Description
Current Price: $25.43
Target: $30.10
Upside: 18.3%
Company
McAfee Corp. (MCFE) provides cyber security services such as antivirus, cloud, and endpoint security solutions which protect consumers, enterprises, and governments from cyberattacks.
Transaction
On March 8, 2021 MCFE the company announced the sale of its lower margin Enterprise business to Symphony Technology Group, a private equity firm, for $4 billion in an all-cash transaction. Proceeds from sale would be used to reduce debt by $1 billion and issue a $4.50 special dividend per share upon close of the transaction to shareholders. After the transaction, MCFE will be exclusively focused on consumer cybersecurity.
The segment was sold at a premium to recent acquisitions at 11.4x NTM EBITDA. The proceeds will be used to pay a special dividend of $4.50 (18% yield), reduce overall debt by $1 billion (-25% decline) and pay additional $500M in one-time taxes and transaction costs. The Enterprise segment has been long neglected by MCFE and the segment’s technology failed to keep up with peers. The sale frees up management’s focus on the faster growing higher margin consumer business.
Pro-Forma Company
Post-transaction, MCFE will be driven by selling software to protect consumers’ digital lives. MCFE’s software is used to secure PCs but can also be deployed on mobile devices, to protect users on public WiFi networks, and for identity and privacy protection. The pure-play consumer cybersecurity business is expected to grow revenue in double digits with consistent margin improvements and reach 50% in adjusted EBITDA margins.
Post the transaction, for 2020 MCFE will be a $1.6Bn revenue company, a year/year growth of 20% (revenue accelerated to 23% in 4Q) with $722MM in EBITDA, a growth of 24% as compared to FY '19. The company plans to incur $300MM in additional onetime separation and stranded cost optimization expenses. Stranded costs are $150MM annualized one-time costs and the company expects to be back to normalized margins (50%) by the end of FY 2022. The company disclosed that 2/3rds of its workforce are in Enterprise and those employees will leave with the transaction. Ex-the one time costs, consumer margins are expected to rise in 2021.
Valuation
Post asset sale, MCFE’s business will be growing nearly 2x faster than the consumer business of peers such as NortonLifeLock (NLOK) and Avast (AVST LN). Pro-forma for the transaction and assigning a 1 turn forward valuation premium to lower growth peers results in an upside target of $30.10 target by year end, this includes a special and regular dividend. The price target is by year end as the company closes the transaction and enters 2022 on an accelerated margin improvement trajectory.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.
Catalyst
Sale of Enterprise business to be completed by 12/31/2021.
Special dividend.