Topic: Daily Advice
Spinoffs & Takeovers Hotline – Friday, September 13, 2024
SALESFORCE INC., $254.57, symbol CRM on New York, provides cloud-based software for customer relationship management applications such as sales, customer service, marketing automation, e-commerce, analytics, and application development.
Founded in 1999 by current CEO Marc Benioff and three other co-founders, the company pioneered the SaaS (software as a service) software model and subscription-based revenue.
Software-as-a-service is where subscribers pay a monthly or yearly fee for software implementation, support and upgrades. That replaces the traditional model of charging customers a one-time fee on the initial sale of software, then charging them for upgrades. SaaS increases client retention and produces recurring revenue streams. For the customer, it stretches out the cost. It’s like renting the software instead of owning it.
Over the years, Salesforce has grown partly through acquisitions like Slack, the messaging and work collaboration app. It paid $28 billion for Slack in July 2021.
On September 3, 2024, Salesforce agreed to acquire Tenyx, a developer of AI-powered voice agents that create natural and engaging conversational experiences and aims to transform customer service. The purchase price has not yet been disclosed.
On September 5, 2024, Salesforce announced it would acquire Own Company. That firm provides data protection and management solutions to more than 7,000 customers worldwide. Salesforce is paying $1.9 billion for the 90% of its stock that it doesn’t already own. It’s Salesforce’s biggest deal since closing the Slack acquisition in 2021.
In the quarter ended July 31, 2024, Salesforce’s revenue was $9.33 billion, up 8.4% from $8.60 billion a year earlier. Excluding one-time items, the company earned $2.50 billion, or $2.59 a share, up 19.6% from $2.09 billion, or $2.15.
Salesforce’s balance sheet is very strong with cash of $17.6 billion.
Salesforce’s two most recent acquisitions should be good fits—and let the company expand in two key areas: data protection and AI. Both are essential to continue to attract and retain clients.
OUR RECOMMENDATION: Salesforce is okay to hold.
Salesforce recent coverage:
VECTOR GROUP LTD., $14.94, symbol VGR on New York, is a Miami-based holding company with two operating segments: Tobacco through Liggett Group LLC and Vector Tobacco LLC, and Real Estate through New Valley LLC. Its tobacco business’s brands include Eagle 20’s, Montego, Liggett Select, and Grand Prix.
On August 21, 2024, the company announced that it had agreed to be acquired by JT Group. That firm is a Japanese company with tobacco, pharmaceuticals, and processed food operations. The company’s cigarette brands include the rights to Winston and Camel outside the U.S. and Mevius in Japan.
JT Group’s offer is $15 a share.
With the completion of this acquisition, JT Group will have an 8% market share in the U.S., up from 2.3%. It will also own two of the top 10 brands by sales in the U.S.
In the quarter ended June 30, 2024, Vector Group’s revenue was $371.9 million, up 1.7% from $365.7 million a year earlier. Revenue was higher due to a strong performance from Montego, the largest discount brand in the U.S. Excluding one-time items, the company earned $53.3 million, or $0.34 a share. That was up 4.9% from $50.8 million, or $0.32.
Vector’s shares now trade below the takeover offer of $15. That indicates investors feel a higher bid is unlikely.
OUR RECOMMENDATION: Vector’s shareholders should tender to the takeover offer. Note, however, that even if you do tender, you will still get any higher offer that may emerge for Vector’s shares.
Vector Group recent coverage:
FORTIVE CORP., $73.60, symbol FTV on New York, provides technologies for connected workflow solutions across various end-markets. Fortive’s three segments—Intelligent Operation Solutions (44% of revenue), Precision Technologies (36%), and Advanced Healthcare Solutions (20%)—include well-known brands with leading market positions.
In July 2016, Danaher Corp. (symbol DHR on New York) combined its Test & Measurement business with its Industrial Technologies operations to create Fortive. It then spun off the firm.
On September 4, 2024, Fortive announced plans to separate into two independent public companies. The new company will hold the Precision Technologies business, while Fortive will retain the other two segments.
Like many separations, the company believes that two companies with focused business models will add more value to shareholders over the long run.
Olumide Soroye, the current CEO of its Intelligent Operations Solutions segment, will become CEO of the remaining Fortive. James Lico, the current CEO, will retire. Tami Newcombe, the current president of its Precision Technologies and Advanced Healthcare Solutions businesses, will lead the new company.
In the quarter ended June 28, 2024, Fortive’s revenue was $1.55 billion, up 1.7% from $1.53 billion a year earlier. Excluding one-time items, the company earned $329.1 million, or $0.93 a share. That was up 8.6% from $303.1 million, or $0.85.
Fortive’s outlook is positive: it continues to launch new products that add value for its customers while providing profitable growth. And at the same time, the upcoming spinoff adds a lot of investor appeal.
OUR RECOMMENDATION: Fortive Corp. is a spinoff buy.
