VVI increases 2019E adj. segment EBITDA guidance to $159-$166 million; in our estimation, Pursuit will approach the key $250 million revenue benchmark in 2020

• VVI posted 1H 2019 revenue growth of 7.3% to ~$641 million with a ~13% increase in adj. segment EBITDA to ~$64 million.
• In terms of full-year 2019E guidance, VVI expects “mid-single digit” consolidated sales growth (unchanged) with adj. segment EBITDA of $159-$166 million (compared with previous guidance of $152-$159 million and $146.3 million in 2018).
• By segment, VVI expects GES to post 2019E sales growth in the “low-single digit” range (unchanged) with adj. segment EBITDA of $76-$80 million (unchanged).  At Pursuit, VVI projects sales growth of 20%-23.5% (previously 15%-17%) with adj. segment EBITDA of $82.5-$86.5 million (previously $76-$79 million).
• Looking into 2020, the company expects roughly $100 million of positive “show-rotation” (with a flow-through rate of ~30%) at GES. Maintenance cap ex, as a % of segment sales, is expected to remain ~2% at GES and ~8% at Pursuit.
• In 2021-2022, VVI expects to add two new attractions to its Pursuit portfolio, including a new FlyOver location in Toronto and a geothermal lagoon experience in Iceland.
• With the recent purchase of Mountain Park Lodges in June 2019, we expect VVI’s high-margin Pursuit segment will approach $250 million of sales, which we discern remains the starkest benchmark precipitating an eventual split of the company’s disparate businesses, during 2020.  In that context, VVI indicated that while management remains focused on executing the company’s growth plans the Board will continue to evaluate all avenues to maximize value for shareholders.
• Our fair value estimate is increased to $75 per share based on a blended multiple of ~9.5x (previously 8.0x) on 2019E/2020E blended EBITDA of ~$180 million as well as projected net debt of ~$187.5 million.

Tenet Healthcare Corp to Spin Off Conifer Business

On July 24, 2019, before the market open, Tenet Healthcare Corp. (NYSE: THC) announced that the company has completed its strategic reviews process of its Conifer business, which was announced in December 2017, and has decided to pursue a tax-free spin-off of the business. Following the distribution of Conifer shares to THC shareholders, Conifer will be an independent publicly traded company. The transaction is expected to be completed by the end of 2Q 2021, and is subject to customary closing measures including assurance on the tax-free nature of the transaction to THC shareholders, enacting a services agreement between THC and Conifer, the effectiveness of filings with the SEC, and final THC Board approval, among others.

Tenet Healthcare Corp. is the owner and operator of general hospitals and related facilities in about 10 states within the US. As of March 31, 2019, the company operated 65 hospitals, 23 surgical hospitals, and approximately 470 outpatient centers throughout the United States. Additionally, the company operates a subsidiary, Conifer Health Solutions, which provides “healthcare business process services in the areas of hospital and physician revenue cycle management and value-based care solutions”– essentially debt collection services via software that registers patients, authorizes insurance, and billing patients and payers for care.

THC currently operates under three reportable segments: Hospital Operations and Other generated $15.3 billion in revenue and $1.4 billion in adjusted EBITDA in 2018 (representing 80.9% and 55.1%, respectively, of consolidated revenue and EBITDA), Ambulatory Care generated, $2.1 billion in revenue and $792 million in adjusted EBITDA (11.0% and 30.9% of consolidated, respectively), and Conifer, which contributed $1.5 billion in revenue and $357 million in adjusted EBITDA in 2018 (8.1% and 13.9% of consolidated, respectively). It should be noted that Catholic Health Initiatives currently owns 23.8% of Conifer.

The previously announced strategic review and subsequent spin-off announcement are part of THC’s larger restructuring plan. Announced in December 2017, the plan initially outlined cost-savings from $150 million to $250 million, which were to be realized by the end of 2018. At the time of the announcement, and throughout 2018, it was suggested that THC was close to selling the Conifer business, as it was posited that hospitals that currently outsource the revenue cycle management process would look to improve the process by bringing inhouse a software solution. However the revenue growth at Conifer has been fairly stagnant, 1.7% growth in 2017 and a decline of 4.0% in 2018, which likely resulted in lower than anticipated bids for the business. Management states that three companies ultimately did bid but the terms of the offers included equity considerations versus an all cash bid, that was not what the company was expecting.

