimwear, of ~$1 billion (compared with a current implied level of ~$350 million) by 2022.  In terms of the wider VS brand, the company expressed an increased willingness to “evolve” its product offering (and marketing) around a “by her, for her” mentality.
• Regarding a potential separation of VS and B&BW, while no commitment to a specific action was articulated the company did acknowledge that B&BW was “underappreciated” and indicated that the company’s corporate structure was “always under review” by the Board.  Moreover, the company pointed to a history of asset sales, carve-outs and spin-offs as evidence of the company’s willingness to pursue bold transformation when it is deemed to be in the best interest of shareholders.
• Our base case fair value estimate of $33.50 per share reflects a blended multiple of less than 7x on 2020E EBITDA of $1.925 billion (previously $2.05 billion) as well as net debt of $3.9 billion (previously $3.8 billion).

Downgrade KAR to HOLD (from BUY) on Valuation; Maintain $29 FVE

• Shares of KAR Auction Services (NYSE: KAR) are now rated HOLD (previously BUY) as upside to our fair value estimate of $29 per share is limited given the share price increase since the spin-off of IAA Inc. (NYSE: IAA).
• Investor concern over the ability of management to achieve profitability from Trade Rev remains a pivotal concern. Lack of clarity on the timing of Trade Rev profitability and the health of the physical auction business prevent us from increasing our valuation via earnings estimates or valuation multiple.
• For its part, management has previously stated that it expects a loss of ~$60 million from Trade Rev this year before seeing losses narrow in 2020.
• Management has previously reiterated its full year 2019 guidance, which includes adjusted EBITDA of $530-$550 million.
• Our fair value estimate of $29 per share is based on 2020E EBITDA of $575 million at ~9.5x incorporating $1.5 billion in net debt and 133.5 million shares outstanding.
• Shares of KAR have increased 9.4% since the spin-off of IAA on June 28, 2019; the S&P 500 increased 1.2% over the same time period.
• Further, incorporating our pre-spin BUY recommendation, shares of KAR have increased 50.2% since our initial KAR report was published on December 14, 2019, when accounting for the ownership distribution of IAA (assuming IAA was held through yesterday’s close) versus a 12.4% increase in the S&P 500.
• If shares of IAA were sold upon distribution (June 28, 2019), a pre-spin purchase of KAR would have resulted in a 30.5% gain versus a 12.4% increase in the S&P 500.
• For further information please see The Spin-Off Report dated December 14, 2018, and UPDATE notes published on April 2, 2019, June 6, 2019, June 21, 2019, and August 7, 2019.

VRNT maintains F2020 sales and EPS guidance of $1.375 billion and $3.65, respectively; fair value estimate remains $70 per share

• VRNT posted 1H F2020 consolidated sales growth of ~9.0% (10.5%, ex-currency) to $655 million with adj. EBITDA and EPS growth of 15% and 20% to $144 million and $1.55, respectively.

• Looking at 2Q F2020 results in isolation, consolidated sales, adj. EBITDA and EPS of $331.3 million, $73.8 million and $0.82 compared with consensus forecasts, per Bloomberg, of $334.5 million, $76 million and $0.80, respectively.

• By segment, at Customer Engagement 1H F2020 sales grew 10.5% (12%, ex-currency) to $434.3 million, including “cloud” growth of 49% to $110.5 million, with adj. segment EBITDA growth of 8% to $110.3 million.

• At Cyber Intelligence, 1H F2020 sales grew 6% (7.5%, ex-currency and 12%, ex-planned reductions in no-margin hardware sales) with a 46% increase in adj. segment EBITDA to $33.6 million, which was primarily driven by the gross margin expansion associated with VRNT’s on-going shift toward a more purely-software model (i.e. the unbundling of “pass-through” hardware sales from the core data mining product).

• The company ended 2Q F2020 with reported net debt of $351 million and net leverage ratio of 1.1x.

• For full-year F2020, VRNT maintained its previous guidance, which called for sales and EPS growth of 10% and 14% to $1.375 billion and $3.65, respectively.

• Anecdotally, the company indicated that 3Q F2020 sales and EPS would be roughly flat sequentially (i.e. versus 2Q F2020) followed by a strong 4Q F2020.  As well, the company expects cash flow from operations to increase, year over year, in F2020.

• Fair value remains $70 per share based on a ~11.5x blended multiple on F2022E EBITDA of $415 million (previously $415.5 million) and projected net debt, including leases liabilities, contingent considerations and minority interest, of ~$101 million (previously $110 million).

