Cannae Holdings: Unlocking Value Through Strategic Rebalancing and Capital Return (NYSE:CNNE) - CNNE Stock Research Report

## Executive Summary / Key Takeaways * Cannae Holdings is executing a strategic plan to rebalance its portfolio away from public equities towards private, cash-generating assets and return capital to shareholders, aiming to increase Net Asset Value and narrow its stock price discount. * The pending sale of Dun & Bradstreet is a pivotal event, expected to yield approximately $632 million in cash proceeds, with a commitment to deploy at least $460 million for significant share repurchases, dividends, and debt reduction. * Key investments like the expanded stake in JANA Partners and the Watkins Company acquisition underscore the focus on building a portfolio of high-performing private companies expected to provide cash distributions to the holding company. * Operational improvements are underway across portfolio companies, including strategic restructuring in the Restaurant Group and infrastructure/synergy development at Black Knight Football Club, aimed at enhancing performance and value. * While facing macroeconomic headwinds and specific portfolio challenges like the Sightline write-off and a proxy contest, the company's liquidity position is solid, bolstered by expected sale proceeds, supporting its capital allocation strategy and long-term value creation goals. ## A Principal Investor's Strategic Evolution Cannae Holdings, Inc. operates as a principal investment firm, strategically acquiring interests in operating companies with a focus on active management and long-term ownership. Founded in 2014, the company has built a diverse portfolio across various sectors, leveraging its operational expertise to enhance the value of its holdings. This approach is exemplified by its historical investment in Dayforce (TICKER:DAY), where Cannae applied its playbook to transform the business over 17 years, culminating in a successful IPO and significant monetization that realized $2.8 billion in proceeds. The company is currently undergoing a significant strategic evolution, centered on increasing its Net Asset Value (NAV) and closing the persistent discount between its share price and intrinsic value. This plan rests on three core pillars: enhancing the performance and valuation of existing portfolio companies, making new investments primarily in private businesses capable of generating cash flow and growing NAV, and consistently returning capital to shareholders. This strategic rebalancing is positioning Cannae for its next phase of growth, moving away from large, liquid public equity stakes towards a more curated portfolio designed for long-term cash generation and value appreciation. In the competitive landscape of diversified holding companies, Cannae operates alongside much larger entities like Berkshire Hathaway (TICKER:BRK.B) and activist investors such as Icahn Enterprises (TICKER:IEP), as well as financial services-focused firms like Jefferies Financial Group (TICKER:JEF). While lacking the sheer scale and financial might of a Berkshire Hathaway, Cannae aims for agility in identifying and executing niche deals. Its approach differs from the confrontational tactics often employed by activist investors, favoring collaborative partnerships. Compared to financial services peers, Cannae's direct operational involvement in diverse sectors and its strategic focus on technology-enabled assets provide a distinct flavor. Cannae's strategic intent includes leveraging technology within its portfolio companies to drive value. Although a specific investment in Sightline Payments' cashless gaming technology faced challenges leading to an impairment and write-off, the underlying strategic rationale highlighted the potential benefits sought in such investments. The aim was to capitalize on technology that could offer quantifiable advantages, such as improving "time to play" metrics by 20-30%, potentially leading to 15% higher efficiency and 10% better margins in relevant segments. While this particular investment did not yield the expected results, the pursuit of technological differentiation remains a strategic consideration in building competitive moats within its portfolio companies. ## Portfolio Transformation and Capital Deployment A cornerstone of Cannae's strategic rebalancing is the monetization of its public equity holdings. Since the beginning of 2024, the company has successfully sold approximately $1.1 billion of stakes in companies like Dayforce, Alight (TICKER:ALIT), Dun & Bradstreet (TICKER:DNB), and Paysafe (TICKER:PSFE). This activity underscores a clear commitment to transitioning the portfolio and generating liquidity. The most significant recent development is the pending acquisition of Dun & Bradstreet by Clearlake Capital for $4.1 billion in equity. As Cannae's largest public investment, this transaction is expected to close in the third quarter of 2025 and will yield approximately $632 million in cash proceeds for Cannae. This event has led to the reclassification of the DB investment as a discontinued operation, resulting in a $68.1 million impairment charge in the first quarter of 2025 to reflect its fair value. The strategic implication of this sale is substantial, providing Cannae with significant capital flexibility. Management has explicitly committed to deploying at least $460 million of the expected DB proceeds towards shareholder returns and debt reduction. This includes using over $300 million for share repurchases, $101 million to repay the outstanding balance on the 2020 Margin Facility, and retaining $60 million for future dividends. This planned capital allocation demonstrates a strong focus on returning value directly to shareholders and strengthening the balance sheet, actions management believes are critical to narrowing the discount to NAV. Complementing the