Description

“Go where the puck is going, not where it has been”

While Bill Foley may need this quote for his Vegas Golden Knights, one of his other investment vehicles, Cannae Holdings, just hit a major goal with today’s IPO of Dun & Bradstreet.   As of today (July 1, 2020), investors can more precisely value CNNE given the majority of CNNE’s value comes from its ownership of DNB.  The longer term investment thesis and current arbitrage opportunity in CNNE will be well elucidated as DNB begins trading.

After the market close yesterday, DNB not only upsized their IPO to over 78mm shares from 66MM shares (excluding another 11.7MM from the shoe), but also increased the offering price to $22/share, higher than the initial $19-$21 range.   The deal was well oversubscribed (with significant demand from LONG ONLY funds).  We think the incremental demand will be extremely strong given the quality of the asset, stellar management team that orchestrated an impressive turnaround of DNB (which has more legs to it) and finally an extremely compelling valuation of ~15x 2021 EBITDA (significantly less than its peer set trading at 18-24x).  The increase in the capital raise will bring the leverage ratio down to <4.5x net debt/ebitda and the continued de-leveraging will allow for strong double digit earnings and free cash flow growth for the next several years.

CNNE has been more active in the past 6 months than I’ve ever seen them in my long history of owning the stock.  For long term investors, I don’t think there is a better vehicle to build wealth than being an owner of CNNE.  Bill Foley (aka the Warren Buffet of utility-like companies) has created significant wealth for his investors/partners and is the architect of some of the highest-quality, recurring revenue businesses in the market.  The table below outlines a few of them including BKI, which has returned 9x investors initial capital.  Interestingly, while another 9x bagger is unlikely, in numerous meetings management has compared their investment in DNB to that of BKI.  Notably, BKI also owns DNB and is another way to get long DNB in the public markets.

While I expect it will be difficult to buy DNB at the IPO price of $22/share today, I think CNNE may be a better way to play an investment in DNB.  CNNE owns approximately 78 MM shares of DNB post deal.  Holding other investments at just cost or at market value (ie “liquidation value” in the table below), you are effectively “creating” DNB at an implied value of ~13x 2021 EBITDA, a lower multiple than what the company initially paid for DNB and ~5x turns lower than the low end of the comp range.  I think DNB can trade to $27-$28/share today, implying that CNNE should conservatively trade to $45-$46/share.

A few additional points regarding the set up with CNNE:

1. CNNE did a ~11MM offering a couple weeks ago and management (including Bill Foley) put in $4MM of their own personal capital at $37.50/share.  This is a very astute management team and I do not think they are playing for 10% upside in the stock (at the current price of $41.3/share).  I think $37.50 is a good number to use fundamentally for a downside risk in the stock.
   
   

2. DNB investors (which include CNNE, BKI, Thomas H Lee, CC Capital led by veteran investor Chinh Chu) are NOT selling a single share in the IPO.  In fact, all of the initial investors (except TH Lee) are investing an incremental $400MM at the IPO price alongside new public investors (with a small discount).  They are subject to a 180 day lockup in the private placement.
   
   

3. At $22/share, DNB is being priced at a 4-5x multiple discount to the lowest range of its peer group leaving ample room for the stock to trade up.  

1. Each turn of multiple expansion is approximately $2/share of equity value to DNB.   Hence, just closing the gap to the low end would result in a stock price of $30-32/share

2. As demonstrated in the table below, CNNE would trade to $50/share+ in this scenario in the near term.  Conservatively, we think CNNE should trade to $45/share today.

3. Additionally, one can further isolate the bet on DNB by shorting the other public investments (which I do not recommend, but is an option for the more liquid names)

As shown in the Sum of the Parts Analysis below, we think CNNE’s intrinsic value is approximately $50/share with much further upside driven by continued monetization of CDAY and the maturation/execution of some of their more nascent investments which we think have tremendous embedded value.   

While the short term risk-reward is compelling for event-driven, special situations investors, CNNE’s investments over the past 6 months combined with significantly more value embedded in DNB makes CNNE an even more compelling vehicle for long-term value investors who want to partner with Bill Foley.  

Catalyst

1. DNB IPO on July 1

2. CDAY monetization

3. Corelogic Acquisition

4. DNB continued turnaround

5. SPAC acquisitions