Drop Coverage of Kontoor Brands Inc. Effective Immediately

• Kontoor Brands Inc. Inc. (NYSE: KTB) was spun off from V.F. Corp. (NYSE: VFC) on May 22, 2019. 

• Given the transaction has now passed our coverage mandate of 90 days post-spin, we DROP coverage of Kontoor Brands effective immediately.

• Our prior estimates and fair values for KTB should no longer be relied on.

NUAN Sets Dates and Distribution Ratio for Automotive Spin-Off; Fair Value Estimate $18; Maintain HOLD

• Nuance Communications Inc. (NASDAQ: NUAN) announced key dates  and distribution ratio associated  with the spin-off of its Automotive business, to be named Cerence Inc.. The distribution is expected to take place at 5:00 PM EST on October 1, 2019.  Each NUAN shareholder as of the record date of September 17, 2019 will receive one share of Cerence Inc. common stock for every 8 shares of NUAN held.

• When-issued trading of Cerence will begin on the NASDAQ on or about Monday, September 16, 2019. Cerence will be listed under the symbol “CRNC.” Regular way-trading will begin on October 2, 2019.

• We adjust our estimates to reflect the announced distribution ratio. Cerence is expected to incur approximately $425.0 million of debt and make a cash distribution of approximately $309.9 million to Nuance. The pre-spin fair value estimate for NUAN remains $18 per share. Post-spin, NUAN and CRNC can be fairly valued at $14 and $28 (versus $4 previously), respectively.

• Shares of NUAN have appreciated approximately 24% year to date (nearing a 52-week high of $18), versus 15% for the S&P 500 over the same period. We maintain our HOLD recommendation. While we view favorably management’s efforts to streamline the business, accelerate share buybacks, and repay debt, we remain concerned about near-term operational performance. Specifically, near-term revenue growth may be offset by more rapid declines in non-core businesses. In addition, competition from larger technology companies remains a concern. While Nuance’s Healthcare and Enterprise businesses tend to be subject to stricter regulatory requirements, which may provide some insulation from competition, we think that unlocking this value may take time.

• For more details, please refer to The Spin Off Report dated June 24, 2019 and UPDATE dated September 3, 2019.

FTV to Separate Transportation and Mobility Assets via Spin-Off

On September 4, 2019, Fortive Corp. (NYSE: FTV) announced that the company plans to separate its global industrial assets focused on transportation and mobility from its growth-oriented professional instrumentation assets via a tax-free spin-off. The separation is expected to be completed in the second half of 2020, subject to standard conditions. Following the completion of the transaction, James A. Lico and Charles E. McLaughlin will continue to serve as President and Chief Executive Officer and Senior Vice President and Chief Financial Officer of Fortive, respectively.

NewCo will be a global industrial company focused on transportation and mobility, with a portfolio of leading retail and commercial fueling, fleet management, and professional tools brands across its transportation technologies and franchise distribution product lines. The company will consist of leading positions in several end-markets, including retail fueling and mobility infrastructure, fleet management & vehicle maintenance and repair. In 2018, the business generated revenue and EBITDA of approximately $2.8 billion and $614 million, respectively (22% EBITDA margin).

The parent company, which will maintain the Fortive name, will be a professional instrumentation company with a differentiated portfolio of growth-oriented businesses that are aligned with long-term growth trends driven by the shift towards software-enabled workflows, connected devices and Internet of Things (IoT) offerings, rising productivity, safety, and security requirements, as well as the demand for safe, high-quality healthcare. Fortive will be comprised of the businesses from the existing company’s Professional Instrumentation Segment, including the Field Solutions, Product Realization, and Sensing Technologies platforms, as well as the Advanced Sterilization Products business. In 2018, the business generated revenue and EBITDA of approximately $3.7 billion and $918 million respectively (25% EBITDA margin). Management stated that in 2019, on a pro-forma basis, the parent company’s revenue would approximate $5 billion.

