Quick Value 1.31.21 (ZimVie Inc)

Upcoming Zimmer spinoff of Spine and Dental businesses

Market Performance

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Market Stats

• Median stock is down 20-30%… Even more for smaller cap stocks. Perhaps the pain has been deeper than overall market levels suggest.

  modest proposal @modestproposal1

  The median Russell 1000 stock is down 19.6%. The median Russell 2000 stock is down 33.4%. The median NDX stock is down 22.6%.

  

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Quick Value

ZimVie Inc

Zimmer Biomet ($ZBH) is a $25bn medical device company that announced a spinoff of their Dental and Spine businesses back in Feb 2021. The outcome is intended to leave RemainCo Zimmer with a faster growth profile and better margins…

ZimVie isn’t yet trading and doesn’t have a ticker but I wanted to quickly review the business that Zimmer no longer wants…

For starters, revenue has been in decline even before the pandemic came into the picture. Margins are considerably worse than combined Zimmer and operating cash flow is a tiny fraction of the consolidated company despite making up ~15% of total Zimmer sales… (Zimmer generates ~$1.5bn+ per year in cash flow while ZimVie is +/- $100m per year.)

EBITDA fell from $153m in 2018 to $89m in 2020 — margins similarly fell from ~15% to 10% during that period — and has since jumped back to TTM $144m / 14% margins.

Spine surgeries are generally elective procedures and dental products, consisting mainly of dental implants, are paid out of pocket and are cosmetic in nature. Both of these made 2020 a particularly challenging year. So the business could be set to rebound (as it has so far in 2021). Longer term, management has commented on the increasing competition and pricing pressure in the spinal business.

These segments make for a $21bn total market of which ZimVie will be a <5% player.

The spinoff will also be levered with ~$555m in gross debt for close to 3.5x net leverage at the time of spin. Nothing outrageous but also not embedded in the past cash flow figures either.

Still plenty to unpack with this one but it looks like a small fraction of the overall company which might make for an interesting setup going into the spin. ZBH trades at ~15x EPS/cash flow and 11.5x EBITDA based on 2022 estimates; it’s likely the spin should trade at a discount to those levels….

For additional review, you can check out the Form 10 spin-off filing here.