Spin-off Links – January 2020
Odds and Ends
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Recently Announced Spin-offs
On January 9, 2020, Synnex (SNX), announced that it would be spinning off Concentrix, a global consumer experience (CX) solutions company. The spin-off generated $4.7BN in sales in 2019 and $531MM in operating profit. It generates revenue by offering services and solutions to help its clients manage and improve customer experiences. Services and products include welcome calls, billing, service inquiries, customer surveys, marketing solutions, and much more. Competitors include Accenture, Conduent, and Genpact. While this business is higher margin than the remaining business, my initial impression is that it’s not a great business. The remaining company will be a pure play technology distribution business. In 2019, it generated $19.1BN in revenue and $564MM in operating profit. While it makes sense to split these businesses up (as they have little overlap), this transaction doesn’t look too interesting at first blush. The spin-off is scheduled to be completed by the second half of 2020.
On January 15, 2020, XPO Logistics (XPO), a warehousing and last mile delivery company, announced that it is exploring strategic alternatives, including a sale or spin-off of one or more of its business units. XPO has been an excellent stock, but management argues that it is still selling for a discount to its sum of the parts valuation. XPO trades at 9x forward EBITDA and management believes each segment would trade at a higher multiple on its own. Segments include: logistics (35% of sales), freight brokerage and truckload (28% of sales), less than truckload (28% of sales), last mile (6% of sales), and managed transportation (3% of sales). I think this announcement is a clear positive, but I would wait for the spin-off announcement euphoria to fade before establishing a position.
On January, 6, 2020, Emmis Communication (EMMS), spun off Mediaco Holding (MDIA). Back in October 2019, I published a quick summary related to this transaction for members. You can find it here. MDIA is a microcap spin-off that owns two radio stations in New York (WBLS-FM and WQHT-FM). Further, the company just bought a billboard asset for $43MM. MDIA trades at $7.00 with a market cap of $49MM and an enterprise value of $155MM. Management has issued guidance (page 11 of this deck) for $18.5MM of EBITDA. Thus, the company is trading at 8.4x ‘20 EBITDA, not too cheap. Standard General, a hedge fund with a good reputation in the media sector, owns 76.3% of the company and has already started buying more on the open market in the $4.50 to $5.50 price range. I will be following this one closely, but I’m not interested at the current price. As Clark Street Value summarizes, the remaining company (EMMS) is currently trading for a negative $64MM enterprise value. To me, it looks more interesting than MDIA. I don’t think I would want to own it for the long term as it’s controlled by its CEO and has a mandate to buy media assets. In other words, it’s a little like a SPAC. Disclosure: I bought some EMMS this morning.
On January 3, 2020, Diversified Healthcare Trust (DHC) spun-off 51% of its 85% ownership stake in Five Star Senior Living (FVE) to its shareholders. Rather than a typical spin-off, this transaction was a pre-packaged bankruptcy reorganization in which FVE’s largest creditor, DHC, restructured its lease agreement with FVE such that FVE effectively became an asset-lite operator of their senior housing facilities, acting as a manager of these properties. As a result, the triple net leases that FVE had with DHC would effectively be cancelled and capital requirements would instead fall to DHC. In exchange, DHC received 85% of FVE equity and also benefits from a stable outlook for FVE (FVE’s share price weakness had been weighing on DHC). FVE is currently trading 8.8x earnings and 5.5x 2020 EBITDA guidance. I published a full summary here.
In terms of comparable companies, there are two: Brookdale Senior Living (BKD) and Capital Senior Living (CSU). BKD trades at 10.6x 2020 EBITDA while CSU trades at 13.9x 2020 EBITDA. Neither BKD or CSU generate positive EPS.
Versus its competitors, FVE looks cheap. However, there are a few things to be aware of.
- The senior living industry has been challenged due to oversupply. Check out the long-term charts of BKD and CSU.
- Adam Portnow has a poor reputation with investors due to self dealing. He owns 13% of FVE and also owns 50% of RMR Group. FVE pays RMR 0.6% of revenue and there is the risk that FVE’s relationship/agreement with RMR shifts economics to RMR.
- Is EBITDA guidance of $20MM to $30MM reasonable? The company looks cheap based on guidance, but I’ve been burned by relying on guidance in the past. I will work to independently verify the company’s earnings power.
There are no imminent spin-offs. However, the transaction that I’m most anticipating is Madison Square Garden’s (MSG) spin-off of its entertainment business. The entertainment business will own Madison Square Garden (the arena) and focus on live entertainment. It will have a very strong balance sheet (~$1.0bn of net cash).
The remaining business with be focused on sports. Its assets will include the New York Knicks franchise and the New York Rangers, as well as some other less valuable assets. I believe fair value for MSG is ~$414 and the stock trades at $297 a 28% discount. The primary reason for the discount is that James Dolan is the CEO and has a poor reputation with investors. Nonetheless, the spin-off could go a long way towards shrinking the discount to fair value.
Further, MSG fair value should likely grow over time given the scarcity value of the professional sports franchises and growing revenue. I recently published a deep dive on MSG here (members only). It looks attractive heading into the spin-off.
More Spin-off Links