divestment strategy is the focus on building a portfolio of new, cash-generating private investments. A key move in this direction is the expansion of the strategic relationship with JANA Partners. Cannae currently holds a 19.99% stake and has agreed to acquire an additional 30% for $67.5 million upfront, with potential further payments, bringing its total ownership to 50% upon closing, expected in the third quarter of 2025. This expanded partnership aims to enhance Cannae's ability to allocate capital to proprietary acquisitions and investments that align with JANA's strategy, providing access to a high-performing private company with AUM exceeding $2 billion and expected cash distributions. Another significant private investment is the acquisition of a majority stake in The Watkins Company in October 2024. This 150-year-old flavoring products company, with LTM sales of approximately $75 million and a history of mid-to-high single-digit growth and strong margins, represents an attractive platform. Cannae invested $80 million, including $20 million structured as convertible preferred with an 8% annual dividend, specifically targeting a business expected to provide consistent cash flow to the holding company. ## Portfolio Performance and Operational Focus Cannae's diverse portfolio requires active management to drive performance and value. The first quarter of 2025 consolidated results reflect the impact of portfolio composition and strategic shifts, with total operating revenues of $103.2 million and a net loss of $115.0 million. This compares to total operating revenues of $110.7 million and a net loss of $91.8 million in the first quarter of 2024. The change in net loss was influenced by lower restaurant revenue, lower operating expenses (driven by reduced management fees and bonuses), a higher income tax expense primarily due to recording a valuation allowance, and a shift in equity in unconsolidated affiliates from a gain to a loss position. The Restaurant Group segment, comprising O'Charleys and 99 Restaurants, saw revenues decrease by 6.9% to $99.1 million in Q1 2025 compared to $106.5 million in Q1 2024. Comparable store sales declined, notably a 14.9% drop at O'Charley's and a 0.3% drop at 99 Restaurants, primarily due to lower guest counts. The cost of restaurant revenue as a percentage of revenue increased to 91.8% from 88.5%, largely due to commodity inflation. Management is actively addressing these challenges through strategic store count reductions, corporate overhead cuts (including a headquarters move expected to save over 7 figures annually), new management appointments, and efforts to improve guest traffic and cost efficiencies.

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Alight, in which Cannae holds a 7.6% interest accounted for via the equity method, reported Q1 2025 total revenue from continuing operations of $548 million (down 2% year-over-year) and Adjusted EBITDA of $118 million (up $2 million). These results were ahead of consensus estimates. Alight management affirmed their full-year 2025 guidance, with a midpoint of $2.36 billion in revenue and $633 million in Adjusted EBITDA, and set midterm targets for 2027 including 4-6% organic revenue growth and 30% Adjusted EBITDA margins. Cannae views Alight's strategic divestiture and subsequent debt reduction to 3.1x EBITDA as positive steps to simplify the business and improve its financial profile, hoping the market will recognize the embedded value. Black Knight Football Club (BKFC), a 44.3% owned equity method investment, continues to be a focus for strategic development. While the Q1 2025 equity in losses was $10.4 million (reflecting BKFC's Q4 2024 results), the segment is seeing significant activity. BKFC recently raised approximately $133 million in new capital, with Cannae contributing $50 million. Infrastructure investments are progressing, including opening a new performance center and plans to acquire and redevelop Vitality Stadium to nearly double capacity. Sporting success, such as AFC Bournemouth's record Premier League point total and FC Lorient's promotion back to Ligue 1, enhances the strategic value and commercial opportunities. The affiliation with Orlando City SC provides a foothold in North American soccer. Management is building out the BKFC holding company to drive synergies across clubs, aiming for improved sporting outcomes, player pathways, and commercial profitability. Other portfolio companies contribute to the overall picture. Computer Services, Inc. (CSI) continues solid performance, marked to fair value annually, resulting in a $16 million gain in Q1 2025 following a $41 million gain last year, and has provided $37 million in cash distributions. Minden Mill Distilling is progressing with product launches and expects significant growth in 2025. Conversely, the investment in Sightline Payments was fully written off in Q4 2024 due to a lack of product traction and liquidity challenges, highlighting the inherent risks in certain portfolio ventures. ## Financial Health and Liquidity As of March 31, 2025, Cannae held $126.2 million in cash and cash equivalents, with $109.9 million at the corporate level. The company's liquidity position is set to be significantly enhanced by the expected $549.4 million in additional cash proceeds from the DB sale, following $80.5 million already received from recent DB share sales. The company's debt structure includes a $101.0 million outstanding balance on the 2020 Margin Facility, which is classified as a current liability as it is expected to be repaid upon the DB sale closing. The FNF (TICKER:FNF) Revolver was recently amended, reducing borrowing capacity to $47.5 million, fixing the interest rate at 5.0%, and extending maturity to November 17, 2030. A $12.2 million reduction in principal on this facility was achieved through the sale of real estate to FNF.