In late 2018 THC management commented that the sale process was being complicated by the relationship between Conifer and THC, as Conifer serves Tenet’s hospital system. Media reports throughout 2018 suggested that interested suitors for Conifer included UnitedHealth Group Inc. (NYSE: UNH), and the business could be valued at around $2 billion, according to the Wall Street Journal.

PRELIMINARY VALUATION

In approaching valuation, we begin with 2018 revenue for the three segments, and recent growth and margin trends. Conifer revenue declined 4% in 2018, and through 1Q 2019 the segment’s revenue declined 13.6%. Despite revenue declines, segment EBITDA margins increased 560 basis points in 2018 to 23.3% (margins were 24.3% and 23.6% in 1Q 2018 and 1Q 2019). Assuming a 10% decline in revenue in 2019, and a further decline of 5% in 2020, as a standalone company Conifer would generate $1.3 billion in revenue. Assuming margin improvements, which should arise from further cost cutting, primarily offshoring some of the business, are offset by increased corporate costs for being a standalone company, it appears reasonable to assume 2002 EBITDA margins of 21%, resulting in EBITDA of $275 million. Given Conifer’s IT focus, peers to the company would include companies that provide systems such as clinical infrastructure and workforce automation solutions such as Covetrus Inc. (NASDAQ: CVET), Allscripts Healthcare Solutions Inc. (NASDAQ: MDRX), Inovalon Holdings Inc. (NASDAQ: INOV), NextGen Healthcare Inc. (NASDAQ: NXGN), and Omnicell Inc. (NASDAQ: OMCL), which currently trade on average at ~12.0x the consensus 2020 EBITDA estimate. Applying the peer average multiple, Conifer as a standalone entity would have an enterprise value of $3.3 billion.

Following the separation of Conifer, THC would have generated $17.4 billion in revenue and EBITDA of $2.2 billion. Assuming current revenue trend from 1Q 2019 persist through the full year, before improving to flat year-over-year in 2020, the post-spin company would generate $16.9 billion in sales in 2020. Assuming margins of 13%, consisting of 10% for General Hospital and 38% for Ambulatory Care, THC would earn $2.3 billion in EBITDA in 2020. Shares of THC currently trade at 7.2x the consensus EBITDA estimate while competitors such as HCA Healthcare Inc. (NYSE: HCA), Universal Health Services Inc. (NYSE: UHS), Quorum Health Corp. (NYSE: QHC), and Community Health Systems (NYSE: CYH) trade on average at 8.3x (with a range of 7.5x – 8.9x). Assuming shares of post-spin THC trade at the low end of the peer group average at 7.5x, post-spin Tenet would have an enterprise value of $17.1 billion.

Based on the above preliminary valuation exercises, on a sum-of-the-parts basis, shares of THC can be fairly valued at $27 per share when incorporating current net debt of $17.3 billion and 103.1 million shares outstanding. Shares of THC closed last night at $17.57, and are currently trading at $18.04, suggesting that the separation could unlock significant shareholder value.

NPO to acquire LeanTeq, a high-margin, high-growth provider of services to the semiconductor industry; fair value remains $81 per share

• This morning, NPO announced the acquisition of LeanTeq, which uses proprietary technologies to provide cleaning, coating, testing, inspection and assembly services to the semiconductor industry with a primary focus on the aftermarket (i.e. 65% of sales).
• LeanTeq will be folded into the Technetics Group of the Sealing Products segment and the deal is expected to close in 4Q 2019.
• Per management, the business’s exposure to high-growth, recurring-revenue verticals, such as smartphone technology, autonomous vehicles, high-speed connectivity (i.e. 5G) and artificial intelligence (AI), are expected to drive “double-digit” top-line growth at LeanTeq.
• Along with the recent purchase of The Aseptic Group (on July 2^nd) the combined purchase price of the two most recent transactions will be ~$345 million.  To that end, NPO expects its post-closing pro forma net debt to EBITDA ratio will be ~2.7x (compared with 1.6x at the end of 1Q 2019) but anticipates a return to its targeted 1.5x-2.0x range by the end of 2020.
• Management expects LeanTeq and The Aseptic Group will add pro forma annual sales of ~$55 million and widen the Sealing Products segment’s EBITDA margin by ~175-200 basis points (off a trailing 12-month base of 16.5%).  As well, the company expects the deal to be accretive to adjusted EPS in the first full-year post-closing.
• Fair value remains $81 per share, reflecting a blended multiple of ~7.5x (unchanged) on 2021E EBITDA of ~$271 million (previously ~$249 million) and net debt 0f ~$395.5 million (previously ~$220 million).
• The company will report 2Q 2019 results on July 29^th after the market close with a conference call on July 30^th at 8:30 a.m. (ET), at which time we may make further adjustments to our forecasts.

