Description

Summary

We think Symantec shares are extremely attractive on the announced deal with Broadcom. Symantec is selling its Enterprise Security assets to Broadcom for $10.7 billion in cash pre-tax and 36x FY 19 operating income, which is expected to yield $8.2 billion in post-tax proceeds. 100% of net proceeds will be distributed to shareholders as a one-time special dividend of $12/share. The deal is expected to close by March 31, 2020.  

At the current share price of $23.14 (as of August 15^th), the remaining Cyber safety business will be created at roughly $11/share, which we think is a compelling valuation given that the Consumer business generated $1.1 billion of operating income in FY 19 (80% of total operating income). With expected earnings of $1.50 per share, the cyber safety business is effectively created at a P/E of 7.4x which we think is cheap.

Symantec has announced plans to increase its quarterly dividend by 67% to $0.125 per share in the first quarter post closing which would imply a dividend yield of 4.3% on a $11 stock price. The Board has also authorized a $1.6 billion share buyback program. 

Additionally, Symantec plans to eliminate $1.5 billion of stranded costs at an expected cash cost of $1 billion within the next 12 months, funding this through sale of underutilized assets such as real estate which will result in pro forma free cash flow of $900 million.

 Cyber Safety Business Valuation

Following the transaction, Symantec will be a focused, pure play leader in cyber safety. Symantec’s Consumer Cyber Safety segment focuses on providing cyber safety solutions under its Norton-branded security and LifeLock-branded identity theft protection services brand to help consumers protect their devices, online privacy, identities, and home networks. 

The Norton and LifeLock offerings generate recurring revenues (~85% customer retention rate) with high operating margins and strong free cash flow generation. Historically, this business has grown in the low single digits with 50% margins, and is expected to generate $900m of free cash flow and $1.50 per share of earnings. The free cash flow generation will support dividends and share buybacks, driving further upside.

Assuming $900m of FCF and a FCF yield of 10%, the stub should trade at $14-15 out of the gate. The $1.6 billion of buybacks over the next 3 years would enable the company to buy back around 15-20% of shares at an average price of $15, which would take the share price to around $17-18.

Catalyst

Deal closing

Cost takeout

Share buybacks