Fortive recent coverage:
FIRST MAJESTIC SILVER CORP., $8.33, symbol AG on Toronto, is a silver and gold producer with three operating mines in Mexico and several exploration and development properties in Mexico and the U.S.
The company’s three mines in Mexico are as follows: the San Dimas silver/sold mine, the Santa Elena silver/gold mine and the La Encantada silver mine. It also owns the Jerritt Canyon gold project in northeastern Nevada.
First Majestic’s goal is to become the world’s largest primary silver producer. It currently generates 50% of its revenue from silver and 50% from gold. Its San Dimas and Santa Elena mines accounted for 89% of its production in the quarter ended June 30, 2024.
On September 5, 2024, the company announced that it would acquire Vancouver-based Gatos Silver (symbol GATO on Toronto) for $970 million (all figures in U.S. dollars) in stock.
Gato shareholders will receive 2.55 shares of First Majestic for each share held in Gatos. First Majestic shareholders will own 62% of the combined entity, while Gatos shareholders will own the rest.
The combined firms will produce between 30 million and 32 million ounces of silver equivalent (including gold) annually. That includes 15 million to 16 million ounces of silver. Gatos is expected to add $70 million in annual free cash flow to the combined entity.
In the second quarter ended June 30, 2024, the company produced 5.3 million ounces of silver equivalent. That was down 16.3% from 6.3 million ounces a year earlier.
First Majestic’s revenue in the latest quarter fell 7.2%, to $136.2 million from $146.7 million a year earlier. The decrease in revenue was driven by a 15% decrease in the total number of ounces sold due to higher silver inventory levels, lower production levels at San Dimas and La Encantada, and the temporary suspension of mining activities at Jerritt Canyon.
Excluding one-time items, the company lost $20.4 million, or $0.07 a share, in the quarter. That’s compared to a loss of $5.5 million, or $0.02.
Growth by acquisition adds risk, especially with a purchase as big as Gatos Silver. However, First Majestic’s prospects for higher production and cash flow are positive.
OUR RECOMMENDATION: First Majestic is a hold.
TOPGOLF CALLAWAY BRANDS CORP., $10.20, symbol MODG on New York, manufactures golf clubs, balls, and apparel. Brands include Callaway, TravisMathew, and Jack Wolfskin and Odyssey.
The company also operates a leading golf entertainment platform through its Topgolf entertainment venues. Topgolf operates driving ranges with a party atmosphere by featuring food, drinks and electronic games. That brings in younger players to golf and helps to replace aging golfers.
Topgolf currently has 90 company-owned Topgolf locations in the U.S. in 36 states, with two new locations opening soon in Des Moines, Iowa, and Greensboro, North Carolina. It also owns two BigShots indoor golf locations in the U.S., four in the U.K., and five franchised venues in Australia, Mexico, the United Arab Emirates, Thailand, and Germany.
The Topgolf entertainment business contributed 43% of revenue in the latest quarter, while golf equipment comprised 36%, and active lifestyle products, 21%. It generates 77% of its revenue from the U.S. and 23% from Europe, Asia, and the rest of the world.
In March 2021, Callaway Golf and Topgolf merged in an all-stock transaction valued at $2.6 billion. Topgolf shareholders received 90 million Callaway Golf shares. In 2022, the company was renamed Topgolf Callaway Brands. It also changed its stock-exchange symbol from “ELY” to “MODG.”
On September 4, 2024, the company announced it planned to separate the two businesses. It intends to spin off at least 80.1% of Topgolf to obtain the desired tax-free treatment for U.S. federal income tax purposes and will also consider retaining a limited ownership in Topgolf for a period of time. However, other options are also being considered, including an outright sale.
Callaway will retain its golf equipment and active lifestyle businesses, along with Toptracer, its state-of-the-art ball tracking technology. As a result of the spinoff, Topgolf will not have any debt and will have significant cash on its balance sheet. It plans to slow its development of new venues in 2025 to approximately five.
Callaway has $2.5 billion in revenue over the past 12 months through June 30, 2024, while Topgolf’s revenues over this period are $1.8 billion.
For the second quarter, ended June 30, 2024, Topgolf Callaway’s revenue fell 1.9%, to $1.16 billion from $1.18 billion a year earlier. Revenues were 1.7% and 6.7% lower in its active lifestyle and golf equipment segments, respectively, partly offset by a 5.0% gain for Topgolf.
Excluding one-time items, the company earned $83.1 million, or $0.42 a share, in the quarter. That was up 9.9% from $75.6 million, or $0.38. The increase was mostly due to lower taxes and interest expenses.
It now appears that the Callaway/Top Golf merger in 2021 has not worked out as planned—and the company’s board believes both businesses are better positioned to compete if they operate as separate companies. But while the split could unlock some value, all of Topgolf Callaway’s businesses face softer growth, at least in the near term.
OUR RECOMMENDATION: Topgolf Callaway Brands is okay to hold for aggressive investors.
Topgolf Callaway recent coverage:
