Fair value increased to $13 per share (from $11) on a valuation profile more in-line with peers; an unconfirmed report by Bloomberg suggests EVRI may be exploring a sale 

• Our fair value estimate for EVRI is increased to $13 per share (from $11) as we think the company’s current operating performance and de-leveraging efforts will increasingly support a valuation profile more in-line with peers.
• To that end, our revised base case reflects a 7.0x multiple on 2020E EBITDA at Games (up from 6.5x) and a 10.5x multiple for FinTech (previously 9.5x).  Notably, these valuation multiples still represent a modest discount to their respective peer groups, which trade at ~7.5x and 12x, respectively.
• Tangentially, an unconfirmed report by Bloomberg suggests EVRI may be exploring a sale (ostensibly of one or both of its businesses).
• For its part, EVRI is not commenting but we would note that management has consistently expressed its commitment to evaluating all options in an effort to unlock maximum value for shareholders.
• For our part, in the event Bloomberg’s reporting is accurate we think EVRI, as a whole or in pieces, would garner interest from a range of financial and strategic players with the outcome ultimately being more in-line with the bull case illustrated in Exhibit #1 on page 2. (Note: our EBITDA forecasts do not add back stock-based compensation.)

LB raises the low-end of its F2019 EPS guidance range to $2.30-$2.60 (from $2.20-$2.60)

• In 1Q F2019, consolidated LB sales increased 3% to $2.629 billion, reflecting 15% growth at Bath & Body Works and a 5% decline at Victoria’s Secret, with EPS of $0.14 (versus $0.17 in the prior year and the breakeven consensus estimate).
• By our calculation, adjusted EBITDA increased ~2.5% to $299 million in 1Q F2019.
• By segment, operating income improved 25% to $155 million at B&BW on 150 basis points of margin expansion to 17.8% while EBIT at VS declined 61% to ~$33 million on 300 basis points of margin contraction to 2.2%.
• In terms of guidance, the company raised the low-end of its full-year F2019 EPS expectations to $2.30-$2.60 (from $2.20-$2.60) while most other metrics remained broadly intact. On the conference call, management anecdotally noted that its guidance assumes a “gradual” improvement at VS as the year progresses.
• For 2Q F2019 specifically, the company expects EPS of $0.15-$0.20 with comparable sales remaining roughly “flat” year over year.
• Additionally, the company announced that it will hold an investor day on September 10, 2019.
• Management reiterated its prior commentary that “everything is on the table”, in terms of improving performance at VS.  We think the September meeting will be a closely followed event and could act as a catalyst for LB shares if management discloses more specifics around its plans for the brand.
• Our base case fair value estimate of $36 per share reflects a blended multiple of less than 7x 2020E EBITDA.
• For context, despite today’s move up in share price, LB shares still trade at less than 6x F2020E EBITDA with a free cash flow yield of ~10%.

VF Corp. Completes the Spin-Off of Kontoor Brands; Fair Values Adjusted; Rate Post-Spin VFC a BUY, KTB a HOLD

