|Shares Out. (in M):||92||P/E||0||0|
|Market Cap (in $M):||3,745||P/FCF||0||0|
|Net Debt (in $M):||-439||EBIT||0||0|
|TEV (in $M):||3,305||TEV/EBIT||0||0|
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Cannae Holdings, Inc (NYSE:CNNE) Long Thesis:
· CNNE is a holding company for non-mortgage / insurance investments led by Bill Foley, the founder Fidelity National Financial (NYSE:FNF).
· Foley has a long history of creating value for shareholders, having originally taken over FNF (CNNE’s parent company) in a $3 million LBO in 1984 and helping it grow to a present market cap over $12 billion.
· CNNE has grown intrinsic value at an annual rate over 20% yet trades at a steep discount to current fair value.
· Insiders have bought stock near the current price and the company has a history of accretive share repurchases.
· The stock has historically traded at an average price to book multiple of 1.3x and is currently trading at 0.99x.
· CNNE has levered upside to the success of several publicly traded SPAC stocks where the company owns shares, warrants, and promote interest, which could provide an attractive hedge to other SPAC shorts.
Foley track record (source: company presentation)
Cannae began as Fidelity National Financial Ventures (NYSE:FNFV) a tracking stock that was distributed to FNF shareholders on 7/1/2014. FNF shareholders originally received 0.3333 shares of FNFV stock for every FNF share owned. At the spin-off date, there were approximately 93 million shares of FNFV outstanding. The initial FNFV announcement on 1/31/2014 estimated that FNFV would have a net asset value of $1.3 billion or $13.98 per share. As of 3/15/2021, CNNE estimated the company’s NAV per share to be $53.06. Including spin-offs, but assuming no re-investment into CNNE shares from one of the acquired spin-offs, this would represent a NAV/share CAGR over 22%. Despite this impressive growth record, CNNE trades well below the company’s and our estimate of net asset value.
FNFV ultimately converted from a tracking stock to a fully independent company, Cannae Holdings (CNNE) in 1:1 split-off completed on 11/20/2017. CNNE has completed two spin-offs. The first was a spinoff of Remy International (REMY), an automotive parts manufacturer, on 12/31/2014. The spinoff was for 0.1789 shares of REMY for every CNNE share owned, and REMY was ultimately acquired by BorgWarner on 11/10/2015 for $29.50 per share in cash (equivalent to $5.28 per CNNE share). The second spinoff was J. Alexander’s (JAX) a restaurant company. The spinoff was for 0.17272 share of JAX for every CNNE share owned and currently trades at $10.08, or $1.74 per CNNE share equivalent.
CNNE is externally managed by Trasimene Capital Management. CNNE pays a quarterly management fee of 0.375% (1.5% annually) of the company’s cost of invested capital, which totaled $1,613.5 million as of 12/31/2020. For liquidity events involving an investment that exceeds an annualized hurdle rate of 8%, CNNE must pay carried interest equal to 15% of the profits on that investment (calculated as the proceeds less allocable management fees) for returns equal to 1-2x the cost of the investment and for profits that exceed 2x the cost, CNNE pays 20%. During Q1 2021 CNNE sold their activist investment in CoreLogic (NYSE:CLGX) generating gross proceeds of $479 million and a gain of $187 million. The estimated taxes and performance fee on this investment has been included in our estimate of NAV.
In addition to CNNE’s historically high return on capital and low present valuation, we also view CNNE as an potentially attractive hedge to our other SPAC shorts given the company’s levered upside to the success in several of its own SPAC investments. CNNE typically invests in the IPO units of SPACs led by Bill Foley. These units are usually sold at $10 per unit and include one share of stock and a fractional warrant exercisable at $11.50 per share providing levered upside to the success of completed SPACs. Additionally, CNNE typically gets 15-20% of the sponsor shares which are purchased for a nominal amount and received upon a successful merger. Finally, CNNE will make additional investments in SPAC shares and warrants through forward purchase agreements and PIPEs conditional to the close of the merger.
CNNE has made a total of 5 SPAC investments:
· Foley Trasimene Acquisition II: This SPAC has completed its merger and now trades as Paysafe (NYSE:PSFE), a leader in specialty payments processing with a concentration in digital commerce and gaming. CNNE currently owns 54.3 million shares and 8.1 million warrants with an exercise price of $11.50. At the current price of $13.73, and using only the intrinsic value of the warrants, we estimate CNNE’s investment in PSFE to be worth $763.6 million or $8.33 per CNNE share.
· Foley Trasimene Acquisition I: This SPAC announced a merger with Alight Solutions (WPF/ALIT) in January 2021 that is expected to close in the second quarter. Alight is a leading provider of cloud based human capital solutions for outsourcing high-touch HR services. CNNE has invested a total of $398.3 million shares and at close will own 44.6 million shares (including 4.6 million sponsor promote shares) and 8 million warrants.
· Trebia Acquisition Corp (NYSE:TREB): IPO’d on 6/16/2020. CNNE has a 15% sponsor interest and forward purchase commitments of $75 million for 7.5 million shares and 2.5 million warrants. The SPAC is targeting a $1.5-2.5 billion deal.
· Austerlitz Acquisition Corp I & II (NYSE:AUS & NYSE:ASZ): Both SPACs IPO’d on 2/26/2021 for $10 per unit. For AUS, CNNE has a $75 million forward purchase agreement for 7.5 million shares, 1.875 million warrants, and a 15% sponsor share interest. For ASZ, CNNE has a $125 million forward purchase agreement for 12.5 million shares, 3.125 million warrants, and a 15% sponsor interest.