Fortive is a diversified industrial conglomerate, which manufactures professional & engineered products, software and services in the areas of field instrumentation, transportation, sensing, product realization, automation, and franchise distribution. The company, which was originally spun off from Danaher Corp.(NYSE: DHR) in July 2016, is comprised of two reportable segments: Professional Instrumentation, which provides products, software and services used to create actionable intelligence by measuring and monitoring a range of physical parameters in industrial applications, including electrical current, radio frequency signals, distance, pressure, temperature, turbidity, radiation, and hazardous gases; and Industrial Technologies, which provides critical technical equipment, components, software and services for manufacturing, repair and transportation markets worldwide. From a strategic perspective, the spin-off is consistent with the company’s strategy of shifting the business increasingly to growth-oriented software and services segments. In March 2018, the company sold almost the entirety of its Automation & Specialty (A&S) business to Altra Industrial Motion Corp (NASDAQ: AIMC) for $3 billion. Fortive management has previously indicated it will have around $8 billion in deployable capital for growth-oriented mergers and acquisitions.

PRELIMINARY VALUATION

Shares of Fortive currently trade at 14.9x the 2020 consensus EBITDA estimate, which is a premium to a basket of multi-industry industrial peers. The larger basket of peers trade on average at 12.7x 2020 EBITDA estimates, with a range of 9.6x to 20.4x (median 12.0x). The spin-off could be expected to result in a lower trading multiple at NewCo as the transportation focused peers, which include the likes of Dover Corp (NYSE: DOV) and Franklin Electric Co. Inc. (NYSE: FELE), currently trade at closer to 12.0x. Conversely shares of post-spin FTV shares will likely continue to trade at a premium to the broader peer group based on the degree of recurring revenue (30%+) and EBITDA margins (Mid-20%).

On a pro forma basis it is expected that in 2018 NewCo would have generated approximately $2.8 billion in revenue, with gross and EBITDA margins of ~43% and ~22%, respectively. Assuming the company’s growth profile approximates the Industrial Technologies segment trends, it can be expected that revenue growth would range from 3% to 5% annually, resulting in 2020 revenue of $3.0 billion. Applying a 22% EBITDA margin the company would earn $666 million before interest, taxes, depreciation and amortization. Assuming NewCo is re-rated lower than FTV’s current multiple to approximate more focused peers, if shares trade at 12.0x NewCo would be valued at approximately $8.0 billion on an enterprise basis.

The post-spin parent company is estimated to generate ~$5.0 billion in revenue in 2019 based on management’s pro-forma estimates (assumes 2019 acquisitions were completed at the beginning of 2019). Assuming a 15% revenue growth rate in 2020, post-spin Fortiv would generate $5.7 billion in revenue in 2020. The company’s outlook expects a mid-20’s adjusted EBITDA margin, which is in line with 2018 Professional Instrumentation segment results. Assuming a 25% EBITDA margin the company would earn $1.4 billion in EBITDA. Valuing the parent company at 15x the 2020 EBITDA estimate of $1.4 billion implies that Fortive ex-New Co would be valued at $21.3 billion on an enterprise basis.

On a pre-spin, sum-of-the-parts basis, shares of Fortive are fairly valued at $71 per share, when incorporating $5.3 billion in net debt and 335.5 million shares outstanding. Given the fair value estimate approximates the current share price ($70 per share at the time of this writing) it does not appear that the transaction alone unlocks meaningful value. This is likely a result of FTV’s current premium multiple to the peer group and suggests that managements rationale may be more strategic in nature versus viewing the conglomerate structure as a hinderance to valuation.

NUAN Files Form 10 for Automotive Spin-Off; Fair Value Estimate $18; Maintain HOLD

• Nuance Communications Inc. (NASDAQ: NUAN) filed a Form 10 registration statement for the spin-off of its Automotive business, to be named Cerence Inc., which expected to take place following the end of the company’s  September 30, 2019 fiscal year. Cerence will be listed on the NASDAQ under the symbol “CRNC.”

• We adjust our estimates to reflect updated pro forma historical financials, balance sheet information, and details on post-spin capitalization. Cerence is expected to incur approximately $425.0 million of debt and make a cash distribution of approximately $309.9 million to Nuance (we had previously estimated debt of $700 million for Cerence). The pre-spin fair value estimate for NUAN remains $18 per share. Post-spin, NUAN and CRNC can be fairly valued at $14 and $4, respectively. Note that a distribution ratio has not been announced as of this writing; as such, our fair value estimates are subject to change as additional information becomes available.

• Shares of NUAN have appreciated approximately 24% year to date (nearing a 52-week high of $18), versus 15% for the S&P 500 over the same period. We maintain our HOLD recommendation. While we view favorably management’s efforts to streamline the business, accelerate share buybacks, and repay debt, we remain concerned about near-term operational performance. Specifically, near-term revenue growth may be offset by more rapid declines in non-core businesses. In addition, competition from larger technology companies remains a concern. While Nuance’s Healthcare and Enterprise businesses tend to be subject to stricter regulatory requirements, which may provide some insulation from competition, we think that unlocking this value may take time.