Withdraw sell recommendation on NPK with shares trading roughly in-line with our revised base-case fair value estimate of $91 per share 

• NPK shares have declined ~26.5% since our initial sell recommendation in July 2018 (versus a ~9.5% increase in the S&P 500 and a ~6.5% decline in the Russell 2000).
• In our view, the stock’s decline has been driven, in large part, by emerging weakness in the company’s Defense business, which posted a 27.5% drop in sales with a ~55% decline in operating profit and EBITDA during 1Q 2019.
• That said, with the stock trading roughly in-line with our revised base-case fair value estimate of $91 per share (and toward the bear-end of our initial valuation range) we prefer to maintain a disciplined approach and withdraw our sell recommendation, as of today’s close.
• We will continue to monitor NPK for an opportunity to re-recommend the shares (either long or short) if valuation shifts or incremental steps toward potential strategic alternatives materialize.

Drop Coverage of Dow Inc. Effective Immediately 

• Dow Inc. (NYSE: DOW) was spun off from DowDuPont Inc. (formerly NYSE: DWDP) on April 1, 2019.
• Given the transaction has now passed our coverage mandate of 90 days post-spin, we DROP coverage of Dow Chemical effective immediately.
• Our prior estimates and fair values for DOW should no longer be relied on.

LNDC’s new CEO articulates his strategic priorities at CF and indicates 4Q 2019 EPS, ex-charges, will meet the low-end of guidance (in-line with our expectations) 

• Last night, LNDC’s new CEO, Dr. Albert Bolles, who took the helm in late-May, laid out his strategic priorities to drive profitable growth at the Curation Foods (CF) business, namely: 1) Focus (i.e. concentrating on only high-impact projects); 2)  Innovation (with a commitment to 100% clean ingredients); 3) Productivity (i.e. a culture of continuous improvement); 4) Operational excellence (i.e. implement an ERP system and fully integrate the Yucatan/Cabo Fresh acquisition); and 5) Sustainability (i.e. respect for people and the planet).
• In terms of specific actions, LNDC has discontinued the Now Planting-soup brand, re-branded its GreenLine green bean offering under the core EatSmart brand and closed the EatSmart@home e-commerce business. Additionally, the company has shut (and will sell) the offices CF maintained in San Rafael, CA (with the Santa Maria location serving as the segment’s new headquarters).  As previously announced, the company also brought in Tim Burgess as the SVP of supply chain to focus on improving operational efficiency, reducing costs and drive efficiencies.
• Collectively, LNDC’s actions over the last month will result in ~$3.8 million or $0.13 of non-recurring charges, including severance, in the 4Q F2019 (May-ending).
• That said, management indicated that absent these one-time costs 4Q F2019 EPS will be at the low-end of its $0.12-$0.15 quarterly guidance. In that context, the company indicated full-year F2019 sales at Curation Foods and Lifecore would be up 5% (at low-end of guidance) and 16% (at high-end of guidance), respectively. (For context, our initial expectations for growth at CF and Lifecore were 6% and 15, respectively.)
• Fair value remains $14 per share, reflecting a blended multiple of 11x on May-ending F2021E EBITDA of $45 million.