· For the SPACs that have not closed a deal (including WPF) we have elected to value the company’s investments at cost.
Publicly Traded Company Investments:
In addition to CNNE’s SPAC investments, CNNE has two primary publicly traded investments, Ceridian HCM Holding Inc. (NYSE:CDAY) and Dun & Bradstreet Holdings (NYSE:DNB).
CDAY was a legacy payroll company that was taken private by Thomas H. Lee Partners and FNF in May 2007. The company acquired Dayforce in 2012, transforming the business into a leading SaaS payroll provider. CDAY went public in 2018 at a $3 billion valuation and now has a market cap over $13 billion. CNNE currently owns 14 million CDAY shares, which at the current price of $91.75, are worth $1,284.5 million or $14.01 per CNNE share.
Dun & Bradstreet was taken private by CNNE and Thomas H. Lee Partners in 2018 at approximately 12x EBITDA. The company provides information about 300 million businesses within two primary product categories, risk management (credit) and business intelligence (marketing). The business is growing organically, and we view it as a reopening play that is much earlier in Foley’s transformation of the business. DNB went public on 7/6/2020, and at the current price of $22.47, CNNE’s 76.5 million shares are worth $1,720 million or $18.77 per CNNE share.
Other Assets / NAV Total:
CNNE’s remaining assets consist of:
· Optimal Blue, a data service provider for mortgage lenders of which CNNE owns 20%.
· Amerilife, a marketer of insurance and retirement products acquired in December 2019.
· Other Investments including O’Charley’s Restaurant & Bar, American Blue Ribbon Holdings, CorroHealth, QOMPLX, Triple Tree, Colt, and various real estate investments.
· These have a total investment at cost of $506.7 million or $8.18 per CNNE share
Combing our estimates for the value of CNNE’s public company investments, SPACs, and other assets yields an estimated pre-tax NAV of $5,342 million or $57.78 per CNNE share. Post tax estimates are a little more difficult and less relevant (CNNE does not plan to liquidate most of their current investments) but we estimate this to be approximately $50.32 per CNNE share. Both these numbers highlight the current undervaluation of CNNE’s current stock price of $41.10 and roughly match a sum of the parts valuation provided by the company in March that does assume tax and management incentive payments.
Not only is CNNE undervalued on an absolute basis compared to its total net asset value, the company is also cheap relative to its own history as measured by price to book.
CNNE 3-year P/BV:
Over the past 3 years, CNNE has traded at an average price to book value of 1.47x. The company currently trades at 0.99x book value which is a 32% discount to its average valuation, and close to the lowest multiple the stock has traded at in the last 3 years (0.91x).
We also believe there are several catalysts that should continue to increase CNNE’s reported book value:
· Closing of SPAC investments: CNNE’s SPAC investments are carried at cost basis until the closure of the de-SPAC merger. Additionally, many of CNNE’s investments in SPACs are structured as forward purchase agreements with exposure to the sponsor’s promote interest in the SPAC shares that are subject to forfeit until the de-SPAC transaction is closed. These are carried at cost as level 3 investments with discounts based on the company’s estimated probability of the SPAC mergers closing. As an example, as of 12/31/2020, the company’s Paysafe subscription agreement was valued at $169.6 million, and all other Forward Purchase Agreements were valued at $136.1 million, for a total of $305.7 million. Subsequent to 12/31/2020, the Paysafe (PSFE) transaction closed, and we estimate the current market value for CNNE’s shares and warrants in PSFE to be $763.6 million, or $8.33 per share.
· Dun & Bradstreet: Though DNB is still in the early earnings of its turnaround, the publicly traded value of CNNE’s DNB shares, which is carried as an investment in unconsolidated affiliate using the equity method of accounting, represents a large delta between where this investment is marked for book value purposes. As of 12/31/2020 CNNE’s book value for the DNB investment was $653.2 million vs the publicly traded value of $1.9 billion at the time.
CNNE insiders have aggressively bought shares over the last two years purchasing a total of 437k shares for $12 million. Since June 2020, the average price paid by insiders has been $36.05, only 12% below the current price of CNNE.
CNNE has a history of share repurchase programs:
· 10/28/2014 – Approved a 3 year stock repurchase program for up to 10 million shares of FNFV through 11/30/2017. This program was exhausted in February 2016.
· 2/18/2016 – Approved a 15 million share repurchase program through 2/28/2019. Under this program the company repurchased a total of 5,446,800 shares for $67.8 million at an average price of $12.95 prior to the completion of the split-off/conversion from FNFV to CNNE in 2017.
· 9/19/2019 – Approved a 3 year repurchase program for up to 5 million shares through 9/30/2022. Through 12/31/2020 CNNE has repurchased a total of 688,416 shares for $19.3 million at an average price of $28.06 per share.
We believe as the company harvests cash from selling CDAY shares and completes their funding commitments for the SPAC investments, CNNE will return to aggressive stock repurchases should the stock continue to be undervalued.
· Past performance is not indicative of future results! While Bill Foley and CNNE have generated superior returns from their prior investments, CNNE shareholders are dependent upon the returns that will be generated from current and future investments which may be poor or value destructive.
· Bill Foley has economic exposure to several different publicly traded entities who may have conflicting interests and could compete with CNNE for management attention and investment opportunities.
Public company risk/volatility: a material percentage of CNNE’s net asset value is tied to publicly traded stocks, primarily CDAY, DNB, and PSFE which are all exposed to general trading risks of the public equity markets
Increasing book value with realizations of asset sales/spins
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