• On May 22, 2019, after the market close, VF Corp. (NYSE: VFC) completed the spin-off of its jeans wear business, Kontoor Brands Inc. (NYSE: KTB).
• VFC shareholders of record as of May 10, 2019, the record date, received one share of KTB for every seven shares of VFC owned.
• In when-issued trading shares of KTB closed at $37.15 per share; shares of VFC ex-KTB closed yesterday at $85.02 per share.
• Additionally, VFC reported F2019 year end results on May 22, 2019, which reflected continued growth at Vans, increased sales at The North Face and a stabilization at Timberland. Lee sales declined 7% while sales at Wrangler declined 1% in F2019.
• Guidance for post-spin VFC calls for revenue $11.7-$11.8 billion and adjusted EPS of $3.30-$3.35, excluding Kontoor Brands.
• Our post-spin fair value estimate for VFC is revised to $94 per share (previously $97 per share); the fair value estimate for KTB is revised to $41 per share (previously $51 per share). The fair value changes reflect full year F2019 results, revised sales, margin, and multiple assumptions, as well as an updated share count.
• We now value KTB at 9.5x estimated 2020 EBITDA of $347 million (previously 10.5x EBITDA of $355 million). We think that the lower multiple reflects an appropriate discount to peer Levi Strauss & Co. (10.6x 2020 consensus EBITDA) given lower than expected sales and margin trend assumptions.
• We view the significant sales growth at the Vans brand (9%-11% in F2020 guidance), and the company’s ability to improve sales at The North Face (6%-8% in F2020 guidance) and Timberland (“up modestly”) as key for earnings growth and multiple expansion post-spin. We maintain a BUY rating on VFC.
• KTB’s negative sales trends combined with increased standalone corporate costs give caution to margins moving forward. We rate shares of Kontoor Brands at HOLD until the company can stabilize revenue trends. We would become more positive on shares if the company were to show signs of sales momentum or shares traded at a significant discount to our revised fair value estimate.
• For further information, please see The Spin-Off Report on VF Corp. dated May 3, 2019.

TiVo Corp. to Spin Off Products Business

On May 9, 2019, after the market close, TiVo Corp. (NASDAQ: TIVO) announced that the company plans to spin off its Products business from its IP Licensing business. Throughout the separation process, the Board of Directors will continue to be open to strategic transactions for each business that could create additional stockholder value and is actively engaged in discussions with parties interested in each of the businesses. The separation, which is expected to be completed in the first half of 2020, is subject to final approval from the TiVo Board of Directors.

TiVo, headquartered in San Jose, CA, is comprised of the acquisition of legacy TiVo Inc, which has origins dating back to the development of the first digital video recorder (DVR) in the late-1990’s, by Rovi Corporation in September 2016, which at the time made technology used in electronic TV guides, DVRs and video-on-demand services.

TiVo reports two distinct business segments): (1) Products, which offers its company-developed media navigation (or “discovery”) platform and component technologies, including interactive program guides and digital video recording, primarily to multi-channel video service providers (i.e. cable operators) and consumer electronics manufacturers; and (2) Intellectual Property Licensing, which licenses a portfolio of ~5,500 patents to pay-television and over-the-top (OTT) content providers as well as mobile phone and consumer electronics manufacturers. 

TiVo’s Product business consists of Platform Solutions and Software and Services businesses. TiVo offers a suite of component technologies that can be integrated into customers’ internally developed platforms or deployed as an integrated TiVo solution for video service providers or retail markets. As of December 31, 2018, there were an estimated 23 million households worldwide utilizing TiVo’s Platform Solutions. For the full year 2018, TIVO’s Product segment generated $401 million in revenue, with a large component of recurring revenue.

TiVo’s IP Licensing business consists of Rovi and TiVo’s patent portfolios, and encompasses approximately 5,500 issued patents and pending applications worldwide. Licensees include traditional and new media video providers across Pay-TV, Mobile, Consumer Electronics and Social Media markets. For 2018, this business totaled $295 million, with a high percentage of this recurring revenue.

TiVo shares trade at 9.0x 2019E EBITDA, a discount to networking and IP licensing peers, owing to a combination of factors, including a broad misconception of TIVO as a consumer-focused hardware company (as opposed to its actual software and IP-focus), the transitory declines in 2018 financial performance (due, in part, to accounting changes and expected/planned declines in some legacy revenue streams). Additionally, the shares have been impacted by concerns surrounding the company’s on-going patent litigation with Comcast (NASDAQ: CMSCA), the second largest pay TV provider, whose IP and metadata license agreements expired in March 2016 and September 2017, respectively (TiVo claims numerous patent infringements). The ultimate resolution can be viewed as a source of upside optionality as it would likely involve a sizeable catch-up payment and could result in approximately $60 million of incremental annual licensing revenue from CMSCA’s ~22 million subscriber base.)