• For more details, please refer to The Spin Off Report dated June 24, 2019.

CNHI to Separate On-Highway and Off-Highway Assets via Spin-Off

On September 3, 2019, CNH Industrial N.V. (NYSE: CNHI) announced that the company plans to spin off its ‘On-Highway’ (commercial vehicles and powertrain segments) as a separate, publicly-listed company. The separation of On-Highway and “Off-Highway’ assets (agriculture, construction and specialty segments) was announced as part of the company’s five-year 2020–2024 business plan, a strategic reorganization expected to improve operating performance. The separation, which is expected to be tax-free to shareholders, is expected to take place by early 2021, subject to approval at an Extraordinary General Meeting of shareholders, which is anticipated to be held in 2H 2020.

CNHI is predominantly an agricultural equipment company, formed by the merger of Fiat Industrial and its U.S. unit CNH. The company manufactures agricultural products under the Case and New Holland brands, the STEYR brand in Europe, and the Miller brand in North America. Case and New Holland were previously part of carmaker Fiat Chrysler Automobiles N.V. (NYSE: FCAU).

The separation of the lower margin ‘On-Highway’ business from the company’s considerably more profitable tractor division (which generates approximately 3x operating profit margins) has been under consideration since early 2018, when the idea was proposed by former CEO Richard Tobin.

The ‘Off-Highway’ company, with 2018 pro-forma revenues of $15.6 billion, will be predominantly an agriculture company (75% of revenue), and also include the construction (19% of revenue), and specialty vehicle (6% of revenue) businesses. The latter includes fire-fighting and other special-purpose vehicles.

The ‘On-Highway’ company, with 2018 pro-forma revenues of $13.1 billion, manufactures commercial vehicles under the IVECO brand, including the Iveco Bus and Heuliez Bus commercial vehicle brands (69% of revenue), as well as operates the FPT Industrial powertrain business (31% of revenue), which manufactures powertrain and alternative propulsion solutions. FPT Industrial will remain a key supplier to the ‘Off-Highway’ business through a long-term supply agreement.

PRELIMINARY VALUATION

CNHI operates four industrial segments (not including its financial services activities): (1) Agricultural Equipment (39% of consolidated sales and 60% of operating profit in 2018); (2) Construction Equipment (10% of sales and ~3.5% of operating profit); (3) Commercial Vehicles (36% of revenue and 15.5% of operating profit); and (4) Powertrain (15% of sales and 21% of operating profit in 2018). For 2019, the company has articulated guidance calling for consolidated sales of ~$27-27.5 billion, adjusted EPS growth of 5%-10% to $0.84-$0.88, and net industrial debt of $0.2-$0.4 billion. Based on the aforementioned guidance, recent trends, and consensus estimates, it can be projected that, on a consolidated basis, CNHI could generate 2019E sales, operating profit, and EBITDA of $27.3 billion, $1.63 billion, and ~$2.6 billion, respectively.

In terms of valuing the post-spin entities, it is possible to value each company based on the current segment operating performance, assuming the pro rata distribution of depreciation & amortization expenses. The Off-Highway will be comprised of the current Agricultural Equipment and Construction Equipment businesses. The Agricultural Equipment business can be projected to generate 2019E sales and EBITDA of $11.5 billion and $1.8 billion, respectively. The segment can be compared to peers such as AGCO Corp. (NYSE: AGCO), Deere & Co. (NSYE: DE), and Kubota Corp. (6326 JT), which trade at an elevated 10x 2019E EV/EBITDA, with the low-end peer trading at ~8.0x. Applying an 8.5x multiple implies segment value of $15 billion. The Construction Equipment segment can be projected to post sales and EBITDA of $3 billion and $102 million, respectively, and can be compared with peers such as Caterpillar (NYSE: CAT), Deere, Hitachi (6501 JT), Komatsu (6301 JT), and Kubota, which trade at 7.0x 2019E EV/EBITDA. Applying the peer multiple implies segment value of $713 million. Combined the Off-Highway company would generate $14.5 billion in revenue and $1.9 billion in EBITDA, which when valued at 8.4x (the weighted average of the two segments) implies a post-spin enterprise value of $15.8 billion.