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KAR and IAA Begin Trading in When-Issued Market; KAR Auction Services to Complete Spin-Off of IAA Inc. on June 28, 2019; Maintain BUY rating on KAR, Rate Post Spin KAR at BUY, IAA Inc. at HOLD

• On June 17, 2019, KAR Auction Services (NYSE: KAR) and IAA Inc. began trading in the when-issued market under the symbols KAR-W and IAA-W, respectively. KAR will complete the spin-off of IAA Inc. on June 28, 2109, with regular-way trading set to begin on the same day.
• In the when-issued market, shares of KAR-W closed last night at $22.79 per share; IAA-W shares closed at $40.00 per share.
• We adjust our post-spin fair value estimates to reflect an updated share count as filed in the latest Form 10 filing (135.7 million shares versus the prior 133.3 million).
• Shares of IAA are now fairly valued at $35 per share (previously $36 per share), and post-spin KAR is fairly valued at $33 per share. The pre-spin KAR FVE is reduced to $69 per share (previously $70 per share).
• At the current shar price, IAA is trading at 15.5x our 2020E EBITDA of $431 million, above our fair value estimate multiple of 14x, which equates to a fair value estimate of $35 per share. As such, we rate shares of IAA at HOLD.
• Shares of post-spin KAR appear undervalued in initial trading. Based on the current when-issued share price, shares are trading at 8.7x our 2020E EBITDA of $604 million. Our post-spin KAR fair value estimate of $33 per share implies 46% upside from the current trading price. We rate post-spin shares of KAR at BUY.
• Investors looking to capitalize on the KAR when-issued pricing could BUY shares of KAR (pre-spin consolidated company) and look to exit the IAA position immediately after the IAA share distribution, or purchase KAR-WI in the when-issued market if sufficient liquidity is present.
• For further information please see The Spin-Off Report on KAR, dated December 14, 2018, and UPDATE notes, dated June 6, 2019, and June 18, 2019.

Drop Coverage of The Walt Disney Company Effective Immediately

• The Walt Disney Company (NYSE: DIS) acquired Twenty First Century Fox, which was spun off from Fox Corp. (NASDAQ: FOXA, FOX) on March 20, 2019.
• Given the transaction has now passed our coverage mandate of 90 days post-spin, we DROP coverage of The Walt Disney Company effective immediately.
• Our prior estimates and fair values for DIS should no longer be relied on

Drop Coverage of Fox Corp. Effective Immediately

• On March 19, 2019, Twenty First Century Fox (“21CF”) completed the spin-off of Fox Corp. (NASDAQ: FOXA, FOX).
• Given the transaction has now passed our coverage mandate of 90 days post-spin, we DROP coverage of Fox Corp. effective immediately.
• Our prior estimates and fair values for Fox Corp. should no longer be relied on.

AECOM to Spin Off Management Services Business

On June 17, 2019, before the market open, AECOM (NYSE: ACM) announced that the company plans to spin off Management Services segment into a standalone government services company. The transaction, which is expected to be tax-free to shareholders, is expected to be completed in the second half of F2020 (September FY end), subject to customary conditions, including final approval of AECOM’s board of directors. The spin-off will not be subject to a shareholder vote.

AECOM, headquartered in Los Angeles, CA, with a current market capitalization of $5.6 billion, is a multinational engineering company providing a broad range of services including archaeology, architecture and design, asset management, construction, cost management, decommissioning and closure, engineering, environmental services, IT and security, operations and maintenance, planning and  consulting, construction management, and risk management services. The company, which generated consolidated revenues of $20.2 billion during F2018, consists of 4 segments: design and consulting services (54% of F2018 operating income), management services (27%), construction services (18%), and AECOM Capital (1%).

ACM shares have appreciated 13% year-to-date, versus essentially flat for the S&P 500 over the same period—reflecting a strong and growing backlog of large commercial, stadia and power projects across a wide range of industries, including facilities, federal, services transportation, environment, water Power, industrial, and oil and gas, among others. The company reported record backlog of $61 billion in its most recently-reported FQ2 (Mar), a 22% year-over-year increase. New opportunities include a $50 billion MTA (Mass Transit Authority) spending program in New York City as well as multiple large infrastructure projects globally. New order wins in FQ2 were $8.1 billion (+17% year-over-year), marking the sixth consecutive quarter exceeding the $6-billion mark. In conjunction with today’s announcement, the company reiterated its financial guidance for F2019, including 12% adjusted EBITDA growth at the mid-point, adjusted EPS of $2.60 -$2.90, and free cash flow of $600-$800 million.

