Cannae Holdings, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021; unaudited. Cannae is an investment and operating company with restaurant businesses and minority investments, including Dun & Bradstreet, Paysafe, Alight, Optimal Blue, AmeriLife and Sightline. Equity-method investee revenues are generally not consolidated into Cannae’s operating revenue.
Financial results and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Operating revenue | $186.0 million | $139.7 million | $560.3 million | $415.3 million |
| Operating loss | $(24.8) million | $(28.4) million | $(97.0) million | $(127.4) million |
| Net income (loss) attributable to Cannae common shareholders | $(121.0) million | $131.9 million | $(177.7) million | $1,254.9 million |
| Basic and diluted EPS | $(1.36) | $1.44 | $(1.97) | $14.97 basic; $14.94 diluted |
| Cash used in operating activities | Not separately presented for the quarter | $(141.6) million | $(190.9) million |
- Revenue increased 33.1% in Q3 and 34.9% year to date, principally reflecting Restaurant Group recovery versus COVID-affected 2020 comparisons and the prior-year reconsolidation of certain restaurant and bakery businesses.
- Restaurant cost of revenue was 88.4% of restaurant revenue in Q3 and 86.9% year to date, improving from 94.0% and 94.2%, respectively. Cannae reported operating losses in both periods.
- Investment results drove the swing in bottom-line earnings: recognized net losses were $186.2 million in Q3 and $224.7 million year to date, versus gains of $189.6 million and $1.683 billion in the comparable 2020 periods. 2020 results included substantial investment gains; 2021 included a $391.8 million other-than-temporary Paysafe impairment.
- Equity in earnings of unconsolidated affiliates was $41.4 million in Q3 and $86.5 million year to date, compared with a $1.2 million loss and $3.6 million of earnings, respectively, in 2020.
- At September 30, cash and cash equivalents were $234.2 million, including $173.3 million at the corporate holding company; total assets were $4.314 billion and total equity $3.508 billion. Cash was down from $724.7 million at December 31, 2020.
- Notes payable totaled $227.8 million, including approximately $200 million outstanding under the 2020 Margin Facility. The filing says the company repaid the facility’s full $200 million balance in October 2021. At September 30, the company also reported $100 million of holding-company credit capacity, with potential to add $300 million by amending the facility.
- Investing cash outflow was $437.7 million and financing cash inflow was $88.8 million for the first nine months. Operating cash outflow improved by $49.3 million year over year, mainly due to working-capital timing.
Material changes and notable items
- Cannae invested in Paysafe, Alight and Sightline during 2021 and recorded these as equity-method investments; their results are reported on a lag. Alight and Sightline earnings were not included in results through September 30.
- Cannae sold shares of Ceridian and Dun & Bradstreet, received $280.6 million of distributions from the Senator JV and exited its material interest in that venture. It also completed sales of certain VIBSQ, Legendary Baking and Rock Creek Idaho assets.
- The company repurchased 2.73 million shares for $96.5 million during the first nine months, at an average $35.36 per share. Its authorized programs permit repurchases but do not require them.
- Other operating expenses included $37.4 million of carried-interest expense to the external Manager in the first nine months, associated with investment monetizations. Management fees to the Manager were also incurred.
Outlook, risks and contingencies
- The filing provides no quantified earnings or revenue guidance. Management said restaurant same-store sales improved against 2020, but remained below corresponding 2019 periods; recovery remains uncertain amid COVID-19 variants and changing consumer behavior.
- Management cited restaurant exposure to competition, labor and food-cost inflation, consumer spending, weather and regulation. Cannae also faces investment valuation and impairment risk, market volatility, acquisition and integration risks, and risks associated with its external manager.
- Cannae entered backstop agreements potentially requiring subscriptions of up to $690 million for the Austerlitz I/Wynn Interactive transaction and up to $200 million for the Trebia/System1 transaction, subject to terms and closing conditions. It also had a $125 million Austerlitz II forward purchase commitment contingent on that SPAC’s business combination.
- Legal matters include a shareholder derivative action alleging fiduciary-duty breaches related to the management agreement and incentive arrangements. The action was stayed while a special litigation committee investigated; the company said it would contest remaining claims. Management stated legal accruals were not material and did not expect currently pending matters, in aggregate, to materially harm financial condition, results or cash flows, while noting outcomes remain uncertain.
- Management considered liquidity sufficient for anticipated needs from operating funds, subsidiary dividends, investment proceeds, asset sales and credit facilities. This assessment is subject to investment-market conditions and portfolio-company cash generation.
Most important facts for investors to verify
- Whether Paysafe’s market-value decline and $391.8 million impairment indicate further downside risk to Cannae’s investment carrying value.
- Post-quarter liquidity and debt after repayment of the $200 million Margin Facility, including the stated holding-company cash and borrowing capacity.
- Performance and valuation of major equity-method investments, particularly Paysafe, Alight, D&B, Optimal Blue and AmeriLife; note the reporting lags and differences between quoted market value and book value.
- Funding exposure and closing conditions for the $890 million aggregate WIL and System1 backstops and the Austerlitz II forward purchase commitment.
- Restaurant recovery relative to 2019, cost inflation, and the effect of dispositions and store closures on comparable-period revenue and operating performance.