The On-Highway company will control the current Commercial Vehicle and Powertrain segments. At the Commercial Vehicle unit, 2019E sales and EBITDA could be projected at $10.8 billion and $461 million, respectively; that segment can be compared to PACCAR Inc. (NASDAQ: PCAR), Volvo (VOLVB SS), and Oshkosh Corp. (NYSE: OSK), which trade at 6.0x 2019E EBITDA. Applying the peer multiple implies segment value of $2.8 billion. Lastly, the Powertrain segment can be expected to generate 2019E sales and EBITDA of $4.6 billion and $624 million, respectively, and can be compared to Cummins (NYSE: CMI), Deutz AG (DEZ GR), and Deere, which trade at 5x 2019E EBITDA. Applying the peer multiple implies segment value of $3.1 billion. Following the separation, the On-Highway company would have an enterprise value of $5.9 billion under this valuation scenario.

Accounting for corporate costs of $350 million, capitalized at 6.5x (the weighted average of the segment valuation multiples), as well as current industrial net debt of $1.9 billion yields a pre-spin, preliminary sum-of-the-parts value of $17.4 billion, or almost $13 per share (based on 1.36 billion shares outstanding).

TechnipFMC plc to Spin off its E&C Business

On August 28, 2019, TechnipFMC plc (NYSE: FTI) announced that the company will separate its engineering and construction (E&C) business from its services business. The transaction, which is expected to be tax free where permissible, including the United States, is expected to close in the first half of 2020, subject to general market conditions, regulatory approvals, consultation of employee representatives, where applicable, and final Board approval. RemainCo will be listed on both the NYSE and Euronext Paris exchange; SpinCo will be exclusively listed on the Euronext Paris exchange.

TechnipFMC plc, with a current market capitalization of $11 billion, is an integrated energy services company formed as a result of the 2017 merger of French oil services provider Technip S.A. and FMC Technologies Inc. The company is dual-listed on the NYSE and the Euronext Paris exchanges and is a component of the S&P 500, CAC 40, and the Dow Jones Sustainability Index. The French government has a 4% ownership position. TechnipFMC provides complete project lifecycle services for the energy industry, including offshore oil & gas exploration and extraction platforms, rigs, crude oil refinery, petrochemical plants, plastics, rubber & fertilizer plants, and onshore & floating LNG (Liquefied Natural Gas) plants. The consolidated company, which generated 2018 revenue and adjusted EBITDA of $12.5 billion and $1.5 billion (12.2% EBITDA margin), consists of three business segments: 1) Subsea Technologies, which includes redesign, engineering, and procurement services; 2) Onshore/Offshore, which provides designing and project development services; and 3) Surface Technologies, which provides products and services used by oil and gas companies involved in land and offshore exploration and production of crude oil and natural gas.  

SpinCo, which will become one of the largest independent onshore/offshore E&C pure-plays, will be headquartered in Paris. The post-spin company comprises TechnipFMC’s Onshore/Offshore segment, including Genesis – a leader in front-end engineering and design. SpinCo will also include Loading Systems, a leader in cryogenic material transfer products, and Cybernetix, a technology leader in process automation—segments which have historically been a part of FTI’s Surface Technologies and Subsea businesses, respectively. The post-spin company should be well-positioned relative to LNG and petrochemical opportunities. In addition, the new company will benefit from its leadership position in the downstream market, and will pursue future growth opportunities in biofuels, green chemistry, and other alternative energy sources.

RemainCo, headquartered in Houston, Texas is comprised of the Surface Technologies business segment and expected to be a fully-integrated technology and services provider, continuing to drive energy development from deep water, conventional and unconventional resources. The company should benefit from the largest installed base of subsea equipment.

For FTI, the decision to separate its E&C business reflects improving fundamentals in the subsea sector, as the company has benefitted from increasing production activity and the achievement of key milestones on projects nearing completion. Note that FTI shares have appreciated 24% in 2019, versus 15% for the S&P 500, having benefited from improving demand (reported 1H 2019 backlog of $25.8 billion, a 75% increase from year-end 2018 levels) and a strong pipeline, with management having raised guidance in its most recently reported quarter.

PRELIMINARY VALUATION

We base our initial, preliminary valuation based on management’s 2019 guidance and recent business trends. For the purposes of this analysis, we assume SpinCo consists of the entirety of FTI’s Onshore/Offshore business (less than 5% is expected to remain with RemainCo).