TIVO’s Products segment could be imperfectly compared with a variety of publically-traded competitors, including Cisco (NASDAQ: CSCO), Ericsson (ERICB SS), via its Mediaroom and Red Bee businesses, Espial Group (ESP CN) and Kudelski SA (KUD VX) and Nielsen (NASDAQ: NLSN), which trade at 10.4x 2019 consensus EBITDA (excluding outliers). Given current business trends it can be assumed that in 2019 the Products segment could generate $365 million in revenue and $49 million in adjusted EBITDA, representing approximately a 9% revenue decline from 2018 and a 13.5% EBITDA margin versus 16.7% in 2018. Given the uncertainties about current business trends we would expect that a standalone Products company would trade at a heavy discount to the above noted peers. Applying a 7.0x multiple implies an enterprise value of $345 million.

TIVO’s IP Licensing business could be most aptly compared to Dolby Laboratories (NYSE: DLB) as well as other companies with licensing business models, such as InterDigital (NASDAQ: IDCC) and Qualcomm (NASDAQ: QCOM), which, on average, trade at 14.6x 2019 consensus EBITDA. Similar to the Products segment, concerns over the litigation with Comcast and current business trends are likely to weigh on shares valuation. If shares were to receive a 10.5x multiple, the standalone company would have an enterprise value of $2.1 billion.

Incorporating corporate costs capitalized at 10x, and current net debt of $689 million, on a preliminary, sum-of-the-parts basis shares of TIVO are assigned a fair value of $9 per share, implying about 16% upside from the current share price. It should be noted that following last night’s separation announcement, which included a cut to the company’s divided, shares of TIVO are down almost 12%. While the preliminary fair value suggests value could be unlocked, investor concern over the dividend cut ($0.08 per share quarterly versus the prior $0.18 per share quarterly), the inability to sell one or both segments, and uncertainty surrounding litigation with Comcast are likely to weigh on shares for the foreseeable future.

TIVO plans to separate its IP & Product businesses via a tax-free spin-off; provides in-line 2019E sales and adj. EBITDA guidance, but cuts quarterly dividend; fair value lowered to $14 per share (from$16) on valuation shift to 2020E

• TIVO announced plans to spin-off its Product business to shareholders in a transaction that is expected to close in 1H 2020 and be tax-free to shareholders (subject to final Board approval, the receipt of a tax opinion and registration effectiveness with the SEC).
• Notably, the company indicated that it will continue to engage in discussions with interested parties regarding potential strategic transactions throughout the separation process.  (In fact, management contends that the split enhances the likelihood of an ultimate value-unlocking deal.)
• On the fundamental front, TIVO provided 2019E sales, EBIT and EBITDA guidance of $640-$650 million, $120-$126 million and $172-$178 million, respectively.  (For context, the consensus estimate for 2019E sales and EBITDA is currently $643.5 million and $174 million, respectively).
• The company forecasts 2019E cash taxes of $28-$29 million and a non-GAAP diluted share count of 127 million.
• By implication, the company’s full-year adjusted EPS guidance is $0.72-$0.76 per share (versus current consensus of $0.76).
• On the dividend front, the company reduced its quarterly pay-out to $0.08 per share (from $0.18), implying a 3.5% yield, as it determines the optimal capital allocation policies for each of its soon to be standalone businesses.
• The company ended 1Q 2019 with net debt of ~$623 million and a net leverage ratio of 3.5x, by our calculation.  (Notably, the company indicated that its ~$1.0 billion of NOL’s will stay with the parent IP Licensing business.)
• Fair value is lowered to $14 per share (previously $16), reflecting 2020E adj. EBITDA of $187.5 million and multiples of 8.0x and 12.5x for Products and Licensing, respectively.

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DowDuPont Announces Details Associated with Corteva Spin-Off; Maintain BUY on DWDP

• On May 7, 2019, DowDuPont Inc. (NYSE: DWDP) announced details associated with the spin-off of Corteva Inc., its agriculture business. On June 1, 2019, each DWDP shareholder will receive 1 Corteva share for every 3 shares of DWDP held on the record date of May 24, 2019. When-issued trading of DWDP and Corteva shares will begin on May 24, 2019 under the symbols “DD-WI” and “CTVA-WI,” respectively. Following the spin-off, on June 3, 2019, Corteva and DuPont will trade on a “regular way” basis on the NYSE under the symbols “CTVA” and “DD,” respectively.

