Cannae Holdings, Inc. Q2 FY2020 Earnings Call

Good morning and welcome, ladies and gentlemen to the Cannae Holding’s Second Quarter 2020 Earnings Conference Call. During today’s presentation, all parties will be in listen-only mode. Following the presentation, the conference will be open for questions with instructions to follow at that time. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Shannon Devine, Investor Relations for Cannae Holding. Please go ahead.

Thank you, operator, and good morning, everyone. We appreciate your participation in our second quarter 2020 earnings conference call. Joining me today are Cannae’s Chairman, Bill Foley; Chief Executive Officer, Rick Massey; Executive Vice President, Corporate Finance, David Ducommun; and Chief Financial Officer, Bryan Coy. As a reminder, a replay of this call will be available through 11:59 p.m. Eastern Time on August 14, 2020. Before we begin, I would like to remind you that this conference call may contain forward-looking statements that involve a number of risks and uncertainties. Statements that are not historical facts, including statements about our expectations, hopes, intentions or strategies regarding the future are forward-looking statements. Forward-looking statements are based on management’s beliefs as well as assumptions made by and information currently available to management. Because such statements are based on expectations as to future financial and operating results and are not statements of fact, actual results may differ materially from those projected. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. The risks and uncertainties which forward-looking statements are subject to include, but are not limited to, the risks and other factors detailed in our press release, which was released this morning, and in the statement regarding forward-looking information, risk factors, and other sections of Cannae’s Form 10-K and other filings with the SEC. Let me now turn the call over to Bill.

Thank you, Shannon. Through the second quarter, we continued to monetize investments, nurture our portfolio companies, make new investments, and prospect for future investment opportunities. During my career, I’ve endured many challenging environments, all of which helped shape my investment philosophy. Despite a more uncertain economic outlook, our strategy is unchanged. As a result, Cannae was built with a fortress-like balance sheet to weather the storm and take advantage of market dislocation. Over the last few months, we have seen our deal pipeline expand and are pleased with our new investment opportunities that have both been presented and sourced. Given this backdrop, we’ve made real progress deploying our capital into attractive investments that we believe will grow the franchise value of Cannae. Our primary accomplishment in the second quarter was the initial public offering of Dun & Bradstreet or D&B, where they listed their shares on the New York Stock Exchange on June 30, at a price of $22 per share, raising $2.4 billion in net proceeds. Cannae invested in a concurrent private placement at a share price of $21.67 and currently owns approximately 18% of D&B, which is valued at $1.95 billion given D&B’s closing price of $25.50 on July 31, 2020. We look forward to continuing to support D&B’s strategic transformation and growth. To capitalize on the many larger investment opportunities we see, Cannae entered into a forward purchase agreement with Foley Trasimene Acquisition Corp or FTAC, providing Cannae with a 20% share of the promote. As an anchor investor and a member of the Sponsor Group, we look forward to working with our partners at THL to identify prospective target businesses in the industries of financial technology or business process outsourcing. We’re actively valuing targets for the potential tool and will update you once we have a definitive agreement with a target. In addition to Cannae’s investment in FTAC, Cannae has entered into a forward purchase agreement with Trebia Acquisition Corp or Trebia, where Cannae is an anchor investor with a 15% economic interest and a founding member of the Sponsor Group. Again, we look forward to working with Frank Martire and the team lending their experience to this transaction. More recently, earlier this week on August 3, Cannae entered into a forward purchase agreement with FTAC Acquisition Corp II for $150 million on similar terms to Trebia. Subsequent to the quarter end, Black Knight announced a definitive purchase agreement to acquire Optimal Blue, a leading provider of secondary market solutions and actionable data services, for an enterprise value of $1.8 billion. Black Knight will combine its compass analytics with Optimal Blue, a newly formed entity where Cannae will own approximately 20% ownership interest for an equity contribution of $290 million. Lastly, Cannae disclosed ownership interest and partnership with Senator Investment Group of approximately 12 million shares and economic equivalence in CoreLogic during the second quarter. On June 26, Cannae, along with Senator Investment Group, submitted an unsolicited proposal to acquire CoreLogic for $65 a share. After spending nearly a year performing due diligence, there are no material uncertainties regarding the proposal, including financial or regulatory. We’re disappointed that CoreLogic has declined our proposal. Subsequent to the quarter end, on July 29, we announced the initiative to call a special meeting of shareholders to elect nine independent and highly accomplished directors to the CoreLogic Board of Directors. Unfortunately, given where we are in this process, I’m unable to provide any further updates at this time or answer questions regarding this matter. To finance these investments and further rebalance our portfolio, we sold 3.7 million shares of Ceridian at a price of $64.40 a share, resulting in gross proceeds of approximately $238.3 million, and we recorded a gain of $53 million. As of July 31, 2020, Cannae owned 16.1 million shares of Ceridian stock, worth $1.3 billion. We also completed a secondary offering of approximately 12.65 million shares of Cannae, raising proceeds of approximately $455 million. This offering helped us broaden our institutional shareholder base to provide capital to fund future transactions and reintroduce the Cannae story to the investment community. To conclude, we’ve made significant progress expanding our portfolio investments, which we believe positions Cannae for continued value creation and outperformance. We’re well positioned to deploy our capital as potential deals arise, and we remain very optimistic about our future. Before I turn the call over to Bryan Coy, our new Chief Financial Officer, I want to first thank Rich Cox for his service to Cannae. Rich resigned from the company two weeks ago, and we’re excited to have Bryan join our team. I’ve got to know Bryan very well over the course of the last few years, as he was the CFO for Black Knight Sports Entertainment, the Vegas Golden Knights. I look forward to working with him in his role at Cannae. With that, I’ll now turn the call over to Bryan to provide a brief overview of our financial results.

Thanks, Bill. I’m looking forward to working with you and the team here at Cannae. Turning to our results, the major items of note were similar to the preceding quarter: Mark-to-market gains in our investments, and the earnings and losses of our affiliates. Cannae recorded $471 million on fair market value gains on Ceridian stock, along with $53 million of realized gain on the shares sold during the quarter, complementing $42 million of unrealized gain on our investment in CoreLogic stock. From our unconsolidated affiliates, Cannae recorded a $56 million loss from Dun & Bradstreet and a $138 million gain on its investment in the equity fund, offset by smaller items for a net $58 million in earnings. On a liquidity front, we entered the second quarter with $399 million in cash. As Bill mentioned above, Cannae created liquidity by selling $238 million of shares ahead of $455 million of equity offering of its own, offset mainly by an additional $100 million investment in the equity fund, which provided Cannae with nearly $1 billion in corporate cash and short-term investments at quarter close, as well as $100 million of undrawn capacity under the F&F revolver. Of that amount, a total of $225 million was committed during the quarter to FTAC and Trebia in early July; $200 million was deployed via the D&B private placement. Subsequent to the quarter end, our $290 million forward purchase investment in Optimal Blue, as well as the forward purchase agreement on FTAC II for $150 million. During the quarter, we repurchased over 123,000 shares of our own at an average price of $29.37. On June 30, 2020, Cannae’s book value was $3.1 billion or $34 per share, compared to $1.5 billion or $18.72 per share on December 31, 2019. Now let me turn the call over to David Ducommun, who will touch on our pipeline and potential investment opportunities.

Thanks, Bryan. As evidenced by our second quarter performance, the Cannae team has kept busy. In addition to the transactions we’ve announced publicly, we’ve been busy behind the scenes looking for our next deal. We screen literally hundreds of potential transactions, both public and private. We’ve met with CEOs, private equity owners, and large public institutional shareholders, and we believe this is a great time to deploy capital. We find current owners are, in general, marginally more willing to transact with us, as their long-term outlook is increasingly uncertain and their strategies, in some cases, need leadership change. We at Cannae are buyers of long-term value. We have no maximum holding period for an asset, as evidenced by a lot of our historical investments. Our outlook, coupled with strong operational expertise, deal structure, and creativity, is a unique asset for Cannae. I should also add, we can act quickly when needed; we’re not a bureaucratic organization. Bill has a robust bench of managers and industry experts, all of whom help us be decisive quickly on transactions. We believe this makes us the preferred counterparty for sellers and businesses in need of capital. Our focus for new investments will be primarily in the industries Bill discussed related to payments, data and analytics, and Fintech. We’re looking for companies with enterprise values ranging from $1 billion to $10 billion, and our equity checks have generally been in the $100 million to $500 million range. However, as you’ve seen from the various facts and other joint venture partnerships that we’ve sponsored, our economic firepower actually far outstrips our existing liquidity. It’s important to us that our targets have a defensible market position and the ability to benefit from the leadership and capital Bill brings to the table. We’ll back to update you as soon as we have a print agreement with the target to announce. I’ll now turn the call back over to Grant, our operator, to begin the Q&A session.

[Operator Instructions] Our first question will come from John Campbell with Stephens. Please go ahead.

Bryan, congratulations on the new role; looking forward to working with you. You guys must have a pot of coffee brewing 24x7 at the Trasimene offices; it’s been a really busy past couple of months for you guys. But I just wanted to get your latest thoughts on a couple of the moving parts. If we could maybe start with Optimal Blue. I’m sure we’re going to hear a lot from Black Knight next week. How do you see Optimal Blue transforming the Black Knight model and the value proposition? And then any thoughts on the kind of ICE and Ellie combo that was announced last night?

Sure, well, Duke, why don’t you take the Optimal Blue piece?

Yes, so we think it's a transformative deal for Black Knight. Optimal Blue really has the industry-leading set of product pricing engine tools for mortgages. Black Knight has a dominant position in mortgage processing. We think they have a very defensible moat, and this is a hybrid product that we think they can bolt onto their existing offering and, frankly, accelerate the growth of that business even faster than it’s been growing on its own. We think it’s a high-quality asset, and we’re excited to see what AJ and the teams do with it. We’re obviously thinking more about this, and I’ll let them defer to their specific operating plans for the business. We’re the equity investor here, and obviously this asset, we think, does a lot to accelerate growth for Black Knight.

On the ICE and Ellie Mae piece, both Ellie Mae and ICE were involved in the Optimal Blue mini-auction. We basically pre-empted the stage and made a term proposal of $1.8 billion. The seller gave Black Knight exclusivity. You can say that the reaction to buy ICE and Ellie Group was probably, in part, due to the fact they were not able to acquire Optimal Blue. I’m sure that Ellie will be a very nice asset for ICE; they are our major competitor. They’re a well-run company, and they’ve now taken another player out of the marketplace and combined with them, so congratulations to ICE.

Yes, that makes sense. I couldn’t agree more. How should we think about the various factors and how they play into Optimal Blue and then maybe CoreLogic, or is there a pretty big pipeline beyond those two?

No, there is a big pipeline, and as you said, we’re brewing coffee all the time because we’re looking at so many different transactions all at once. I would like to think about the terms of the development of the vaccine. Phase I for us in terms of the SPACs was from the launch of Trasimene I in late May through the July 4th weekend. We were screening and investigating various companies and trying to understand how a company might fit with our philosophy and how their growth prospects were. I would say we culled down from about 100 companies plus down to about 10 companies, and we began Phase II, which was really dealing with the bankers regarding the various companies of interest. We went to the bankers, and we tried to deal with the sponsor representative at that particular bank. In learning more about the core values of a particular transaction we were looking at, we started Phase III trial really in late July. Phase III means we started talking to management at the various target companies and evaluating management, evaluating their core business principles and core operations. We began to cull the herd down and expand the herd because often something pops up and we accelerate Phase I reviews and get into Phase II and then Phase III. At this point, on the Trasimene SPAC, we’ve probably talked to five different management teams at this point, all of which are very interesting to us. We have a couple of different companies that we’re extremely interested in, and we’re trying to pursue to see if a transaction can be developed with those companies. Now, we have the advantage of assuming the markets stay with us for another week and half or so; we will have a second SPAC that will be even larger than Trasimene I, giving us the ability to really expand our search process again and look for large targets. All the SPACs that we have normally find something interesting; it just won’t be for the amount raised, and the SPAC will include a pipe so we can reward our SPAC investors with a non-promote piece of the business. We have a number of sponsors highly interested in investing with us. We really feel like we don’t have a top limit on what we can look at and what we can seriously consider. I would expect us to make a couple of major acquisitions within a year or so.

That sounds good. You guys closed the quarter at almost $1 billion in cash. Obviously, there’s a flurry of events here post-quarter. You’re either deploying or set to deploy about $640 million, and that leaves you with about $325 million in cash post all this. Does that sound about right? Or am I missing anything in that math?

