Cannae Holdings (CNNE) is an excellent investment opportunity. At its purest, Cannae represents a leveraged buyout of the Dun & Bradstreet Company. Management has been working together for over 20 years and successfully generated an 8x return on equity on their previous investment in Black Knight. They are well-aligned with shareholders and motivated to generate and realise value.
The business began as a diversified holding company in November 2017 through a split from Fidelity National Financial (FNF). Today, the company’s principal assets are a 22% stake in Ceridian HCM Holding (CDAY) and a new private equity investment in Dun & Bradstreet.
Ceridian specialises in human capital management software and has been growing EBITDA by around 30-40% per annum in the last few years.
The real jewel in the crown, however, is Dun & Bradstreet, the world’s leading business credit reporting agency. Founded in 1841, the company has compiled a database which holds over 330 million business records.
If you are a company which wants to extend or borrow credit, you need to have a relationship with D&B.
Scope to Reduce Costs
D&B has a bloated cost structure. Cash costs per employee at D&B are among the highest in the information services industry. By way of context, the company generated $500 million of EBITDA in 2018. Cannae closed its acquisition of D&B in February 2019, and management revealed in the Q2 earnings results they had generated $153 million of annualised cost savings.
Significantly, such savings were achieved without sacrificing any revenue. The company is now well-positioned to deliver on a long-term target of $200 million cost reduction.
Sales Initiatives Should Drive Top Line Growth
There is clear scope to improve the sales process. A meeting with management in June revealed Cannae has replaced the executive sales team with its own appointees. Since a significant proportion of D&B’s 140,000 customers are signed on one-year deals, the new team is focused on moving customers onto multi-year deals. Management believes this initiative could free up more than 20% of the sales’ division’s time, which can then be re-directed to sourcing new customers and up-selling existing ones. Management indicated D&B sells its own data to third parties, who then provide a layer of analytics before re-selling it to D&B clients, yet the revenue these parties extract is over 3x D&B’s average sales per customer. Upon presenting these findings, the Board approves the technological investment required to sell its own analytical data. The acquisition of Lattice Engines on June 1, 2019, allows D&B, a big data analytics platform, to integrate solutions and improve its overall customer offering.
Cannae’s management team is led by two principals: Chinh Chu, former senior partner at Blackstone, and Bill Foley, a West Point graduate with over 30 years’ experience running public companies, most recently at Fidelity National. Both have a significant share of net worth invested in D&B as well as Cannae.
Valuation is Attractive
Cannae has a market cap of $2.0 billion and enterprise value of $2.1 billion. The group has 30.7 million shares in Ceridian, representing a 21.7% ownership stake, which are currently worth $1.60 billion. Cannae’s 24.5% stake in D&B is listed at a value of $497.5 million, which implies these two holdings are worth $2.1 billion (excluding fees and tax). However, given the ongoing turnaround at D&B, its stake could be worth substantially more in future years. No value is attributable to Cannae’s other positions in a restaurant portfolio and T-System.
Given management’s track record in monetizing assets, shares in Cannae are recommended for purchase.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.