• DWDP provided additional information regarding its intended reverse stock split, which is subject to shareholder approval at a special meeting on May 23, 2019. The split is expected at a ratio of not less than 2-for-5 and not greater than 1-for-3; the final ratio is to be determined by the Board of Directors. Should the reverse split be approved, the Board will select a ratio of one new share of DWDP common stock for three shares of current DWDP common stock; the reverse stock split will be effective immediately following the Corteva distribution.

• Post-spin, DD will be compromised of the specialty products business. 

• 2019 guidance calls for DuPont sales to decline in the mid-single digits, per prior guidance; Corteva sales are expected to decline between 3-5% in the first half of 2019. Our estimates remain unchanged. Corteva will hold an investor day tomorrow.

• The fair value estimate for post-spin DuPont and Corteva are adjusted to $88 and $39 respectively (from $29 and $13), reflecting a 1:3 distribution and 1:3 reverse stock split for DD.

• With the DWDP pre-spin fair value estimate of $42 representing over 30% upside to the current share price, we maintain our BUY recommendation, noting that despite a softer start to 2019, both companies should experience earnings leverage throughout the year despite fundamental weakness across multiple end markets.

• For more details, please refer to The Spin Off Report dated January 14, 2019 and UPDATE dated May 2, 2019.

Drop Coverage of Henry Schein Inc. Effective Immediately

• Henry Schein Inc (NASDAQ: HSIC) spun-off Covetrus Inc. (NASDAQ: CVET) on February 7, 2019.
• Given the transaction has now passed our coverage mandate of 90 days post-spin, we DROP coverage of Henry Schein Inc. effective immediately.
• Our prior estimates and fair values for HSIC should no longer be relied on.

Drop Coverage of Covetrus Inc. Effective Immediately

• Covetrus Inc. (NASDAQ: CVET) was spun-off from Henry Schein Inc (NASDAQ: HSIC) on February 7, 2019.
• Given the transaction has now passed our coverage mandate of 90 days post-spin, we DROP coverage of Covetrus Inc. effective immediately.
• Our prior estimates and fair values for CVET should no longer be relied on.

The Ensign Group to Spin Off Home Health and Hospice Businesses

On May 6, 2019, after the market close, The Ensign Group Inc. (NASDAQ: ENSG) announced that the company plans to spin off its home health and hospice businesses. The spin entity, to be named The Pennant Group, Inc., will include Ensign’s home health and hospice operations, substantially all of Ensign’s senior living operations, and Ensign’s mobile diagnostic and clinical laboratory operations. Pennant has applied to list its shares on the NASDAQ stock market under the ticker symbol “PNTG.” The post-spin parent company, The Ensign Group, Inc., will include transitional and skilled services, rehabilitative care services, healthcare campuses, post-acute-related new business ventures and real estate investments. The transaction, which is tax-free to shareholders, is expected to be completed in or before 4Q 2019. Each ENSG shareholder is expected to receive one share of Pennant common stock for every two shares of Ensign common shares, pending acceptance by NASDAQ as well as approval by the company’s board and the SEC.

Post-spin Pennant becomes a publicly traded pure-play home health company, and will consist of 60 home health and hospice agencies, 51 senior living operations, and mobile diagnostics and lab operations located across 13 states. Pennant anticipates 23 of the senior living assets will remain subject to leases with third-party landlords. In addition, Pennant will operate 28 senior living communities pursuant to long-term triple-net leases with Ensign subsidiaries. Daniel Walker, President of Ensign’s Cornerstone (home health) subsidiary, will become the chairman, CEO and president of Pennant following the spinoff.

Ensign’s transitional and skilled services portfolio, as well as its rehabilitative care services, health care campuses, post-acute new business ventures and the company’s 77 existing owned real estate holdings will continue to operate as The Ensign Group.