I think that’s right. Does that sound right to you, Bryan?

That sounds actually a little bit high; you might not be accounting for the last $150 million for FTAC II.

Okay, got it. All right, that’s helpful.

Our next question will come from David Eller with Wells Fargo. Please go ahead.

I think you kind of answered some of my questions in part. But I guess I’ll ask them maybe in a little different way. Can you just talk about your plans for your Dun & Bradstreet stake? I think you mentioned the $1.9 billion? What are your plans for that following the IPO?

We’re locked up for six months, and the endgame in Dun & Bradstreet is not yet been told. Dun & Bradstreet is now in its own acquisition mode, and because of the size of the offering we were able to accomplish, they have $500 million in cash available and can make some very accretive transactions. We feel Dun & Bradstreet's story is just beginning, and we don’t have any plans to dispose of any shares. We really feel like there’s going to be a lot of value created in Dun & Bradstreet over the next 18 months, and after that time period, we would probably start looking at a slow disbursement of some shares over a long period, just as we’ve done with Ceridian. What I don’t want to do is leave the party too soon unless there is a serious need for a very large amount of capital. That’s the way I feel about Ceridian, and I certainly feel that way about Dun & Bradstreet, which I think is probably in its first or second innings of its turnaround.

Got it. You kind of touched on it and segued to my second question. You think about the Dun & Bradstreet IPO; they put a lot of cash on the balance sheet. But they still do have a good bit of debt. So you talked about in the past there have been a lot of interesting M&A opportunities, but the leverage was kind of a constraining factor there. Can you talk about just expectations there for how to allocate that excess cash?

We don’t have plans to pay down our senior secured or unsecured notes until February of 2022. On the IPO, we managed to claw back 40% of those two debt instruments. Of course, we completely prepaid the preferred. It’s expensive, but we need to get that balance sheet in much better shape. I don’t see us paying down the unsecured or secured debt until then, when it could be done without any makes hold, which is pretty prohibitive. I see Dun & Bradstreet making tuck-in acquisitions and looking very seriously at the international markets. As you may recall, Dun & Bradstreet was a significant international player and over time has sold many of those businesses to create short-term gain. We are actively looking for international partners that may want to sell back to Dun & Bradstreet. So that’s going to be a major focus of our acquisition strategy, plus tuck-ins because Dun & Bradstreet needs to have more products. If they can make a small tuck-in acquisition of a product that fits within their core offerings, that’s how they’ll really accelerate their growth and achieve some serious quarter-over-quarter revenue growth. That’s the Dun & Bradstreet philosophy at this point, and much more will be revealed over the next two or three quarters as we move down that path.

Got it, and then last question from me. Optimal Blue, can you talk about the funding structure there? Provide a little more detail? Where Black Knight raised up and sold; will that be raised in a separate box or how do you expect that to be funded?

There will be debt associated with Optimal Blue, about $500 million. That debt will be raised by Black Knight and will be mirror notes into the subsidiary Optimal Blue at a premium interest rate. Black Knight will raise money at x and will fund the transaction at x plus y. THL and ourselves, as 20% owners, will own 60%. That’s kind of the way we put together the structure. Logically, it would have been great if Black Knight could have acquired the company itself, but it would have really fouled up their debt to cap ratios. What we’re trying to do is keep Black Knight at 3.9 debt to cap, while we aim to get down to the high twos pretty quickly. That’s the reason for the structure.

Great, thank you for all the detail.

Our next question will come from Carter Trent with Stephens. Please go ahead.

I just got one quick question. On the press release, I was looking at the cost of invested capital section and noticed the equity fund was broken out separately from CoreLogic. Just to confirm, does the equity fund separate from CoreLogic? Are they making their own investments in other companies?

Bryan?

No, they’re not. The equity fund is.

It’s CoreLogic.

Okay, perfect. Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Bill Foley for any closing remarks.

Thank you for your time today. To conclude, we’re very pleased with our second quarter results and remain optimistic that the current market environment will continue to offer attractive opportunities for our team. Cannae continues to seek potential investments as we expand our portfolio and deliver long-term value to our shareholders. Please continue to stay safe and healthy, and thank you for your time today.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.