The new Management Services company is a top 20 government services provider, leveraging a broad base of government-related intelligence, cyber-security, IT, nuclear remediation and O&M (Operations & Maintenance) expertise serving national government clients – including the U.S. Departments of Defense and Energy and various intelligence and other agencies. As an independent entity, the government services business is expected to accelerate the execution of its strategic plan, invest to expand its capabilities and to pursue a pipeline of over $30 billion. For F2018, the Management Services segment generated revenue of $3.7 billion, operating income of $200 million and adjusted operating income of $239 million. In 1H2019, the business generated 18% adjusted operating income growth and over $3 billion of contract wins.

PRELIMINARY VALUATION

In terms of a preliminary valuation, management clearly cited that a driver for the planned separation is rooted in the fact that government services peers trade at much high valuation multiples versus commercial peers. Government peers, including Leidos Holdings Inc. (LDOS), Booz Allen Hamilton Holding Corp. (NYSE: BAH), Science Applications International Corp. (NYSE: SAIC), and ManTech International Corp. (NASDAQ: MANT) trade at an average of 13.0x the consensus 2020 EBITDA estimate. More commercial focused peers, including Tutor Perini Corp. (NYSE: TPC), Quanta Services Inc. (NYSE: PWR), Mas Tec Inc. (NYSE: MTZ), and KBR Inc. (KBR), amongst others trade at approximately 6.5x the 2020 consensus EBITDA estimate. For its part, shares of ACM currently trade at 8.1x 2020 consensus EBITDA, virtually in line with ACM shares five-year average forward EV/EBITDA multiple.

In estimating the standalone post-spin companies’ ability to generate earnings, investors can start with the post-spin government services company, which is the current Management Services segment, which generated $3.7 billion in revenue in F2018. Revenue growth for the new company has accelerated since the end of F2017, with F2018 growth of 10.6%; through 1H F2019 sales have increased by 15.4%. Management’s commentary calling for ~6% margins for the spin company implies about 60 basis points of margin expansion from F2018 reported operating margin of 5.4%. Assuming revenue growth for the spin company of 15% in F2019, with normalizing levels of 10% in 2020, the company would be forecast to generate $4.7 billion in sales in 2020. Assuming a 6.5% EBITDA margin (incorporating an operating margin below 6% and proportionate allocation of depreciation and amortization). The company would earn $304 million before interest, taxes, depreciation, and amortization.

Excluding the Management Services segment, AECOM would have recorded F2018 revenue of $16.5 billion. Growth and margins at the non-government side of the company’s operations has been lower than at the proposed spin company. Through 1H F2020 the parent company’s sales increased by approximately 10.5%. Assuming 10%, and a normalized 4.0% revenue growth in 2019 and 2020, respectively, AECOM (ex the government services business) would record sales of $18.8 billion. We estimate that EBITDA margins would approximate 4%, resulting in 2020 EBITDA of $753 million. Note that the 4% EBITDA margin equates to roughly a 3% operating margin with Remainco’s proportionately allocated depreciation and amortization.

It can be assumed that following the separation, the government services business would be re-rated to a higher multiple to more closely approximate peers. If shares of the spin company were valued at the peer average of 13x 2020 EBITDA, the company would be estimated to have an enterprise value of $3.9 billion. The parent company should be expected to be re-rated lower as it loses the higher margin, more stable government services portfolio of work. Assuming the parent company trades down to 6.5x, the company would be valued at $4.9 billion on an enterprise basis. Accounting for current net debt of $3.3 billion, and shares outstanding of 157.3 million, a pre-spin, preliminary sum-of-the-parts fair value estimate of ~$35.50 per share is derived. It should be noted that the multiples used in this preliminary valuation may prove aggressive upon eventual separation and are subject to revision. For the government services business, peers’ EBITDA margins approaching 10% are significantly higher that what is projected for the spin company. Further, at 6.5x, the parent company would trade in line with its peer group, which may be reasonable given the current expectations that management will be lowering its net debt to EBITDA to around 2.0x prior to the spin-off. However, the parent company peers trade as low as 4.2x 2020 EBITDA estimates, which provides downside risk to this preliminary valuation.