The Ensign Group, headquartered in Mission Viejo, California, with a current market capitalization of $2.8 billion, is a group of independent operating subsidiaries spanning skilled nursing, assisted living, and home and hospice services across 12 states. Ensign is the parent company of nine home care businesses, rolling up its home health and hospice assets into its Cornerstone Healthcare Inc. subsidiary.  With an aging baby boomer population in need of health care, and post-acute care becoming increasingly complex, the strategy of separating the two distinct businesses should allow for improved strategic focus. Ensign has been highly acquisitive, having made at least nine acquisitions over the past few months. The transaction also follows the very successful spin-off of CareTrust REIT, Inc. (NASDAQ: CTRE), a senior housing property REIT that spun off from Ensign in 2014.

As a starting point for valuation, we look to Pennant’s filed Form 10. In 2018 the company generated $306.2 million in revenue, and earned $22.1 million in pro-forma EBITDA, representing a 7.2% margin. Over the past two years, the company would have exhibited revenue growth of 16.4% and 14.9% in 2017 and 2018, respectively. Assuming revenue growth of 15% and 12% in 2019 and 2020, respectively, Pennant would generate $394.3 million in revenue in 2020. EBITDA margins could be expected to modestly increase to 7.5%, which would result in EBITDA of $29.6 million. Following the separation, the company will earn 55% of revenue from Hospice and 38% from senior living. Peers with a focus on hospice and senior living, including Amedisys Inc. (NASDAQ: AMED), Chemed Corp. (NYSE: CHE), and LHC Group Inc. (NASDAQ: LHCG), amongst others, trade on average at 16.5x 2020 consensus EBITDA, a significant premium to ENSG’s current 10.2x multiple. Applying the hospice focused peer multiple to 2020 estimated EBITDA of $29.6 million results in an enterprise value estimate of $488 million. It should be noted that in Pennant’s Form-10, the company’s pro-forma balance sheet indicates that the company will carry $19 million in net debt, which when combined with the expected one-for-two share distribution would indicated a preliminary fair value estimate of almost $18 per share for the Pennant (roughly $9 in value per share based on ENSG’s current shares outstanding).

Absent Pennant’s contribution, ENSG would have had revenue of approximately $1.7 billion, and $166 million in EBITDA (9.9% margin.). The remaining businesses have experienced revenue growth rates of 11.0% and 9.6% in 2017 and 2018, respectively. Assuming the company can maintain a 10% annual revenue growth rate, and margins of 10%, the company would have sales of $2.1 billion and EBITDA of $209.9 million in 2020. Post-spin ENSG can be compared to other skilled nursing, outpatient rehab and acute care companies, which trade on average at about 13.0x 2020 consensus EBITDA. Applying this peer group multiple to estimated post-spin ENSG EBITDA of $209.9 million, Ensign would be estimated to have an enterprise value of $2.7 billion. Accounting for the net debt to be assigned to Pennant, it is estimated that a preliminary fair value of $48 per share would be assigned to post-spin ENSG.

On a sum-of-the-parts basis, shares of ENSG are assigned a preliminary fair value estimate of $57 per share incorporating current net debt of $221 million and 53 million shares outstanding. The preliminary fair value estimate implies roughly 8.5% upside from last night’s closing price. Notably shares of ENSG have increase 34% year-to-date versus a 17% increase in the S&P 500 over the same period.

Brunswick Announces Sale of Fitness Business; Discontinuing Coverage

• On May 6, 2019, Brunswick Corp. (NYSE: BC) announced the sale of its Fitness business to KPS Capital Partners, LP, a private investment firm, in an all-cash transaction for approximately $490 million. The purchase price represents approximately 0.5x 2019E sales.
• Following completion of the sale, Brunswick will be comprised solely of its global marine portfolio, which includes market-leading positions in propulsion, parts and accessories, boats and services.
• Recall that management noted its confidence that it was in a position to announce a sale of the business as expeditiously as possible, potentially in Q2.
• Given the sale, versus spin-off of the business, we are discontinuing coverage of Brunswick Corp.