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Cash flow from operations improved significantly in Q1 2025, providing $9.1 million compared to a use of $36.0 million in Q1 2024, primarily driven by tax refunds and lower operating expenses. Investing activities used $7.0 million in Q1 2025, a decrease from the $194.5 million provided in Q1 2024, reflecting fewer investment sales and lower new investment outlays. Financing activities used $7.4 million in Q1 2025, down from $26.4 million used in Q1 2024, mainly due to lower debt payments partially offset by dividend payments.

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Cannae maintains multiple stock repurchase authorizations, with shares remaining available under the 2022, 2023, and 2025 programs. While no repurchases occurred in Q1 2025, management prioritizes buybacks as a use of capital, particularly with the expected DB proceeds. The company also declared a $0.12 per share quarterly dividend payable in June 2025. Management acknowledges that the dividend is currently funded by utilizing the capital pool but aims to cover it fully with cash flow generated from portfolio businesses over time. ## Risks and Outlook Despite strategic progress, Cannae faces notable risks. Macroeconomic uncertainty, including inflation and potential impacts on consumer spending, continues to pose headwinds, particularly for the Restaurant Group. While the investment in Alight is currently assessed as not other-than-temporarily impaired despite its fair value being below book value, further market declines or deterioration in Alight's performance could necessitate future impairment charges. The company recorded a $28.3 million valuation allowance against deferred tax assets in Q1 2025, primarily related to NOLs and certain investment-related deferred taxes, influenced by being in a cumulative book loss position. The recoverability of remaining deferred tax assets will require ongoing monitoring. Furthermore, the company is currently subject to a proxy contest initiated by a shareholder seeking Board representation. This situation could divert management attention, disrupt operations, incur significant costs, and potentially lead to changes in governance or strategic direction, which could negatively impact the stock price and relationships with stakeholders. Management has affirmed its focus on long-term value creation despite this challenge. Looking ahead, the outlook is anchored by the expected closing of the DB sale in Q3 2025 and the subsequent deployment of proceeds, which is anticipated to significantly impact the balance sheet and shareholder returns. The expanded JANA partnership is also expected to close in Q3 2025, signaling increased activity in sourcing and executing new private investments. Alight's affirmed 2025 guidance and midterm targets provide a roadmap for performance improvement in a key holding. At BKFC, the promotion of FC Lorient to Ligue 1 and the potential for Hibernian FC to enter European competition, alongside infrastructure development and synergy building, point to continued strategic progress and potential value creation in the sports segment. The focus on improving cash flow at the Restaurant Group and integrating new investments like Watkins are critical to achieving the goal of covering the dividend from portfolio operations. ## Conclusion Cannae Holdings is navigating a transformative period, actively rebalancing its portfolio and sharpening its strategic focus. The impending monetization of its largest public asset, Dun & Bradstreet, provides a significant catalyst, unlocking substantial capital for deployment towards shareholder returns and investments in cash-generating private businesses. This strategic shift, coupled with operational improvements across key holdings like Alight, Black Knight Football Club, and the Restaurant Group, is designed to enhance Net Asset Value and address the discount in the company's share price. While macroeconomic headwinds and specific portfolio challenges persist, the company's strengthened liquidity position and commitment to its stated capital allocation priorities underpin the investment thesis. The expanded partnership with JANA and the acquisition of Watkins highlight the deliberate move towards assets expected to provide consistent cash flow, supporting the sustainability of shareholder distributions over time. Investors should monitor the successful closing and deployment of the DB proceeds, the performance trajectory of core portfolio companies against their stated targets, and the execution of the strategy to generate cash flow from the diversified asset base as key indicators of future value creation.