Based on the midpoint of management’s 2019 guidance for subsea and Surface Technologies businesses, RemainCo is expected to generate 2019 revenues of $7.3 billion. Assuming 5% revenue growth, post-spin RemainCo could reasonably generate 2020 revenues of $7.7 billion. Based on an estimated EBITDA margin of 12%, which is flat relative to 2019 guidance, RemainCo could be estimated to generate 2020 EBITDA of $926 million. Shares of FTI currently trade at 6.2x the 2020 consensus EBITDA estimate. FTI’s peer group includes other subsea engineering companies such as SEACOR Holdings, Inc. (NYSE: CKH) and Oceaneering International (NYSE: OII) and Subsea 7 SA (SUBCY), amongst others, although FTI has historically garnered a higher multiple owing to its growth rate and margin profile. Applying a consolidated multiple of 6x to estimated 2020 EBITDA generates an implied enterprise value of $5.6 billion for ReamainCo.

SpinCo will consist essentially of FTI’s onshore/offshore services business. Management has previously provided revenue guidance of between $6 and $6.3 billion and EBITDA margin guidance of approximately 16.5%. Assuming 5% revenue growth, and flat EBITDA margin, SpinCo could reasonably generate EBITDA of $1.1 billion in 2020. Applying a7x multiple to the services business (a one-turn premium multiple to the company’s consolidated multiple), owing to higher margin profile, the business could be fairly valued at an enterprise value of $7.5 billion.

Factoring in for an estimated $210 billion in net debt, and approximately 465 million shares outstanding, shares of FTI can be fairly valued at $28, which represents approximately 13% upside from current levels. Given the strong recent run in the shares, coupled with today’s movement (shares are up 6% intraday), the transaction appears to offer modest near-term upside.

MSG Reports F2019 Results, Provides Sphere Project and Spin-Off Update; Maintain BUY, Revised FVE to $361 per Share (Previously $362/Share)

• On August 20, 2019, before the market open, The Madison Square Garden Company (NYSE: MSG) reported 4Q and full-year F2019 results (June FY end) which included a full year revenue increase of 5% to $1.6 billion and a full year adjusted operating income decline of 14% to ~$170 million. The operating income decline was largely attributable to higher SG&A from higher professional fees and employee compensation related to the Sphere project.
• MSG’s reported 4Q F2019 results were impacted by the adoption of ASC 606 resulting in lower reported operating income; absent the impact of ASC 606 the company’s 4Q reported revenue would have increased by 3% to $326 million and adjusted operating income would have been $3.7 million versus a $1.3 million loss in the prior year period. This will be MSG’s last quarter of apples to oranges comparisons from ASC 606.
• Commenting on the Sphere project, management stated that it is currently reviewing the cost estimate of $1.7 billion provided by AECOM (NYSE: ACM), which it views as too high. We expect that the ultimate cost is likely in between management’s $1.2 billion budget and AECOM’s estimate. MSG stated that it has made significant progress and plans on completing the Las Vegas Sphere in calendar year 2021.
• We note that given MSG’s large asset base (sports teams, arenas, and theaters), which are not typically valued based on earnings, shares typically do not trade on reported earnings. Today’s early selling pressure (down 6%) is likely attributable to the higher than expected construction costs for the sphere.
• On this morning’s conference call, it was noted that the Sports spin-off has taken longer than expected, while noting that it is now expected to be completed in 1Q 2020 (calendar year).
• We maintain our BUY rating on MSG as we believe the separation of sports and entertainment businesses will unlock value.
• The capitalization of the Entertainment business, with $1 billion in cash and 33% ownership stake in the Sports business should allow for funding of the Sphere projects without significant debt or equity issuances with significant opportunities to drive revenue and profit from the new venues.
• A pure-play Sports company could allow the Dolan family to take a minority investment to mark to market the value of the NY Knicks and or NY Rangers. We note that Joseph Tsai recently completed the acquisition of the Brooklyn Nets at a valuation that was in line with the Forbes valuation of the Nets (including the Barclays Center); our estimates of value for the Knicks and Rangers are roughly in line with the most recent published valuations by Forbes.
• Our fair value estimate is revised to $361 per share (from $362 per share) and consists of $211 per share in value from the Sports company and $149 per share from the Entertainment company. The lower estimate is a result of lower revenue base at the Entertainment operating businesses.
• The sports valuation includes $160 per share from the Knicks and $51 per share attributed to the NY Rangers.
• The entertainment business valuation includes $56 per share in value from the venues, $46 in operation assets, and $24 per share in net cash.
• For more details, please refer to The Spin Off Report dated February 13, 2019.